Vol. 77 Wednesday, 

No. 220 November 14, 2012 

Part II 

Commodity Futures Trading Commission 

17 CFR Parts 1, 3, 22 et al. 

Enhancing Protections Afforded Customers and Customer Funds Held by 

Futures Commission Merchants and Derivatives Clearing Organizations; 

Proposed Rule 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67866 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

1Commission regulations referred to herein are 

found at 17 CFR Ch. 1 (2012). Commission 

regulations are accessible on the Commission’s Web 

site, www.cftc.gov. 

2 7 U.S.C. 6d(a)(2). 

3 7 U.S.C. 1 et seq. 4The term ’’ futures customer’’ is defined in 

§ 1.3(iiii) to include any person who uses a futures 

commission merchant as an agent in connection 

with trading in any contract for the purchase or sale 

of a commodity for future delivery or an option on 

such contract (excluding any proprietary accounts 

under § 1.3(y)). The Commission adopted the 

definition of the term ‘‘futures customer’’ on 

October 16, 2012 as part of the final rulemaking that 

amended existing Commission regulations to 

incorporate swaps. The Federal Register release 

adopting the final rules can be accessed at http:// 

www.cftc.gov/ucm/groups/public/@newsroom/ 

documents/file/federalregister101612.pdf. 

5See Dodd-Frank Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov/ 

LawRegulation/OTCDERIVATIVES/index.htm. 

6The term ‘‘Cleared Swaps Customer’’ is defined 

in § 22.1 as any person entering into a Cleared 

Swap, but excludes: (1) Any owner or holder of a 

Cleared Swaps Proprietary Account with respect to 

the Cleared Swaps in such account; and (2) A 

clearing member of a DCO with respect to Cleared 

Swaps cleared on that DCO. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 3, 22, 30, and 140 

RIN 3038–AD88 

Enhancing Protections Afforded 

Customers and Customer Funds Held 

by Futures Commission Merchants 

and Derivatives Clearing Organizations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is proposing to adopt new 

regulations and amend existing 

regulations to require enhanced 

customer protections, risk management 

programs, internal monitoring and 

controls, capital and liquidity standards, 

customer disclosures, and auditing and 

examination programs for futures 

commission merchants (‘‘FCMs’’). The 

proposal also addresses certain related 

issues concerning derivatives clearing 

organizations (‘‘DCOs’’) and chief 

compliance officers (‘‘CCOs’’). The 

proposed rules will afford greater 

assurances to market participants that: 

customer segregated funds and secured 

amounts are protected; customers are 

provided with appropriate notice of the 

risks of futures trading and of the FCMs 

with which they may choose to do 

business; FCMs are monitoring and 

managing risks in a robust manner; the 

capital and liquidity of FCMs are 

strengthened to safeguard their 

continued operations; and the auditing 

and examination programs of the 

Commission and the self-regulatory 

organizations (‘‘SROs’’) are monitoring 

the activities of FCMs in a prudent and 

thorough manner. 

DATES: Comments must be received on 

or before January 14, 2013. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AD88, by any of 

the following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: Send to David A. Stawick, 

Secretary, Commodity Futures Trading 

Commission, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand delivery/Courier: Same as 

Mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov/search/index.jsp. 

Follow the instructions for submitting 

comments. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that is exempt from disclosure under the 

Freedom of Information Act, a petition 

for confidential treatment of the exempt 

information may be submitted according 

to the procedures set forth in § 145.9 of 

the Commission’s regulations.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Division of Swap Dealer and 

Intermediary Oversight: Gary Barnett, 

Director, 202–418–5977, 

gbarnett@cftc.gov; Thomas Smith, 

Deputy Director, 202–418–5495, 

tsmith@cftc.gov; Frank Fisanich, Chief 

Counsel, 202–418–5949, 

ffisanich@cftc.gov; or Ward P. Griffin, 

Associate Chief Counsel, 202–418– 

5425, wgriffin@cftc.gov, Three 

Lafayette Centre, 1155 21st Street 

NW., Washington, DC 20581, or Kevin 

Piccoli, Deputy Director, 646–746– 

9834, kpiccoli@cftc.gov, 140 

Broadway, 19th Floor, New York, NY 

10005. 

Division of Clearing and Risk: Robert B. 

Wasserman, Chief Counsel, 202–418– 

5092, rwasserman@cftc.gov, Three 

Lafayette Centre, 1155 21st Street 

NW., Washington, DC 20581. 

Office of the Chief Economist: Camden 

Nunery, Economist, cnunery@cftc.gov, 

202–418–5723, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. General Statutory and Current 

Regulatory Structure 

The protection of customers—and the 

safeguarding of money, securities or 

other property deposited by customers 

with an FCM—is a fundamental 

component of the Commission’s 

disclosure and financial responsibility 

framework. Section 4d(a)(2) 2 of the 

Commodity Exchange Act (‘‘Act’’) 3

requires each FCM to segregate from its 

own assets all money, securities and 

other property deposited by futures 

customers to margin, secure, or 

guarantee futures contracts and options 

on futures contracts traded on 

designated contract markets.4 Section 

4d(a)(2) further requires an FCM to treat 

and deal with futures customer funds as 

belonging to the futures customer, and 

prohibits an FCM from using the funds 

deposited by a futures customer to 

margin or extend credit to any person 

other than the futures customer that 

deposited the funds. Section 4d(f) of the 

Act, which was added by section 724(a) 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act,5 requires 

each FCM to segregate from its own 

assets all money, securities and other 

property deposited by Cleared Swaps 

Customers to margin transactions in 

Cleared Swaps.6

The Commission has adopted §§ 1.20 

through 1.30, and § 1.32, to implement 

section 4d(a)(2) of the Act, and adopted 

Part 22 to implement section 4d(f) of the 

Act. The purpose of these regulations is 

to safeguard funds deposited by futures 

customers and Cleared Swaps 

Customers, respectively. 

Regulation 1.20 requires each FCM 

and DCO to separately account for and 

to segregate from its own proprietary 

funds all money, securities, or other 

property deposited by futures customers 

for trading on designated contract 

markets. Regulation 1.20 also provides 

that an FCM or DCO may deposit 

futures customer funds only with a 

bank, trust company, and for FCMs 

only, a DCO or another FCM. The funds 

must be deposited under an account 


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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67867 

7The Commission approved the part 22 

regulations on January 11, 2012, with an effective 

date of April 9, 2012. Compliance with the part 22 

regulations is required by November 8, 2012. See, 

Protection of Cleared Swaps Customer Contracts 

and Collateral; Conforming Amendments to the 

Commodity Broker Bankruptcy Provisions, 77 FR 

6336 (Feb. 7, 2012). 

name that clearly identifies the funds as 

belonging to the futures customers of 

the FCM or DCO and further shows that 

the funds are segregated as required by 

section 4d(a)(2) of the Act and 

Commission regulations. FCMs and 

DCOs also are required to obtain a 

written acknowledgment from a 

depository stating that the depository 

was informed that funds deposited are 

customer funds being held in 

accordance with the Act. 

FCMs and DCOs also are restricted in 

their use of futures customer funds. 

Regulations 1.20 and 1.22 provide that 

the funds deposited by one futures 

customer may not be used to margin or 

to secure the contracts or option 

positions, or extend credit to any 

person, other than the futures customer 

that deposited the funds. An FCM or 

DCO, however, may for convenience 

commingle and hold funds deposited as 

margin by multiple futures customers in 

the same account or accounts with one 

of the recognized depositories. An FCM 

or DCO also may invest futures 

customer funds in certain permitted 

investments under § 1.25. 

Part 22 of the Commission’s 

regulations, which governs Cleared 

Swaps transactions, implements section 

4d(f) of the Act and parallels many of 

the provisions in Part1 addressing the 

manner in which, and the 

responsibilities imposed upon, an FCM 

holding funds for futures customers 

trading on designated contract markets.7

Regulation 22.2 requires an FCM to treat 

and to deal with funds deposited by 

Cleared Swaps Customers as belonging 

to such Cleared Swaps Customers and to 

hold such funds separately from the 

FCM’s own funds. Regulation 22.4 

provides that an FCM may deposit 

Cleared Swaps Customer Collateral with 

a bank, trust company, DCO, or another 

registered FCM. Regulation 22.6 

requires that the account holding the 

Cleared Swaps Customers Collateral 

must clearly identify the account as an 

account for Cleared Swaps Customers of 

the FCM engaging in cleared swap 

transactions and that the funds 

maintained in the account are subject to 

the segregation provisions of section 

4d(f) of the Act and Commission 

regulations. 

Regulation 22.2(d) also prohibits an 

FCM from using the funds deposited by 

one Cleared Swaps Customer to 

purchase, margin, or settle cleared swap 

transactions of any person other the 

Cleared Swaps Customer that deposited 

the funds. Further, § 22.2(c) permits an 

FCM to commingle the Cleared Swaps 

Customer Collateral of multiple Cleared 

Swaps Customers into one or more 

accounts, and § 22.2(e)(1) permits an 

FCM to invest Cleared Swaps Customer 

Collateral in permitted investments 

under § 1.25. 

In addition to holding funds for 

futures customers transacting on 

designated contract markets and for 

Cleared Swaps Customers engaging in 

cleared swap transactions, FCMs also 

hold funds for persons trading futures 

contracts listed on foreign boards of 

trade. Section 4(b) of the Act provides 

that the Commission may adopt rules 

and regulations proscribing fraud and 

requiring minimum financial standards, 

the disclosure of risk, the filing of 

reports, the keeping of books and 

records, the safeguarding of the funds 

deposited by persons for trading on 

foreign markets, and registration with 

the Commission by any person located 

in the United States who engages in the 

offer or sale of any contract of sale of a 

commodity for future delivery that is 

made subject to the rules of a board of 

trade located outside of the United 

States. Pursuant to the statutory 

authority of section 4(b), the 

Commission adopted Part 30 of its 

regulations to address foreign futures 

and foreign option transactions. 

The segregation provisions for funds 

deposited by foreign futures or foreign 

options customers to margin foreign 

futures or foreign options transactions 

under Part 30, however, are significantly 

different from the requirements set forth 

in § 1.20 for futures customers trading 

on designated contract markets and Part 

22 for Cleared Swaps Customers 

engaging in cleared swap transactions. 

Regulation 30.7 provides that an FCM 

may deposit the funds belonging to 

foreign futures or foreign options 

customers in an account or accounts 

maintained at a bank or trust company 

located in the United States; a bank or 

trust company located outside of the 

United States that has in excess of $1 

billion of regulatory capital; an FCM 

registered with the Commission; a DCO; 

a member of a foreign board of trade; a 

foreign clearing organization; or a 

depository selected by the member of a 

foreign board of trade or foreign clearing 

organization. The account with the 

depository must be titled to clearly 

specify that the account holds funds 

belonging to the foreign futures or 

foreign options customers of the FCM 

that are trading on foreign futures 

markets. An FCM also is permitted to 

invest the funds deposited by foreign 

futures or foreign option customers in 

accordance with § 1.25. 

However, unlike § 1.20 and Part 22, 

which require an FCM to hold a 

sufficient amount of funds in 

segregation to meet the total account 

equities of all of the FCM’s futures 

customers and Cleared Swaps 

Customers at all times (i.e., the Net 

Liquidating Equity Method), § 30.7 

requires an FCM to maintain in separate 

accounts an amount of funds only 

sufficient to cover the margin required 

on open foreign futures contracts, plus 

or minus any unrealized gains or losses 

on such open positions, plus any funds 

representing premiums payable or 

received on foreign options (including 

any additional funds necessary to secure 

such options, plus or minus any 

unrealized gains or losses on such 

options) (i.e., the ‘‘Alternative 

Method’’). Thus, under the Part 30 

Alternative Method an FCM is not 

required to maintain a sufficient amount 

of funds in such separate accounts to 

pay the full account balances of all of its 

foreign futures or foreign options 

customers at all times. 

In addition to the segregation 

requirements of sections 4d(a)(2) and 

4d(f) of the Act, and the secured amount 

requirements in Part 30 of the 

Commission’s regulations, FCMs also 

are subject to minimum net capital and 

financial reporting requirements that are 

intended to ensure that such firms meet 

their financial obligations in a regulated 

marketplace, including their financial 

obligations to customers and DCOs. 

Each FCM is required to maintain a 

minimum level of ‘‘adjusted net 

capital,’’ which is generally defined 

under § 1.17 as the firm’s net equity as 

computed under generally accepted 

accounting principles, less all of the 

firm’s liabilities and further excluding 

all assets that are not liquid or readily 

marketable. Regulation 1.17(c)(5) further 

requires an FCM to impose capital 

charges (i.e., deductions) on certain of 

its liquid assets to protect against 

possible market risks in such assets. 

FCMs also are subject to financial 

recordkeeping and reporting 

requirements. FCMs that carry customer 

accounts are required under § 1.32 to 

prepare a schedule each business day 

demonstrating their compliance with 

the segregation and secured amount 

requirements. Regulation 1.32 requires 

the calculation to be performed by noon 

each business day, reflecting the 

account balances and open positions as 

of the close of business on the previous 

business day. 

Each FCM also is required by § 1.10 

to file with the Commission and with its 


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67868 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

8The term ‘‘self-regulatory organization’’ is 

defined by § 1.3 to mean a contract market, a swap 

execution facility, or a registered futures 

association. A DSRO is the SRO that is appointed 

to be primarily responsible for conducting ongoing 

financial surveillance of an FCM under a joint audit 

agreement submitted to and approved by the 

Commission under § 1.52. 

9See Report of the Trustee’s Investigation and 

Recommendations, In re MF Global Inc., No. 11– 

2790 (MG) SIPA (Bankr. S.D.N.Y. Jun. 4, 2012). 

designated self-regulatory organization 

(‘‘DSRO’’) monthly unaudited financial 

statements and an annual audited 

financial report, as well as notices of 

certain predefined events.8 Regulation 

1.12 requires an FCM to file a notice 

with the Commission and with the 

firm’s DSRO whenever, among other 

things, the firm: (1) Fails to maintain 

compliance with the Commission’s 

capital requirements; (2) fails to hold 

sufficient funds in segregated or secured 

amount accounts to meet its regulatory 

requirements; (3) fails to maintain 

current books and records; or (4) 

experiences a significant reduction in 

capital from the previous month-end. 

The purpose of the regulatory notices is 

to alert the Commission and the firm’s 

DSRO as early as possible to potential 

financial issues at the firm that may 

adversely impact the ability of the FCM 

to comply with its obligations to 

safeguard customer funds, or to meet its 

financial obligations to other FCMs or 

DCOs. 

The statutory mandate to segregate 

customer funds—to treat them as 

belonging to the customer and not use 

the funds inappropriately—takes on 

greater meaning in light of the 

devastating events experienced over the 

past year. Those events, which are 

discussed in greater detail below, 

demonstrate that the risks of 

misfeasance and malfeasance, and the 

risks of failing to maintain sufficient 

excess funds in segregation: (i) Put 

customer funds at risk; and (ii) are 

exacerbated by stresses on the business 

of the FCM. Many of those risks can be 

mitigated significantly by better risk 

management systems and controls, 

along with an increase in risk-oriented 

oversight and examination of the FCMs. 

Determining what is a ‘‘sufficient’’ 

amount of excess funds in segregation 

for any particular FCM requires a full 

understanding of the business of that 

FCM, including a proper analysis of the 

factors that affect the actual amount of 

segregated funds held by the FCM 

relative to the minimum amount of 

segregated funds it is required to hold. 

Further, appropriate care must be taken 

to avoid withdrawing such excess funds 

at times of great stress to cover needs 

unrelated to the purposes for which 

excess segregated and secured funds are 

maintained. In times of stress, excess 

funds may look like an easy liquidity 

source to help cover other risks of the 

business; yet withdrawing it makes it 

unavailable when it may be most 

needed. The recent market events 

illustrate both the need to: (i) Require 

that care be taken about monitoring 

excess segregated and secured funds, 

and the conditions under and the extent 

to which such funds may be withdrawn; 

and (ii) place appropriate risk 

management controls around the other 

risks of the business to help relieve (A) 

the likelihood of an exigent event or, (B) 

if such an event occurs, the likelihood 

of a failure to prepare for such an event, 

which in either case could create 

pressures that result in an inappropriate 

withdrawal of customer funds. 

Although the Commission’s existing 

regulations provide an essential 

foundation to fostering a wellfunctioning marketplace, wherein 

customers are protected and 

institutional risks are minimized, recent 

events have demonstrated that 

additional measures are necessary to 

effectuate the fundamental purposes of 

the statutory provisions discussed 

above. Further, concurrently with the 

enhanced responsibilities for FCMs that 

are proposed herein, the oversight and 

examination systems must be enhanced 

to mitigate risks and effectuate the 

statutory purposes. 

B. Self-Regulatory Structure 

The Commission’s oversight structure 

provides that SROs are the frontline 

regulators of FCMs, introducing brokers 

(‘‘IBs’’), commodity pool operators, and 

commodity trading advisors. In 2000, 

Congress affirmed the Commission’s 

reliance on SROs by amending section 

3 of the Commodity Exchange Act to 

state: ‘‘It is the purpose of this Act to 

serve the public interests through a 

system of effective self-regulation of 

trading facilities, clearing systems, 

market participants and market 

professionals under the oversight of the 

Commission.’’ 

As part of its oversight responsibility, 

an SRO is required to conduct periodic 

examinations of member FCMs’ 

compliance with Commission and SRO 

financial and related reporting 

requirements, including the FCMs’ 

holding of customer funds in segregated 

and secured accounts. The Commission 

oversees the SROs by examining them 

for the performance of their duties. 

More recently, the Commission has 

moved to conducting quarterly reviews 

of the SROs’ FCM examination program 

in which the Commission selects a 

small sample of the SRO’s FCM work 

papers to review. In addition, the 

Commission also conducts limitedscope reviews of FCMs in a ‘‘for cause’’ 

situation that are sometimes referred to 

as ‘‘audits,’’ but they are not full-scale 

audits as accountants commonly use 

that term. 

In addition, because there are 

multiple SROs who share the same 

member FCMs, to avoid subjecting 

FCMs to duplicative examinations from 

SROs, the Commission has a permissive 

system that allows the SROs to agree 

how to allocate FCMs amongst them. An 

SRO who is allocated certain FCMs for 

such examination is referred to as the 

DSRO of those FCMs. 

Under Commission regulations, FCMs 

must have their annual financial 

statements audited by an independent 

certified public accountant following 

U.S. Generally Accepted Auditing 

Standards (‘‘U.S. GAAS’’). As part of 

this certified annual report, the 

independent accountant also must 

conduct appropriate reviews and tests to 

identify any material inadequacies in 

systems and controls that could violate 

the Commission’s segregation or secured 

amount requirements. Any such 

inadequacies are required to be reported 

to the FCM’s DSRO and to the 

Commission. 

C. Futures Commission Merchant 

Insolvencies and Failures of Risk 

Management 

Recent events demonstrate the need 

for revisions to the Commission’s 

customer protection regime. Since 

October 2011, two FCMs have entered 

into insolvency proceedings. On 

October 31, 2011, MF Global, Inc. 

(‘‘MFGI’’), which was dually-registered 

as an FCM with the Commission and as 

a securities broker-dealer (‘‘BD’’) with 

the U.S. Securities and Exchange 

Commission (‘‘SEC’’), was placed into a 

liquidation proceeding under the 

Securities Investor Protection Act by the 

Securities Investor Protection 

Corporation (‘‘SIPC’’). The trustee 

appointed to oversee the liquidation of 

MFGI has reported a potential $900 

million shortfall of funds necessary to 

repay the account balances due to 

customers trading futures on designated 

contract markets, and an approximately 

$700 million shortfall in funds 

immediately available to repay the 

account balances of customers trading 

on foreign futures markets.9 The 

shortfall in customer segregated 

accounts is attributable by the MFGI 

Trustee to significant transfers of funds 

out of the customer accounts that were 

used by MFGI for various purposes 

other than to meet obligations to or on 


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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67869 

10Complaint, U.S. Commodity Futures Trading 

Commission v. Peregrine Financial Group, Inc., and 

Russell R. Wasendorf, Sr., No. 12–cv–5383 (N.D. Ill. 

July 10, 2012). A copy of the Commission’s 

complaint has been posted to the Commission’s 

Web site. 

11See, e.g., Edward Krudy, Jed Horowitz and John 

McCrank, ‘‘Knight’s Future in Balance After 

Trading Disaster,’’ Reuters (Aug. 3, 2012), available 

at http://in.reuters.com/article/2012/08/03/ 

knightcapital-loss-idINL2E8J27QE20120803 (noting 

that a software issue caused the firm to incur a $440 

million trading loss, which represented much of the 

firm’s capital); Chris Dieterich and Nathalie Tadena, 

‘‘Penson Worldwide’s US Securities Accounts To 

Be Acquired By Apex Clearing,’’ available at 

http://online.wsj.com/article/BT-CO-20120531- 

717791.html (discussing circumstances that led 

Penson to sell its futures business). 

12See, Investment of Customer Funds and Funds 

Held in an Account for Foreign Futures and Foreign 

Options Transactions, 76 FR 78776 (Dec. 19, 2011). 

13See Commission Regulation 39.12(g)(8)(i) and 

Derivatives Clearing Organization General 

Provisions and Core Principles, 76 FR 69334 (Nov. 

8, 2011). 

14See 77 FR 6336 (Feb. 7, 2012). 

15See Core Principles and Other Requirements for 

Designated Contract Markets, 77 FR 36612 (June 19, 

2012). 

behalf of customers. The trustee also is 

attempting to recover approximately 

$640 million of customer funds that was 

deposited by MFGI with its London, 

U.K. affiliate, MFGUK, as margin funds 

for trading on foreign markets. The 

MFGI trustee and the Special 

Administrators handling the liquidation 

of MFGUK are disputing the legal status 

of the funds and whether they are 

customer funds under English law. The 

outcome of this dispute will have a 

significant impact on the amount of 

funds that are returned to MFGI. 

In addition, the Commission filed a 

civil injunctive complaint in federal 

district court on July 10, 2012, against 

Peregrine Financial Group, Inc. (‘‘PFG’’), 

a registered FCM and its Chief Executive 

Officer (‘‘CEO’’) and sole owner, Russell 

R. Wasendorf, Sr., alleging that PFG and 

Wasendorf, Sr. committed fraud by 

misappropriating customer funds, 

violated customer fund segregation 

laws, and made false statements 

regarding the amount of funds in 

customer segregated accounts in 

financial statements filed with the 

Commission. The complaint states that 

in July 2012 during an NFA 

examination PFG falsely represented 

that it held in excess of $220 million of 

customer funds when in fact it held 

approximately $5.1 million.10

Recent incidents also have 

demonstrated the value of establishing 

robust risk management systems within 

FCMs and enhanced early warning 

systems to detect and address capital 

issues. In particular, problems that arise 

through an FCM’s non-futures-related 

business can have a direct and 

significant impact on the FCM’s 

regulatory capital, raising questions as 

to whether the FCM will be able to 

maintain the minimum financial 

requirements mandated by the Act and 

Commission regulations.11

These recent incidents have 

highlighted weaknesses in the customer 

protection regime prescribed in the 

Commission’s regulations and through 

the self-regulatory system. In particular, 

questions have arisen on the 

requirements surrounding the holding 

and investment of customer funds, 

including the ability of FCMs to 

withdraw funds from customer 

segregated accounts and Part 30 secured 

accounts. Additionally, the incidents 

have underscored the need for 

additional safeguards—such as robust 

risk management systems, strengthened 

early-warning systems surrounding 

margin and capital requirements, and 

enhanced public disclosures—to 

promote the protection of customer 

funds and to minimize the systemic risk 

posed by certain actions of market 

participants. Further questions have 

arisen on the system of audits and 

examinations of FCMs, and whether the 

system functions adequately to monitor 

FCMs’ activities, verify segregated fund 

and secured amount balances, and 

detect fraud. Consequently, the 

Commission has taken steps to study 

and address the issues raised by the 

incidents, and industry participants 

likewise have taken steps to address the 

issues. Such steps are described in 

greater detail in the next section. 

D. Recent Commission Rulemakings and 

Other Initiatives Relating to Customer 

Protection 

Since late 2011, the Commission has 

promulgated rules directly impacting 

the protection of customer funds. The 

Commission also has studied the 

current regulatory framework 

surrounding customer protection, 

particularly in light of the recent 

incidents outlined above, in order to 

identify potential enhancements to the 

systems and Commission regulations 

protecting customer funds. The 

Commission’s efforts have been 

informed, in part, by efforts undertaken 

by industry participants. The proposed 

rule amendments set forth in this 

release have been informed by the 

efforts detailed below. 

In December 2011, the Commission 

adopted final rule amendments revising 

the types of investments that an FCM or 

DCO can make with customer funds 

under § 1.25, for the purpose of 

affording greater protection for such 

funds.12 Among other changes to §§ 1.25 

and 30.7, the final rule amendments 

removed from the list of permitted 

investments: (1) corporate debt 

obligations not guaranteed by the 

United States; (2) foreign sovereign debt; 

and (3) in-house and affiliate 

transactions. 

In adopted the amendments to § 1.25, 

the Commission was mindful that 

customer segregated funds must be 

invested by FCMs and DCOs in a 

manner that minimizes their exposure 

to credit, liquidity, and market risks 

both to preserve their availability to 

customers and DCOs, and to enable 

investments to be quickly converted to 

cash at a predictable value in order to 

avoid systemic risk. The amendments 

are consistent with the general 

prudential standard contained in § 1.25, 

which provides that all permitted 

investments must be ‘‘consistent with 

the objectives of preserving principal 

and maintaining liquidity.’’ 

The Commission also approved final 

regulations that require DCOs to collect 

initial customer margin from FCMs on 

a gross basis.13 Under the final 

regulations, FCMs are no longer 

permitted to offset one customer’s 

margin requirement against another 

customer’s margin requirements and 

deposit only the net margin collateral 

with the DCO. As a result of the rule 

change, a greater portion of customer 

initial margin will be posted by FCMs 

to the DCOs. 

The Commission also approved a new 

margining regime for cleared swaps 

positions.14 Under the traditional 

futures margining model, DCOs hold an 

FCM’s customer funds on a collective 

basis and are permitted to use the 

collective margin funds held for the 

FCM’s customers to satisfy a margin 

deficiency caused by a single customer. 

The Commission approved an 

alternative margin rule for cleared swap 

transactions. Under the ‘‘LSOC rule’’ 

(legal segregation with operational 

comingling), the DCOs that clear swaps 

transactions have greater information 

regarding the margin collateral of 

individual Swaps Customers, and each 

Swaps Customer’s collateral is protected 

individually all the way to the 

clearinghouse. 

The Commission also included 

customer protection enhancements in 

the final rule for designated contract 

markets. These provisions codify into 

rules staff guidance on minimum 

requirements for SROs regarding their 

financial surveillance of FCMs.15 The 

rules require that a DCM have 

arrangements and resources for effective 


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67870 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

16 Id. at 36646. 

17Further information on the public roundtable, 

including video recordings and transcripts of the 

discussions, have been posted to the Commission’s 

Web site. See http://www.cftc.gov/PressRoom/ 

Events/opaevent_cftcstaff022912 (relating to Feb. 

29, 2012); http://www.cftc.gov/PressRoom/Events/

opaevent_cftcstaff030112 (relating to Mar. 1, 2012). 

18Additional information, including documents 

submitted by meeting participants, has been posted 

to the Commission’s Web site. See http:// 

www.cftc.gov/PressRoom/Events/opaevent_tac

072612. 

19The FIA’s release addressing FAQs on the 

protection of customer funds is accessible on the 

FIA’s Web site at http://www.futuresindustry.org/ 

downloads/PCF–FAQs.PDF. 

20The FIA’s initial recommendations are 

accessible on the FIA’s Web site at http:// 

www.futuresindustry.org/downloads/

Initial_Recommendations_for_Customer

_Funds_Protection.pdf. 

21For more information relating to the new FCM 

financial requirements, see http:// 

www.nfa.futures.org/news/ 

newsNotice.asp?ArticleID=4072. 

rule enforcement and trade and 

financial surveillance programs, 

including the authority to collect 

information and examine books and 

records of members and market 

participants. The rules also establish 

minimum financial standards for both 

member FCMs and IBs and nonintermediated market participants. The 

Commission expressly noted in the 

preamble of the Adopting Release that 

‘‘a DCM’s duty to set financial standards 

for its FCM members involves setting 

capital requirements, conducting 

surveillance of the potential future 

exposure of each FCM as compared to 

its capital, and taking appropriate action 

in light of the results of such 

surveillance.’’ 16 Further, the rules 

mandate that DCMs adopt rules for the 

protection of customer funds, including 

the segregation of customer and 

proprietary funds, the custody of 

customer funds, the investment 

standards for customer funds, 

intermediary default procedures and 

related recordkeeping. 

In addition to the rulemaking efforts 

outlined above, the Commission has 

sought additional information through a 

series of roundtables and other 

meetings. On February 29 and March 1, 

2012, the Commission solicited 

comments and held a public roundtable 

to solicit input on customer protection 

issues from a broad cross-section of the 

futures industry, including market 

participants, FCMs, DCOs, SROs, 

securities regulators, foreign clearing 

organizations, and academics.17 The 

roundtable focused on issues relating to 

the advisability and practicality of 

modifying the segregation models for 

customer funds; alternative models for 

the custody of customer collateral; 

enhancing FCM controls over the 

disbursement of customer funds; 

increasing transparency surrounding an 

FCM’s holding and investment of 

customer funds; and lessons learned 

from recent commodity brokerage 

bankruptcy proceedings. 

The Commission also hosted a public 

meeting of the Technology Advisory 

Committee (‘‘TAC’’) on July 26, 2012.18

Panelists and TAC members discussed 

potential technological solutions 

directed at enhancing the protection of 

customers funds by identifying and 

exploring technological issues and 

possible solutions relating to the ability 

of the Commission, SROs and customers 

to verify the location and status of funds 

held in customer segregated accounts. 

Commission staff hosted an additional 

roundtable on August 9, 2012, to 

discuss SRO requirements for 

examinations of FCMs and Commission 

oversight of SRO examination programs. 

The roundtable also focused on the role 

of the independent public accountant in 

the FCM examination process, and 

proposals addressing various 

alternatives to the current system for 

segregating customer funds. 

In developing the proposals set forth 

in this release, the Commission also has 

been informed by efforts undertaken by 

industry participants. On February 29, 

2012, the Futures Industry Association 

(‘‘FIA’’) initiated steps to educate 

customers on the extent of the 

protections provided under the current 

regulatory structure. FIA issued a list of 

Frequently Asked Questions (‘‘FAQ’’) 

prepared by members of the FIA Law 

and Compliance Division addressing the 

basics of segregation, collateral 

management and investments, capital 

requirements and other issues for FCMs 

and joint FCM/BDs, and clearinghouse 

guaranty funds.19 The FAQ is intended 

to provide existing and potential 

customers with a better understanding 

of the risks of engaging in futures 

trading and a clear explanation of the 

extent of the protections provided to 

customers and their funds under the Act 

and Commission regulations. 

FIA also issued a series of initial 

recommendations for the protection of 

customer funds.20 The 

recommendations were prepared by the 

Financial Management Committee, 

whose members include representatives 

of FIA member firms, DCOs and 

depository institutions. The initial 

recommendations address enhanced 

disclosure on the protection of customer 

funds, reporting on segregated funds 

balances by FCMs, FCM internal 

controls surrounding the holding and 

disbursement of customer funds, and 

revisions to Part 30 regulations to make 

the protections comparable to those 

provided for customers trading on 

designated contract markets. 

On July 13, 2012, the Commission 

approved new FCM financial 

requirements proposed by the National 

Futures Association (‘‘NFA’’).21 The 

NFA Financial Requirements Section 16 

and its related Interpretive Notice 

entitled NFA Financial Requirements 

Section 16: FCM Financial Practices and 

Excess Segregated Funds/Secured 

Amount Disbursements (collectively 

referred to as ‘‘the Segregated Funds 

Provisions’’) were developed in 

consultation with Commission staff. 

NFA’s Segregated Funds Provisions 

require each FCM to: (1) Maintain 

written policies and procedures 

governing the deposit of the FCM’s 

proprietary funds (i.e., excess or 

residual funds) in customer segregated 

accounts and Part 30 secured accounts; 

(2) maintain a targeted amount of excess 

funds in segregate accounts and Part 30 

secured accounts; (3) file on a daily 

basis the FCM’s segregation and Part 30 

secured amount computations with 

NFA; (4) obtain the approval of senior 

management prior to a withdrawal that 

is not for the benefit of customers, 

whenever the withdrawal equals 25 

percent or more of the excess segregated 

or Part 30 secured amount funds; (5) file 

a notice with NFA of any withdrawal 

that is not for the benefit of customers, 

whenever the withdrawal equals 25 

percent or more of the excess segregated 

or Part 30 secured amount funds; (6) file 

detailed information regarding the 

depositories holding customer funds 

and the investments made with 

customer funds as of the 15th day (or 

the next business day if the 15th is not 

a business day) and the last business 

day of each month; and (7) file 

additional monthly net capital and 

leverage information with NFA. 

Significantly, NFA’s Segregated 

Funds Provisions also require FCMs to 

compute their Part 30 secured amount 

requirement and compute their targeted 

excess Part 30 secured funds using the 

same Net Liquidating Equity Method 

that is required by the Act and 

Commission regulations for computing 

the segregation requirements for 

customers trading on U.S. contract 

markets under section 4d of the Act. 

FCMs are not permitted under the NFA 

rules to use the Alternative Method to 

compute the Part 30 secured amount 

requirement. The failure of an FCM to 

maintain its targeted amount of excess 

Part 30 funds computed using the Net 


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Liquidating Equity Method may result 

in NFA initiating a Membership 

Responsibility Action (‘‘MRA’’) against 

the firm. 

In addition, in setting the target 

amount of excess funds, the FCM’s 

management must perform a due 

diligence inquiry and consider various 

factors relating, as applicable, to the 

nature of the FCM’s business, including 

the type and general creditworthiness of 

the FCM’s customers, the trading 

activity of the customers, the types and 

volatility of the markets and products 

traded by the FCM’s customers, and the 

FCM’s own liquidity and capital needs. 

The FCM’s Board of Directors (or similar 

governing body), CEO or Chief Financial 

Officer (‘‘CFO’’) must approve in writing 

the FCM’s targeted residual amount, any 

changes thereto, and any material 

changes in the FCM’s written policies 

and procedures. 

The NFA Board of Directors also 

approved on August 16, 2012, 

amendments to NFA financial 

requirements for FCMs that will require 

each FCM to provide its DSRO with 

view-only access via the Internet to 

account information for each of the 

FCM’s customer segregated funds 

account(s) maintained and held at a 

bank or trust company. The same 

requirement would apply to the FCM’s 

customer secured account(s) held for 

customers trading on foreign futures 

exchanges. 

In addition, the NFA rule 

amendments provide that if a bank or 

trust company is unable to allow the 

FCM to provide its DSRO with viewonly full access via the Internet, the 

bank or trust company will not be 

deemed an acceptable depository to 

hold customer segregated and secured 

accounts. NFA intends to expand its 

oversight of FCMs under the amended 

rules, once the amendments are 

implemented, to receive daily reports 

from all depositories for customer 

segregated and secured accounts, 

including FCMs that are clearing 

members of DCOs. NFA plans to 

develop a program to compare the 

balances reported by the depositories 

with the balances reported by the FCMs 

in their daily segregation reports. An 

immediate alert would be generated for 

any material discrepancies. 

E. Commission’s Proposal 

The incidents outlined above, 

coupled with the information generated 

through the recent efforts undertaken by 

the Commission and industry 

participants, demonstrate the need for 

new rules and amendments to existing 

rules. In particular, an examination of 

FCM business operations—including 

the non-futures business of FCMs—and 

the currently regulatory framework 

evince a need for enhanced customer 

protections, risk management programs, 

disclosure requirements, and auditing 

and examination programs. The 

amendments proposed herein address 

these issues in several ways. 

First, recognizing problems 

surrounding the treatment of customer 

segregated funds and foreign futures or 

foreign options secured amounts, the 

Commission is proposing to amend 

several components of Parts 1, 22, and 

30 of the Commission’s regulations. The 

Commission believes that the proposed 

amendments will provide greater 

certainty to market participants that the 

customer funds entrusted to FCMs will 

be protected. Second, to address 

shortcomings in the risk management of 

FCMs, the Commission is proposing a 

new § 1.11 that will establish robust risk 

management programs. Third, the 

Commission determined that the current 

regulatory framework should be reoriented to implement a more riskbased, forward-looking perspective, 

affording the Commission and SROs 

with read-only access to accounts 

holding customer funds and additional 

information on depositories and the 

customer assets held in such 

depositories. The proposed amendments 

to §§ 1.10, 1.12, 1.20, 1.26, and 1.32 

address those and other issues. Fourth, 

given the difficulties that can arise in an 

FCM’s business, and the direct and 

significant impact on the FCM’s 

regulatory capital that can result from 

such difficulties, the Commission is 

proposing to amend § 1.17(a)(4) to 

ensure that an FCM’s capital and 

liquidity are sufficient to safeguard the 

continuation of operations at the FCM. 

Fifth, to effect the change in orientation 

needed in FCM examinations programs, 

as well as to assure quality control over 

program contents, administration and 

oversight, the Commission is proposing 

to amend § 1.52, which, among other 

things, addresses the formation of Joint 

Audit Committees and the 

implementation of Joint Audit 

Programs. And sixth, recognizing the 

need to increase the information 

provided to customers concerning the 

risks of futures trading and the FCMs 

with which they may choose to conduct 

business, the Commission is proposing 

amendments to § 1.55 that will enhance 

the disclosures provided by FCMs. 

These amendments are discussed in 

greater detail in the next Section. 

II. Section by Section Analysis of 

Proposed Commission Regulations and 

Proposed Amendments to Existing 

Commission Regulations 

A. Proposed Amendments to § 1.10: 

Financial Reports of Futures 

Commission Merchants and Introducing 

Brokers 

Regulation 1.10 requires each FCM to 

file with the Commission and with the 

firm’s DSRO an unaudited financial 

report each month. The financial report 

must be prepared using Form 1–FR– 

FCM. An FCM, however, that is duallyregistered as a BD, may file a Financial 

and Operational Combined Uniform 

Single Report under the Securities 

Exchange Act of 1934 (‘‘FOCUS 

Report’’) in lieu of the Form 1–FR–FCM. 

Each FCM also is required to file an 

annual report certified by an 

independent public accountant with the 

Commission and with its DSRO. 

The unaudited monthly and certified 

annual financial reports are required to 

contain basic financial statements 

including a statement of financial 

condition, a statement of income (loss), 

and a statement of changes in 

ownership equity. The financial 

statements also are required to include 

additional schedules designed to 

address specific regulatory objectives to 

demonstrate that the FCM is in 

compliance with minimum capital and 

customer funds segregation 

requirements. These additional 

schedules include a statement of 

changes in liabilities subordinated to 

claims of general creditors, a statement 

of the computation of the minimum 

capital requirements (‘‘Capital 

Computation Schedule’’), a statement of 

segregation requirements and funds in 

segregation for customers trading on 

U.S. commodity exchanges 

(‘‘Segregation Schedule’’) and a 

statement of secured amounts and funds 

held in separate accounts for foreign 

futures and foreign options customers 

(‘‘Secured Amount Schedule’’). In 

addition, the certified annual report 

must contain a reconciliation of material 

differences between the Capital 

Computation Schedule, the Segregation 

Schedule, and the Secured Amount 

Schedule contained in the certified 

annual report and the unaudited 

monthly report for the FCM’s year-end 

month. 

The Forms 1–FR–FCM and the 

FOCUS Reports are necessary financial 

reporting for Commission and DSRO 

staff to assess the ongoing financial 

condition of an FCM and provide 

significant information regarding the 

operations of the firm that may impact 

the FCM’s ability to maintain 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67872 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

22The Commission also proposes to revise the 

title of the ‘‘Secured Amount Schedule’’ by adding 

the term ‘‘30.7 Customer’’ to specify that the 

secured amount will include both U.S.-domiciled 

and foreign-domiciled customers consistent with 

the proposed amendments to Part 30 of the 

Commission Regulations discussed in Section II.R 

below. 

23The NFA recently adopted a similar 

amendment to its rules, mandating that its member 

FCMs maintain written policies and procedures 

identifying a target amount that the FCM will seek 

to maintain as its residual interest in customer 

segregated and secured accounts. See NFA Notice 

I–12–14 (July 18, 2012), available at http:// 

www.nfa.futures.org/news/ 

newsNotice.asp?ArticleID=4072. 

24The term ‘‘Cleared Swaps Customer Collateral’’ 

is defined in § 22.1 to mean all money, securities, 

or other property received by a futures commission 

merchant or by a derivatives clearing organization 

from, for, or on behalf of a Cleared Swaps Customer 

to margin a Cleared Swap or the settlement value 

of a Cleared Swap, and includes any accruals on 

such Cleared Swap transactions. 

25See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov/ 

LawRegulation/OTCDERIVATIVES/index.htm. 

26See 77 FR 6336 (February 7, 2012). 27See Capital Requirements of Swap Dealers and 

Major Swap Participants, 76 FR 27802 (May 12, 

2011). 28Regulation 1.10(h) provides that a duallyregistered FCM/BD may file a FOCUS Report in lieu 

of the Form 1–FR–FCM provided that all 

information that is required to be included in the 

Form 1–FR–FCM is included in the FOCUS Report. 

Currently, dual-registrant FCM/BDs include a 

Segregation Schedule and a Secured Amount 

Schedule in the FOCUS Report filings as 

supplemental schedules. If the Commission were to 

adopt a Cleared Swaps Segregation Schedule, dualregistrant FCM/BDs would have to include such 

schedule in their Focus Report filings. 

compliance with Commission 

requirements and the protection of 

customer funds. The Form 1–FR–FCM 

and FOCUS Reports are filed 

electronically with the Commission and 

are subject to automated edits by the 

Commission’s financial statement 

surveillance software. Alerts and edit 

checks, which may indicate a need for 

further analysis and follow-up by staff, 

are generated by the financial 

surveillance software and major issues 

are immediately and automatically 

forwarded to Commission staff for 

review. 

The Segregation Schedule and the 

Secured Amount Schedule generally 

indicate, respectively, the total amount 

of funds held by the FCM in segregated 

or secured accounts, the total amount of 

funds that the FCM must hold in 

segregated or secured accounts to meet 

its regulatory obligations to futures 

customers and foreign futures or foreign 

options customers, and whether the firm 

holds excess segregated or secured 

funds in the segregated or secured 

accounts as of the reporting date. The 

Commission is proposing to amend 

§ 1.10 to require each FCM to also 

disclose in the Segregation Schedule 

and in the Secured Amount Schedule 22

a target amount of ‘‘residual interest’’ 

(denoting the FCM’s proprietary funds) 

that the FCM is required to maintain in 

customer segregated accounts and 

secured accounts based upon its written 

policies and procedures for computing a 

targeted amount required under the new 

risk management provisions in § 1.11 

discussed in Section II.B below.23 In 

addition to the target amount of residual 

interest, the FCM also will be required 

to report on the Segregation Schedule 

and the Secured Amount Schedule the 

sum of outstanding margin deficits of 

the relevant customers for each 

computation, to ensure that the residual 

interest is at all times in excess of such 

sum, demonstrating compliance with 

the newly proposed procedures in 

§§ 1.22 and 1.23, which shall require 

residual interest to exceed the sum of 

such margin deficits. 

As more fully discussed in Section 

II.B below, proposed § 1.11 will require 

each FCM that carries customer funds to 

determine a necessary level of excess 

segregated and secured funds that the 

firm should hold in segregated or 

secured accounts to ensure against 

becoming undersegregated or 

undersecured as a result of the 

withdrawal of proprietary funds from 

segregated or secured accounts. Each 

FCM is required under proposed § 1.11 

to compute or determine the necessary 

target of residual interest based upon 

appropriate due diligence and 

consideration of various factors relating 

to the nature of the FCM’s business,24

including the type and general 

creditworthiness of the customer base, 

the amount of the undermargined 

customer accounts on any given day, 

and the volatility and liquidity of the 

markets and products traded by 

customers. 

The disclosure of the targeted amount 

of the FCM’s residual interest in 

segregated or secured accounts will 

allow the Commission and DSRO to 

assess the size of the target relative to 

both the total funds held in segregation 

or secured accounts and to compare the 

target to other FCMs. Such information 

will assist the Commission and DSROs 

in assessing the potential risk that a firm 

may become undersegregated or 

undersecured, and will enhance the 

Commission’s and DSRO’s ability to 

protect customer funds. 

The Commission also is proposing to 

revise Form 1–FR–FCM to adopt a new 

‘‘Statement of Cleared Swap Customer 

Segregation Requirements and Funds in 

Cleared Swap Customer Accounts 

Under Section 4d(f) of the Act’’ 

(‘‘Cleared Swaps Segregation 

Schedule’’). The Commission is 

proposing the Cleared Swaps 

Segregation Schedule to implement 

provisions in section 724(a) of the 

Dodd-Frank Act.25 Section 724(a) 

amended section 4d of the Act, and 

requires an FCM to segregate from its 

own assets any money, securities and 

other property deposited by a Cleared 

Swaps Customer to margin its cleared 

swaps positions. As part of the 

implementation of section 724(a) of the 

Dodd-Frank Act, the Commission 

adopted § 22.2(g) which requires an 

FCM to compute, as of the close of 

business each business day, a 

segregation computation demonstrating 

compliance with its obligation to hold 

sufficient funds in segregated accounts 

in an amount sufficient to cover the 

total Net Liquidating Equity of each of 

the FCM’s Cleared Swaps Customers.26

The proposed Cleared Swaps 

Segregation Schedule will be 

comparable to the current Segregation 

Schedule and will allow the 

Commission and the FCM’s DSRO to 

obtain information on the FCM’s 

holding of Cleared Swaps Customer 

Collateral to ensure that such funds are 

held in accordance with the provisions 

of Part 22 of the Commission’s 

regulations and that the FCM is 

reporting that it has sufficient funds in 

segregated accounts to meet its 

obligations to all of its Cleared Swaps 

Customers computed under the Net 

Liquidating Equity Method. 

The Commission previously proposed 

a Cleared Swaps Segregation Schedule 

as part of its proposed regulations to 

adopt capital requirements for swap 

dealers and major swap participants.27

In light of the Commission’s decision to 

revise the Cleared Swaps Segregation 

Schedule from the version that was 

published for comment as part of the 

Commission’s proposed capital rules for 

swap dealers and major swap 

participants by requiring the FCM to 

separately disclose its targeted residual 

interest in Cleared Swaps Customer 

Accounts and the sum of margin deficits 

for such accounts, the Commission is 

republishing the Cleared Swaps 

Segregation Schedule as part of this 

proposal to provide the public with an 

opportunity to comment on the 

proposal.28

The Commission also is proposing to 

amend § 1.10(g)(2) to provide that the 

Cleared Swaps Segregation Schedule is 

a public document. Regulation 1.10 

currently provides that the Commission 

will treat the monthly Form 1–FR–FCM 


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29WinJammer is a web-based application 

developed jointly by the Chicago Mercantile 

Exchange (‘‘CME’’) and the NFA. FCMs currently 

use WinJammer to transmit Forms 1–FR–FCM, 

FOCUS Reports, and other financial information 

and regulatory notices to the Commission and to the 

SROs. 

reports and monthly FOCUS Reports as 

exempt from mandatory public 

disclosure for purposes of the Freedom 

of Information Act and the Government 

in the Sunshine Act, except for certain 

capital numbers and other financial 

information including the Segregation 

Schedules and the Secured Amount 

Schedules contained in the financial 

reports. The Commission is proposing to 

amend § 1.10(g)(2) to provide that the 

Cleared Swaps Segregation Schedule is 

a public document in the same manner 

as the Segregation Schedule and 

Secured Amount Schedule, and is 

available by requesting copies from the 

Commission. 

Making the Cleared Swaps 

Segregation Schedule publicly available 

will benefit customers and potential 

customers by allowing them to review 

an FCM’s compliance with its regulatory 

obligations and will provide a certain 

amount of detail as to how the FCM 

holds customer funds, which customers 

and potential customers will be able to 

assess from a risk perspective and also 

use to compare to other firms. This 

information, coupled with additional 

firm risk disclosures that the 

Commission is proposing in § 1.55 and 

discussed in detail in Section II.P 

below, will provide customers with 

greater transparency regarding the risks 

of entrusting their funds and engaging 

in transactions with particular FCMs. 

Customers also will be able to view the 

total amount of the targeted residual 

interest each FCM holds and to assess 

for themselves the adequacy of the 

targeted residual interest and whether 

the FCM holds funds in excess of the 

targeted residual interest. 

The Commission also is proposing to 

amend several statements in the Form 

1–FR–FCM. The Commission is 

proposing to amend the Statement of 

Financial Condition by adding a new 

line item 1.D. Line 1 currently 

separately details the amount of funds 

in segregation or separate accounts for 

futures customers and foreign futures or 

foreign option customers. Proposed line 

item 1.D. will set forth the amount of 

funds held by the FCM in segregated 

accounts for Cleared Swaps Customers. 

This amendment is necessary due to the 

adoption of the Part 22 regulations, 

which require the segregation of Cleared 

Swaps Customer Collateral and the 

proposed adoption of the Cleared Swaps 

Segregation Schedule as part of the 

Form 1–FR–FCM. 

The Commission also is proposing to 

amend the Statement of Financial 

Condition by adding a new line item 

22.F., which requires the separate 

disclosure of the FCM’s liability to 

Cleared Swaps Customers. The 

Commission also is proposing to revise 

current line item 27.J. to require the 

FCM to disclose its obligation to retail 

forex customers. Currently, an FCM’s 

obligation to retail forex customers is 

included with other miscellaneous 

liabilities and reported under current 

line item 27.J. ‘‘Other.’’ The separate 

reporting of an FCM’s retail forex 

obligation will provide greater 

transparency on the Statement of 

Financial Condition regarding the firm’s 

obligations to its retail counterparties in 

off-exchange foreign currency 

transactions, and is appropriate given 

the Commission’s direct jurisdiction 

over such activities under section 2(c) of 

the Act when conducted by an FCM. 

The Commission also is proposing to 

amend § 1.10(b)(1)(ii) to require that an 

FCM submit its certified annual report 

to the Commission and to its DSRO 

within 60 days of its year-end date. 

Currently, an FCM is required to submit 

the annual certified financial statements 

within 90 days of the firm’s year-end 

date, except for FCMs that are duallyregistered as FCM/BDs, which are 

require to submit the certified annual 

report within 60 days of the year-end 

date under both Commission and SEC 

regulations. Therefore, the proposal will 

only impact FCMs that are not duallyregistered as BDs. 

The proposal will align the filing 

deadlines for both FCMs and dual 

registrant FCMs/BDs. The annual 

certified financial report is a key 

component of the Commission’s and 

DSROs’ financial surveillance program, 

as it represents that an independent 

entity has conducted an audit following 

U.S. generally accepted auditing 

standards for the purpose of expressing 

an opinion on the financial statements 

of the FCM. Requiring standalone FCMs 

to submit the certified financial 

statements within 60 days of the firm’s 

year-end date will allow Commission 

and DSRO staff to review the financial 

statements on a more timely basis to 

identify and address accounting or 

auditing issues that may impact the 

financial condition of the FCM. 

In addition, the Commission notes 

that, pursuant to § 3.3(f)(2), the annual 

report of an FCM’s CCO must be 

furnished electronically to the 

Commission simultaneously with the 

submission of Form 1–FR–FCM, as 

required under § 1.10(b)(2)(ii); 

simultaneously with the FOCUS Report, 

as required under § 1.10(h); or 

simultaneously with the financial 

condition report, as required under 

section 4s(f) of the Act, as applicable. 

Given the 60-day deadline proposed 

herein, the Commission is proposing a 

conforming amendment to § 3.3(f)(2) to 

reflect the proposed 60-day deadline. 

The Commission is proposing to add 

a new requirement in § 1.10(b)(5) to 

require each FCM to file with the 

Commission on a monthly basis its 

balance sheet leverage ratio. FCMs 

currently are required to file the same 

leverage information with the NFA on a 

monthly basis. The Commission does 

not expect the imposition of this 

regulation to have any significant 

impact on the FCMs as the ratio is 

calculated from existing reported 

balances and already provided to NFA. 

The leverage ratio will provide 

information regarding the amount of 

assets supported by the FCM’s capital 

base. The Commission views leverage 

information as an important element in 

assessing the financial condition of an 

FCM as a high degree of balance sheet 

leverage may indicate that the firm does 

not have the capital to support its 

investment decisions, particularly if 

such investments loose a significant 

amount of their value in a short period 

of time or require substantial margin 

payments or other payments to support. 

The Commission also is proposing to 

amend § 1.10(c)(2)(i) to require that all 

monthly unaudited Forms 1–FR–FCM 

or FOCUS Reports be filed 

electronically with the Commission. 

The Commission also is proposing to 

amend § 1.10(c)(2)(i) to require an FCM 

to file its certified financial statement in 

electronic format. 

FCMs currently file the monthly 

unaudited financial statements with the 

Commission using the WinJammer 

Online Filing System (‘‘WinJammer’’) 

electronic filing system, and the 

proposed amendments are simply 

codifying current practices.29 Annual 

certified financial reports currently are 

required to be filed in paper form, and 

are required to contain the manual 

signature of the public accountant that 

conducted the examination. Under the 

Commission’s proposal, an FCM will 

use the WinJammer system to file its 

certified financial report as a ‘‘PDF’’ 

document. The electronic filing of 

certified annual reports will ensure that 

such documents are received in a timely 

manner and will allow Commission staff 

to initiate prompt reviews of the public 

accountant’s report to identify any 

accounting issues or material 

inadequacies that might have been 

identified during the examination. The 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67874 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

30Proposed § 1.11 contains an applicability 

provision in paragraph (a) that makes clear that the 

risk management program is only required of FCMs 

that accept money, securities, or property to margin 

or secure the trades or contracts of customers 

transacting in futures, options on futures, and 

swaps. 

31The evaluation process must include 

documented criteria that any depository will be 

assessed against in order to qualify to hold funds 

timely review of the certified financial 

statements will enhance customer 

protections as deficiencies and other 

accounting issues will be promptly 

identified and reviewed. 

The Commission also is proposing a 

technical amendment to § 1.10(c)(1). 

Regulation 1.10(c)(1) provides that any 

report or information required to be 

provided to the Commission by an IB or 

FCM will be considered filed when 

received by the Commission Regional 

office with jurisdiction over the state in 

which the FCM has its principal place 

of business. To ensure that reports are 

filed expeditiously with the correct 

Commission Regional office, the 

Commission’s proposed amendment to 

§ 1.10(c)(1) cross-references § 140.02, 

which sets forth the jurisdiction of each 

of the Commission’s three Regional 

offices. 

The Commission requests comment 

on all aspects the proposed amendments 

to § 1.10. Specifically, the Commission 

requests comments on the following 

questions: 

• Should other schedules in the Form 

1–FR–FCM be amended to provide 

additional information to the 

Commission and the FCM’s SROs? 

• The Commission is proposing to 

require FCMs to submit to the 

Commission and the firm’s DSRO a 

monthly computation of the FCM’s 

balance sheet leverage. The proposal is 

consistent with the leverage 

computation set forth in the rules of the 

NFA. Are there other measures of 

leverage that the Commission should 

consider adopting? Are there other 

financial statement ratios in addition to 

leverage that the Commission should 

consider requiring FCMs to submit to 

the Commission and DSROs? 

B. Proposed § 1.11: Risk Management 

Program for Futures Commission 

Merchants 

Proposed § 1.11 requires each FCM 

that carries customer accounts 30 to 

establish a risk management program 

designed to monitor and manage the 

risks associated with the FCM’s 

activities as an FCM. It further provides: 

(1) That such risk management program 

consist of written policies and 

procedures; (2) that such policies and 

procedures be approved by the 

governing body of the FCM and be 

furnished to the Commission; and (3) 

that a risk management unit that is 

independent from the business unit be 

established to administer the risk 

management program. 

Paragraph (b) of proposed § 1.11 

establishes definitions for the terms 

‘‘Customer,’’ ‘‘Customer Account,’’ 

‘‘Business Unit,’’ ‘‘Governing Body,’’ 

‘‘Segregated Funds,’’ and ‘‘Senior 

Management.’’ 

‘‘Business Unit’’ is defined to clearly 

delineate the separation of the risk 

management unit required by the 

proposed rule from the other personnel 

of an FCM. 

The term ‘‘Customer’’ is defined 

broadly to include futures customers (as 

defined in § 1.3) trading futures 

contracts or options on futures contracts 

listed on designated contract markets, 

30.7 Customers (as proposed to be 

defined in § 30.1) trading futures 

contract or options on futures contracts 

listed on foreign contract markets, and 

Cleared Swaps Customers (as defined in 

§ 22.1) engaging in cleared swap 

transactions. 

The term ‘‘Customer Funds’’ is 

defined to mean funds deposited by 

futures customers, 30.7 Customers, and 

Cleared Swap Customers as margin or 

funds accruing to such customers from 

open futures or cleared swap 

transactions. Existing Commission 

regulations require FCMs to hold each 

of these types of customer deposited 

funds, as applicable, in separate 

accounts and to segregate such 

Customer Funds from the FCM’s own 

funds and from each other type. 

The term ‘‘Governing Body’’ is 

defined as the sole proprietor, if the 

FCM is a sole proprietorship; a general 

partner, if the FCM is a partnership; the 

board of directors, if the FCM is a 

corporation; and the chief executive 

officer, chief financial officer, the 

manager, the managing member, or 

those members vested with the 

management authority if the FCM is a 

limited liability company or limited 

partnership. ‘‘Senior Management’’ is 

defined to mean any officer or officers 

specifically granted the authority and 

responsibility to fulfill the requirements 

of senior management by the Governing 

Body. These definitions, as used in 

proposed § 1.11, are designed to ensure 

that there is accountability at the 

highest levels for the FCM’s key internal 

controls and processes designed to 

protect the funds of the FCM’s 

customers. 

The term ‘‘Segregated Funds’’ is 

defined to mean money, securities, or 

other property held by a futures 

commission merchant in separate 

accounts pursuant to § 1.20 for futures 

customers, pursuant to § 22.2 for cleared 

swaps customers, and pursuant to § 30.7 

for foreign futures and options 

customers. The definition makes clear 

that the requirements of § 1.11 applies 

to all customer funds that may be held 

by an FCM. 

Proposed § 1.11(c)(4) requires FCMs 

to provide copies of the risk 

management policies and procedures to 

the Commission and the FCM’s DSRO in 

order to allow the Commission and 

DSROs to monitor the status of risk 

management practices among FCMs. 

Submission of such policies and 

procedures to the Commission without 

further comment or action by the 

Commission or Commission staff should 

not be construed as an endorsement of 

the completeness or effectiveness of the 

risk management policies and 

procedures and no FCM should make a 

representation to the contrary. The 

Commission invites comments on the 

submission of risk management policies 

and procedures and, more generally, on 

whether the provisions of § 1.11 have 

achieved a sufficient level of detail for 

the purposes of designing a 

comprehensive risk management 

program. 

Proposed § 1.11(e) provides for a nonexclusive list of the elements that must 

be a part of the risk management 

program of an FCM. Such policies and 

procedures should include: (1) 

identifying risks (including risks posed 

by affiliates, all lines of business of the 

FCM, and all other trading activity of 

the FCM) and setting of risk tolerance 

limits; (2) providing periodic risk 

exposure reports to senior management 

and the governing body; (3) operational 

risk controls; (4) capital controls; and (5) 

establishing a risk management program 

that takes into account risks associated 

with the safekeeping and segregation of 

customer funds. 

In regard to customer funds, the 

Commission notes that FCMs are 

required by the Act and Commission 

regulations to segregate and safeguard 

funds deposited by customers for 

trading futures and/or swap contracts. 

Recent events have emphasized that it is 

essential that FCMs maintain adequate 

systems of internal controls, involving 

the participation and review of the 

firm’s senior management, in order to 

properly safeguard customer funds. 

Accordingly, proposed § 1.11(e)(3)(i) 

requires that the risk management 

policies and procedures of an FCM 

related to the risks associated with 

safekeeping and segregation of customer 

funds must include: (1) The evaluation 

and monitoring of depositories; 31 (2) 


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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67875 

belonging to Customers. The criteria must address 

a depository’s capitalization, creditworthiness, 

operational reliability, access to liquidity. The 

criteria must also address risks associated with 

concentration of Customer funds in any depository 

or group of depositories, the availability of deposit 

insurance, and the regulation and supervision of 

depositories. The evaluation criteria is intended to 

ensure that the FCM adopts an evaluation process 

which reviews potential depositories against 

substantive criteria relevant to the safe custody of 

Customer funds and that the FCM’s process for 

evaluating and selecting depositories can be 

reviewed by regulators and auditors. The FCM also 

must maintain a documented process addressing 

the ongoing monitoring of selected depositories, 

including a thorough due diligence review of each 

depository at least annually. 

32As required by § 1.20, such account opening 

documentation is necessary to ensure that the 

depositories are aware of their obligations regarding 

the accounts and the statutory and regulatory 

protections afforded the funds held in the accounts 

due to their status as Segregated Funds. 

33The controls must include the conditions for 

pre-approval and the notice to the Commission for 

such withdrawals required by proposed § 1.23, 

§ 22.17, or § 30.7, discussed below. 

34The FCM’s assessment must take into 

consideration the market, credit, counterparty, 

operational, and liquidity risks associated with the 

investments. 

35The policies and procedures must provide for 

the separation of duties among personnel that are 

responsible for customer trading activities, and 

approving and overseeing cash receipts and 

disbursements (including investment and treasury 

operations). The policies and procedures must 

further require that any movement of funds to 

affiliated companies or parties be approved and 

documented. 

36Separate from requiring the establishment of a 

target for residual interest, the Commission is 

further requiring, as discussed in more detail under 

Sections II.G, II.H, and II.I for §§ 1.20, 1.22, and 

1.23, respectively, that residual interest at all times 

exceed the sum of outstanding margin deficits to 

provide a mechanism for ensuring compliance with 

the prohibition of the funds of one customer being 

used to margin or guarantee the positions of another 

customer under the Act and existing regulations. 

37Such report is mandated by § 3.3 of the 

Commission’s regulations; See Swap Dealer and 

Major Swap Participant Recordkeeping, Reporting, 

and Duties Rules; Futures Commission Merchant 

and Introducing Broker Conflicts of Interest Rules; 

and Chief Compliance Officer Rules for Swap 

Dealers, Major Swap Participants, and Futures 

Commission Merchants, 77 FR 20128, Apr. 3, 2012 

(promulgating final rules concerning the CCOs of 

FCMs, swap dealers, and major swap participants); 

see also § 4d(d) of the Act, 7 U.S.C. 6d(d). 

account opening procedures that ensure 

the FCM obtains the acknowledgment 

required under § 1.20 from the 

depository and that the account is 

properly titled as belonging to the 

customers of the FCM; 32 (3) establishing 

and maintaining an adequate targeted 

amount of excess funds in customer 

accounts reasonably designed to ensure 

the FCM is at all times in compliance 

with the segregation requirements for 

customer funds under the Act and 

Commission regulations, as discussed 

further below; (4) controls ensuring that 

withdrawal of cash, securities, or other 

property from accounts holding 

customer funds not for the benefit of 

customers are in compliance with the 

Act and Commission regulations; 33 (5) 

procedures for assessing the 

appropriateness of investing customer 

funds in accordance with § 1.25; 34 (6) 

the valuation, marketability, and 

liquidity of customer funds and 

permitted investments made with 

customer funds; (7) the appropriate 

separation of duties of personnel 

responsible for compliance with the Act 

and Commission regulations relating to 

the protection and financial reporting of 

customer funds; 35 (8) procedures for the 

timely recording of transactions in the 

firm’s books and records; and (9) annual 

training of personnel responsible for 

compliance with the Act and 

Commission regulations relating to the 

protection and financial reporting of 

customer funds. 

Regarding the proposed requirement 

that FCMs establish and maintain an 

adequate targeted amount of excess 

funds in customer accounts, the 

Commission notes that FCMs currently 

deposit proprietary funds into both 

customer segregated accounts and Part 

30 secured accounts as a buffer to 

minimize the possibility of the firm 

being in violation of its segregated and 

secured fund obligations at any time. 

Under the proposal, senior management 

of the FCM must perform appropriate 

due diligence in setting the amount of 

this buffer and must consider the nature 

of the FCM’s business including the 

type and general creditworthiness of its 

customer base, the types of markets and 

products traded by the firm’s customers, 

the proprietary trading activities of the 

FCM, the volatility and liquidity of the 

markets and products traded by the 

customers and the FCM, the FCM’s own 

liquidity and capital needs, and 

historical trends in customer segregation 

and secured account funds balances, 

customer debits and margin deficits. 

The FCM also must reassess the 

adequacy of the targeted residual 

interest quarterly. 

The Commission believes that each 

FCM must set the amount of excess 

segregated and secured funds required 

utilizing a quantitative and qualitative 

analysis that reasonably ensures 

compliance at all times with segregated 

and secured fund obligations. Such 

analysis must take into account the 

various factors that could affect 

segregated and secured balances, and 

must be sufficiently described in writing 

to allow the DSRO of the FCM and 

Commission to duplicate the 

calculations and test the assumptions. 

The analysis must provide a reasonable 

level of assurance that the excess is at 

an appropriate level for the FCM.36 A 

failure to adopt or maintain appropriate 

risk management policies and 

procedures or to implement, monitor 

and enforce controls required by § 1.11 

may result in a referral to the 

Commission’s Division of Enforcement 

for appropriate action. 

Finally, to ensure the effectiveness of 

a risk management program, § 1.11(e)(4) 

requires that the risk management 

program include a supervisory system 

that is reasonably designed to ensure 

that the risk management policies and 

procedures are diligently followed. 

Furthermore, § 1.11(f) requires an 

annual review and testing of the 

adequacy of each FCM’s risk 

management program by internal audit 

staff or a qualified external, third party 

service. 

The Commission requests comment 

on all aspects of proposed § 1.11. 

Specifically, the Commission requests 

comment on the following: 

• Should the Commission have 

different risk management requirements 

for FCMs based upon some measureable 

criteria, such as size of the firm or type 

of customers? How would the 

Commission design such criteria to 

distinguish between firms? Which 

elements in proposed § 1.11 should 

apply to smaller FCMs vs. larger FCMs? 

What elements should apply to all 

FCMs irrespective of the size of the 

firm? 

• Does the proposed risk management 

program address the appropriate 

minimum elements that should be 

covered by an FCM risk management 

program? 

• Regulation 3.3 requires the CCO of 

an FCM to provide an annual report to 

the Commission that must review each 

applicable requirement under the Act 

and Commission regulations, and with 

respect to each applicable requirement, 

identify the policies and procedures that 

are reasonably designed to ensure 

compliance with the requirement, and 

provide an assessment of the 

effectiveness of the policies and 

procedures.37 The annual report also 

must include a certification by the CCO 

that, to the best of his or her knowledge 

and reasonable belief, and under 

penalty of law, the information 

contained in the annual report is 

accurate and complete. The Commission 

requests comment on whether the 

standard for the CCO’s certification in 

the annual report (i.e., based upon the 

CCO’s knowledge and reasonable belief) 

is adequate for a certification of the 

FCM’s compliance with policies and 

procedures for the safeguarding of 

customer funds. Should § 1.11 contain a 

separate CCO certification requirement 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67876 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

38 43 FR 39956, 39967 (Sept. 8, 1978). 39 77 FR 6336 (Feb. 7, 2012). 

40Regulation 1.20(a), 17 CFR 1.20(a). 

41The Commission further notes that investing 

customer funds in investments that are not 

permitted investments under § 1.25, or holding 

investments in a manner that is otherwise not 

compliant with § 1.25 does not change the legal 

status of the funds as customer funds in the event 

of the bankruptcy of the FCM. 

that would impose a higher duty of 

strict liability or some other higher 

obligation on a CCO? 

• Should the risk management 

program require an FCM to conduct 

quarterly or periodic audits to detect 

any breach of the policies and 

procedures that address the proper 

segregation of customer funds? 

• Should the Commission establish a 

phased-in compliance provision for 

§ 1.11? If so, how long of a phase-in 

period should be provided? Should 

there be different phase-in periods for 

different provisions of the proposed 

regulation? 

C. Proposed Amendments to § 1.12: 

Maintenance of Minimum Financial 

Requirements by Futures Commission 

Merchants and Introducing Brokers 

The regulatory notices required under 

§ 1.12 are intended to provide the 

Commission and SROs with prompt 

notice of potential adverse conditions at 

FCMs or IBs that may indicate or lead 

to a threat to the financial condition of 

the firm or the protection of customer 

funds held by the FCM. In adopting 

§ 1.12 in 1978, the Commission stated 

that the establishment of an early 

warning system was necessary because 

‘‘[a] fundamental purpose of the Act is 

to protect the public from financially 

irresponsible FCMs who handle 

customer funds.’’ 38

Regulation 1.12 currently obligates 

FCMs and IBs to provide notice to the 

Commission and to the respective 

DSROs if certain specified reportable 

events occur. Reportable events include: 

failing to maintain the minimum level 

of required regulatory capital (§ 1.12 

(a)); failing to maintain current books 

and records (§ 1.12(c)); and failing to 

comply with the requirements to 

properly segregate customer funds 

(§ 1.12(h)). The Commission is 

proposing to amend § 1.12 to include 

several additional reportable events and 

to revise the process for submitting 

reportable events to the Commission 

and DSROs. 

Regulation 1.12(a) requires an FCM or 

IB that fails to maintain the minimum 

level of adjusted net capital required by 

§ 1.17 to provide immediate notice to 

the Commission and to the entity’s 

DSRO. The notice must include 

additional information to adequately 

reflect the FCM’s or IB’s current capital 

condition as of any date that the entity 

is undercapitalized. 

The Commission is proposing to 

amend § 1.12(a) to explicitly provide 

that if the FCM or IB cannot compute or 

document its actual capital at the time 

it knows that it is undercapitalized, it 

must still provide the written notice 

required by § 1.12(a) immediately and 

cannot delay filing the notice until it 

has adequate information to compute its 

actual level of adjusted net capital. A 

purpose of the notice provision under 

§ 1.12(a) is to provide the Commission 

and the DSROs with immediate notice 

of the undercapitalized condition of an 

FCM or IB. If an FCM or IB were to 

delay alerting the Commission that it 

was undercapitalized due to the fact 

that it could not accurately assess its 

capital condition, it would frustrate the 

intent of the notice provision. It is 

imperative that an FCM or IB provide 

immediate notice if the firm is 

undercapitalized. Upon the filing of a 

notice, Commission and SRO staff will 

contact the FCM or IB to obtain greater 

details of the financial condition of the 

firm, including information regarding its 

current financial condition or issues 

associated with the firm’s inability to 

accurately determine its current 

financial condition. 

Regulation 1.12(h) currently requires 

an FCM that fails to hold sufficient 

funds in segregated accounts to meet its 

obligations to futures customers, or that 

fails to hold sufficient funds in separate 

accounts for foreign futures or foreign 

options customers, to provide 

immediate notice to the Commission 

and to the FCM’s DSRO. The 

Commission is proposing to amend 

paragraph (h) to include an explicit 

requirement that an FCM provide 

immediate notice to the Commission 

and to its DSRO if the FCM fails to hold 

sufficient funds in segregated accounts 

for Cleared Swaps Customers to meet its 

obligation to such customers. 

Commencing November 8, 2012, the 

compliance date for certain Commission 

Part 22 regulations, FCMs will be 

required under § 22.2 to hold a 

sufficient amount of funds in Cleared 

Swaps Customer Accounts to meet the 

Net Liquidating Equity of each Cleared 

Swaps Customer.39 Immediate 

notification of a failure to hold 

sufficient funds in segregation for 

Cleared Swaps Customers is essential 

for the Commission and DSROs to 

promptly assess the financial condition 

of an FCM and to determine if there are 

threats to the safety of the Cleared 

Swaps Customers’ funds held by the 

FCM. The proposed amendment to 

§ 1.12(h) also harmonizes the notice 

requirements whenever an FCM fails to 

hold sufficient funds for futures 

customers, 30.7 Customers, and Cleared 

Swaps Customers. 

The Commission also is proposing to 

amend § 1.12 by adding new paragraph 

(i) to require an FCM to provide notice 

whenever it discovers or is informed 

that it has invested funds held for 

customers in investments that are not 

permitted investments under § 1.25, or 

if the FCM holds permitted investments 

in a manner that is not in compliance 

with the provisions of § 1.25 (such as 

the investment concentration limits). 

The proposal will apply to funds held 

for futures customers, 30.7 Customers, 

and Cleared Swaps Customers. 

The protection of customer funds is a 

core element of the Commission’s 

regulatory program. FCMs are entrusted 

with a responsibility to use customer 

funds only for the benefit of the 

depositing customers.40 FCMs are 

permitted, however, to invest customer 

funds pursuant to the standards and 

conditions set forth in § 1.25. Regulation 

1.25 contains a list of permitted 

investments and other criteria that are 

intended to allow an FCM to receive the 

benefit of investing customer funds 

while also preserving the principal and 

maintaining the liquidity of the 

customer funds. 

Requiring an FCM to provide prompt 

notice of a § 1.25 violation will allow 

Commission and DSRO staff to assess 

whether customer funds are endangered 

and to work with the FCM to ensure that 

the impermissible investments are 

appropriately liquidated and customer 

funds remain intact. Commission and 

DSRO staff also will benefit from 

receiving notices of § 1.25 violations in 

that the notices will provide 

information regarding new investments 

that FCMs may engage in that are not 

permitted investments under § 1.25. 

Such information will be helpful for the 

Commission and DSRO in conducting 

reviews of other FCMs and in providing 

regulatory updates to the industry.41

The Commission also is proposing to 

amend § 1.12 to provide a new 

paragraph (j) that will require an FCM 

to provide immediate notice to the 

Commission and to the firm’s DSRO if 

the FCM does not hold an amount of 

funds in segregated accounts for futures 

customers or for Cleared Swaps 

Customers, or if the FCM does not hold 

sufficient funds in separate accounts for 

30.7 Customers, sufficient to meet the 

firm’s targeted residual interest in one 

or more of these accounts as computed 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67877 

42The Commission’s proposed amendment to 

require the electronic filing of reports applies to 

both registered FCMs and applicants for registration 

as FCMs. Applicants for FCM registration currently 

file regulatory notices with NFA using WinJammer. 

under proposed § 1.11, or if its residual 

interest in one or more of these accounts 

is less than the sum of outstanding 

margin deficits for such accounts. 

Proposed § 1.11 will require each FCM 

that carries customer funds to calculate 

an appropriate amount of excess funds 

(i.e., proprietary funds) to hold in 

segregated or secured accounts to 

mitigate the FCM from being 

undersegregated or undersecured due to 

a withdrawal of proprietary funds from 

a segregated or secured account. The 

fact that an FCM is not holding a 

sufficient amount of excess funds in 

customer accounts to meet its targeted 

residual interest may be indicative of 

more severe financial or operational 

issues at the firm. In addition, if an 

FCM’s residual interest is less than the 

sum of outstanding margin deficits in 

one such account, it is possible that 

funds of one customer in such account 

are at risk of margining or guaranteeing 

the open positions of another customer. 

Accordingly, the Commission is 

proposing to require an FCM to file 

immediate notice of such an event to 

allow Commission and DSRO staff to 

contact the FCM to assess the condition 

of the firm and the safety of customer 

funds. 

The Commission also is proposing 

new paragraphs (k) and (l) for § 1.12. 

Paragraphs (k) and (l) will require an 

FCM to provide notice to the 

Commission and to the firm’s DSRO in 

the event of a material adverse impact 

in the financial condition of the firm or 

a material change in the firm’s 

operations. Proposed paragraph (k) will 

require an FCM to provide immediate 

notice if the FCM, its parent, or a 

material affiliate, experiences a material 

adverse impact to its creditworthiness 

or its ability to fund its obligations. 

Indications of a material adverse impact 

of an FCM’s creditworthiness may 

include a bank or other financing entity 

withdrawing credit facilities, a credit 

rating downgrade, or the FCM being 

placed on ‘‘credit watch’’ by a credit 

rating agency. Proposed paragraph (l) 

will require an FCM to provide 

immediate notice of material changes in 

the operations of the firm, including: A 

change in senior management; the 

establishment or termination of a 

material line of business; a material 

change in the FCM’s clearing 

arrangements; or a material change in 

the FCM’s credit arrangements. 

Paragraph (l) is intended to provide the 

Commission with notice of material 

events, such as the departure of the 

FCM’s CCO, CFO, or CEO. 

As noted above, § 1.12 is intended to 

provide the Commission and DSROs 

with notice of potential issues that may 

impact the financial condition of an 

FCM or the safety of customer funds. 

The regulatory objective is for FCMs to 

provide material information to the 

Commission and DSROs as early as 

possible so that the Commission and 

DSROs can assess the information and 

communicate with the FCMs prior to a 

more serious issue developing that may 

impair the financial condition of the 

firms or the safety of customer funds. 

Proposed paragraphs (k) and (l) will 

provide the Commission and DSROs 

with notice of major events that will 

initiate a dialogue between the 

Commission, DSROs, and FCMs which 

will have the benefit of informing the 

Commission and DSROs of material 

events impacting FCMs. Such 

information would be used by the 

Commission and DSROs in setting the 

scope of the review and monitoring of 

the FCMs, including the determination 

of the risk of the firms for purposes of 

scheduling future examinations. 

Without paragraphs (k) and (l), the 

Commission and DSROs may not learn 

of material events at FCMs until the 

firms are subject to periodic 

examinations. 

The Commission is proposing to add 

a new paragraph (m) to § 1.12 that will 

require an FCM that receives a notice, 

examination report, or any other 

correspondence from the SEC or a SRO 

to file a copy of such notice, 

examination report, or correspondence 

with the Commission. In order to 

perform comprehensive oversight of an 

FCM, the Commission and the DSROs 

need to receive prompt notice of any 

concern or adverse action taken by the 

SEC or a securities SRO. The protection 

of futures customers funds are not 

immune from issues that arise from the 

securities operations or business of a 

dual registrant FCM/BD. Requiring an 

FCM to provide prompt notice to the 

Commission and the firm’s DSRO of any 

notice, examination report, or 

correspondence that the firm receives 

from the SEC or a securities SRO will 

allow the Commission and the DSRO to 

identify potential threats to the safety of 

customer funds. 

The Commission is further proposing 

to amend the process that an FCM uses 

to file the notices required by § 1.12. 

Currently, § 1.12 requires an FCM to 

provide the Commission and DSROs 

with telephonic and facsimile notice in 

some situations, and to provide written 

notice by mail in other situations. An 

FCM also is permitted, but not required, 

to file notices and written reports with 

the Commission and with its DSRO 

using an electronic filing system in 

accordance with instructions issued by 

or approved by the Commission. 

The Commission is proposing to 

amend § 1.12(n) to require that all 

notices and reports filed by an FCM 

with the Commission or with the FCM’s 

DSRO must be in writing and submitted 

using an electronic filing system. Each 

FCM currently uses WinJammer to file 

regulatory notices with the Commission 

and with the firm’s DSRO. The 

WinJammer system provides for the 

most effective mechanism for ensuring 

that regulatory notices are promptly 

received by the Commission and by the 

DSROs.42 The regulation further 

provides that if the FCM cannot file a 

notice due to the electronic system 

being inoperable or for any other reason, 

it must contact the Commission 

Regional office with jurisdiction over 

the firm and make arrangements for the 

filing of the regulatory notices by filing 

the notice with the Commission via 

electronic mail at a specially designated 

email address established by the 

Commission; fcmnotices@cftc.gov. The 

Commission also is proposing to amend 

§ 1.12(n) to require that each notice filed 

by an FCM, IB, or SRO under § 1.12 

must include a discussion of what 

caused the reportable event, and what 

steps have been, or are being taken, to 

address the reportable event. The 

reporting entity, however, may not 

delay the reporting of a reportable event 

if it does not possess complete 

information on what caused the event, 

or the steps that have been taken or are 

being taken to address the event. 

The amendments to §§ 1.12(b), (d), (e), 

(f) and (g) are necessary and technical in 

nature, and primarily revise internal 

cross-references to the filing 

requirements in § 1.12(n). 

The Commission request comment on 

all aspects of the proposed amendments 

to § 1.12. Specifically, the Commission 

requests comment on the following: 

• Are there other reportable events 

that the Commission should consider 

adding to § 1.12 that would benefit the 

Commission and the DSROs in the 

monitoring of the financial and 

operating conditions of FCMs? 

• Should the Commission consider 

removing any of the reportable events 

listed in § 1.12? If so, why? 

• Should any of the reportable events 

be made public by the Commission, 

SROs, or FCMs? If so, which reportable 

events? What benefit would the public 

receive from the disclosure of the 

reportable events? What would be the 

costs of disclosing the reportable events 

to the FCMs? Are there any negative 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67878 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

43The Commission further notes, however, that 7 

of the 20 FCMs are audited by a PCAOB-registered 

CPA that also conducts audits of BDs or public 

companies and, therefore, will be subject to PCAOB 

examination at a future date. 

impacts of disclosing the reportable 

events? 

• Are the reporting standards in 

proposed paragraphs (k) and (l) 

adequately detailed and objective so 

that an FCM can determine when there 

is a reportable event? If not, what 

standards should the Commission use to 

define a reportable event under 

paragraphs (k) and (l)? 

D. Proposed Amendments to § 1.15: Risk 

Assessment Reporting Requirement for 

Futures Commission Merchants 

Regulation 1.15 requires FCMs to 

submit certain risk assessment reports to 

the Commission. The risk assessment 

filings include FCM organizational 

charts; financial, operational, risk 

management policies, and systems 

maintained by the FCM; and fiscal yearend consolidated and consolidating 

financial information for the FCM and 

its highest level material affiliate. 

The Commission is proposing to 

amend § 1.15(a)(4) to require each FCM 

that is subject to § 1.15 to submit its risk 

assessment information to the 

Commission electronically in 

accordance with instructions issued by 

the Commission. The Commission 

intends for FCMs to file the risk 

assessment materials using the 

WinJammer electronic filing system. 

The Commission requests comments on 

its proposed amendments to § 1.15. 

E. Proposed Amendments to § 1.16: 

Qualifications and Reports of 

Accountants 

Regulation 1.16 sets forth the 

qualifications a public accountant must 

possess in order to conduct audits of 

Commission registrants. Currently, a 

public accountant must be registered 

and in good standing under the laws of 

the place of the public accountant’s 

principal office in order to conduct 

examinations of FCMs. 

The Commission is proposing to 

amend § 1.16(b)(1) to require that the 

public accountant be registered with the 

Public Company Accounting Oversight 

Board (‘‘PCAOB’’) in addition to being 

in good standing with the relevant state 

licensing authorities. In addition, the 

public accountant must have undergone 

an examination by the PCAOB and any 

deficiencies noted during such 

examination must have been remediated 

to the satisfaction of the PCAOB. 

Regulation § 1.16(b)(4) also will impose 

an obligation on an FCM’s governing 

body to ensure that a public accountant 

is qualified to perform an audit of the 

FCM by assessing the firm’s experience 

in auditing FCMs, the firm’s experience 

and knowledge of the Act and 

Commission regulations, and the depth 

and experience of the firm’s auditing 

staff. 

The Commission also is proposing to 

amend § 1.16(c)(2) to require a public 

accountant to state in the audit opinion 

whether the audit was conducted in 

accordance with U.S. GAAS after full 

consideration of the auditing standards 

adopted by the PCAOB. Currently, all 

audits of the certified financial 

statements of FCMs must be performed 

under U.S. GAAS. However, as the 

Commission is now proposing that 

certified public accountants must be 

registered with the PCAOB, it is 

necessary to also require that the 

auditing standards promulgated by the 

PCAOB be considered and adhered to 

where applicable. PCAOB requires 

auditors opining on a public company 

financial statements to comply with all 

applicable auditing standards, including 

PCAOB standards; whereas U.S. GAAS 

is required for the audits of non-public 

companies. 

In 2003, the PCAOB adopted existing 

U.S. GAAS as interim standards, subject 

to periodic revision as the PCAOB 

deemed necessary. Since that time, the 

PCAOB has issued its own auditing 

standards in areas of the audit in which 

differentiated audit procedures or 

reporting requirements have been 

considered necessary. These areas 

largely pertain to audits of internal 

control over financial reporting as well 

as reports on those controls, audit 

documentation and engagement quality 

review. Generally speaking, the most 

significant difference between U.S. 

GAAS and PCAOB standards relates to 

the auditor’s testing of internal controls 

over financial reporting which are 

meant to cover the auditor’s opinion on 

the Sarbanes-Oxley Act Section 404 

report on internal controls. From a 

regulatory perspective, an auditor’s 

focus on internal controls is critical to 

helping to ensure that material errors in 

financial or regulatory reporting are 

identified on a timely basis, and the 

PCAOB standards provide more focus 

on the auditing standards in this regard. 

It should also be noted that auditors of 

BDs are now required to register with 

the PCAOB and follow PCAOB 

standards; thus, any dually-registered 

FCM/BDs will already have to comply 

with this requirement. 

The proposed amendments to 

§§ 1.16(b)(1) and (c)(2) are designed to 

reasonably ensure the quality and 

competence of public accountants that 

engage in the audits of FCMs. FCMs are 

sophisticated financial market 

participants that are subject to extensive 

regulation. In addition, the complexity 

of FCM audits is increased substantially 

when a firm is engaged in proprietary 

trading or dually-registered as an FCM/ 

BD. Public accountants must be 

knowledgeable regarding the business 

operations, regulatory obligations and 

financial reporting requirements for 

FCMs, and the governing body of the 

FCM must ensure that the public 

accountant has the knowledge, 

experience, and resources to conduct 

the audits. Also, requiring the public 

accountant to be registered with PCAOB 

will ensure that the public accountant is 

subject to periodic reviews to assess its 

compliance with industry standards. 

While the Commission does not 

expect the proposed PCAOB registration 

requirement to have a material impact 

on FCMs, it recognizes that not all FCMs 

currently use CPAs that are registered 

with the PCAOB or CPAs that have been 

subject to an examination by the 

PCAOB. Currently, 111 of the 116 FCMs 

are examined by CPAs that are 

registered with the PCAOB. Also, 12 

CPAs that are registered with the 

PCAOB have not yet been subject to a 

PCAOB examination. These 12 CPAs 

conduct examinations of 20 FCMs. 

Therefore, currently 25 of the 116 FCMs 

would not satisfy the proposed 

requirement that only PCAOB-registered 

CPAs that have been subject to at least 

one PCAOB review may be engaged to 

conduct an examination of the FCM’s 

financial statements.43

The Commission is proposing a 

technical amendment to § 1.16 to revise 

the definition of the term ‘‘customer.’’ 

Regulation 1.16 details the standards 

that a public accountant must meet in 

conducting a financial examination of 

an FCM. Currently, § 1.16(a)(4) defines 

the term ‘‘customer’’ to include futures 

customers, Cleared Swaps Customers, 

and foreign futures or foreign options 

customers. The Commission is 

proposing to amend § 1.16(a)(4) to revise 

the definition of customer to replace the 

term ‘‘foreign futures or foreign options 

customer’’ with the term ‘‘30.7 

Customer’’ to make the provision 

consistent with the amendments 

contained in Part 30 of the 

Commission’s regulations. 

The Commission also is proposing to 

amend paragraph (f)(1)(i)(C) of § 1.16 to 

provide that any filing of a notice of the 

extension of time to file the audited 

financial reports must be submitted by 

the FCM to the Commission using an 

electronic filing system. The 

Commission intends for FCMs to use the 

WinJammer electronic filing system. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67879 

44The term ‘‘noncustomer’’ is generally defined 

under § 1.17 as affiliates or management of an FCM. 

The Commission also is proposing to 

remove the requirement from 

§ 1.16(c)(1) that annual financial reports 

contain the manual signature of the 

public accountant. Under the proposed 

amendments to § 1.10 discussed above, 

FCMs will be filing annual financial 

reports electronically, which will 

preclude the use of manual signature. 

The Commission requests comment 

on all aspects of proposed § 1.16. 

Specifically, the Commission request 

comment on the following: 

• A purpose of the requirement that 

FCMs engage only CPAs that are 

registered with the PCAOB and have 

been reviewed by the PCAOB is to 

enhance the quality of the audit 

examination conducted by CPAs. Does 

the PCAOB registration and 

examination process enhance the 

quality of FCM audit engagements? 

• Are there viable alternatives that 

the Commission should consider to 

enhance the quality of CPA FCM 

examinations in lieu of PCAOB 

registration and examination? 

• Should the Commission consider 

allowing the non-PCAOB registered 

CPAs or PCAOB-registered CPAs that 

have not been subject to a PCAOB 

review to contractually engage for a peer 

review from a qualified CPA who is 

aware of the reason for the peer review 

as a short-term measure to allow the 

non-compliant CPAs to continue to 

conduct audits of FCMs? 

• If the Commission adopts the 

PCAOB registration and examination 

requirement, how should the 

Commission implement the effective or 

compliance dates? What factors should 

the Commission consider in setting an 

effective date or compliance date for 

this provision? 

F. Proposed Amendments to § 1.17: 

Minimum Financial Requirements for 

Futures Commission Merchants and 

Introducing Brokers 

The Commission is proposing to 

amend § 1.17 by adding a new provision 

that will authorize the Commission to 

require an FCM to transfer its customer 

business and cease operating as an FCM 

if the FCM cannot immediately certify 

to the Commission, and demonstrate 

with verifiable evidence, that the FCM 

has sufficient access to liquidity to 

continue operating as a going concern. 

The Commission also is proposing to 

amend § 1.17 to permit an FCM that is 

not a dually-registered FCM/BD to 

develop the framework proposed by the 

SEC, as set forth below, to establish, 

maintain and enforce written policies 

and procedures for determining 

creditworthiness, and upon a 

determination that a particular type of 

security has minimal credit risk, to 

apply lower deductions to such 

securities in computing the FCM’s 

adjusted net capital. 

Section 4f(b) of the Act provides that 

no person may be registered as an FCM 

unless such person meets the minimum 

financial requirements that the 

Commission has established by 

regulation to ensure that an FCM meets 

its obligations at all times as an FCM to 

its customer and to market participants, 

including DCOs. The Commission’s 

minimum capital requirements for 

FCMs are set forth in § 1.17 and 

generally require an FCM to maintain 

adjusted net capital equal to or in excess 

of the greater of: $1 million; 8 percent 

of the risk maintenance margin required 

on customer and non-customer futures 

and options on futures positions carried 

by the FCM; 44 the amount of adjusted 

net capital required by the NFA; or, for 

dual-registrants, the amount of net 

capital required by the SEC. The term 

‘‘adjusted net capital’’ is generally 

defined as the FCM’s net, liquid assets 

less all of the FCM’s liabilities (except 

certain qualifying subordinated debt). In 

computing its adjusted net capital, an 

FCM is required to reduce the value of 

proprietary futures and securities 

positions included in its liquid assets by 

certain prescribed amounts or 

percentages of the market value 

(otherwise known as ‘‘haircuts’’) to 

discount for potential adverse market 

movements in the securities. 

Commission Regulation 1.17(a)(4) 

currently provides that an FCM must 

cease operating as an FCM and transfer 

its customers positions to another FCM 

if the FCM is not in compliance with the 

minimum capital requirements, or is 

unable to demonstrate its compliance 

with the minimum capital requirements. 

The FCM, however, can initiate 

customer trades for liquidation purposes 

only. Regulation 1.17(a)(4) further 

provides that the Commission or the 

FCM’s DSRO may grant the FCM up to 

a maximum of 10 days to come back 

into compliance with the minimum 

capital requirements without having to 

cease operating as an FCM or 

transferring customer accounts. 

The Commission is proposing to add 

an additional clause to § 1.17(a)(4), 

which will specify that the Commission 

may request certification in writing from 

an FCM that it has sufficient liquidity to 

continue operating as a going concern, 

and that if such certification is not 

provided immediately or the FCM is not 

able to demonstrate its access to 

liquidity with verifiable evidence, the 

FCM must transfer all customer 

accounts and immediately cease doing 

business as an FCM. The proposed 

liquidity provision is intended to cover 

circumstances that require immediate 

attention. The proposal is not intended 

to provide a mechanism for the 

Commission to require FCMs to 

demonstrate that they are a going 

concern for an extended period of time 

into the future. Rather, the purpose of 

the proposal is to provide the 

Commission with a means of addressing 

exigent circumstances by requiring an 

FCM to produce a written analysis 

showing the sources and uses of funds 

over a short period of time not to exceed 

one week. 

The Commission believes this clause 

provides additional protection to 

customers in the event of an imminent 

liquidity drain on a registrant, which 

may not be immediately reflected in its 

accounting or regulatory capital 

business records. Market events or other 

external indicators may come to the 

attention of the Commission which 

suggest an FCM is under severe 

liquidity stress, which demonstrates 

that although the firm is still able to 

demonstrate compliance with required 

regulatory capital, conditions are such 

that it will not be able to meet liquidity 

requirements out a period of time not to 

exceed one week. This provision will 

allow the Commission to essentially 

require an FCM on demand to be able 

to certify its access to liquidity 

sufficient to continue operating as a 

going concern for a period not to exceed 

one week. The inability of the FCM to 

satisfy this requirement will allow the 

Commission to direct the FCM to 

transfer customer accounts and cease 

doing business as an FCM. 

The Commission believes the ability 

to certify, and if requested, demonstrate 

with verifiable evidence, sufficient 

liquidity to operate as a going concern 

to meet immediate financial obligations, 

is a minimum financial requirement 

necessary to ensure an FCM will 

continue to meet its obligations as a 

registrant as set forth under § 4(f)(b) of 

the Act. The certification required must 

satisfy the same oath or affirmation 

requirements as those required for the 

submission of monthly financial reports 

under § 1.10(d)(4), to ensure that it is 

made by an appropriate individual and 

that it is in writing under oath of the 

individual that it is true and correct to 

the best knowledge and belief of such 

individual. If a registrant certifies to the 

Commission its access to liquidity, but 

is not able to demonstrate with 

sufficient evidence such liquidity (for 

example such evidence may include 

confirmations by third parties of access 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67880 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

45See § 1.17(c)(5)(x)(A). 46Commission Regulations 1.17(c)(5)(v) and 

1.32(b) both incorporate 17 CFR 240.15c3– 

1(c)(2)(vi) by reference. 47See 43 FR 15072 (Apr. 10, 1978) at 15077 and 

43 FR 39956 (Sept. 8, 1978) at 39963. 48See 76 FR 26550 (May 6, 2011). 

49See discussion adopting § 1.17(c)(5)(vi) for 

options haircuts at 43 FR 39956 at 39964, with 

respect to the applicability of provisions 

incorporating by reference and referring to the rules 

of the SEC for securities broker dealers also 

registered as futures commission merchants. 

to credit lines with available credit or of 

unrestricted cash balances available to 

meet projected short term cash 

requirements), the Commission believes 

it would be prudent to require the 

registrant to transfer customer accounts. 

Circumstances related to a liquidity 

drain could also result in a breakdown 

of management controls and result in an 

erroneous or false certification, and in 

such circumstances, the protection of 

customers must be paramount. The 

Commission requests comment on the 

proposed additional clause to 

§ 1.17(a)(4). 

Regulation 1.17 further requires an 

FCM to take a haircut against the value 

of securities the FCM holds as 

investments of customer funds under 

§ 1.25. A primary purpose of these 

haircuts is to provide a margin of safety 

against losses that might be incurred by 

the FCM as a result of market 

fluctuations in the prices of, or lack of 

liquidity in, the security positions. 

For futures positions, an FCM that is 

a member of the clearing organization 

where the positions are cleared is 

required to take a haircut equal to the 

margin required by the clearing 

organization on such futures 

positions.45 For securities positions, 

§ 1.17 incorporates by reference the 

securities haircuts that a BD is required 

to take in computing its net capital 

under the SEC’s regulations.46 The 

structure of the Commission’s net 

capital rule referring to the SEC’s net 

capital rule is a result of the 

Commission’s determination to defer to 

the SEC in areas of its expertise, 

specifically with respect to market risk 

and appropriate haircuts on securities 

positions.47

The SEC capital rule currently applies 

a general or ‘‘default’’ haircut of 15 

percent of the market value of 

commercial paper, convertible debt 

instruments, and nonconvertible debt 

instruments if the securities are readily 

marketable, and 100 percent of the 

market value if the securities are not 

readily marketable. The SEC capital rule 

also provides for a lower haircut for 

commercial paper, convertible debt 

instruments, and nonconvertible debt 

instruments if the securities are rated in 

higher rating categories by at least two 

nationally recognized statistical rating 

organizations (‘‘NRSROs’’). To receive 

the benefit of a reduced haircut on 

commercial paper, the commercial 

paper must be rated in one of the three 

highest rating categories by at least two 

NRSROs. To receive the benefit of a 

reduced haircut on a nonconvertible 

debt security or a convertible debt 

security, the security must be rated in 

one of the four highest rating categories 

by at least two NRSROs. 

The SEC has proposed rule 

amendments to implement the DoddFrank Act requirement to remove 

references to credit ratings in its 

regulations and substitute a standard for 

creditworthiness deemed appropriate, 

including a proposed amendment to its 

net capital rule for BDs at 17 CFR 

240.15c3–1.48 Under the SEC proposal, 

a BD may impose the default haircuts of 

15 percent of the market value of readily 

marketable commercial paper, 

convertible debt, and nonconvertible 

debt instruments or 100 percent of the 

market value of nonmarketable 

commercial paper, convertible debt, and 

nonconvertible debt instruments. A BD, 

however, may impose lower haircut 

percentages for commercial paper, 

convertible debt, and nonconvertible 

debt instruments that are readily 

marketable, if the BD determines that 

the investments have only a minimal 

amount of credit risk pursuant to its 

written policies and procedures 

designed to assess the credit and 

liquidity risks applicable to a security. 

Under the SEC proposal, the BD’s 

written policies and procedures may 

assess a security’s credit risk using the 

following factors, to the extent 

appropriate, instead of exclusively 

relying on NRSROs ratings: 

• Credit spreads (i.e., whether it is 

possible to demonstrate that a position 

in commercial paper, nonconvertible 

debt, and preferred stock is subject to a 

minimal amount of credit risk based on 

the spread between the security’s yield 

and the yield of Treasury or other 

securities, or based on credit default 

swap spreads that reference the 

security); 

• Securities-related research (i.e., 

whether providers of securities-related 

research believe the issuer of the 

security will be able to meet its financial 

commitments, generally, or specifically, 

with respect to securities held by the 

broker-dealer); 

• Internal or external credit risk 

assessments (i.e., whether credit 

assessments developed internally by the 

broker-dealer or externally by a credit 

rating agency, irrespective of its status 

as an NRSRO, express a view as to the 

credit risk associated with a particular 

security); 

• Default statistics (i.e., whether 

providers of credit information relating 

to securities express a view that specific 

securities have a probability of default 

consistent with other securities with a 

minimal amount of credit risk); 

• Inclusion on an index (i.e., whether 

a security, or issuer of the security, is 

included as a component of a 

recognized index of instruments that are 

subject to a minimal amount of credit 

risk); 

• Priorities and enhancements (i.e., 

the extent to which a security is covered 

by credit enhancements, such as 

overcollateralization and reserve 

accounts, or has priority under 

applicable bankruptcy or creditors’ 

rights provisions); 

• Price, yield and/or volume (i.e., 

whether the price and yield of a security 

or a credit default swap that references 

the security are consistent with other 

securities that the broker-dealer has 

determined are subject to a minimal 

amount of credit risk and whether the 

price resulted from active trading); and 

• Asset class-specific factors (e.g., in 

the case of structured finance products, 

the quality of the underlying assets). 

A BD that maintains written policies 

and procedures and determines that the 

credit risk of a security is minimal is 

permitted under the SEC proposal to 

apply the lesser haircut requirement 

currently specified in the SEC capital 

rule for commercial paper (i.e., between 

zero and c of 1 percent), nonconvertible 

debt (i.e., between 2 percent and 9 

percent), and preferred stock (i.e., 10 

percent). 

For FCMs that are dually-registered as 

BDs, any changes adopted by the SEC to 

these securities haircuts will be 

applicable under § 1.17(c)(5)(v) unless 

the Commission specifically provides an 

alternate treatment for FCMs.49

However, FCMs that are not dual 

registrants would be required to take the 

default haircuts of 15 percent for readily 

marketable securities. The Commission 

does not believe that it is appropriate to 

exclude standalone FCMs from using an 

internal process to assess the credit risk 

of certain securities. Therefore, the 

Commission’s proposed amendment to 

§ 1.17(c)(v) will permit an FCM that is 

not a BD to develop the framework 

proposed by the SEC to establish, 

maintain and enforce written policies 

and procedures for determining 

creditworthiness, and upon a 

determination that a particular type of 

security has minimal credit risk, to 

apply lower deductions to such 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67881 

securities. An FCM will be required to 

maintain its written policies and 

procedures in accordance with the 

general recordkeeping requirements of 

§ 1.31, and the implementation of the 

policies and procedures will be subject 

to review by the FCM’s DSRO. An FCM 

that elects to develop written policies 

and procedures will be subject to review 

by its DSRO. 

Regulation 1.17 also requires an FCM 

to reduce its capital (i.e., take a capital 

charge) for customer, noncustomer, and 

omnibus accounts that are 

undermargined for more than a 

specified period of time. Regulation 

1.17(c)(5)(viii) requires an FCM to take 

a capital charge if a customer account is 

undermargined for three business days 

after the margin call is issued. The 

capital charge is equal to the amount of 

funds necessary to restore the account to 

the initial margin requirement. 

Regulation 1.17(c)(5)(ix) requires an 

FCM to take a capital charge for 

noncustomer and omnibus accounts that 

are undermargined for two business 

days after the margin call is issued. The 

capital requirement for undermargined 

noncustomer and omnibus accounts is 

the amount of funds necessary to restore 

the account to the maintenance margin 

level. 

For purposes of these Commission 

regulations, a margin call is presumed to 

be issued by the FCM the day after an 

account becomes undermargined. Thus, 

if a customer’s account is 

undermargined at the close of business 

on Monday, the FCM will issue a 

margin call on Tuesday, and the 

regulation requires the FCM to take an 

undermargined capital charge at the 

close of business on Friday if the margin 

call is not met. For noncustomer and 

omnibus accounts that were 

undermargined at the close of business 

on Monday, the FCM would take a 

capital charge as of the close of business 

on Thursday. 

The Commission is proposing to 

amend §§ 1.17(c)(5)(viii) and (ix) to 

require an FCM to take capital charges 

for undermargined customer, 

noncustomer, and omnibus account that 

are undermargined for more than one 

business day after a margin call is 

issued. Therefore, an FCM will impose 

a capital charge as of the close of 

business on Wednesday for any 

customer, noncustomer, or omnibus 

account that did not fully satisfy a 

margin call that is issued by the FCM on 

Tuesday for an account that was 

undermargined as of the close of 

business on Monday. 

The timely collection of margin is a 

critical component of an FCM’s risk 

management program and is intended to 

ensure that an FCM holds sufficient 

funds deposited by account owners to 

meet potential obligations to a DCO. As 

guarantor of the financial performance 

of the customer, noncustomer, and 

omnibus accounts that it carries, the 

FCM is financially responsible if the 

owner of an account cannot meet its 

margin obligations to the FCM and 

ultimately to a DCO. The timeframe for 

meeting margin calls currently provided 

in §§ 1.17(c)(5)(viii) and (ix) may have 

been appropriate when the capital rules 

were adopted in the 1970s when the use 

of checks and the mail system were 

more prevalent for depositing margin 

with an FCM. The Commission believes, 

however, that in today’s markets, with 

the increasing use of technology, 24- 

hour-a-day trading, and the use of wire 

transfers to meet margin obligations, 

that the timeframe for taking a capital 

charge should be reduced both to 

incentivize FCMs to exercise prudent 

risk management and to strengthen the 

financial protection of FCMs, their 

customers, and the clearing systems by 

requiring the FCMs to reserve capital for 

undermargined customer, noncustomer, 

and omnibus accounts that fail to meet 

a margin call on a timely basis. 

The Commission also is proposing, as 

discussed in Section II.I below, to 

require an FCM to maintain a residual 

interest in customer segregated accounts 

in an amount sufficient to cover all 

customer accounts that are 

undermargined as of the close of 

business on the previous trading day, 

thereby ensuring that residual interest 

in customer segregated accounts 

exceeds the sum of outstanding margin 

calls for customers, and that the funds 

of one customer are not used to margin 

or guarantee the positions of another 

customer. The FCM may only maintain 

as residual interest cash and assets that 

qualify as permitted investments under 

§ 1.25. Margin deficits will be calculated 

as enough to restore the customer’s 

account equity to the maintenance 

margin requirement on the account. 

The Commission also is proposing 

technical amendments to certain 

definitions in § 1.17 to reflect proposed 

changes discussed in Section II.R below 

concerning the § 30.7 secured amount 

calculation. The § 1.17(b)(2) and (7) 

definitions of the terms ‘‘customer’’ and 

‘‘customer account’’ are being proposed 

to be amended, the first to include ‘‘30.7 

Customer’’ (which is a new definition 

being proposed in § 30.1 to include 

foreign domiciled persons) and the 

second to remove surplus language due 

to the revised definition of ‘‘customer.’’ 

The Commission requests comment 

on the proposed amendments to § 1.17. 

Specifically, the Commission requests 

comment on the following: 

• Does the proposed amendment to 

require an FCM to certify that it has 

sufficient liquidity to operate as a going 

concern provide a sufficient and 

objective standard for FCMs to assess 

whether they are in compliance with the 

provision? Are there alternative 

standards or approaches that the 

Commission should consider to meet its 

objective of ensuring that an FCM has 

sufficient liquidity to meet its pending 

short-term obligations so that customer 

funds would not be put at risk in the 

event of the insolvency of the FCM? 

• Should the Commission consider 

alternative timeframes for the 

imposition of a capital charge for 

undermargined accounts? 

G. Proposed Amendments to § 1.20: 

Futures Customer Funds To Be 

Segregated and Separately Accounted 

for 

The Commission is proposing to 

reorganize the structure of § 1.20 by 

providing additional paragraph 

subdivisions to the existing specific 

requirements, applying headings to the 

regulation to assist in the reading and 

understanding of the regulation. The 

Commission also is proposing to add 

new provisions designed to enhance the 

protection of customer funds. 

Regulation 1.20 implements the 

provisions of section 4d(a)(2) of the Act, 

which provides, in relevant part, that an 

FCM must: (1) Separately account for all 

futures customer funds and segregate 

such funds as belonging to its futures 

customers; (2) not commingle futures 

customer funds with the FCM’s 

proprietary funds; (3) not use the funds 

of one futures customer to margin or 

extend credit to any person other than 

to the futures customer that deposited 

the funds; and (4) deposit futures 

customer funds in any bank, trust 

company or DCO. 

Paragraph (a) of § 1.20 sets forth the 

general principle under section 4d(a)(2) 

of the Act by requiring an FCM to 

separately account for all futures 

customer funds and to segregate such 

funds from the FCM’s proprietary funds 

by depositing them under an account 

name that clearly shows that the funds 

are futures customer funds and 

segregated as required by the Act. 

Paragraph (g)(1) applies the same 

general principle to futures customer 

funds received by a DCO from its 

members. 

Paragraph (a) also requires each FCM 

to perform appropriate due diligence on 

all depositories in accordance with its 

risk management policies and 

procedures required under proposed 


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50See Administrative Determination No. 29 of the 

Commodity Exchange Administration dated Sept. 

28, 1937 stating, ‘‘the deposit, by a futures 

commission merchant, of customers’ funds * * * 

under conditions whereby such funds would not be 

subject to withdrawal upon demand would be 

repugnant to the spirit and purpose of the 

Commodity Exchange Act. All funds deposited in 

a bank should in all cases by subject to withdrawal 

on demand.’’ 

51 In the case of the bankruptcy of Lehman 

Brothers, for example, immediate access to 

customer funds allowed the commodity customer 

accounts to be effectively transferred to Barclays 

over the weekend of September 20–21, 2008, 

immediately following the commencement of the 

liquidation of the firm. This transfer was authorized 

in the hours immediately following the 

commencement of Lehman’s liquidation, and was 

implemented in the hours immediately thereafter. 

§ 1.11 to ensure that the depositories 

holding customer funds are financially 

sound. The FCM must annually update 

its due diligence. 

Paragraph (a) of § 1.20 also provides 

that an FCM must be in compliance 

with its segregation obligations at all 

times. It is not sufficient for an FCM to 

be in compliance at the end of a 

business day, but to fail to meet its 

segregation obligations on an intra-day 

basis. If an FCM was not in compliance 

with the segregation requirements on an 

intra-day basis that would necessarily 

mean that the FCM was using the funds 

of one customer to margin positions of 

another customer or to cover losses of 

another customer. 

Paragraph (b) of § 1.20 lists the 

permitted depositories for futures 

customer funds as any bank, trust 

company, derivatives clearing 

organization, or another FCM. These 

permitted depositories are listed in 

existing § 1.20 and the Commission is 

not proposing to amend the list. 

Proposed paragraph (g)(2) lists the 

permitted depositories for futures funds 

received by a DCO as any bank or trust 

company, and clarifies that the term 

‘‘bank’’ includes a Federal Reserve 

Bank. This proposed amendment 

implements section 806(a) of the DoddFrank Act, which provides that a 

Federal Reserve Bank may establish and 

maintain a deposit account for a 

‘‘financial market utility’’ (in the present 

case, a DCO) that has been designated as 

systemically important. 

Paragraph (c) provides that an FCM 

may hold futures customer funds in 

depositories outside of the United States 

only in accordance with the current 

provisions of § 1.49. Paragraph (g)(3) 

sets forth the same limitation for a DCO. 

Regulation 1.49 currently permits an 

FCM or DCO to hold futures customer 

funds in certain foreign depositories 

provided that the FCM or DCO holds 

sufficient funds in the United States to 

meet its U.S. dollar-denominated 

obligations to futures customers. 

Regulation 1.49 also requires specific 

futures customer authorization for an 

FCM or DCO to hold futures customer 

funds in certain foreign jurisdictions. 

The Commission is not proposing to 

amend § 1.49 as part of this rulemaking. 

Proposed § 1.20(e) prohibits an FCM 

from commingling futures customer 

funds with the FCM’s proprietary funds, 

and prohibits the FCM from 

commingling funds deposited by futures 

customers with funds deposited by 30.7 

Customers or Cleared Swaps Customers. 

Regulation 1.20(e), however, does 

permit an FCM to commingle the funds 

of multiple futures customers in a single 

account or accounts for operational 

convenience. Similarly, proposed 

§ 1.20(g)(5) prohibits a DCO from 

commingling futures customer funds 

with the DCO’s proprietary funds or 

with any proprietary account of any of 

its clearing members, and prohibits the 

DCO from commingling funds held for 

futures customers with funds deposited 

by clearing members on behalf of their 

Cleared Swaps Customers. DCOs would 

be permitted to commingle the funds of 

multiple futures customers in a single 

account or accounts for operational 

convenience. 

Proposed § 1.20(f) restricts an FCM’s 

use of customer funds. An FCM is 

prohibited from using one futures 

customer’s funds to margin or secure 

another futures customer’s positions. An 

FCM also is prohibited from using a 

futures customer’s funds to extend 

credit to any other person. The FCM 

also may obligate futures customers’ 

funds to a DCO or another FCM solely 

to purchase, margin, or guarantee 

futures and options positions of futures 

customers. 

The Commission is proposing a new 

paragraph (h) which states that all 

futures customer funds deposited with a 

bank or trust company must be available 

for immediate withdrawal upon demand 

by the FCM or DCO. Paragraph (h) 

codifies a long-standing interpretation 

of the Commission’s Division of Swap 

Dealer and Intermediary Oversight and 

predecessor divisions derived from an 

administration determination by the 

Commission’s predecessor, the 

Commodity Exchange Authority of the 

U.S. Department of Agriculture.50 The 

requirement, as proposed, is a practical 

necessity to the effective functioning of 

FCMs and futures markets. Should a 

depository have the ability to delay an 

FCM from withdrawing customer funds, 

the FCM may not be able to meet margin 

obligations to DCOs, or requests by 

futures customers for access to their 

funds. In addition, an inability of an 

FCM to have immediate access to the 

futures customer funds that it holds may 

adversely impact the transfer of futures 

customers positions in the event of the 

FCM’s insolvency.51

• The Commission is proposing a 

new paragraph (i), which mirrors what 

was recently adopted in Part 22 for 

Cleared Swaps Customers, by providing 

more detail implementing the Net 

Liquidating Equity Method of 

calculating segregation requirements. In 

addition, because a customer may have 

Net Liquidating Equity (i.e., a credit 

balance) in his or her account, requiring 

segregation of his or her funds, and still 

be undermargined relative to open 

positions, proposed paragraph (i) 

requires an FCM to record in the 

accounts of its futures customers the 

amount of margin required for such 

customers’ open positions, and to 

calculate margin deficits for each such 

customer. Moreover, the Commission is 

proposing to require that an FCM 

maintain residual interest in segregated 

accounts in an amount that exceeds the 

sum of all futures customers’ margin 

deficits. A margin deficit occurs when 

the value of the futures customer funds 

for a futures customer’s account is less 

than the total amount of collateral 

required by DCOs for that account’s 

contracts. Currently, the Commission 

requires FCMs to hold sufficient funds 

in segregated futures customer accounts 

to ensure that those accounts do not 

become undersegregated. Proposed new 

paragraph (i) will affirmatively require 

an FCM to maintain enough funds in the 

futures customer accounts to cover all 

margin deficits as well as to ensure that 

the accounts are not undersegregated. 

The Commission requests comments on 

all aspects of proposed new § 1.20(i), 

including the costs and benefits of this 

proposed regulation. The Commission 

specifically requests comment on the 

following: 

• Will this proposal serve to increase 

the protections to customer funds in the 

event of an FCM bankruptcy? 

• To what extent would this proposal 

increase costs to FCMs and/or futures 

customers? 

• To what extent would this proposal 

benefit futures customers and/or FCMs? 

• To what extent would this proposal 

increase or mitigate market risk? 

• To what extent would this proposal 

lead to FCMs requiring customers to 

provide margin for their trades before 

placing them? 

• To what extent is this likely to lead 

to a re-allocation of costs from 

customers with excess margin to 

undermargined customers? 

• For purposes of margin deficit 

calculations, should the Commission 


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52 74 FR 7838 (February 20, 2009). 

53The Commission notes that both the current 

and proposed definition of ‘‘customer funds’’ in 

Regulation 1.3(gg) do not include ‘‘secured amount 

funds’’ as defined in Regulation 30.7 (i.e., funds 

deposited by foreign futures or foreign options 

customers). See 76 FR 33066, 33085 (June 7, 2011). 

However, as used in this notice, unless otherwise 

specified, the term ‘‘customer funds’’ is meant to 

include secured amount funds. The regulations 

adopted by this notice are also being amended to 

use the term ‘‘customer’’ as newly proposed (i.e., in 

this rulemaking the Commission is deleting 

references to ‘‘commodity or option customers’’. As 

necessary, the Commission distinguishes between 

the two types of funds in this notice by referring 

to ‘‘customer segregated funds’’ and ‘‘customer 

secured amount funds.’’ 

54 75 FR 47738 (Aug. 9, 2010). 

55Letters were submitted by: Hunton & Williams 

on behalf of the Working Group of Commercial 

Energy Firms (‘‘Energy Working Group’’); 

International Derivatives Clearinghouse LLC 

(‘‘IDCH’’); Futures Industry Association (‘‘FIA’’); 

Harris, N.A. (‘‘Harris’’); Katten Muchin Rosenman 

LLP (‘‘Katten’’); CME Group Inc. (‘‘CME’’); The 

Minneapolis Grain Exchange (‘‘MGEX’’); JPMorgan 

Chase Bank, N.A. (‘‘JP Morgan’’); and The Federal 

Reserve Bank of Chicago, Financial Markets Group 

(‘‘FRB Chicago’’). 

56See MGEX CL–00007 at 1; FIA CL–00003 at 2; 

Harris CL–00004 at 1. 

57See MGEX CL–00007 at 1; CME CL–00006 at 

2; FRB Chicago CL–00010 at 1. 

58FIA CL–00003 at page 2. 

59FIA suggests, for example, the following 

language: ‘‘The terms of this letter shall remain 

binding upon the parties, their successors and 

assigns, including for the avoidance of doubt, 

regardless of the change in name of any party.’’ FIA 

CL–00003 at page 2. 

60Proposed Appendix A to Regulation 1.20 

provides that the Account will be entitled ‘‘[Name 

of Futures Commission Merchant or Derivatives 

Clearing Organization] CFTC Regulation 1.20 

Customer Segregated Account.’’ 75 FR 47738, 47743 

(Aug. 9, 2010); Proposed Appendix A to Regulation 

1.26 provides that the Account will be entitled 

‘‘[Name of Futures Commission Merchant or 

Derivatives Clearing Organization] CFTC Regulation 

1.26 Customer Segregated Money Market Mutual 

Fund Account.’’ 75 FR 47738, 47744 (Aug. 9, 2010); 

and Proposed Appendix E to part 30 provides that 

the Account will be entitled ‘‘[Name of Futures 

Commission Merchant] CFTC Regulation 30.7 

Customer Secured Account.’’ 75 FR 47738, 47745 

(Aug. 9, 2010). 

address issues surrounding the timing of 

when an FCM must have sufficient 

funds in the futures customer account to 

cover all margin deficits? If so, how 

should the Commission address such 

issues? 

In addition to the foregoing, the 

Commission also is proposing to revise 

requirements regarding the written 

acknowledgment letter that an FCM or 

DCO is required to obtain from a 

depository holding futures customer 

funds. Regulation 1.20 currently 

requires an FCM or DCO to obtain a 

written acknowledgment from each 

depository, unless the depository is a 

DCO that has rules approved by the 

Commission providing for the 

segregation of customer funds. The 

written acknowledgment must state that 

the depository was informed that the 

futures customer funds deposited 

belong to futures customers and are 

being held in accordance with the 

provisions of the Act and Commission 

regulations. 

The Commission previously proposed 

amendments to the acknowledgment 

letter regulations. On February 20, 2009, 

the Commission published proposed 

amendments to §§ 1.20, 1.26, and 30.7 

for public comment (the ‘‘Original 

Proposal’’).52 The Original Proposal set 

out specific representations that would 

have been required to be included in all 

acknowledgment letters in order to 

reaffirm and to clarify the obligations 

that depositories incur when accepting 

customer funds or secured amount 

funds.53

In light of the comments on the 

Original Proposal, the Commission 

determined to re-propose the 

amendments with several changes made 

in response to comments (the ‘‘Revised 

Proposal’’).54 As part of the Revised 

Proposal, the Commission proposed the 

required use of standard template 

acknowledgment letters which were 

included as Appendix A to each of 

§ 1.20 and 1.26, and Appendix E to Part 

30 of the Commission’s regulations 

(referred to herein as the ‘‘Template 

Letters’’ or ‘‘Acknowledgment Letters’’). 

The Commission received nine 

comment letters on the Revised 

Proposal.55 In general, the commenters 

were supportive of the Commission’s 

Revised Proposal and, in particular, 

were very supportive of requiring the 

use of Template Letters. It was noted by 

certain commenters that use of a 

standard template will simplify the 

process of obtaining an 

Acknowledgment Letter.56 In addition, 

it was noted by commenters that 

uniformity of Acknowledgment Letters 

will provide consistency and legal 

certainty across the commodities and 

banking industries.57

The Commission is proposing revised 

amendments to the Acknowledgment 

Letters in this release to address several 

issues that have arisen as a result of the 

recent MF Global and Peregrine failures 

and the adverse impact on customers 

that had funds on deposit with these 

FCMs. The additional amendments are 

discussed below. The Commission also 

has revised the Acknowledgment Letters 

to address comments to the Revised 

Proposal. These revisions are discussed 

immediately below. 

1. Obligation To Obtain New 

Acknowledgment Letters 

Under the Revised Proposal, an FCM 

or DCO would be required to obtain a 

new Acknowledgment Letter within 60 

days of changes in the name of any 

party to the Acknowledgment Letter or 

changes to the account number(s) under 

which customer funds are held. FIA 

stated that it is unduly burdensome to 

require the parties to execute a new 

Acknowledgment Letter in the event of 

a party changing its name within 60 

days of the event.58 FIA recommended 

instead including ‘‘binding effect’’ 

language in the Template Letters to 

ensure parties remain subject to the 

applicable provisions.59 If the 

Commission determines to adopt the 

amendment requirement, FIA requested 

that the time period be extended from 

60 to 120 days because a change in 

name often occurs in the context of a 

merger or acquisition in which case the 

relevant party will be in the process of 

amending numerous agreements and 

related documentation. 

The Commission has determined to 

add to the Template Letter the ‘‘binding 

effect’’ language as proposed by FIA, as 

this language will ensure the continued 

applicability of the Acknowledgment 

Letter in the event of a name change to 

the parties. The Commission, however, 

is proposing to require that FCMs and 

DCOs file new Acknowledgment Letters 

in the event of a name, address, or other 

change as specified in the proposed rule 

because the Commission believes it is 

important to maintain current and 

accurate Acknowledgment Letters to 

provide clear legal status of the 

customer account, which will better 

protect customers in the event of a 

dispute regarding the legal status of the 

account. The Commission is proposing 

a 120-day time period for an FCM to 

obtain new Acknowledgment Letters. 

Given the use of the Template Letter, 

which is not open to negotiation, and 

electronic filing, the Commission 

believes that 120 days is a sufficient 

period of time for FCMs and DCOs to 

obtain and file the new 

Acknowledgment Letters. 

2. Technical Amendments to 

Acknowledgment Letter for Omnibus 

Accounts; Abbreviation of Account 

Names 

Regulation 1.20 provides that 

customer funds, when deposited with a 

depository, ‘‘shall be deposited under 

an account name that clearly identifies 

them as such and shows that they are 

segregated as required by the Act and 

[Part 1 of the CFTC Regulations].’’ FIA 

noted that the account naming 

convention used in the proposed forms 

of Template Letters 60 may present 

certain issues with respect to 

Acknowledgment Letters obtained by 

FCMs maintaining customer funds with 


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61FIA CL–00003 at 4 and 5. 

62 In the Revised Proposal, the Template Letter 

provides that ‘‘the Funds in the Account(s) shall be 

released immediately, * * * upon proper notice 

and instruction from an appropriate officer or 

employee * * * of the CFTC. [FCM/DCO] will not 

hold [depository] responsible for acting pursuant to 

any instruction from the CFTC upon which 

[depository] has relied after having taken reasonable 

measures to assure that such instruction was 

provided to [depository] by a duly authorized 

officer or employee of the CFTC.’’ 

63 In October 2011, the Commission reorganized 

the Division of Clearing and Intermediary Oversight 

into two divisions, the Division of Clearing and 

Risk and the Division of Swap Dealer and 

Intermediary Oversight. With respect to a transfer 

of customer funds as contemplated in this 

rulemaking, instructions would come from either 

the Director of the Director of the Division of 

Clearing and Risk or the Director of the Division of 

Swap Dealer and Intermediary Oversight (or one of 

the Director’s designees). 

64See Katten CL–00005 at FN 3. 

65FIA CL–00003 at page 3. 

66The Commission will publish on its Web site 

the identity of the Director of the Division of 

Clearing and Risk, the Director of the Division of 

Swap Dealer and Intermediary Oversight, and the 

individual(s) who are authorized to serve as their 

designees. The Template Letters do not explicitly 

refer to instructions provided by ‘‘the Commission’’ 

because in exigent circumstances, it is not likely 

that action approved by a majority of 

Commissioners will be feasible. 

another FCM through a customer 

omnibus account relationship.61 The 

first issue is with respect to operational 

limits on the number of characters 

available for account names. Secondly, 

naming conventions for such accounts 

typically include the words ‘‘Customer 

Omnibus Account’’ and the relevant 

account number. FIA accordingly 

requested the Commission to clarify that 

the Template Letters may be modified to 

permit the use of the words ‘‘CFTC 

Regulated FCM Customer Omnibus 

Account’’ to describe such accounts. 

The Commission has modified the 

proposed Template Letters to provide an 

option to add the words ‘‘CFTC 

Regulated FCM Customer Omnibus 

Account’’ to describe such accounts 

when applicable. In addition, the 

Commission is proposing that if the 

name of the account as set forth in the 

Template Letter is too long for a 

depository’s system to include all 

characters, the depository may 

abbreviate the name in order to 

accommodate its system, provided that 

(i) it remains clear that the account is a 

CFTC regulated segregated/secured 

account held for the benefit of 

customers (e.g., ‘‘segregated’’ may be 

shortened to ‘‘seg;’’ ‘‘customer’’ may be 

shortened to ‘‘cust;’’ ‘‘account’’ to 

‘‘acct;’’ etc.), and (ii) when completing 

an Acknowledgment Letter, such letter 

must include both the long and short 

versions of the account name. 

3. Clarification Regarding Notice, 

Authentication, and Instruction Protocol 

for Commission Authorized 

Withdrawals 

Four of the commenters to the 

Revised Proposal addressed the need for 

the Commission to establish specific 

standards with respect to the notice, 

authentication and instruction protocol 

regarding Commission instructions for 

the immediate release of funds from a 

Customer Account.62

The FRB Chicago pointed out that, as 

the Acknowledgment Letters will have 

been filed electronically with the 

Commission, the Commission will know 

all of the Depositories that have signed 

such letters, their location, and basic 

contact information. In light of this, the 

FRB Chicago suggests that the 

Commission could establish for each 

depository a basic but unique 

authentication identifier. The 

Commission believes this suggestion has 

merit, and it will consider 

implementing this type of data 

collection and identification as it works 

to implement the operational aspects of 

the electronic filing of Acknowledgment 

Letters. 

JP Morgan suggests that the 

Acknowledgment Letter include a 

notice provision with contact 

information for the depository so that 

the Commission has information on 

how best to contact the depository. The 

Commission agrees with this suggestion 

and has revised the Template Letters to 

indicate where depository contact 

information may be inserted as optional 

information. The Commission 

recognizes that such information may be 

subject to frequent change and, 

therefore, at this time, the Commission 

is not requiring that an amended 

Acknowledgment Letter be filed in the 

event there are changes to such contact 

information. 

Katten asserts that Depositories face 

legal uncertainty with respect to their 

release of customer funds in reliance on 

instructions from the Commission. 

Katten states that the Commission’s 

reluctance to define ‘‘proper notice’’ or 

‘‘reasonable measures’’ imposes on 

Depositories the conflicting obligations 

(i) to the Commission, to release 

customer funds ‘‘immediately upon 

proper notice,’’ and (ii) to its customer 

FCM, to take ‘‘reasonable measures’’ 

first to assure that such notice was 

‘‘duly authorized.’’ 

With respect to due authorization, 

Katten requests that the Commission 

reconsider its decision to permit an 

instruction to transfer customer funds to 

be made orally, with written 

confirmation to follow. Katten believes 

that the depository’s obligation to take 

‘‘reasonable measures’’ may require it to 

await written confirmation in any event. 

In addition, Katten believes that the 

proposed amendments to §§ 1.20, 1.26, 

30.7 and 140.91 do not limit the identity 

of the Commission officers and 

employees that may issue a notice to a 

depository or the process that must be 

followed before such a notice is issued. 

Katten submits that a depository would 

have a reasonable basis to conclude that 

an instruction to transfer customer 

funds was duly authorized if the 

depository could be assured that any 

instruction to transfer customer funds 

would be issued only by the Director of 

the Division of Clearing and 

Intermediary Oversight (or the Director’s 

designee).63 Katten recommends that 

‘‘the Commission revise the proposed 

rules to confirm that any such 

instruction may be made only by the 

Commission or by the director of DCIO 

(or the director’s designee) acting with 

the concurrence of the General Counsel 

(or Deputy General Counsel).’’ 64 FIA 

requests, at a minimum, that the 

Commission define and limit the term 

‘‘appropriate officer or employee’’ of the 

Commission (for example, authorization 

limited to Division Directors or other 

senior designated personnel such as 

Deputy Directors or Associate 

Directors).65

With respect to a ‘‘duly authorized 

officer or employee of the CFTC,’’ the 

Commission has determined to provide 

that any such instruction to transfer 

customer funds may be made by the 

Director of the Division of Clearing and 

Risk (or the Director’s designee), or by 

the Director of the Division of Swap 

Dealer and Intermediary Oversight (or 

the Director’s designee). Accordingly, 

the Template Letter now specifies that 

such instructions may only be given by 

the Director of the Division of Clearing 

and Risk (or any successor division), the 

Director of the Division of Swap Dealer 

and Intermediary Oversight (or any 

successor division), or the designees of 

such Directors under delegated 

authority.66 With regard to the role of 

the General Counsel, the General 

Counsel will be consulted by the 

Director of the Division of Clearing and 

Risk (or any successor division), the 

Director of the Division of Swap Dealer 

and Intermediary Oversight (or any 

successor division), or the designees of 

such Directors prior to the exercise of 

the delegated authority. 

The Commission does not believe, as 

asserted by Katten, that ‘‘reasonable 

measures’’ may require the depository to 

await written confirmation. For 

example, due to the nature of the 


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67 75 FR 47738, 47740. The Revised Proposal also 

noted that, as set forth in the Template Letter, in 

the event the FCM becomes subject to a voluntary 

or involuntary petition for relief under the U.S. 

Bankruptcy Code, the depository will have no 

obligation to release the customer funds except 

upon instruction from the bankruptcy trustee or 

pursuant to a court order. Id. 68See Amended Financial and Segregation 

Interpretation No. 10, 70 FR 24768 (May 11, 2005) 

(‘‘Thus any impediments or restrictions on the 

FCM’s ability to obtain immediate and unfettered 

access to customer funds are not permitted. The 

immediate and unfettered access requirements is 

[sic] intended to prevent potential delay or 

interruption in securing required margin payments 

that, in times of significant market disruption, 

could magnify the impact of such market disruption 

and impair the liquidity of other FCMs and 

clearinghouses.’’) 

69The merger clause language in the Revised 

Proposal’s Template Letter reads as follows: ‘‘This 

letter agreement constitutes the entire 

understanding of the parties with respect to its 

subject matter and supersedes and replaces all prior 

writings, including any applicable agreement 

between the parties in connection with the 

Account(s), with respect thereto.’’ 

exceptional circumstances that would 

prompt a call from the Commission, it 

is likely that the depository would 

already be aware of certain problems 

facing the FCM or DCO and would not 

be surprised to receive a phone call 

from a Division Director (or his or her 

designee). In addition, while the 

Commission believes it is desirable that 

any such instruction to release customer 

funds be in writing, or, if oral, to be 

confirmed in writing, the Commission is 

not limiting the manner of notice in the 

Template Letter given the potential 

exigencies of the situation and the need 

for flexibility in communication. For 

example, either the Commission or the 

depository could be experiencing 

unexpected technical problems in its 

respective email servers or facsimile 

machines. It is critical that the transfer 

of customer funds from a Segregated 

Account not be delayed as a result of 

technical or other operational issues. 

With respect to the release of 

customer funds ‘‘immediately upon 

proper notice,’’ Katten commented that 

it appreciates the Commission’s 

recognition of the potential practical 

obstacles to immediate release (e.g., 

Fedwire is unavailable). However, 

Katten remains concerned that, in the 

absence of further guidance or 

clarification, the use of the term 

‘‘immediately’’ may subject a depository 

to potential claims by either FCMs or 

the Commission in the event that there 

is a delay in the transfer of customer 

funds, even if such delay is the result of 

reasonable actions on the part of the 

depository or events beyond the control 

of the depository. In addition, FIA 

commented that it would like the 

Commission to confirm that its 

authority to require the transfer of 

customer funds would be expected to be 

used sparingly (i.e., ‘‘only in 

exceptional circumstances’’). 

After considering these comments, the 

Commission is proposing to retain the 

use of the word ‘‘immediately’’ in the 

Template Letter regarding instructions 

to a depository for release of customer 

funds. First, in response to FIA’s 

comment, the Commission clarifies that 

the use of its authority to require the 

immediate release of customer funds 

would be in exceptional circumstances. 

As stated in the Revised Proposal, ‘‘[t]he 

Commission would issue such an 

instruction only when, in the judgment 

of the Commission, it is necessary to do 

so for the protection of customer funds. 

For example, the prospective insolvency 

of the FCM could prompt an instruction 

from the Commission to release the 

customer funds.’’ 67 Next, the 

Commission notes that anything less 

than the term ‘‘immediate’’ could leave 

the timing open to interpretation, which 

could cause delays in the transfer of 

funds and have a potential impact on 

safety and soundness of customer funds 

and positions. In this regard, the 

Commission notes that customer funds 

in the Segregated Account have always 

been subject to withdrawal immediately 

upon demand by the FCM.68

4. Limiting the ‘‘Merger’’ Clause in the 

Acknowledgment Letter 

CME believes that the use of an 

integration clause (i.e., the statement 

that the Acknowledgment Letter 

‘‘constitutes the entire understanding of 

the parties with respect to its subject 

matter’’) in the Template Letters is 

inappropriate and could have a number 

of serious and unintended 

consequences. For example, the parties 

to the Acknowledgment Letter could be 

prevented from relying upon and 

enforcing terms of applicable account 

(or similar) agreements that do not 

conflict with the Acknowledgment 

Letter. CME believes the term ‘‘subject 

matter’’ is ambiguous and could be 

interpreted very broadly thereby casting 

doubt on the validity and interpretation 

of existing agreements between the 

parties. The CME suggests the following 

more narrowly tailored language for the 

integration clause in the Template 

Letters: ‘‘This letter agreement 

supersedes and replaces any prior 

agreement between the parties in 

connection with the Account(s), 

including but not limited to any prior 

Acknowledgment Letter, to the extent 

that such prior agreement is 

inconsistent with the terms hereof.’’ 

FIA agrees with the CME’s comment 

that the scope of the ‘‘merger clause’’ in 

the Template Letters should be 

narrowed to make clear that these 

clauses do not invalidate the terms of 

other agreements that may have been 

entered into by the parties and that do 

not conflict with the Template Letters. 

The FRB Chicago also believes that this 

provision should be narrowed so that a 

bank’s standard account opening 

agreements, corporate resolutions and 

other agreements incorporated by 

reference should govern the remainder 

of the account relationship, but not 

matters specific to section 4d of the Act. 

Should there be a conflict, the 

Acknowledgment Letter should govern 

matters specific to section 4d of the Act. 

The Commission agrees with the 

commenters that the scope of the 

‘‘merger clause’’ language in the 

Template Letter 69 should be narrowed. 

Accordingly, the Commission is 

replacing the clause with CME’s 

suggested language above. In addition, 

in order to incorporate the comment of 

the FRB Chicago and to ensure that 

future agreements between the parties 

do not negate the Acknowledgment 

Letter, the Commission is adding the 

following sentence to the end of the new 

language: ‘‘In the event of any conflict 

between this letter agreement and any 

other agreement between the parties in 

connection with the Account(s), this 

letter agreement shall govern with 

respect to matters specific to section 4d 

of the Act and the CFTC’s regulations, 

as amended.’’ 

5. New Proposed Amendments to 

Acknowledgment Letters 

The Commission is also now 

proposing under Appendix A to § 1.26 

and Appendix F to § 30.7 an additional 

acknowledgment letter template form 

for money market mutual funds (to the 

extent they are permissible investments 

under § 1.25). The template form for 

money market mutual funds is 

substantially the same as the 

Acknowledgment Letters. The 

Commission requests comment on all 

aspects of the template form. 

In addition, the Commission is 

proposing to add language to its 

proposed Acknowledgment Letters 

(under § 1.20, § 1.26 and § 30.7) 

authorizing and requiring the depository 

to grant—at all times—read-only 

electronic access to such accounts to the 

Commission and, in the case of an FCM, 

to the FCM’s DSRO. Given recent 

events, the Commission believes such 

access is crucial to the protection of 

customer funds. The Commission is also 

proposing a substantive requirement for 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67886 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

this access in §§ 1.20, 1.26 and 30.7 in 

addition to the language in the 

Acknowledgment Letters. 

The proposal for read-only access is 

not intended to require a depository to 

have the ability to provide the 

Commission or an FCM’s DSRO with 

real-time information regarding an 

FCM’s account balance. The 

Commission understands that 

depositories may not have the capability 

to provide customers or any other party 

with real-time account balances and 

position information. The conditions of 

the proposal would be satisfied if the 

depository had the capability to provide 

read-only access to account information 

as of the close of the prior business day. 

The Commission intends to continue 

to explore possible uses of technology to 

enhance its ability to protect customer 

funds. Read-only access will allow 

Commission staff to review an FCM’s 

segregated account balances reported by 

depositories and to compare those 

balances to the FCM’s reported account 

balances either as part of a review of the 

firm, or in circumstances where the 

Commission is concerned about the 

financial condition of the firm. The 

read-only access is an additional tool 

that Commission staff may use as part 

of its assessment of the financial 

condition of an FCM and the safety of 

customer funds. The Commission will 

continue to review how direct access to 

account balances and the use of 

technology can provide greater 

assurance as to the safety of customer 

funds held by an FCM. 

The Commission requests comment 

on all aspects of the proposed 

amendments to § 1.20. Specifically, the 

Commission requests comment on the 

following: 

• The proposal requires each 

depository to provide the Commission 

and an FCM’s DSRO with direct, readonly access to the FCM’s accounts held 

by the depository. What technology 

issues are raised by the Commission’s 

proposal? How can the Commission 

adequately address such technology 

issues? 

• What account information can 

depositories currently provide to the 

Commission and to DSROs via the 

internet on a read-only basis? Do all 

depositories (e.g., banks, trust 

companies, derivatives clearing 

organizations, or other FCMs) have the 

capability of using the Internet to 

provide account access to the 

Commission and DSROs? Are there 

other options for depositories to provide 

read-only access to FCM accounts other 

than the internet? 

• How should the Commission 

implement this requirement? What 

timeframe would be appropriate to 

make the requirement effective? Please 

provide analysis with your comment. 

H. Proposed Amendments to § 1.22: Use 

of Futures Customer Funds 

The Commission proposes to amend 

§ 1.22 by clarifying that the prohibition 

on the FCM’s use of one futures 

customer’s funds to margin or secure the 

positions of another futures customer, or 

to extend credit to another person, 

applies at all times. 

Regulation 1.22 provides that an FCM 

may not use the cash, securities or other 

property deposited by one futures 

customer to purchase, margin or settle 

the trades, contracts, or other positions 

of another futures customer, or to 

extend credit to any other person. 

Regulation 1.22 further provides that an 

FCM may not use the funds deposited 

by a futures customer to carry trades or 

positions, unless the trades or positions 

are traded through a designated contract 

market. 

The proposed amendment to clarify 

that the prohibition on the FCM’s use of 

one futures customer’s funds to margin 

positions of another futures customer is 

intended to remove any question as to 

the permissibility of being 

undersegregated at any point in time 

during the day. Section 4d(a)(2) requires 

an FCM to segregate futures customers’ 

funds from its own funds, and prohibits 

an FCM from using the funds of one 

customer to margin or extend credit to 

any other futures customer or person. 

The Commission believes that section 

4d(a)(2) is intended to provide a 

maximum level of protection to futures 

customer funds, which would be 

thwarted and inconsistent with the 

reading of the Act if an FCM only 

recognized this principle at the end of 

the trading day. Further, the 

Commission is proposing language 

providing a clear mechanism to ensure 

compliance with this prohibition, which 

is to require an FCM to maintain 

residual interest in segregated accounts 

in an amount which exceeds the sum of 

all margin deficits for futures customers. 

The Commission also is proposing that 

the sum of all margin deficits be 

reported on the Segregation Schedule 

(as discussed previously with respect to 

proposed amendments to § 1.10) and 

also required to be reported on the daily 

segregation calculation (as discussed 

further herein with respect to proposed 

amendments to § 1.32), so that 

compliance review of this mechanism 

can be performed. 

I. Proposed Amendments to § 1.23: 

Interest of Futures Commission 

Merchant in Segregated Futures 

Customer Funds; Additions and 

Withdrawals 

The Commission is proposing to 

amend § 1.23 to require additional 

safeguards with respect to an FCM 

withdrawing futures customer funds 

from segregated accounts that are part of 

the FCM’s residual interest in such 

accounts. 

Regulation 1.23 provides that an FCM 

may deposit unencumbered proprietary 

funds, including securities that qualify 

as permitted investments under § 1.25, 

into segregated futures customer 

accounts in order to ensure that the firm 

always maintains sufficient funds in 

such accounts to meet its total 

obligations to futures customers. FCMs, 

by virtue of practical necessity, must 

keep proprietary funds in segregated 

futures customer accounts in order to 

act as a buffer between futures 

customers whose funds are commingled 

in such accounts. In the event that any 

futures customer were to experience 

losses such that the customer has 

insufficient funds to meet the margin 

requirements at clearing organizations 

associated with its positions, or if all of 

the funds deposited by the futures 

customer were depleted and the account 

had a debit balance, without proprietary 

funds of the FCMs being held in such 

accounts to absorb the debit balance as 

it accrued, funds of other futures 

customers would be used to guarantee 

the undermargined amount or the debit. 

For this reason, FCMs are permitted to 

deposit their own funds into segregated 

accounts and to maintain a residual 

financial interest in such accounts. 

Regulation 1.23 further provides that an 

FCM’s books and records must always 

reflect the firm’s residual interest in the 

accounts of its futures customers. 

In addition, an FCM is permitted to 

withdraw funds from futures customer 

accounts for the FCM’s proprietary use 

to the extent of the FCM’s actual 

residual interest in such accounts. The 

withdrawal, however, may not result in 

the FCM failing to hold sufficient funds 

to meet its obligations to its futures 

customers, or in the funds of one futures 

customer margining or securing the 

positions of another futures customer. 

The Commission also is proposing that 

the residual amount maintained by an 

FCM be required to exceed the sum of 

margin deficits for futures customers, as 

discussed previously with respect to 

§§ 1.20 and 1.22, to provide a clear 

mechanism to ensure that the funds of 

one futures customer are not used to 

margin or guarantee the positions of 


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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67887 

another futures customer. Irrespective of 

the procedures permitting withdrawals 

of residual interest under the 

amendments proposed, the proposed 

amendments further make clear that no 

withdrawals may be made of residual 

interest to the extent of the sum of 

margin deficits. 

If an FCM does not have adequate 

internal controls governing the 

calculation and withdrawal of its 

residual interest from futures customer 

accounts, the FCM’s actions may 

actually result in the withdrawal of 

futures customer funds and not the 

FCM’s residual interest. Such a 

withdrawal would be a violation of 

section 4d(a)(2) of the Act. 

The Commission, therefore, is 

proposing to amend § 1.23 to include 

additional safeguards applicable to an 

FCM’s withdrawal of funds from the 

accounts of futures customers that are 

part of the FCM’s residual interest in 

such accounts. Under proposed 

§ 1.23(a), an FCM will still have access 

to its own funds deposited into futures 

customer accounts to the extent of the 

FCM’s residual interest therein, subject 

to the restriction on withdrawal of 

residual interest equal to the sum of 

margin deficits. However, proposed 

§ 1.23(b) will prohibit an FCM from 

withdrawing any of its residual interest 

or excess funds from futures customer 

accounts (any withdrawal not made for 

the benefit of futures customers would 

be considered a withdrawal of the 

FCM’s residual interest) on any given 

business day unless the FCM had 

completed the daily calculation of funds 

in segregation pursuant to § 1.32 as of 

the close of the previous business day, 

and the calculation showed that the 

FCM maintained excess segregated 

funds in the futures customer accounts 

as of the close of business on the 

previous business day. Proposed 

§ 1.23(b) further requires that the FCM 

adjust the excess segregated funds 

reported on the daily segregation 

calculation to reflect other factors, such 

as overnight and current day market 

activity and the extent of current 

customer undermargined or debit 

balances, to develop a reasonable basis 

to estimate the amount of excess funds 

that remain on deposit since the close 

of business on the previous day prior to 

initiating a withdrawal. 

The Commission also is proposing 

several additional required layers of 

authorization and documentation if the 

withdrawal exceeds, individually or in 

the aggregate with other such 

withdrawals, 25 percent of the FCM’s 

residual interest. Proposed § 1.23(c) 

prohibits an FCM from withdrawing 

more than 25 percent of its residual 

interest in futures customer accounts 

unless the FCM’s CEO, CFO, or other 

senior official that is listed as a 

principal on the firm’s Form 7–R 

registration statement and is 

knowledgeable about the FCM’s 

financial requirements (‘‘Financial 

Principal’’) pre-approves the withdrawal 

in writing. 

Regulation 1.23(c) will further require 

the FCM to immediately file a written 

notice with the Commission and with 

the firm’s DSRO of any withdrawal that 

exceeds 25 percent of its residual 

interest. The written notice must be 

signed by the CEO, CFO, or Financial 

Principal that pre-approved the 

withdrawal, specifying the amount of 

the withdrawal, its purpose, its 

recipient(s), and contain an estimate of 

the residual interest after the 

withdrawal. The written notice also 

must contain a representation from the 

person that pre-approved the 

withdrawal that to such person’s 

knowledge and reasonable belief, the 

FCM remains in compliance with its 

segregation obligations. The proposal 

further requires that the official in 

making this representation specifically 

consider any other factors that may 

cause a material change in the FCM’s 

residual interest since the close of 

business on the previous business day, 

including known unsecured futures 

customer debits or deficits, current day 

market activity, and any other 

withdrawals. The written notice would 

be required to be filed with the 

Commission and with the FCM’s DSRO 

electronically. 

Proposed § 1.23(d) requires an FCM 

that has withdrawn funds from 

segregated futures customer accounts for 

its own purposes, and such withdrawal 

causes the firm to fall below its targeted 

residual interest in such accounts, to 

deposit proprietary funds into the 

accounts to restore the residual interest 

balance to the targeted amount. The 

FCM must deposit the proprietary funds 

into the segregated account prior to the 

close of the next business day. 

Alternatively, the FCM may revise its 

targeted residual interest amount, if 

appropriate, in accordance with its 

written policies and procedures for 

establishing, documenting, and 

maintaining its target residual interest, 

in accordance with the requirements of 

proposed § 1.11. Should an FCM’s 

residual interest, however, be exceeded 

by the sum of the FCM’s futures 

customers’ margin deficits, an amount 

necessary to restore residual interest to 

that sum must be deposited 

immediately. 

The Commission’s proposal is 

consistent in most respects with NFA’s 

recent rule amendments that require 

FCMs to maintain written policies and 

procedures regarding the withdrawal of 

proprietary funds from futures 

customers’ segregated accounts 

discussed in Section I.D above. The 

proposal will continue to provide FCMs 

with flexibility to access the residual 

interest in segregated funds, but with 

the responsibility to ensure that any 

withdrawals of residual interest are, in 

fact, the firm’s own funds. This 

responsibility exists currently by virtue 

of the language of section 4d(a)(2) of the 

Act and § 1.23, however the processes 

necessary to ensure that the 

responsibility was carried out were not 

specified by regulation. 

By providing a prohibition on 

withdrawals until the segregation 

calculation is performed by the FCM 

and submitted to the Commission and to 

the DSRO, and further requiring written 

approvals by the FCM’s senior officials 

prior to any withdrawals in excess of 25 

percent of the prior day’s residual 

interest with notice to the Commission 

and a DSRO, any withdrawal of funds 

in excess of the residual interest will be 

clear violations of proposed § 1.23, and 

the responsibility for such violations 

will be clear from written pre-approvals 

made by the CEO, CFO or Financial 

Principal, or the lack thereof. 

J. Proposed Amendments to § 1.25: 

Investment of Customer Funds 

The Commission is proposing to 

amend § 1.25(b)(3)(v) to provide that the 

25-percent counterparty concentration 

limit for reverse repurchase agreements 

applies not only to a single 

counterparty, but to all counterparties 

under common control or ownership. 

The Commission also is proposing to 

delete paragraph (b)(6) of § 1.25 because 

the information that an FCM is required 

to record and maintain under paragraph 

(b)(6) is currently required by § 1.27. 

Further, the Commission is proposing to 

amend § 1.25(d) to clarify the conditions 

under which an FCM may deposit firmowned securities into segregation. 

Regulation 1.25 sets forth the 

financial investments that an FCM or 

DCO may make with customer funds. As 

one of the permitted investments, FCMs 

and DCOs may use customer funds to 

purchase securities from a counterparty 

under an agreement for the resale of the 

securities back to the counterparty 

(‘‘reverse repurchase agreements’’). 

Regulation 1.25 places conditions on 

such repurchase or reverse repurchase 

agreements, including limiting 

permitted counterparties to certain 

banks and government securities 

brokers or dealers, and prohibiting an 

FCM or DCO from entering into such 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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70 Liability of Futures Commission Merchants and 

Clearing Associations, Administrative 

Determination No. 230 (Nov. 23, 1971). 

agreements with affiliate. Regulation 

1.25(b)(3)(v) also imposes a 

counterparty concentration limit on 

reverse repurchase agreements that 

prohibits an FCM or DCO from 

purchasing securities from a single 

counterparty that exceeds 25 percent of 

the total assets held in segregation by 

the FCM or DCO. 

Under the proposed amendment to 

§ 1.25(b)(3)(v), an FCM or DCO must 

aggregate the value of the securities 

purchased from two or more different 

counterparties under repurchase 

agreements if the counterparties are 

under common control or ownership. 

The aggregate value of the securities 

purchased under the repurchase 

agreements from the counterparties 

must not exceed 25 percent of the total 

assets held in segregation by the FCM or 

DCO. The Commission believes that 

expanding the concentration limitation 

to counterparties under common control 

or ownership is consistent with the 

original intention of the concentration 

limitation, which was to minimize the 

potential losses or disruptions due to 

the default of a counterparty. If the 

counterparties are under common 

control or ownership, a default by one 

counterparty may adversely impact all 

of the counterparties. 

The Commission also is proposing to 

amend § 1.25 by deleting paragraph 

(b)(6), which requires an FCM or DCO 

to prepare a record, on a daily basis, 

detailing the type of instruments in 

which customer funds were invested, 

the original costs of the investments, 

and the current market value of the 

investments. As noted above, the 

information that an FCM is required to 

record and maintain under paragraph 

(b)(6) is currently required by § 1.27. 

Finally, the Commission is proposing 

to amend § 1.25(d)(7) to recognize that 

a DCO designated as systemically 

important (‘‘SIDCO’’) by the Financial 

Stability Oversight Council may keep 

securities transferred to the SIDCO 

under a repurchase or reverse 

repurchase agreement in a safekeeping 

account with a Federal Reserve Bank, as 

authorized by section 806 of the DoddFrank Act. 

K. Proposed Amendments to § 1.26: 

Deposit of Obligations Purchased With 

Futures Customer Funds 

As discussed above, the Commission 

has previously proposed to amend 

§ 1.26 along with § 1.20 to require a 

template form of Acknowledgment 

Letter—in addition to other substantive 

requirements and obtaining and filing 

such Acknowledgment Letters—with 

respect to the deposit of instruments 

purchased with customer funds, 

including money market mutual funds. 

As discussed earlier with respect to 

§ 1.20, the Commission received and 

analyzed comments on those proposals. 

As noted above, the Commission is 

herein proposing changes to the 

template Acknowledgment Letter set 

forth in Appendix A to § 1.26 for money 

market mutual funds, which incorporate 

revisions based on the Commission’s 

analysis of prior comments, and is 

proposing new additions to such 

template. The Commission is also 

proposing new substantive requirements 

applicable to obtaining and filing such 

written Acknowledgment Letters. A new 

substantive requirement under § 1.26, as 

proposed to be amended and included 

in the template form, is a requirement 

that depositories provide the 

Commission and, and in the case of an 

FCM, the FCM’s DSRO—at all times— 

with read-only electronic access to all 

FCM and DCO accounts holding 

customer funds. 

L. Proposed Amendments to § 1.29: 

Increment or Interest Resulting From 

Investment of Customer Funds 

The Commission is proposing to 

amend § 1.29 to explicitly provide that 

an FCM bears sole responsibility for any 

losses resulting from the investment of 

customer funds in financial instruments 

permitted under § 1.25. 

Regulation 1.29 provides that an FCM 

is not prohibited from keeping as its 

own any interest or other gain resulting 

from the investment of customer funds 

in financial instruments permitted 

under § 1.25. Regulation 1.25 also 

provides that an FCM must manage the 

permitted investments consistent with 

the objectives of preserving principal 

and maintaining liquidity. 

The proposed amendment clarifies 

that an FCM is solely responsible for 

any losses that result from the 

investment of customer funds in the 

financial instruments listed under 

§ 1.25. An FCM may not charge or 

otherwise allocate any such losses to the 

accounts of the FCM’s customers. To 

allocate losses on the investment of 

customer funds would result in the use 

of customer funds in a manner that is 

not consistent with section 4d(a)(2) and 

§ 1.20, which provides that customer 

fund can only be used for the benefit of 

futures customers and limits 

withdrawals from futures customer 

accounts, other than for the purpose of 

engaging in trading, to certain 

commissions, brokerage, interest, taxes, 

storage or other fees or charges lawfully 

accruing in connection with futures 

trading. 

The Commission requests comment 

on the proposed amendment to 

explicitly provide that losses resulting 

from the investment of customer funds 

may not be allocated by an FCM to 

customers. The Commission also 

requests comment on how any losses 

associated with bank deposits should be 

addressed. The Commodity Exchange 

Authority issued an Administrative 

Determination (‘‘AD’’) in 1971 that 

provides that an FCM may not be liable 

for losses resulting from the deposit of 

customer funds with a bank that 

subsequently closes or is unable to 

repay the FCM’s deposit.70 The AD 

provides that an FCM would not be 

liable if it had used due care in selecting 

the bank, had not otherwise breached its 

fiduciary responsibilities toward the 

customers, and had fully complied with 

the requirements of the Act and the 

Commission regulations relating to the 

handling of customers’ funds. The 

Commission requests comment on 

whether the regulations should be 

revised to impose an obligation on an 

FCM to repay customer funds in the 

event of a default by a bank holding 

customer funds. Should there be a 

distinction drawn between U.S.- 

domiciled and regulated banks and nonU.S.-domiciled banks? 

M. Proposed Amendments to § 1.30: 

Loans by Futures Commission 

Merchants: Treatment of Proceeds 

The Commission is proposing to 

amend § 1.30 to provide that an FCM 

may not loan funds to finance a 

customer’s trading account on an 

unsecured basis, or accept as collateral 

for the loan the customer’s trading 

account. 

Regulation 1.30 provides that 

Commission regulations do not prevent 

an FCM from lending its own funds to 

a customer that has pledged securities 

and property, or from repledging or 

selling the customer’s securities or 

property pursuant to specific written 

agreement of the customer. This 

provision generally allows customers to 

deposit non-cash collateral as initial and 

variation margin. Absent the provisions 

in § 1.30, an FCM may be required to 

liquidate the non-cash collateral if the 

customer was subject to an initial or 

variation margin call. 

The Commission is proposing to 

amend § 1.30 to prohibit an FCM from 

loaning funds to finance a customer’s 

trading account on an unsecured basis, 

or from accepting a customer’s trading 

account as collateral for the loan. The 

Commission believes that extending 

unsecured loans to customers is not a 


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71Regulation 1.17(c)(3). 

72CME Rule 930.G.—Loans to Account Holders— 

provides that clearing members may not make loans 

to account holders to satisfy their performance bond 

requirements unless such loans are secured by 

readily marketable collateral that is otherwise 

unencumbered and which can be readily converted 

into cash. 

73 In fact, since FCMs file the Segregation 

Schedules with the CME and NFA via WinJammer, 

the Commission already has access to the filings, 

and the amendment will not require an FCM to 

change any of its operating procedures. 

74Each Form 1–FR–FCM and FOCUS Report is 

received by the Commission via WinJammer. The 

financial forms are automatically electronically 

reviewed within several minutes of being received 

by the Commission and if a firm is undersegregated 

an alert is immediately issued to Commission staff 

members via an email notice. 

common occurrence as the current 

capital requirements in § 1.17 would 

require the FCM to take a 100 percent 

capital charge on the unsecured 

receivables from the customers 

associated with such loans. Commission 

staff has, however, had to provide its 

views on whether a customer trading 

account may be used to collateralize a 

loan from the FCM. 

A trading account does not qualify as 

readily marketable securities that are 

generally required to collateralize a loan 

for the FCM to avoid the 100 percent 

unsecured receivable capital charge.71

Rules of the CME also prohibit an FCM 

from providing unsecured financing to a 

customer for margin purposes.72 The 

Commission is proposing to explicitly 

prohibit unsecured lending by FCMs to 

customers in the proposed amendments 

in § 1.30. Should customers have 

liquidity needs sufficient to require 

unsecured lending, the Commission 

believes it to be prudent to require that 

such unsecured lending be done by a 

party other than the FCM carrying the 

customer account. This newly proposed 

prohibition comports with the 

Commission’s existing regulatory 

requirement contained in § 1.56 that 

provides that no FCM may represent 

that it will not call for or attempt to 

collect initial and maintenance margin 

as established by the rules of the 

applicable board of trade. 

N. Proposed Amendments to § 1.32: 

Segregated Account: Daily Computation 

and Record 

The Commission is proposing to 

amend § 1.32 to require additional 

safeguards with respect to futures 

customer funds on deposit in segregated 

accounts, and to require FCMs to 

provide twice each month a detailed 

listing to the Commission of 

depositories holding customer funds. 

Regulation 1.32 requires an FCM to 

prepare a daily record as of the close of 

business each day detailing the amount 

of funds the firm holds in segregated 

accounts for futures customers trading 

on designated contract markets, the 

amount of the firm’s total obligation to 

such customers computed under the Net 

Liquidating Equity Method, and the 

amount of the FCM’s residual interest in 

the futures customer segregated 

accounts. In addition, the daily record 

must detail the sum of the futures 

customers’ margin deficits, to ensure 

that residual interest equals or exceeds 

such sum. In performing the calculation, 

an FCM is permitted to offset any 

futures customer’s debit balance by the 

market value (less haircuts) of any 

readily marketable securities deposited 

by the particular customer with the 

debit balance as margin for the account. 

The amount of the securities haircuts 

are as set forth in SEC Rule 15c3– 

1(c)(vi). 

FCMs are required to perform the 

segregation calculation prior to noon on 

the next business day, and to retain a 

record of the calculation in accordance 

with § 1.31. Both the CME and NFA 

require their respective member FCMs 

to file the segregation calculations with 

the CME and NFA, as appropriate, each 

business day. FCMs, however, are only 

required to file a segregation calculation 

with the Commission at month end as 

part of the Form 1–FR–FCM (or FOCUS 

Reports for dual-registrant FCM/BDs). 

Regulation 1.12, as discussed in Section 

II.C above, requires the FCM to provide 

immediate notice to the Commission 

and to the firm’s DSRO if the FCM is 

undersegregated at any time. 

The Commission is proposing to 

amend § 1.32 to require each FCM to file 

its segregation calculation with the 

Commission and with its DSRO each 

business day. The Commission also is 

proposing to amend § 1.32 to require 

FCMs to use the Segregation Schedule 

contained in the Form 1–FR–FCM (or 

FOCUS Report for dual-registrant FCM/ 

BDs) to document its daily segregation 

calculation. 

As noted above, the CME and NFA 

require their respective member FCMs 

to file their segregation calculations 

with them on a daily basis. The CME 

and NFA also require the FCMs to 

document their segregation calculation 

using the Segregation Schedule 

contained in the Form 1–FR–FCM. 

Therefore, the additional requirement of 

filing a Segregation Schedule with the 

Commission is not a material change to 

the regulation.73

The Commission believes that the 

filing of a Segregation Schedule by each 

FCM each day will significantly 

enhance its ability to monitor and 

protect customer funds. Commission 

staff will be able to determine almost 

immediately upon receipt of the 

Segregation Schedule whether a firm is 

undersegregated and immediately take 

steps to determine if the firm is 

experiencing financial difficulty or if 

customer funds are at risk.74

Commission staff also can coordinate 

the review of the daily segregation 

computations with the additional bank 

and other depository information that it 

will have access to under proposed 

§ 1.23. 

In addition, the use of the Segregation 

Schedule provides a uniform way for 

each FCM to present its information to 

the Commission, in a format that both 

the Commission and FCMs are familiar 

with that will reduce significantly the 

possibility of a miscommunication 

regarding the information that is 

reported. The standardized Segregation 

Schedule will also facilitate the 

Commission’s ability to compare one 

FCM to another, and to perform 

additional trend and other analysis to 

identify potential issues with the 

holding of customer funds. The filing of 

daily segregation records also will allow 

staff to monitor significant movements 

in the balances of segregated funds on 

a day-to-day basis. 

Proposed § 1.32(d) provides that the 

Segregation Statement must be filed 

with the Commission and with the 

FCM’s DSRO electronically using a form 

of user authentication assigned in 

accordance with procedures established 

or approved by the Commission. The 

Commission is not proposing to change 

the timeframe for the preparation of the 

Segregation Statements. The Segregation 

Statement must be filed by noon (based 

upon the location of the FCM) the next 

business day. 

The Commission also is proposing to 

amend § 1.32(b) to provide that in 

determining the haircuts for commercial 

paper, convertible debt instruments, and 

nonconvertible debt instruments 

deposited by customers as margin, the 

FCM may develop written policies and 

procedures to assess the credit risk of 

the securities as proposed by the SEC 

and discussed more fully in Section II.F 

above. If the FCM’s assessment of the 

credit risk is that it is minimal, the FCM 

may apply haircut percentages that are 

lower than the 15 percent default 

percentage under SEC Rule 15c3– 

1(c)(2)(vi). 

The Commission is further proposing 

to amend § 1.32 by requiring each FCM 

to file detailed information regarding 

depositories and the substance of the 

investment of customer funds under 

§ 1.25. Proposed paragraphs (f) and (j) of 

§ 1.32 will require each FCM to submit 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67890 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

75 7 U.S.C. 7(d)(11). 

76 7 U.S.C. 21(p). 

77 77 FR 36611 (June 19, 2012). 

to the Commission and to the firm’s 

DSRO a listing of every bank, trust 

company, DCO, other FCM, or other 

depository or custodian holding 

customer funds. 

The listing must specify separately for 

each depository the total amount of cash 

and § 1.25 permitted investments held 

by the depository for the benefit of the 

FCM’s customers. Specifically, each 

FCM must list the total amount of cash, 

United States government securities, 

United States agency obligations, 

municipal securities, certificates of 

deposit, money market mutual funds, 

commercial paper, and corporate notes 

held by each depository, computed at 

current market values. The listing also 

must specify: (1) If any of the 

depositories are affiliated with the FCM; 

(2) if any of the securities are held 

pursuant to an agreement to resell the 

securities to a counterparty (reverse 

repurchase agreement) and if so, how 

much; and (3) the depositories holding 

customer-owned securities and the total 

amount of customer-owned securities 

held by each of the depositories. The 

FCM is also required to disclose if any 

of the depositories are affiliated with the 

FCM. 

Each FCM is required to submit the 

listing of the detailed investments to the 

Commission and to the firm’s DSRO 

twice each month. The filings must be 

made as of the 15th day of each month 

(or the next business day, if the 15th day 

of the month is not a business day) and 

the last business day of the month. The 

filings are due to the Commission and 

to the firm’s DSRO by 11:59 p.m. on the 

next business day. 

Proposed paragraph (k) of § 1.32 will 

require each FCM to retain the 

Segregation Statement prepared each 

business day and the detailed 

investment information, together with 

all supporting documentation, in 

accordance with § 1.31. 

The Commission’s proposal is similar 

to existing SRO practices and rules. The 

CME and NFA recently adopted rules 

requiring member FCMs to submit 

detailed information on how they invest 

customer funds and the depositories 

holding customer funds. The 

information required to be filed by 

FCMs with the CME and NFA is 

consistent with the information that 

FCMs are required to file with the 

Commission and DSROs under the 

proposed amendments to § 1.32, with 

the exception that the current CME rule 

does not require member FCMs to 

submit information regarding the 

holding of customer-owned securities. 

The proposed timeframes for both 

preparing and filing both the 

Segregation Statements and the detailed 

investment information are consistent 

between the SRO rules and proposed 

§ 1.32. 

The Commission also notes that NFA 

will be publishing information on its 

Web site regarding how each FCM 

invests and holds customer funds. 

Commission staff is consulting with 

NFA and is assessing whether NFA 

should be the primary method for the 

public to obtain information on how 

FCMs hold and invest customer funds. 

The twice monthly filing of 

information on the investment of 

customer funds will provide the 

Commission and SROs with more 

timely detailed information regarding 

how FCMs are holding and investing 

customer funds, which will allow the 

Commission and SROs to more closely 

monitor customer funds to assess their 

safety. In this regard, the reporting of 

the use of depositories that are affiliated 

with the FCM will alert staff to review 

such relationships more closely to 

ensure that transactions are done in an 

appropriate arms-length manner and not 

to the benefit of the affiliated 

depository. Staff also can compare 

reported the reported investment 

balances with information maintained 

directly by the depositories using the 

on-line access that the depositories will 

be required to provide to Commission 

staff under § 1.20 discussed above. 

The Commission request comment on 

all aspects of the proposed amendments 

to § 1.32. Specifically, the Commission 

requests comments on the following: 

• Should the Commission amend the 

regulations to require each FCM to 

disclose information regarding its 

investments of customer funds? If so, 

what information should be disclosed? 

What investment information would be 

of the most benefit to market 

participants in assessing whether to 

entrust funds to a particular FCM? How 

would the investment information be 

used by market participants? 

• How frequently should investment 

information be disclosed? What format 

should be used to disclose the 

information? How should the 

information be disclosed? Should the 

information be posted on the FCM’s 

internet web site? 

• Should NFA act as the primary 

source for the disclosure of how FCMs 

hold and invest customer funds? 

O. Proposed Amendments to § 1.52: 

Self-Regulatory Organization Adoption 

and Surveillance of Minimum Financial 

Requirements 

SROs are required by the Act and 

Commission regulations to monitor their 

member FCMs for compliance with the 

Commission’s and SROs’ minimum 

financial and related reporting 

requirements. Specifically, DCM Core 

Principle 11 provides, in relevant part, 

that a board of trade shall establish and 

enforce rules providing for the financial 

integrity of any member FCM and the 

protection of customer funds.75 In 

addition, section 17 of the Act requires 

NFA to establish minimum capital, 

segregation, and other financial 

requirements applicable to its member 

FCMs, and to audit and to enforce 

compliance with such requirements.76

The Commission also has established 

in § 1.52 minimum elements that each 

SRO financial surveillance program 

must contain to satisfy the statutory 

objectives of Core Principle 11 and 

section 17 of the Act. In this regard, 

§ 1.52 requires, in part, each SRO to 

adopt and to submit for Commission 

approval rules prescribing minimum 

financial and related reporting 

requirements for member FCMs. The 

rules of the SRO also must be the same 

as, or more stringent than, the 

Commission’s requirements for financial 

statement reporting under § 1.10 and 

minimum net capital under § 1.17. 

In addition, the Commission adopted 

final amendments to § 1.52 on May 10, 

2012, to codify previously issued CFTC 

staff guidance regarding the minimum 

elements of an SRO financial 

surveillance program.77 The final 

amendments require an SRO to: (1) 

Maintain staff of an adequate size, 

training, experience, and independence 

to effectively implement a supervisory 

program; (2) maintain a program that 

provides for the ongoing surveillance of 

FCMs through review of financial 

statements and regulatory notices; (3) 

identify firms that pose a high degree of 

potential risk, including risk to 

customer funds; (4) conduct routine, 

periodic onsite examinations of FCMs; 

and (5) adequately document all aspects 

of the operation of the supervisory 

program, including the conduct of riskbased scope setting and the risk-based 

surveillance of high-risk member 

registrants, and the imposition of 

remedial and punitive actions for 

material violations. 

In order to effectively and efficiently 

allocate SRO resources over FCMs that 

are members of more than one SRO, 

§ 1.52(c) currently permits two or more 

SROs to enter into an agreement to 

establish a joint audit plan for purpose 

of assigning to one of the SROs (the 

DSRO) of the joint audit plan the 

function of monitoring and examining 

member FCMs for compliance with 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67891 

78The original signatories of the joint audit plan 

approved on March 18, 2009 are as follows: Board 

of Trade of the City of Chicago, Inc.; Board of Trade 

of Kansas City; CBOE Futures Exchange, LLC; 

Chicago Climate Futures Exchange, LLC; Chicago 

Mercantile Exchange Inc.; Commodity Exchange, 

Inc; ELX Futures, L.P.; HedgeStreet, Inc.; ICE 

Futures U.S., Inc.; INET Futures Exchange, L.L.C.; 

Minneapolis Grain Exchange; NASDAQ OMX 

Futures Exchange; National Futures Association; 

New York Mercantile Exchange, Inc.; NYSE Liffe 

US, L.L.C.; OneChicago, L.L.C. 

certain regulatory and financial 

reporting obligations. The audit plan 

must be submitted to the Commission 

for approval. The Commission may 

approve a joint audit plan, or part of 

such a plan, after notice and comment 

if the Commission determines that the 

plan: (1) Is necessary or appropriate to 

serve the public interest; (2) is for the 

protection and in the interest of 

customers; (3) reduces multiple 

monitoring and auditing for compliance 

with the minimum financial 

requirements; (4) reduces multiple 

reporting of financial information; (5) 

fosters cooperation and coordination; 

and (6) does not hinder the 

development of a registered futures 

association. Currently all active SROs 

are members of a joint audit plan that 

was approved by the Commission on 

March 18, 2009.78

The Commission is proposing 

additional amendments to § 1.52 in light 

of recent events that highlight a need for 

strengthening the minimum 

requirements that SROs must abide by 

in conducting financial surveillance to 

minimize the chances that FCMs that 

engage in unlawful activities that result, 

or could result, in the loss of customer 

funds or the inability of the firms to 

meet their financial obligations to 

market participants, including DCOs, go 

undetected. The proposed amendments 

to § 1.52 revise the current supervisory 

program required to be established and 

implemented by SROs pursuant to 

existing § 1.52(b) with respect to their 

FCM members. In addition, for SROs 

that choose to delegate their duties to 

oversee and examine FCMs that are 

members of two or more SROs to a 

DSRO pursuant to a plan established 

under existing § 1.52(c) in lieu of each 

conducting its own oversight and 

examinations of such common FCM 

members, proposed § 1.52 provides that 

the plan adopt certain requirements to 

assure the quality of the DSRO oversight 

and examinations conducted under the 

plan, both as to the substance of the 

oversight and examination program and 

the application of such program. 

Proposed § 1.52(b) requires each SRO 

to adopt rules requiring its member 

FCMs to establish a risk management 

program that is at least as stringent as 

the risk management program required 

in proposed § 1.11. Proposed § 1.11 is 

discussed in Section II.B above, and 

requires an FCM to establish a risk 

management program designed to 

monitor and manage risks associated 

with the activities of the FCM. 

Proposed § 1.52 does not make 

significant changes to the existing SRO 

supervisory programs with respect to 

the oversight and examination of retail 

foreign exchange dealer and IB member 

registrants. However, with respect to the 

oversight and examination of FCMs, 

proposed § 1.52 requires an SRO to 

adopt significant new requirements in 

its supervisory program. The 

supervisory program for FCMs will now 

explicitly require, among other things, 

controls testing as well as substantive 

testing, and the examination process for 

each FCM must be driven by the risk 

profile of each such FCM. In addition, 

the supervisory program must conform 

to U.S. GAAS after giving full 

consideration to those auditing 

standards as prescribed by the PCAOB. 

The supervisory program also must 

contain written standards addressing 

numerous aspects of the examination 

process over FCMs as provided in 

proposed § 1.52(c)(2)(iii), including the 

examination of the risk assessment 

process, the examination of the 

planning process, and the quality 

control procedures to ensure that the 

examinations maintain the level of 

quality expected by the SRO. 

The Commission believes that an 

examination of an FCM must include a 

review and assessment of the firm’s 

internal controls in order to identify 

where there may be potential 

weaknesses and to properly gauge the 

risks associated with such weaknesses 

including their potential impact on the 

financial condition of the firm and the 

protection of customer funds. 

The SRO also must engage an 

‘‘examinations expert’’ under 

§ 1.52(c)(2) to review its supervisory 

program and the application of the 

supervisory program at least once every 

two years. The term ‘‘examinations 

expert’’ is proposed to be defined under 

§ 1.52(a) as a nationally recognized 

accounting and auditing firm with 

substantial expertise in audits of FCMs, 

risk assessment and internal control 

reviews, and is someone acceptable to 

the Commission. The Commission is 

proposing to delegate to the Director of 

the Division of Swap Dealer and 

Intermediary Oversight the 

responsibility of assessing whether a 

particular entity is qualified and 

approved as an examinations expert to 

review the SRO’s supervisory program 

The review will require the 

examinations expert to assess the 

sufficiency of the SRO’s risk-based 

approach and the internal controls 

testing and also whether the supervisory 

program is being appropriately applied 

by the SRO in its examinations of its 

member FCMs. In addition, the review 

will require that the examinations 

expert provide an opinion as to whether 

the supervisory program is reasonably 

likely to identify a material deficiency 

in internal controls of the FCM or in any 

of the other items that are the subject of 

an examination conducted in 

accordance with the supervisory 

program. Furthermore, the review will 

require that the examinations expert 

also provide recommendations on new 

or best practices prescribed by industry 

sources that should be incorporated in 

the supervisory program. The SRO must 

receive a written report from the 

examinations expert describing, among 

other things, the items mentioned in 

this paragraph. 

Upon receipt of the written report, the 

SRO must provide such written report 

to the Commission. The SRO must 

update the supervisory program and 

coordinate with the Commission to 

resolve any issues raised by the written 

report and any Commission questions 

and comments before the updated 

supervisory program becomes the 

standard for the SRO’s examinations of 

its registered FCM members. Proposed 

§ 1.52(c)(2)(vi) also requires each SRO to 

submit an initial supervisory program 

within 120 days of the effective date of 

the regulation, or a longer period of time 

that Director of the Division of Swap 

Dealer and Intermediary Oversight 

(acting pursuant to authority delegated 

by the Commission) may approve. The 

initial supervisory program must 

contain an affirmation from the 

examinations expert regarding the 

evaluation of the supervisory program, 

including the sufficiency of the riskbased approach and the internal 

controls testing. The examinations 

expert also must opine as to whether the 

supervisory program is reasonably likely 

to identify a material weakness in 

internal controls over financial or 

regulatory reporting. 

Consistent with the current 

regulation, and in order to avoid 

duplicative examinations and oversight 

of FCMs, retail foreign exchange dealers, 

or IBs, proposed § 1.52(d)(1) provides 

that when two or more SROs have a 

common member registrant, such SROs 

may voluntarily agree to establish a plan 

to delegate to a single DSRO the 

function of overseeing and examining 

such common member registrant 

otherwise required from each such SRO. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67892 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

79The Commission’s view is only that the current 

agreement does not have to be revised as a result 

of the proposed amendments. The SRO members of 

the current joint audit plan, however, are not 

precluded from making any amendments or 

otherwise revising the joint audit program 

consistent with the terms included in the agreement 

for making such revisions. 

Proposed amendments to § 1.52(d)(1) 

would further provide that while an 

SRO may delegate the functions of 

examining a member FCM for 

compliance with the minimum financial 

and reporting and risk management 

requirements, the delegating SRO 

retains responsibility for its member 

FCM’s compliance with such 

requirements. 

If SROs choose to take advantage of 

the efficiency provided by a joint audit 

plan with respect to their oversight and 

examinations over common member 

FCMs, then the plan must satisfy the 

requirements of proposed § 1.52(d)(2), 

which will assure the quality of the 

SROs, both as to the substance of the 

oversight and examination program and 

the application of such program. 

Proposed § 1.52(d)(2) requires in such a 

plan that the SROs form a Joint Audit 

Committee and adopt a Joint Audit 

Program pursuant to which FCMs are 

overseen and examined by a DSRO. 

The Joint Audit Committee members 

will be subject to a number of duties 

according to proposed § 1.52(d)(2). The 

most important of these is that the Joint 

Audit Committee members establish 

and maintain a Joint Audit Program that 

the DSROs must apply in their oversight 

and examinations of FCMs. 

The requirements for the 

establishment and maintenance of the 

Joint Audit Program are identical in 

many ways to the establishment and 

maintenance of the standalone 

supervisory program with respect to 

FCMs described in proposed §§ 1.52(b) 

and (c). For example, the Joint Audit 

Program and the standalone supervisory 

program both require controls testing as 

well as substantive testing, and the 

examination process for each FCM must 

be driven by the risk profile of each 

such FCM. Both programs are required 

to be reviewed by an examinations 

expert every two years. Both must have 

standards addressing the items listed in 

proposed § 1.52(c)(2)(iii), including the 

examination risk assessment, 

examination planning, and quality 

control to ensure that the examinations 

maintain the level of quality expected. 

The rationale for this approach is 

because one of the goals of proposed 

§ 1.52(d)(2) is to ensure that the SRO 

and examinations of FCMs is at least up 

to the same heightened standard, 

regardless of whether the oversight and 

examinations are conducted by the SRO 

itself or by a DSRO designated by the 

Joint Audit Committee. 

The proposed revisions to § 1.52(d) 

would not nullify the existing joint 

audit plan approved by the Commission 

on March 18, 2009. Furthermore, the 

Commission believes that the new 

minimum requirements for a Joint Audit 

Program under proposed § 1.52(d)(2) 

will not require revisions to the current 

joint audit plan. In this regard, the joint 

audit plan approved by the Commission 

includes a provision in paragraph 3 that 

provides that the minimum practices 

and procedures followed by each DSRO 

in the conduct of examinations of FCMs 

shall be established to conform with the 

requirements of § 1.52, Commission staff 

interpretations, and any other 

Commission requirements hereinafter in 

effect relating to audits and financial 

reviews. The Commission believes that 

this provision would require the DSROs 

of the current joint audit plan to revise 

their Audit Program to meet the new 

requirements of proposed 1.52, but not 

require a new joint audit plan to be 

submitted to the Commission.79

The members of the current joint 

audit plan would be required to 

establish, operate and maintain a Joint 

Audit Program under proposed 

§ 1.52(d)(2)(i). The members of the 

current joint audit plan also would be 

required to submit to the Commission 

for its review and comment a Joint 

Audit Program within 120 days (or such 

other time as the Commission may 

approve) of the effective date of the 

amendments to § 1.52 under proposed 

§ 1.52(d)(2)(ii)(H). The Joint Audit 

Program must be accompanied by a 

written report from an examinations 

expert affirming that the examinations 

expert has evaluated the Joint Audit 

Program and the examinations expert’s 

opinion as to whether the Joint Audit 

Program is reasonably likely to identify 

a material deficiency in internal 

controls over financial and regulatory 

reporting, and other items that are 

subject of an examination conducted in 

accordance with the Joint Audit 

Program. 

The Commission is proposing to 

delegate the responsibility for granting 

an extension of time to submit an initial 

Joint Audit Program to the Director of 

the Division of Swap Dealer and 

Intermediary Oversight. In this 

connection, the Commission anticipates 

that the Division of Swap Dealer and 

Intermediary Oversight will be 

performing ongoing consultation with 

SROs regarding the examination 

programs and, therefore, would be in 

position to assess the adequacy of, and 

necessity for, any request for an 

extension of the filing deadline. It is 

anticipated that the Director of the 

Division of Swap Dealer and 

Intermediary Oversight will grant 

requests for reasonable extensions of 

time for the submission of the Joint 

Audit Program. 

The Commission requests comments 

on all aspects of proposed § 1.52. The 

Commission also requests comments on 

the following: 

• The Commission is proposing to 

require that the SRO and/or JAC 

program be subject to an evaluation by 

an examinations expert at least once 

every two years. The examinations 

expert is defined as a nationally 

recognized accounting and auditing 

firm. Is the proposed definition of the 

examinations expert sufficiently clear or 

detailed to identify which entities may 

qualify as an examinations expert? If 

not, how can the Commission make the 

definition more objective? Should the 

Commission consider entities other than 

accounting and auditing firms (such as 

consulting firms) to act as examinations 

experts? 

• Is the requirement for the 

examinations expert to conduct an 

evaluation of the SRO or JAC program 

at least once every two years an 

appropriate timeframe? Should the 

Commission consider a shorter interval 

between evaluations? If so, why? 

Alternatively, should the Commission 

consider a longer interval between 

evaluations? If so, why? What criteria 

should the Commission consider in 

setting the interval? Should the 

Commission allow SRO or JAC 

programs that have minimal issues 

raised by the examinations expert be 

subject to a longer evaluation interval 

than programs that have more issues 

identified by the examinations expert? If 

so, how would the Commission 

implement such a program? 

• Does the requirement for an 

examinations expert add sufficient 

value to the SRO or JAC program to 

justify the costs of such evaluations? 

Please provide detail in your response 

to assist the Commission in assessing 

the costs of such evaluations. 

• Are there alternatives to the 

examinations expert’s evaluation to 

assess the adequacy of the SRO and JAC 

program that the Commission should 

consider? Please provide detail in your 

response. 

• The Commission is proposing that 

an SRO submit an initial supervisory 

program and that the members of a Joint 

Audit Committee submit an initial Joint 

Audit Program within 120 days of the 

effective date of the regulation. The 

initial supervisory program and the 

initial Joint Audit Program must include 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67893 

80FCMs and IBs are not required to provide 

disclosure documents to institutional customers, 

defined as eligible contract participants under 

section 1a of the Act. See § 1.55(f). 

a written report containing an 

affirmation from an examinations expert 

regarding the evaluation of the 

supervisory program or the Joint Audit 

Program, including the sufficiency of 

the risk-based approach and the internal 

controls testing. The examinations 

expert also must opine as to whether the 

supervisory program or the Joint Audit 

Program is reasonably likely to identify 

a material weakness in internal controls 

over financial or regulatory reporting. Is 

the proposed 120-day period a sufficient 

period of time for an SRO or JAC to 

obtain such report from an examinations 

expert and to submit its respective 

supervisory program or Joint Audit 

Program? If not, what is a sufficient 

period of time? 

P. Proposed Amendments to § 1.55: 

Public Disclosures by Futures 

Commission Merchants 

The Commission is proposing to 

amend § 1.55 to enhance the disclosures 

provided to customers and potential 

customers regarding the extent to which 

customer funds are protected when 

deposited with an FCM as margin or to 

guarantee performance for trading 

commodity interests. The Commission 

also is proposing to require each FCM 

to disclose certain firm specific 

information regarding the FCM’s 

financial condition and operations to 

allow customers and potential 

customers to assess the risks of engaging 

the firm to conduct futures trading and 

the risks of entrusting their funds to the 

FCM. 

Regulation 1.55(a) currently requires 

an FCM, or an IB in the case of an 

introduced account, to provide each 

customer with a risk disclosure 

statement prior to opening the 

customer’s account (‘‘Risk Disclosure 

Statement’).80 Regulation 1.55(b) 

provides a standard form Risk 

Disclosure Statement that each FCM or 

IB is required to provide to each 

prospective customer. The current Risk 

Disclosure Statement is primarily 

intended to provide a customer with 

disclosure of the market risks of 

engaging in futures trading and 

addresses, among other things, risks 

associated with leverage, market 

movements, and the inability to exit the 

market due to limit moves. The FCM or 

IB also is required to receive a signed 

acknowledgment from the customer 

stating that the customer received and 

understood the Risk Disclosure 

Statement. 

The Commission is proposing to 

amend § 1.55 to require FCMs to 

provide additional disclosures to 

prospective customers. Specifically, the 

Commission is proposing to add new 

provisions to paragraph (b) that will 

require the Risk Disclosure Statement to 

contain a statement that: (1) Customer 

funds are not protected by insurance in 

the event of the bankruptcy or 

insolvency of the FCM, or if customer 

funds are misappropriated in the event 

of fraud; (2) customer funds are not 

protected by SIPC, even if the FCM is a 

BD registered with the SEC; and (3) 

customer funds are not insured by a 

DCO in the event of the bankruptcy or 

insolvency of the FCM holding the 

customer funds. The proposed 

amendments also will require an FCM 

to disclose that each customer’s funds 

are not held in an individual segregated 

account by an FCM, but rather are 

commingled in one or more accounts, 

and that FCMs may invest funds 

deposited by customers in investments 

listed in § 1.25. The proposed 

amendments also will require that each 

FCM disclose that funds deposited by 

customers may be deposited with 

affiliated entities of the FCM, including 

affiliated banks and brokers. 

The Commission also is proposing to 

revise the Risk Disclosure Statement 

required by § 1.55(b) to include a new 

disclosure that informs a potential 

customer that each futures commission 

merchant is required by Commission 

regulations to make certain firm specific 

disclosures and financial information 

publicly available on the futures 

commission merchant’s Web site to 

assist the customer with his or her 

assessment and selection of a futures 

commission merchant. The firm specific 

disclosures are detailed in proposed 

paragraph (k) of § 1.55 and are discussed 

below. The Risk Disclosure Statement 

also must include the futures 

commission merchant’s Web site 

address where the additional firm 

specific and financial information may 

be obtained by the customer. 

The Commission is proposing the 

additional disclosures in response to the 

recent failures of MF Global and 

Peregrine. The Commission is 

concerned that the current Risk 

Disclosure Statement does not provide 

customers with adequate or complete 

information regarding the risks of 

engaging in trading through an FCM. 

Current disclosures in the Risk 

Disclosure Statement focus on the 

market risks of engaging in futures 

trading. However, the Commission 

understands that many of MF Global’s 

former customers did not have adequate 

and meaningful information regarding 

the risks that their funds were exposed 

to beyond general market risks. 

Specifically, the Commission 

understands that some customers 

believed that their funds were covered 

by insurance or other protection. Some 

customers also believed that DCOs 

guaranteed customer funds in the event 

of a bankruptcy of an FCM. 

The proposed additional disclosures 

in the Risk Disclosure Statement are 

intended to provide customers with a 

greater understanding of the risks of 

entrusting their funds with an FCM. 

This includes disclosures regarding the 

meaning and operation of the term 

‘‘segregation’’ under the Act and 

Commission regulations. In addition, 

the Commission believes that customers 

will benefit from an awareness that 

FCMs may use affiliated entities to hold 

customer funds. 

The Commission also is proposing 

that the Risk Disclosure Statement 

include a new provision that informs 

potential customers to the fact that 

additional firm specific disclosures and 

financial information about a particular 

FCM may be obtained from information 

maintained on each FCM’s respective 

Web site. The content of the additional 

firm specific and financial disclosures 

are discussed below. 

The Commission also is proposing to 

amend § 1.55, by adding new 

paragraphs (i) through (n) which will 

require an FCM to provide to each 

customer an additional disclosure 

document that will set forth firm 

specific information and address firmspecific risk factors to allow customers 

to have more information regarding the 

FCM and the risks associated with 

entrusting their funds to the FCM, or 

otherwise conducting business with or 

through the FCM (‘‘Firm Specific 

Disclosure Document’’). The additional 

risk information provided also will 

enable customers to make more 

meaningful judgments regarding the 

appropriateness of selecting an FCM by 

providing tools and information for the 

meaningful comparisons of business 

models and risks across FCMs. Such 

additional information will greatly 

enhance the due diligence that a 

customer can conduct both prior to 

opening an account and on an ongoing 

basis, as the proposal will require that 

the FCM update the risk disclosure 

information on a periodic basis. The 

Commission believes that the proposed 

Firm Specific Disclosure Document, 

coupled with the existing Risk 

Disclosure Statement, will provide 

customers with a more complete 

perspective regarding the risks of 

participating in the futures markets. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67894 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

Under the proposal, in addition to 

providing general firm contact 

information, the Firm Specific 

Disclosure Document will contain the 

names, business contacts, and 

backgrounds for the FCM’s senior 

management and members of the FCM’s 

board of directors. The Firm Specific 

Disclosure Document also will include 

firm risk disclosures including: (1) A 

discussion of the significant types of 

business activities and product lines 

that the FCM engages in; (2) a 

discussion of the FCM’s significant lines 

of business and the approximate amount 

of assets and capital devoted to each 

line of business; (3) a discussion of the 

material risks of the firm including the 

FCM’s creditworthiness, leverage, 

capital and liquidity condition, and an 

explanation of how such risks may be 

material to customers that deposit funds 

for futures trading with the firm; and (4) 

a discussion of any material 

administrative, civil, criminal, or 

enforcement actions pending or any 

enforcement actions taken in the last 

three years. 

The proposed Firm Specific 

Disclosure Document also will require 

each FCM to disclose firm specific 

information regarding its operations in 

the futures marketplace. An FCM will 

be required to disclose the name of the 

firm’s DSRO, and to provide an 

overview of customer funds segregation 

protections and limitations, and how it 

manages its collateral management and 

investments. Each FCM also will be 

required to disclose the clearinghouses 

and carrying brokers that its uses to 

conduct its business, as well as its 

policies and procedures concerning the 

choice of depositories, custodians and 

counterparties. 

The proposed Firm Specific 

Disclosure Document also will require 

the FCM to disclose certain financial 

and risk management information 

including the firm’s total equity, 

regulatory capital, and net worth as of 

the most recent month end when the 

disclosure document is prepared. The 

FCM also is required to disclose 

information regarding: (1) The amount 

of the FCM’s proprietary margin 

requirements as a percentage of the total 

segregated and secured funds that the 

FCM holds; (2) the number of customers 

that comprise 50 percent of the firm’s 

total customer segregated and secured 

amount requirements; (3) the aggregate 

notional value, by asset class, of all nonhedged, principal over-the-counter 

transactions into which the FCM has 

entered; (4) the amount, generic source 

and purpose of any unsecured lines of 

credit (or similar short-term funding) 

the FCM has obtained but not yet drawn 

upon; (5) the aggregate amount of 

financing the FCM provides for 

customer transactions involving illiquid 

financial products for which it is 

difficult to obtain timely and accurate 

prices; (6) the percentage of customer 

receivables that the FCM had to writeoff as uncollectable during the prior 

year compared to the current segregated 

and secured amount balances; and (7) a 

summary of the FCM’s current risk 

practices, controls and procedures. 

An FCM is obligated to update the 

Firm Specific Disclosure Document as 

necessary to keep the information 

accurate, but at least on an annual basis. 

An FCM also is required to make the 

Firm Specific Disclosure Document 

available to its customers and the 

general public on its Web site. An FCM 

may, however, use an alternative 

electronic means to make the Firm 

Specific Disclosure Document available 

to its customers provided that the 

electronic version is presented in a 

format that is readily communicated to 

its customers. The Proposal further 

provides that an FCM shall provide a 

paper copy of the Firm Specific 

Disclosure Document to a customer 

upon the customer’s request. 

The Commission also is proposing to 

amend § 1.55 to require each FCM to 

disclose on its Web site to the general 

public financial information that is 

publicly available under existing 

Commission regulations. Specifically, 

proposed paragraph (o) of § 1.55 will 

require each FCM to make available on 

its Web site the daily Segregation 

Schedule; the daily Secured Amount 

Schedule; and the daily Cleared Swaps 

Segregation Schedule. Each FCM will be 

required to maintain 12 months of the 

above segregation and secured 

schedules available on its Web site. 

Proposed paragraph (o) also requires 

each FCM to disclose on its Web site a 

summary schedule of the firm’s adjusted 

net capital, net capital, and excess net 

capital for the 12 most recent monthend dates. Each FCM also will be 

required to disclose on its Web site the 

following statements and schedules 

from the most current year end annual 

report that is certified by an 

independent public accountant in 

accordance with § 1.16: the Statement of 

Financial Condition; the Segregation 

Schedule; Secured Amount Schedule; 

the Cleared Swaps Segregation 

Schedule; and all footnotes related to 

the above statement and schedules. 

The information that the proposal 

requires each FCM to disclose on its 

Web site is information that is currently 

publicly available under Commission 

regulations, or proposed by this 

rulemaking in the case of the Cleared 

Swaps Segregation Schedule, to be 

public information. Regulation 1.10(g) 

currently provides that the Segregation 

Schedules and Secured Amount 

Schedules contained in the monthly 

unaudited Forms 1–FR–FCM are public 

information. Regulation 1.10(g) further 

provides that the amounts of an FCM’s 

adjusted net capital, minimum net 

capital requirement, and excess net 

capital as reported in the firm’s 

unaudited monthly Form 1–FR–FCM 

are public information. Lastly, § 1.10(g) 

provides that the Statement of Financial 

Condition, Segregation Schedule, 

Secured Amount Schedule, and related 

footnote disclosures contained in an 

FCM’s audited annual financial report 

are public documents. 

The Commission also is proposing in 

paragraph (o) of § 1.55 to require each 

FCM to include a statement on its Web 

site that is available to the public that 

additional information, including 

information on how the FCM invests 

customer funds, may be obtained from 

the NFA. The FCM also is required to 

include a link on its Web site to the 

NFA web page which shows financial 

information for the FCM. Lastly, 

proposed paragraph (o) requires each 

FCM to include a statement regarding 

the Commission’s reporting of select 

FCM financial information and a link to 

the Commission’s Web site. 

The Commission is proposing 

paragraph (o) as it believes that 

customers will make more informed 

choices regarding which FCMs to use to 

carry their account and to entrust their 

funds to if they have the opportunity to 

have access to FCM financial 

information. Requiring FCMs to make 

the information available to the public 

on their respective Web sites will allow 

customers and potential customers with 

a convenient method of obtaining and 

reviewing the information to assist with 

their selection process. Customers will 

have the ability to compare and contrast 

financial data from all FCMs to assist 

with the decision making process of 

determining which firms meet their 

criteria for holding their funds. 

The Commission requests comment 

on all aspects of proposed amendments 

to § 1.55. Specifically, the Commission 

requests comment on the following: 

• Do the existing and proposed 

disclosures required to be included in 

the Risk Disclosure Statement and Firm 

Specific Disclosure Document 

adequately convey to retail and/or 

institutional investors the market and 

firm specific risks of engaging in futures 

trading and the risks of using an FCM 

to execute trades on customers’ behalf 

and to hold customers’ funds? If not, 

how should the Risk Disclosure 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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81 77 FR 6336 (February 7, 2012). 82 52 FR 28980 (Aug. 5, 1987). 

Statement and Firm Specific Disclosure 

Document be amended? 

• Are there other disclosures that the 

Commission should require to be 

included in Risk Disclosure Statement? 

If so, what are the additional disclosures 

and how would such disclosures benefit 

customers? 

• Are there other disclosures that the 

Commission should require to be 

included in a Firm Specific Disclosure 

Document? If so, what are the additional 

disclosures and how would such 

disclosures benefit customers? 

• Are the proposed additional firmspecific disclosures too broad? If so, 

how should the Commission refine the 

disclosures to be more specific, yet 

provide the type of information that the 

Commission would like customers to 

receive? 

• The Commission is proposing to 

require an FCM to disclose in the Firm 

Specific Disclosure Document the 

number of customers that comprise 50 

percent of the FCM’s customer fund 

balances for futures customers, Cleared 

Swaps Customers, and 30.7 Customers. 

Should the Commission consider 

additional or different percentages? If 

so, what should the percentages be and 

why? 

• The Commission requests comment 

on how the new or revised Risk 

Disclosure Statement and Disclosure 

Documents should be provided to 

existing customers. Should FCMs be 

required to obtain new signature 

acknowledgments from existing 

customers for a revised Risk Disclosure 

Statement? How should existing 

customers be informed of the new Firm 

Specific Disclosure Statement? How can 

the Commission be assured that all 

existing customers have been informed 

of the new disclosure documents, and 

the availability of the FCM financial 

data? 

• If FCMs are required to provide 

existing customers with new Risk 

Disclosure Statements, how should 

Commission address the 

implementation of the requirement? 

What would be an adequate period of 

time for FCMs to obtain new 

acknowledgment from existing 

customers? 

Q. Proposed Amendments to Part 22 

The Commission recently adopted 

final regulations in Part 22 

implementing the provisions of the 

Dodd Frank Act that provide for the 

protection of Cleared Swaps Customer 

contracts and collateral.81 Although 

substantive differences in the 

segregation regimes between futures and 

cleared swaps at the clearing level exist 

under the final Part 22 regulations as 

adopted, requirements with respect to 

collateral which is not posted to 

clearinghouses and maintained by FCMs 

for Cleared Swaps Customers replicate 

or incorporate by reference the same 

regulatory requirements applicable to 

the segregation of futures customer 

funds under section 4d(a)(2) of the Act 

(for example, holding funds separate 

and apart from proprietary funds, 

limitations on the FCM’s use of 

customer funds, titling of depository 

accounts, Acknowledgment Letter from 

depository requirements, and 

limitations on investment of swap 

customers’ funds are currently 

contained in Part 22 regulations). 

The determination that appropriate 

enhancements are necessary with 

respect to the regulatory requirements 

discussed above for segregated futures 

customer funds under section 4d(a)(2) of 

the Act is equally applicable to Cleared 

Swaps Customer Collateral. The written 

policies and procedures requirements 

proposed in § 1.11 would be applicable 

to Cleared Swaps Customer Collateral, 

the new withdrawal limitations 

requirements proposed in § 1.23 are 

proposed to be replicated in a new 

§ 22.17, and the changes to the daily 

segregation calculations and filing of 

such calculations, as well as 

requirements for detailed depository 

and investment information, are 

proposed to apply to Cleared Swaps 

Customer funds through proposed 

amendments to § 22.2(g). In addition, 

changes discussed above regarding 

§ 1.17 with respect to securities haircuts 

are also proposed with respect to 

§ 22.2(f), which similarly incorporates 

by reference the applicable SEC 

securities haircuts. Finally, the 

proposed § 1.20(i) requirement that an 

FCM maintain residual interest in 

segregated accounts in an amount that 

exceeds the sum of all futures 

customers’ margin deficits is also 

proposed with respect to Cleared 

Swaps. As stated above, this 

requirement provides a clear 

mechanism for demonstrating FCM 

compliance with the prohibition under 

the Act and existing Commission 

regulations on using the collateral of 

one Cleared Swaps Customer to support 

the obligations of another Cleared 

Swaps Customer. 

R. Amendments to § 1.3: Definitions; 

and § 30.7: Treatment of Foreign 

Futures or Foreign Options Secured 

Amount 

Part 30 of the Commission’s 

regulations were adopted in 1987 and 

govern trading on foreign futures 

markets.82 Regulation 30.7 requires an 

FCM to set aside in separate accounts 

for the benefit of its foreign futures or 

foreign options customers an amount of 

funds defined as the ‘‘foreign futures or 

foreign options secured amount.’’ The 

term ‘‘foreign futures or foreign options 

secured amount’’ is defined in § 1.3(rr) 

as the amount of funds necessary to 

margin the foreign futures or foreign 

options positions held by the FCM for 

its foreign futures or foreign options 

customers, plus or minus any gains or 

losses on such open positions. The 

calculation of the foreign futures or 

foreign options secured amount is 

referred to as the ‘‘Alternative Method.’’ 

Foreign futures or foreign options 

customers receive substantially less 

protection for their account deposits 

under the Alternative Method than 

futures customers receive for their 

account deposits under section 4d(a)(2) 

of the Act and Commission regulations. 

Section 4d(a)(2) of the Act and 

Commission regulations require an FCM 

to segregate in separate accounts 

sufficient funds to satisfy the full 

account equities of all of its futures 

customers trading on designated 

contract markets (i.e., the Net 

Liquidating Equity Method). The 

regulatory objective of the Net 

Liquidating Equity Method is to ensure 

that an FCM has sufficient funds in 

segregated accounts to cover the full 

account equities of all of its futures 

customers. This would allow the FCM 

to transfer the futures customers’ 

positions and margin collateral in the 

event of the insolvency of the FCM to 

another firm that was financial sound. If 

the FCM does not maintain sufficient 

funds in segregation to cover the full 

account equities, the futures customers 

may not be able to be transferred to 

another FCM, or the futures customers 

may be required to deposit margin funds 

with the transferee FCM to adequately 

margin the positions. 

In contrast, the Alternative Method 

only obligates an FCM to set aside an 

amount of funds in separate accounts 

sufficient to cover the margin required 

on open foreign futures and foreign 

options positions, plus or minus any 

unrealized gains or losses on such 

positions. Any funds deposited by 

foreign futures or foreign options 

customers in excess of the required 

amount to be set aside in separate 

accounts under the Alternative Method 

may be held by the FCM in operating 

cash accounts and may be used by the 

FCM as if it were its own capital. 

Therefore, an FCM is not required to set 

aside in separate accounts a sufficient 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67896 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

83The total amount of customer funds held by 

FCMs is available on the Commission’s Web site at 

http://www.cftc.gov/MarketReports/

FinancialDataforFCMs/index.htm. 

84 Id. 85See 11 U.S.C. 761–766. 

amount funds to repay the full account 

balances of each of its foreign futures or 

foreign options customers, and, in the 

event of an FCM insolvency, the foreign 

futures or foreign options customers 

may not recover 100 percent of the 

value of their accounts or be able to 

transfer their positions to another FCM. 

The Commission is proposing to 

amend the Part 30 regulations to 

eliminate the Alternative Method and to 

require FCMs to use the Net Liquidating 

Equity Method to compute the amount 

of funds they must set aside in separate 

accounts for the benefit of its foreign 

futures or foreign options customers. 

The amount of funds held for foreign 

futures and foreign options customers 

has grown dramatically in the last 10 

years. FCMs held approximately $36.4 

billion for foreign futures or foreign 

options customers as of June 30, 2012, 

compared to a total of $7.9 billion held 

as of March 31, 2002 (an approximate 

470 percent increase).83 In addition, the 

amount of funds held by FCMs for 

foreign futures or foreign options 

customers has increased relative to the 

amount of segregated funds held by 

FCMs during the last 10 years. Funds 

held for foreign futures or foreign 

options customers represented 

approximately 13 percent of the total 

customer funds held by FCMs as of 

March 31, 2002, and represented 

approximately 21 percent of total 

customer funds as of June 30, 2012.84

Accordingly, the Commission is 

proposing to amend § 1.3(rr) to define 

the term ‘‘foreign futures or foreign 

options secured amount’’ to mean the 

amount of funds an FCM needs to 

satisfy the full account balances of each 

30.7 Customer at all times (i.e., the Net 

Liquidating Equity Method). 

The term ‘‘30.7 Customer’’ is 

proposed to be defined in § 30.1 to mean 

both U.S.-domiciled customers and 

foreign-domiciled customers trading 

foreign futures or foreign options. As 

originally adopted, FCMs were only 

required to hold funds for U.S.- 

domiciled customers. The Net 

Liquidating Equity Method will require 

the FCM to set aside a sufficient amount 

of funds in secured accounts to repay 

the total account balances of all of its 

30.7 Customers, which will align the 

requirement with the segregation 

requirements for both futures customers 

and Cleared Swaps Customers. The 

proposed amendments will significantly 

enhance the protection afforded to 

funds deposited by customers trading 

on foreign markets. 

The Commission also is proposing to 

substantively revise the regulations 

governing an FCM’s holding of funds 

deposited by a customer for trading on 

foreign futures markets. The proposed 

amendments to the foreign futures or 

foreign options secured amount 

requirement establish many of the 

regulatory requirements that currently 

exist, or are proposed to be adopted 

under this rulemaking, with regard to 

segregated funds deposited by 

customers trading on a designated 

contract market under Part 1 and 

deposited by Cleared Swaps Customers 

under Part 22 of the Commission’s 

Regulations. 

Regulation 30.7(a) requires an FCM to 

set aside in separate accounts sufficient 

funds to meet its current obligations to 

foreign futures or foreign option 

customers denominated as the ‘‘foreign 

futures or foreign options secured 

amount.’’ The term ‘‘foreign futures or 

foreign options customer’’ is defined in 

§ 30.1 to mean any person located in the 

United States, its territories, or 

possessions. The term ‘‘foreign futures 

or foreign options secured amount’’ is 

defined at § 1.3(rr) and means an 

amount of money, securities, or other 

property sufficient to margin, guarantee, 

or secure open foreign futures contracts 

plus any unrealized gains or losses on 

such contracts, and any money 

securities or property representing 

premiums paid or received, and any 

other funds necessary to guarantee or 

secure, open foreign option transactions 

(i.e., the Alternative Method of 

computing the secured amount 

requirement). Thus, an FCM is not 

required to set aside in separate 

accounts all funds deposited by or 

otherwise belonging to foreign futures or 

foreign option customers. Funds 

deposited by foreign futures or foreign 

options customers that exceed the 

foreign futures or foreign options 

secured amount may be commingled 

with the FCM’s proprietary funds and 

used by the FCM as part of its business 

capital. 

In addition, § 30.7(b) requires only 

that an FCM set aside the required 

margin funds for foreign futures 

customers that are located within the 

United States, its territories, or 

possessions. Regulation 30.7 permits the 

FCM to include foreign futures 

customers that are located outside of the 

United States, but the FCM is not 

obligated to include such foreigndomiciled customers. 

Furthermore, Commission staff 

previously issued guidance to FCMs 

stating that an FCM could carry 

positions other than foreign futures and 

foreign option positions in foreign 

futures or foreign options customers’ 

accounts. Thus, FCMs could commingle 

and carry customers’ non-foreign futures 

positions, such as foreign currency 

positions and over-the-counter 

positions, in such customers’ foreign 

futures or foreign options account. 

The intent of the following 

amendments is to align the regulatory 

approach and customer protections by 

raising the requirements for foreign 

futures or foreign options secured 

amount to make it consistent with the 

FCM’s segregation requirements for 

customers trading on designated 

contract market or engaging in cleared 

swap transactions. 

As stated above, the Commission is 

proposing to require FCMs to compute 

the foreign futures or foreign options 

secured amount using the Net 

Liquidating Equity Method by amending 

the definition in § 1.3(rr) of the term 

‘‘foreign futures or foreign options 

secured amount’’ to match structurally 

the definition in § 1.3(gg) of the term 

‘‘customer funds,’’ which encompasses 

the Net Liquidating Equity Method of 

computing the amount of funds an FCM 

is required to maintain in customer 

segregated accounts. Specifically, the 

proposed definition of the term ‘‘foreign 

futures or foreign options secured 

amount’’ would be amended to mean all 

money, securities and property received 

by an FCM for, or on behalf of, ‘‘30.7 

Customers’’ to margin, guarantee, or 

secure foreign futures contracts and 

foreign option transactions, and all 

funds accruing to ‘‘30.7 Customers’’ as 

a result of such foreign futures and 

foreign options transactions. The term 

‘‘30.7 Customer’’ is proposed to be 

defined in § 30.1 to mean any person, 

whether domiciled within or outside of 

the United States, that engages in 

foreign futures or foreign options 

transactions through the FCM. 

Requiring an FCM to set aside in 

separate accounts the funds deposited 

by both domestic and foreign-domiciled 

customers provides comparable 

customer protections to customers 

notwithstanding their place of domicile. 

In addition, requiring the FCM to hold 

U.S.-domiciled and foreign-domiciled 

customer funds in separate accounts 

under § 30.7 ensures that such 

customers receive equal protections in 

the event of the bankruptcy of the firm. 

Part 190 of the Commission’s 

regulations and the U.S. Bankruptcy 

Code 85 provide that in the event of a 

commodity broker bankruptcy 

liquidation, customers in the account 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67897 

86 Id. By definition, ‘‘foreign future’’ under 

section 761 of the Bankruptcy Code is not limited 

to transactions entered on foreign boards of trade 

on behalf of U.S. domiciled persons, and 

‘‘customer’’ is not limited to U.S. domiciled 

persons. The result is that by the application of 

these definitions a preferential account class at a 

commodity broker for customers trading foreign 

futures would not be limited to U.S. domiciled 

customers. 

87See Acknowledgment Letters for Customer 

Funds and Secured Amount Funds, 75 FR 47738 

(Aug. 9, 2010). 

class entitled to a preference to the 

amounts in set-aside accounts for 

customers trading on foreign boards of 

trade include both U.S.-domiciled and 

foreign-domiciled customers.86 The 

Commission is proposing to require 

funds to be set aside equally for U.S.- 

domiciled and foreign-domiciled 

customers trading on foreign boards of 

trade in the computation under § 30.7 

by establishing a new definition of 30.7 

Customers that includes existing foreign 

futures or foreign options customers 

(which are U.S.-domiciled persons 

trading foreign futures or foreign 

options) as well as any foreigndomiciled persons trading foreign 

futures or foreign options through the 

registered FCM. The secured amount 

definition, as proposed to be amended 

in § 1.3(rr), will reference ‘‘30.7 

Customers’’ instead of ‘‘foreign futures 

or foreign options customers,’’ to ensure 

FCMs are required to set aside funds 

equal to the net liquidating equity of all 

such persons. Combined with the 

proposed amendment to require net 

liquidating equity, this should result in 

at all times an amount required to be set 

aside for all persons equal to the amount 

owed to such persons that would share 

in the account class for foreign futures 

in a commodity broker liquidation. The 

Commission is also proposing 

amendments in § 1.10 and § 1.17 to 

reference ‘‘30.7 Customers’’ instead of 

foreign futures or foreign options 

customers in the title of the schedules 

prepared by an FCM. 

In addition, the Commission is 

proposing to add language to § 30.7(a) to 

provide an equivalent offset to that 

available in the futures customer 

segregation calculation under § 1.32(b) 

for deficits in accounts secured by 

securities, subject to language updating 

the reference to applying securities 

haircuts in calculating the offset as 

discussed in Section II.F above. The 

result of these amendments as discussed 

should be accord between the 

methodologies applied in the 4d 

segregation calculation and the § 30.7 

calculation. 

Consistent with proposed changes in 

§ 1.20(i) and Part 22, the Commission 

also is proposing to add language to 

§ 30.7(a) to provide that an FCM must 

hold residual interest in accounts set 

aside for the benefit of 30.7 Customers 

equal to the sum of all margin deficits 

for such accounts, to provide an 

equivalent clear mechanism for 

ensuring that the funds of one 30.7 

Customer are not margining or 

guaranteeing the positions of another 

30.7 Customer. Although this 

prohibition is not specified in the Act as 

it is with respect for futures customers 

and Cleared Swaps Customers, the 

Commission is proposing to the extent 

possible to replicate wherever practical 

and advisable customer protection 

provisions for futures customers and 

Cleared Swaps Customers to 30.7 

Customers. As a result, most of the 

amendments proposed earlier in various 

provisions for these customers also are 

being proposed in § 30.7. 

The Commission requests comment 

on the proposed amendments to 

§ 30.7(a). 

Proposed paragraph (b) of § 30.7 sets 

forth the permitted depositories for 

holding 30.7 Customer funds. The 

proposal does not alter the list of 

depositories that are currently permitted 

under § 30.7 to hold 30.7 Customers’ 

funds: (1) A bank or trust company 

located in the United States; (2) a bank 

or trust company located outside of the 

United States that maintains in excess of 

$ 1 billion of regulatory capital; (3) an 

FCM registered with the Commission; 

(4) a DCO; (5) the clearing organization 

of a foreign board of trade; (6) a member 

of a foreign board of trade; and (7) the 

depositories used by the clearing 

organization of a foreign board of trade 

or a member of a foreign board of trade. 

Proposed § 30.7(c) would limit the 

amount of 30.7 Customers’ funds that an 

FCM could hold in non-U.S. 

jurisdictions. Under the proposal, an 

FCM must hold 30.7 Customer funds in 

the United States, except to the extent 

that the funds held outside of the 

United States are necessary to margin, 

guarantee, or secure (including any 

prefunding obligations) the foreign 

futures or foreign options positions of 

an FCM’s 30.7 Customers. The 

Commission also is proposing to allow 

an FCM to deposit additional 30.7 

Customer Funds equal to 10 percent of 

the total amount of funds required to be 

held by non-U.S. brokers or foreign 

clearing organizations for 30.7 

Customers as a cushion to the required 

margin requirements, so that the FCM 

has a certain degree of flexibility in 

managing its daily cash movements and 

to ensure that the foreign futures or 

foreign options positions are not 

undermargined at foreign brokers or 

clearing organizations. The Commission 

recognizes that due to differences in 

time zones, trading hours, banking 

holidays, as well needs for cash 

transfers to foreign jurisdictions to settle 

and to be credited to accounts, a 

customer may not be able to 

immediately transfer funds to its FCM, 

and an FCM may not be able to 

immediately transfer funds to a foreign 

broker or foreign clearing organization 

to meet a margin call. The proposed 

cushion is intended to provide an FCM 

with sufficient flexibility to meet its 

customers’ trading obligations on 

foreign markets, while also requiring as 

much of the total 30.7 Customer funds 

to be held within the United States in 

order to minimize the impact of the 

repatriation risk in the event of an FCM 

insolvency. 

The Commission previously proposed 

changes to the form of the 

Acknowledgment Letter required from 

depositories holding funds set aside as 

the foreign futures or foreign options 

secured amount.87 The Commission 

here re-proposes in a revised paragraph 

(d) to § 30.7 the requirements for 

obtaining and submitting 

Acknowledgment Letters for § 30.7 

accounts, which proposed changes 

include further revised template forms 

of Acknowledgment Letter included as 

Appendices E and F. The proposed 

template forms, in addition to 

incorporating earlier proposed changes 

previously summarized with respect to 

the § 1.20 Acknowledgment Letters, 

have been further revised to include a 

depository’s agreement to provide readonly account access to Commission or 

DSRO staff, in order for Commission or 

DSRO staff to directly verify balances as 

necessary. The Commission is also 

proposing subparagraphs (3), (4) and (5) 

of § 30.7(d), which substantively require 

24 hour a day direct read-only 

electronic access to the depository 

account by the Commission and the 

DSRO, require the depository to file the 

written Acknowledgment Letter directly 

with the Commission and the FCM’s 

DSRO, and require the depository to 

provide confirmations to the 

Commission and the FCM’s DSRO 

directly upon request. The Commission 

requests comment on the revised 

requirements for Acknowledgment 

Letters for § 30.7 accounts as proposed 

in paragraph (d) and the new template 

forms of the Acknowledgment Letters 

proposed in Appendices E and F. 

As part of its participation in the 

public roundtable discussed in the 

Background section above, FIA 

recommended that the Commission 

eliminate the ability of FCMs to 

commingle funds from unregulated 


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88See 52 FR 28980 at 28985–28986. 89 76 FR 78776 at 78802 (December 19, 2011). 

transactions with funds for foreign 

futures and options trading in Part 30 

set aside accounts, except by 

Commission order, as is the case under 

4d(a)(2) of the Act for segregated funds. 

The Commission agrees with this 

recommendation. The comments cited 

in the release adopting Part 30 with 

respect to back office operational 

difficulties of establishing multiple 

‘‘customer’’ origins were persuasive at 

the time Part 30 was adopted.88 With 

the technological changes of intervening 

decades, however, these concerns 

should no longer dictate the advisability 

of commingling the funds of regulated 

foreign futures and foreign options 

transactions with unregulated 

transactions. Therefore, the Commission 

is proposing to amend § 30.7 by 

adopting new paragraph (e), which will 

extend the prohibition against 

commingling to any funds of account 

holders of an FCM unrelated to trading 

foreign futures or foreign options, 

except as the Commission shall by order 

permit, under terms and conditions as 

specified. Should there be a need to 

permit commingling of funds, the 

Commission will continue to have the 

ability to permit such commingling 

under the formalities of processes 

associated with a Commission order. 

The Commission requests comment on 

this proposed amendment to § 30.7(e). 

The Commission has proposed to 

adopt a new paragraph (f) and a new 

paragraph (k) in § 30.7, to extend 

regulatory provisions from §§ 1.20, 1.21, 

1.22 and 1.24, that previously were 

applicable only to 4d segregated funds, 

to funds set aside as the foreign futures 

or foreign options secured amount 

under § 30.7. The Commission requests 

comment on replicating these regulatory 

requirements applicable to segregated 

funds to funds set aside as the foreign 

futures or foreign options secured 

amount. These proposed requirements 

would make clear that FCMs would not 

be permitted to use funds set aside as 

the foreign futures or foreign options 

secured amount other than for the 

benefit of 30.7 Customers, and that 

funds set aside as the foreign futures or 

foreign options secured amount should 

not be invested in any obligations of 

clearing organizations or boards of 

trade, and that further, no funds placed 

at foreign brokers should be included as 

funds set aside as the foreign futures or 

foreign options secured amount unless 

those funds are on deposit to margin the 

foreign futures or foreign options 

trading of 30.7 Customers. In addition to 

extending these existing Commission 

regulations to § 30.7 in proposed 

paragraphs (f) and (k), the Commission 

is also proposing a new requirement 

prohibiting a FCM from imposing any 

liens or allowing any liens to be 

imposed on funds set aside as the 

foreign futures or foreign options 

secured amount. The Commission has 

previously adopted a lien prohibition 

with respect to the segregation of 

Cleared Swaps Customer collateral at 

§ 22.2(d)(2) and therefore proposes to 

extend this lien prohibition to funds set 

aside as the foreign futures or foreign 

options secured amount in § 30.7. The 

Commission requests comment on the 

proposed amendments providing 

limitations on use and permitted 

withdrawals as contained in §§ 30.7(f) 

and (k). 

As discussed in Section II.I above, the 

Commission has proposed new 

limitations on withdrawals of segregated 

funds in § 1.23. The proposed 

amendments provide for an FCM’s 

residual interest in segregated funds, 

and permits withdrawals from 

segregated funds for the proprietary use 

of the FCM to the extent of such 

residual interest, subject to the 

requirement that the withdrawal must 

not occur prior to the completion of the 

daily segregation computation for the 

prior day, and should the withdrawal 

(individually or aggregated with other 

withdrawals) exceed 25 percent of the 

prior day residual interest, the 

withdrawal must be subject to specific 

approvals by senior management and 

appropriately documented, and further 

subject to a complete prohibition on 

withdrawals of residual interest to the 

extent of margin deficits. The 

Commission has proposed paragraph (g) 

of § 30.7 to apply the same restrictions 

on withdrawals of an FCM’s residual 

interest in funds set aside as the foreign 

futures or foreign options secured 

amount. The Commission requests 

comment on proposed paragraph (g) of 

§ 30.7. 

Regulation 30.7(g) was recently 

adopted by the Commission to provide 

that the investment of § 30.7 funds be 

subject to the investment limitations 

contained in § 1.25.89 The Commission 

is proposing to now move this permitted 

investment requirement to a new 

paragraph § 30.7(h), and further to adopt 

a new paragraph § 30.7(i), which makes 

clear that FCMs are solely responsible 

for any losses resulting from the 

permitted investment of funds set aside 

as the foreign futures or foreign options 

secured amount. The new paragraph 

§ 30.7(i) is intended to apply the same 

standard as is being proposed in the 

amendment to § 1.29 for segregated 

funds discussed above. The Commission 

is also requesting comment on whether 

the investment of 30.7 property should 

be restricted in cases of jurisdictions 

where client asset protection of such 

property cannot be assured? If so, what 

assurances should be required? For 

example, in cases of jurisdictions where 

client asset protections can be waived, 

should the Commission require that the 

Commission or a DSRO be practicably 

able to audit for evidence of such 

waiver? What are the relevant costs and 

benefits of adopting any of these 

alternatives? 

The Commission also is proposing in 

an amended paragraph (j) to § 30.7 to 

clarify the circumstances under which 

an FCM may make secured loans to 30.7 

Customers and to adopt the same 

restriction on unsecured lending to 30.7 

Customers as has been proposed with 

respect to futures customers and 4d 

segregated funds in the proposed 

amendment to § 1.30 discussed above. 

The Commission requests comment on 

applying this restriction in relation to 

30.7 Customers. 

Finally, the Commission is proposing 

an amended paragraph (l) to § 30.7 to 

require the daily computation of the 

foreign futures or foreign options 

secured amount and the filing of such 

daily computation with the Commission 

and DSROs, as well as to require the 

FCM to provide investment detail of the 

foreign futures or foreign options 

secured amount as of the middle and 

end of the month. The proposed 

amendments to paragraph (l) of § 30.7 

are intended to be consistent with the 

requirements for the daily segregation 

calculation for segregated customer 

funds and the provision of the 

segregation investment detail which are 

proposed in § 1.32. The Commission 

requests comment on the proposed 

changes requiring the filing of the daily 

secured amount computation and the 

investment detail as proposed in 

§ 30.7(l). 

III. Consideration of Costs and Benefits 

The misuse or mishandling of 

customer funds at specific FCMs like 

MF Global or Peregrine not only 

imposes a burden on those customers 

whose funds have been misused, but 

also creates a burden to the public by 

eroding the trust of the American public 

in all market intermediaries. This loss of 

trust could deter market participants 

from the benefits of using regulated, 

transparent markets and clearing. The 

overarching purpose of this rule is to 

provide regulators the means by which 

to detect and deter the misuse or 

mishandling of customer funds by FCMs 

in order to produce the benefits that 


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90The failure of one clearing member could lead 

to instability in other clearing members if the losses 

due to the first member’s failure are large enough 

to exhaust the guarantee fund and require 

additional capital infusion from other clearing 

members. 

91 In the final rule amending § 1.25, the 

Commission stated, ‘‘the Commission is narrowing 

the scope of investment choices in order to 

eliminate the potential use of portfolios of 

instruments that may pose an unacceptable level of 

risk to customer funds.’’ See ‘‘Investment of 

Customer Funds and Funds Held in an Account for 

Foreign Futures and Foreign Options Transactions,’’ 

76 FR 78776, December 19, 2011. 

92 77 FR 6336 (Feb. 7, 2012) (Protection of Cleared 

Swaps Customer Contracts and Collateral; 

Conforming Amendments to the Commodity Broker 

Bankruptcy Provisions). 

93 77 FR 36612 (June 19, 2012) (Core Principles 

and Other Requirements for Designated Contract 

Markets). 

94Public Meeting of the Technology Advisory 

Committee, July 26, 2012. See http://www.cftc.gov/ 

PressRoom/Events/opaevent_tac072612. Public 

Roundtable to Discuss Additional Customer 

Protections, August 9, 2012. See http:// 

www.cftc.gov/PressRoom/Events/ 

opaevent_cftcstaff080912. 

95The seven parts of the proposal are: (1) 

Requiring FCMs to implement risk management 

programs including extensive written policies and 

procedures related to various aspects of their 

handling of customer funds; (2) increasing reporting 

requirements for FCMs related to segregated 

customer funds, including daily reports to the 

Commission and DSROs; (3) requiring FCMs to 

establish target amounts of residual interest to be 

maintained in segregated accounts as well as 

creating restrictions and increased oversight for 

FCM withdrawals out of such residual interest in 

customer segregated accounts, including clear sign 

off and accountability from senior management for 

such withdrawals; (4) strengthening requirements 

for the acknowledgment letters that FCMs and 

DCOs must obtain from their depositories; (5) 

eliminating the Alternative Method for calculating 

30.7 Customer funds segregation requirements and 

requiring FCMs to include foreign-domiciled 

customers’ funds in segregated accounts; (6) 

strengthening the regulatory requirements 

applicable to SRO and DSRO oversight of FCMs, 

including regulating oversight provided under the 

function of a Joint Audit Committee (Joint Audit 

Program) that would establish standards for, and 

oversee the execution of, FCM audits; and (7) 

requiring FCMs to provide additional disclosures to 

investors. 

accrue by virtue of avoiding similar 

defaults in the future and to prevent the 

costs, including lost customer funds, 

decreased market liquidity that follows 

from a crisis in confidence, and the 

potential for the failure of one FCM to 

cause instability in other clearing 

members.90

The Commission’s proposal builds on 

recent efforts by the Commission and 

industry to better protect customer 

funds. As discussed above in section 

I.D., in December 2011 the Commission 

amended § 1.25 of its regulations to 

eliminate certain options for the 

permissible investments of customer 

funds.91 Two months later, the 

Commission approved a margin rule for 

cleared swap transactions referred to as 

‘‘LSOC’’ (legal separation with 

operational commingling) in which each 

swaps customer’s collateral is protected 

individually all the way to the 

clearinghouse.92 The Commission also 

convened a roundtable in late February 

2012 to discuss what amendments 

should be made to Commission 

regulations in order to provide 

additional protection to customer funds. 

Further, in June 2012, the Commission 

finalized rules for DCMs and included 

amendments to § 1.52 which codify staff 

guidance on minimum requirements for 

SROs regarding their financial 

surveillance of FCMs.93 With the recent 

default of another FCM, Peregrine, the 

Commission held two additional 

roundtables to discuss, among other 

things, technological approaches to 

mitigating the risk of fraud, and possible 

amendments to the Commission’s rules 

regarding protection of customer 

funds.94

In this rulemaking, the Commission is 

proposing amendments to improve the 

protection of customer funds. The 

content of the Commission’s proposal 

can be categorized in seven parts: (1) 

Requiring FCMs to implement extensive 

risk management programs including 

written policies and procedures related 

to various aspects of their handling of 

customer funds; (2) increasing reporting 

requirements for FCMs related to 

segregated customer funds, including 

daily reports to the Commission and 

DSRO; (3) requiring FCMs to establish 

target amounts of residual interest to be 

maintained in segregated accounts as 

well as creating restrictions and 

increased oversight for FCM 

withdrawals out of such residual 

interest in customer segregated 

accounts, specifically including clear 

sign off and accountability from senior 

management for such withdrawals; (4) 

strengthening requirements for the 

acknowledgment letters that FCMs and 

DCOs must obtain from their 

depositories; (5) eliminating the 

Alternative Method for calculating 30.7 

Customer funds segregation 

requirements and requiring FCMs to 

include foreign investors’ funds in 

segregated accounts; (6) strengthening 

the regulatory requirements applicable 

to SRO and DSRO oversight of FCMs, 

including regulating oversight provided 

under the function of a Joint Audit 

Committee that would establish 

standards for, and oversee the execution 

of, FCM audits; and (7) requiring FCMs 

to provide additional disclosures to 

investors. 

Statutory Mandate To Consider the 

Costs and Benefits of the Commission’s 

Action: Commodity Exchange Act 

Section 15(a) 

Section 15(a) of the Act requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the Act 

or issuing certain orders. Section 15(a) 

further specifies that the costs and 

benefits shall be evaluated in light of the 

following five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

section 15(a) considerations. 

There are four considerations relevant 

to this proposal. These are: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness and financial integrity 

of futures markets; (3) sound risk 

management practices; and (4) other 

public interest considerations. The 

Commission proposes that the 

amendments would not have any effect 

on price discovery. 

In the discussion that follows, the 

Commission provides an overview of 

the proposed rules in light of the three 

relevant 15(a) cost-benefit 

considerations previously identified, 

and then considers the costs and 

benefits of each section individually in 

light of the same 15(a) public interest 

considerations. The Commission 

concludes with additional requests for 

public comment on all aspects of its 

preliminary consideration of the costs 

and benefits of the rule proposals. 

Overview of the Costs and Benefits of 

the Proposed Rules and Amendments in 

Light of the 15(a) Considerations 

Protection of Market Participants and 

the Public 

As stated above, the Commission is 

proposing amendments to improve 

protection of customer funds. Each of 

the seven parts of the proposal 95 would 

increase levels of protection for 

customer funds. Requiring FCMs to 

implement risk management programs 

that include documented policies and 

procedures regarding various aspects of 

handling customer funds would help 

protect customer funds by promoting 

robust internal risk controls and 

reducing the likelihood of errors or 

fraud that could jeopardize customer 

funds. In addition, by requiring each 

FCM to document certain policies and 

procedures, the proposed rules would 

enable the Commission, DSROs, and 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67900 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

other auditors to evaluate each FCM’s 

compliance with their own policies and 

procedures. Moreover, the proposed 

requirement that FCMs establish a 

program for quarterly audits by 

independent or external people that is 

designed to identify any breach of the 

policies and procedures would help to 

ensure regular, independent validation 

that the procedures are followed 

diligently. Audits of this sort provide 

more thorough review of internal 

procedures than the Commission or 

DSROs would be able to perform 

regularly with existing resources, which 

would provide helpful scrutiny of each 

FCM’s procedures on a regular basis. 

This, together with the proposed 

requirement that FCMs establish a 

program of governing supervision that is 

designed to ensure the policies required 

in § 1.11 are followed, will tend to 

promote compliance with the FCM’s 

own policies and procedures. And by 

promoting such compliance, the 

requirements would reduce the risk of 

operational errors, lax risk management, 

and fraud, and thus the risk of 

consequent loss of customer funds. 

Increasing reporting requirements for 

FCMs related to segregated customer 

funds would help the Commission and 

DSRO identify FCMs that should be 

monitored more closely in order to 

safeguard customer funds. Moreover, by 

making some additional reported 

information public, the proposed rules 

would facilitate additional market 

discipline that further promotes 

protection of customer funds. 

Creating restrictions and increased 

oversight for FCM withdrawals out of its 

residual interest in customer segregated 

accounts, and requiring sign off from 

senior management for large 

withdrawals would protect customers 

by helping to ensure that such 

withdrawals do not cause segregated 

account balances to drop below their 

segregation requirements. Moreover, it 

would promote effective oversight of 

customer segregated accounts by senior 

management by increasing their 

accountability for withdrawals that 

affect the balance of such accounts. 

The acknowledgments and 

commitments depositories would be 

required to make through proposed 

§§ 1.20, 1.26, and 30.7 would provide 

additional protection for customer funds 

by, among other things, requiring 

depositories that accept customer funds 

to acknowledge that customer funds 

cannot be used to secure the FCM’s 

obligations to the depository. Such an 

acknowledgment would provide 

additional protection of customer funds 

in the event of an FCM’s default. In 

addition, depositories would agree in 

the acknowledgment letter to give the 

Commission and DSROs read-only 

electronic access to an FCM’s segregated 

accounts, which would benefit 

customers by enabling the Commission 

and DSROs to monitor the accounts for 

discrepancies between the FCM’s 

reports and the balances on deposit at 

various depositories. This would 

provide an additional mechanism by 

which customers would be protected 

against a shortfall in customer funds 

due to operational errors or fraud. 

Requiring FCMs to include foreigndomiciled investors’ funds in segregated 

accounts ensures that all customers 

placing funds on deposit for use in 

trading foreign futures and foreign 

options will benefit from the same 

protections provided by the Act and 

Commission regulations. As discussed 

below, the Commission understands 

that most, if not all FCMs currently 

extend the same protections to U.S.- 

domiciled and to foreign-domiciled 

customers. However, incorporating 

foreign-domiciled customers within the 

protections provided to 30.7 Customers 

places regulatory weight behind the 

protections and ensures that FCMs are 

not permitted to cut corners with 

respect to protecting foreign-domiciled 

customers’ funds during a time of 

financial strain. Similarly, eliminating 

the Alternative Method provides 

additional protection to customer funds 

by ensuring that FCMs are not allowed 

to reduce their segregation requirements 

for 30.7 Accounts during a time 

financial strain. As discussed below, 

this change would provide protection to 

both U.S-domiciled and foreigndomiciled customers with funds in 30.7 

Accounts. 

The proposed provisions in § 1.52 

include additional requirements for 

both the supervisory program for SROs 

as well as for the formation of a Joint 

Audit Committee to oversee the 

implementation and operation of a Joint 

Audit Program that directs audits of 

FCMs by DSROs. By requiring both the 

SRO supervisory programs and the Joint 

Audit Program to comply with U.S. 

generally accepted audit standards, to 

develop written policies and 

procedures, to require controls testing as 

well as substantive testing, and to have 

an examinations expert review the 

programs at least once every two years, 

the proposed amendments would help 

to ensure that audits of FCMs by SROs 

or DSROs are thorough, effective, and 

continue to incorporate emerging best 

practices for such audits. As a 

consequence, the proposed amendments 

would help to ensure that audits are as 

effective as possible at identifying 

potential fraud, strengthening internal 

controls, and verifying the integrity of 

FCMs’ financial reports, each of which 

tend to provide protection for FCMs’ 

customers, counterparties, and 

investors. 

In addition the proposed § 1.55 would 

require disclosure of firm-specific risks 

to customers. This additional 

information would assist them with due 

diligence when selecting an FCM and 

would help to ensure that they are 

aware of any changes at the FCM that 

could prompt them to reconsider their 

decision to deposit funds with the FCM. 

In doing so, the proposed rules would 

promote market discipline that incents 

FCMs to manage their risks carefully 

and would assist customers in 

understanding how their funds are held 

and what risks may be relevant to the 

safety of their funds. 

Efficiency, Competitiveness and 

Financial Integrity of Futures Markets 

The proposed amendments would 

increase the efficiency and financial 

integrity of the futures markets by 

ensuring that FCMs have strong risk 

management controls that are subject to 

multiple and enhanced external checks, 

by enhancing reporting requirements, 

facilitating increased oversight by the 

Commission and DSROs, by allowing 

FCMs flexibility in the development of 

newly required policies and procedures 

wherever the Commission has 

determined that such flexibility is 

appropriate, and by requiring FCMs to 

implement training regarding the 

handling of customer funds. In addition, 

the proposed rules include some 

requirements that many industry 

participants have requested as necessary 

for the adequate protection of customers 

and also highlighted as best practices 

already adopted within the industry. 

Requiring such standards to be adopted 

by all FCMs will promote the 

competitiveness of futures markets by 

ensuring a level playing field at a 

minimum level necessary for the 

protection of customers, and not 

allowing any FCMs to, at the expense of 

customers, maintain an unfair 

competitive advantage to their 

counterparts who utilize best practices 

and may have such protections already 

in place. There are also provisions in 

the proposal that permit FCMs that are 

not broker-dealers to implement certain 

securities net capital haircuts that have 

been proposed to apply to jointly 

registered FCM/BDs by the SEC, which 

similarly enhances competition by 

keeping a level playing field between 

sole FCMs and jointly registered FCM/ 

BDs with respect to such requirements. 

More specifically, the proposed 

amendments to §§ 1.10, 1.11, 1.12, 1.32, 


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22.2, and 30.7 would increase reporting 

requirements for FCMs related to 

segregated customer funds, including 

daily, bi-monthly, and additional eventtriggered reports to the Commission and 

DSROs. The expanded range and 

frequency of information that the 

Commission and DSRO would receive 

under the proposed regulations would 

enhance their ability to monitor each 

FCM’s segregated accounts, which 

would promote the integrity of futures 

markets by helping to ensure proper 

handling of customer funds at FCMs. 

In addition, the proposed changes 

would facilitate increased oversight by 

the Commission and DSROs by 

including additional notification 

requirements, obligating FCMs to alert 

the Commission when certain events 

occur that could indicate an FCM’s 

financial strength is deteriorating or that 

important operational errors have 

occurred. Such notifications would 

enable the Commission and DSROs to 

increase monitoring of such FCMs to 

ensure that customer funds are handled 

properly in such circumstances. The 

proposed rules would also require FCMs 

and DCOs to obtain an acknowledgment 

letter from depositories that would give 

the Commission and DSROs electronic 

access to view customer accounts at 

each depository. That would enable 

both the Commission and DSROs to 

verify the presence of customer funds 

which would provide a safeguard 

against fraud and would promote the 

integrity of markets for futures, cleared 

options, and cleared swaps. 

The proposed rules would also 

require FCMs to establish policies and 

procedures regarding several aspects of 

how they handle customer funds. The 

rules would give FCMs the flexibility, 

where appropriate, to develop policies 

and procedures tailored to the unique 

composition of their customer base, 

size, and other operational 

disincentives. This flexible approach 

protects FCMs from additional 

regulatory compliance costs that could 

otherwise result from rules requiring 

every FCM to operate in exactly the 

same way without sacrificing the 

additional accountability that results 

from written policies and procedures 

that the Commission or DSRO can 

review and use as the basis for FCM 

audits. 

The proposed requirement that FCMs 

would provide annual training to all 

finance, treasury, operations, regulatory, 

compliance, settlement and other 

relevant employees regarding the 

segregation requirements for segregated 

funds, for notices under § 1.12, 

procedures for reporting noncompliance, and the consequences of 

failing to comply with requirements for 

segregated funds, would enhance the 

integrity of the futures markets by 

promoting a culture of compliance by 

the FCM’s personnel. The training 

would help to ensure that FCM 

employees understand the relevant 

policies and procedures, that they are 

empowered and incented to abide by 

them, and that they know how to report 

non-compliance to appropriate 

authorities. 

Last, the proposing form of the rule 

would allow FCMs that are not dual 

registrants (i.e., are not both FCMs and 

BDs) to follow the same procedures as 

dual registrants when determining what 

regulatory capital haircut applies to 

certain types of securities in which the 

FCM invests its own capital or customer 

funds. This proposed change is needed 

as the SEC has proposed a change for 

broker-dealers which would permit joint 

registrants to possibly apply a lower 

regulatory haircut for certain securities, 

but which would not be applicable to 

sole FCMs without the proposal. 

Therefore, the proposal would ensure 

that sole FCMs are not competitively 

disadvantaged and are able to continue 

applying the same regulatory capital 

haircuts for such securities as joint 

registrants. 

Sound Risk Management 

The amendments proposed here, if 

adopted, would promote sound risk 

management by facilitating market 

discipline, enhancing internal controls, 

enabling the Commission and DSROs to 

monitor FCMs for compliance with 

those controls, by minimizing the risk 

that an FCM’s financial strain could 

interfere with customers’ ability to 

manage their positions, by requiring 

FCMs to notify the Commission in 

additional circumstances that could 

indicate emerging financial strain, and 

by requiring senior management to be 

involved in the process of setting targets 

for residual interest. 

The proposed reporting requirements 

would enhance market discipline by 

providing additional information to 

investors regarding the location of their 

funds, and the size of residual interest 

buffer that an FCM targets and 

maintains in its segregated accounts. 

This additional information would be 

valuable to customers selecting an FCM 

and monitoring the location of their 

funds deposited with the FCM which 

would promote market discipline. For 

example, if an FCM were to establish a 

low target for residual interest, or 

maintain a very low residual interest, 

market participants would likely 

recognize this as a practice that could 

increase risk to the funds they have on 

deposit at the FCM, and would likely 

either apply pressure to the FCM to 

raise their target, or take their business 

to a different FCM that maintains a 

larger residual interest in customer fund 

accounts. This market discipline would 

incent FCMs to maintain a level of 

residual interest that is adequate to 

ensure that a shortfall does not develop 

in the customer segregated accounts. 

The proposed rules would also 

enhance FCM internal controls by 

requiring them to establish a risk 

management program that includes 

policies and procedures related to 

various aspects of how segregated 

customer funds are handled. For 

example, FCMs would be required to 

establish procedures for continual 

monitoring of depositories where 

segregated customer funds are held, and 

would have to establish a process for 

evaluating the marketability, liquidity, 

and accuracy of pricing for § 1.25 

compliant investments. 

In addition, documented policies and 

procedures would benefit the FCM 

customers and the public by providing 

the Commission and DSROs greater 

ability to monitor and enforce 

procedures that FCMs perform to ensure 

that the protection of customer funds is 

achieved, with the effect that the 

Commission would have a greater 

ability to address and protect against 

operational errors and fraud that put 

customer funds at risk of loss. 

Further, through the proposed 

amendments to § 1.17(a)(4), FCMs will 

need to manage their access to liquidity 

so as to be able to certify to the 

Commission, at its request, that they 

have sufficient access to liquidity to 

continue operating as a going concern. 

This proposal will provide the 

Commission with the flexibility to deal 

with emerging liquidity drains at FCMs 

which may endanger customers, 

potentially prior to instances of 

regulatory capital non-compliance, 

allowing customer positions and funds 

to be transferred intact and quickly to 

another FCM. This change would 

promote sound risk management 

practices by helping to ensure that 

customers maintain control of their 

positions without interruption. 

The proposed additions to 

notification requirements established in 

§ 1.12 would enhance the Commission’s 

ability to identify situations that could 

lead to financial strain for the FCM, 

which makes it possible for the 

Commission to monitor further 

developments with that FCM more 

carefully and to begin planning earlier 

for the possibility that the FCM’s 

customer positions may need to be 

transferred to other FCMs, in the event 


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96The Commission is not able to quantify the 

costs that would result from increased residual 

interest held in customer segregated accounts, from 

increased capital held by the FCM, or from lost 

investment opportunities due to restrictions on the 

amount of funds that may be held overseas. The 

Commission does not have sufficient data to 

estimate the amount of additional residual interest 

FCMs are likely to need as a consequence of 

proposed, the amount of additional capital they 

may hold for operational purposes, the cost of 

capital for FCMs, or the opportunity costs FCMs 

may experience because of restrictions on the 

amount of customer funds they can hold overseas, 

each of which would be necessary in order to 

estimate such costs. 

97The lower bound assumes an FCM requires the 

minimum estimated number of personnel hours to 

be compliant with these new rules and that, when 

possible, they already have policies, procedures, 

and systems in place that would satisfy the 

proposed requirements. The upper bound assumes 

an FCM requires the maximum amount of 

personnel hours and do not have pre-existing 

policies, procedures, and systems in place that 

would satisfy the proposed requirements. The 

greatest amount of variation within in the range 

would depend on the number of new depositories 

an FCM must establish relationships with due to 

current depositories that would not be willing to 

sign the required acknowledgment letter. The lower 

bound assumes that an FCM does not need to 

establish any new relationships with depositories. 

The Commission estimates that the largest FCMs 

may have as many as 30 depositories, and as a 

conservative estimate, the Commission assumes for 

the upper bound that an FCM would have to 

establish new relationships with 15 depositories. 

98As above, the lower bound assumes that an 

FCM requires the minimum estimated number of 

personnel hours to be compliant and that for eventtriggered costs, the FCM bears the minimum 

number of possible events. The upper bound 

assumes an FCM requires the maximum number of 

personnel hours to be compliant. It also assumes an 

FCM has to notify the Commission pursuant to the 

proposed amendments in § 1.12 five times per year, 

and that an FCM withdraws funds from residual 

interest for proprietary use 50 times per year. The 

estimate does not include additional costs that 

would result if FCMs increase the amount of 

residual interest or capital that they hold in 

response to the proposed rules, or certain 

operational costs that the Commission does not 

have sufficient information to estimate. 

that the FCM currently holding those 

positions defaults. Advance notice helps 

to ensure customers’ positions are 

protected by enabling the Commission 

to work closely with DCOs and DSROs 

to identify other FCMs that have 

requisite capital to meet regulatory 

requirements if they were to take on 

additional customer positions, thus 

facilitating smooth transition of those 

positions in the event that it is 

necessary. 

Last, residual interest is an important 

aspect of protection for customer funds 

because it enables the FCM to ensure 

that it can meet all customer obligations 

at any time without using another 

customer’s funds to do so. In general, 

the larger the residual interest, the more 

secure customer funds are in this 

respect. By requiring that senior 

management set the target for residual 

interest, and that they conduct adequate 

due diligence in order to inform that 

decision, the proposed rule promotes 

both informed decision making about 

this important form of protection, and 

accountability among senior 

management for this decision, both of 

which are consistent with sound risk 

management practices. 

Other Public Interest Considerations 

As discussed above, the recent 

failures of MF Global and Peregrine, 

FCMs to which customers have 

entrusted their funds, sparked a crisis of 

confidence regarding the security of 

those funds. This crisis in confidence 

could deter market participants from 

using regulated, transparent markets 

and clearing which would create 

additional costs for market participants 

and losses in efficiency and safety that 

could create additional burdens for the 

public. The Commission anticipates that 

this rule will not only address the 

current crisis of confidence, but that it 

will produce benefits for the public by 

virtue of avoiding similar defaults in the 

future. 

These proposed amendments are not, 

however, without costs. The most 

significant costs created by the proposed 

amendments are those that increase the 

amount of capital that FCMs would be 

required to contribute to segregated 

accounts as part of establishing a target 

for their residual interest, incent them to 

hold additional capital, prevent them 

from holding excess segregated funds 

overseas, and that are created 

operationally by the formation of a risk 

management unit and adoption of new 

policies and procedures. 

Multiple proposed changes would 

incent or require FCMs to increase the 

amount of residual interest that they 

maintain in segregated accounts 

including: (1) Requiring FCMs to 

establish a target for residual interest 

that reflects proper due diligence on the 

part of senior management; (2) 

disclosing the FCMs’ targeted residual 

interest publicly; and (3) requiring them 

to report to the Commission and their 

DSRO any time their residual interest 

drops below that target. In addition by 

restricting FCMs’ ability to withdraw 

residual interest from segregated 

accounts and obligating FCMs to report 

to the Commission and their respective 

DSRO each time the residual interest 

drops below the target, the proposed 

regulations would incent FCMs to hold 

additional capital, which is also likely 

to be a significant cost. 

When FCMs hold excess customer 

funds overseas, such funds will likely 

be held at depositories that are 

themselves subject to foreign insolvency 

regimes, which may provide protections 

for customer funds that are less effective 

than those applicable under U.S. law. 

By prohibiting FCMs from holding 

excess customer funds overseas, the 

proposed regulations could reduce the 

returns that FCMs may obtain on 

invested customer funds. 

And last, the proposed requirements 

related to operational procedures are 

likely to create significant costs, 

particularly related to creating and 

documenting policies and procedures, 

as well as complying with ongoing 

training, due diligence, and audit 

requirements. However, in several cases 

the implementation costs of proposed 

changes would be minimal. For 

example, some proposed requirements 

would obligate FCMs to provide the 

Commission and DSROs more regular 

access to information that FCMs and 

their depositories are already required 

to maintain, or in some cases are already 

reporting to their DSROs. The 

Commission also anticipates that some 

of the changes proposed codify best 

practices for risk management that many 

FCMs and DCOs may already follow. In 

such cases, the costs of compliance 

would be mitigated by the compliance 

programs or best practices that the firm 

already has in place. Moreover, in other 

cases the proposed changes codify 

practices that are already required by 

SROs, and therefore would impose no 

additional costs. 

The initial and ongoing costs of the 

proposed rules for FCMs would vary 

significantly depending on the size of 

each FCM, the policies and procedures 

that they already have in place, and the 

frequency with which they experience 

certain events that would create 

additional costs under the proposed 

rules. The Commission estimates that 

the initial operational cost 96 of 

implementing the proposed rules would 

be between $193,000 and $1,850,000 per 

FCM.97 And the initial cost to the SROs 

and DSROs would be between $41,100 

and $63,500 per SRO or DSRO. The 

Commission estimates that the ongoing 

operational cost to FCMs would be 

between $287,000 and $2,300,000 per 

FCM per year.98 As described below in 

§ 1.52, the Commission does not have 

adequate information to determine the 

ongoing cost of the proposed 

requirements for SROs and DSROs. 

In the sections that follow, the 

Commission considers the costs and 

benefits of the proposed changes, 

section by section, in light of the 

relevant 15(a) public interest, costbenefit considerations. 


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99The Segregation Schedule and Secured 

Amount Schedule are already public documents. 

100This assumes 40–80 hours of time from both 

a programmer and 20–40 hours from an 

intermediate accountant. The average compensation 

for a programmer is $53.64/hour [$82,518 per year/ 

(2000 hours per year)*1.3 = $53.64/hour]; 

$53.64*40= $2,145.47 and $53.64*80= $4,290.94. 

The average compensation for an intermediate 

accountant is $34.11/hour [$52,484.00 per year/ 

(2000 hours per year)*1.3 is $34.11per hour]; 

$34.11*20= $682.29 and $34.11*40= $1,364.58. All 

figures are taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 

101The Commission has numbered its questions 

throughout the Cost Benefit Considerations section. 

When responding to specific questions, please 

reference the number of the question. In addition, 

Continued 

Consideration of Costs and Benefits 

Related to Proposed Changes in Each 

Section 

§ 1.3(rr)—Definition of ‘‘Foreign Futures 

or Foreign Options Secured Amount’’ 

Proposed Changes 

As described above in II.R, the 

proposed amendments to § 1.3(rr) would 

replace the term ‘‘foreign futures or 

foreign options customers’’ with the 

term ‘‘30.7 Customers.’’ The former only 

includes U.S.-domiciled customers, 

whereas the term ‘‘30.7 Customers’’ 

includes both U.S.-domiciled and 

foreign-domiciled customers who place 

funds in the care of an FCM for trading 

on foreign boards of trade. This change 

expands the range of funds that the FCM 

must include as part of the foreign 

options or foreign futures secured 

amount. 

In addition, the definition of ‘‘foreign 

futures or foreign options secured 

amount’’ currently means ‘‘all money, 

securities and property held by or held 

for or on behalf of a futures commission 

merchant from, for, or on behalf of 

foreign futures or foreign options 

customers as defined in § 30.1.’’ The 

proposed definition would change the 

meaning of ‘‘foreign futures or foreign 

options secured amount’’ so that it is 

equal to the amount of funds an FCM 

needs in order to satisfy the full account 

balances of each of its customers at all 

times. This definitional change supports 

the shift in § 30.7 from the ‘‘Alternative 

Method’’ to the ‘‘Net Liquidating Equity 

Method’’ of calculating the foreign 

futures or foreign options secured 

amount. 

Benefits and Costs 

These definitional changes would 

determine what funds are considered 

part of the ‘‘foreign futures or foreign 

options secured amount.’’ However, the 

costs and benefits of these changes are 

attributable to the substantive 

requirements related to the definitions 

and, therefore, are discussed in the cost 

and benefit considerations related to 

§ 30.7. 

§ 1.10—Financial Reports of Futures 

Commission Merchants and Introducing 

Brokers 

Proposed Changes 

As described above in II.A, the 

proposed amendments would make four 

changes. First, they would amend the 1– 

FR–FCM to create a new schedule called 

the ‘‘Cleared Swap Segregation 

Schedule’’ that would be included in 

the FCM’s monthly report, together with 

the Segregation Schedule and Secured 

Amount Schedule. Second, it would 

make the Cleared Swap Segregation 

Schedule a public document.99 Third, 

the proposed amendments would 

require each of the Schedules to include 

the FCM’s target for residual interest in 

the accounts relevant to that Schedule, 

as well as a calculation of any surplus 

or deficit in residual interest with 

respect to that target. And fourth, the 

proposed rule would require each FCM 

to submit to the Commission a monthly 

statement reporting the FCM’s leverage. 

Benefits 

The proposal to include target 

residual interest and monthly 

calculation of the deviation from that 

target on the monthly Schedules 

provides important benefits with respect 

to the safety of customer funds. The data 

in the reports is public information. 

Public disclosure incentivizes FCMs to 

set a reasonable target for residual 

interest. Under proposed regulations, 

FCMs would have to notify the 

Commission and their respective DSRO 

each time they drop below their targeted 

residual interest, which gives them an 

incentive to set a low target, even if they 

intend to keep more residual interest in 

their accounts. However, by disclosing 

an FCM’s targeted residual interest to 

the public, the proposed rule would 

enable customers and potential 

customers of an FCM to incorporate the 

size of the FCM’s targeted residual 

interest, and the corresponding amount 

of protection to customers’ funds 

provided by that level of residual 

interest, into their selection of an FCM. 

Holding all other considerations 

constant, FCMs that have higher targets 

relative to their segregation 

requirements would presumably be 

more attractive to customers than FCMs 

that target smaller levels of residual 

interest relative to their segregation 

requirements because of the additional 

protection of customer funds it 

provides. This additional information 

permits customers to weigh this 

consideration along with considerations 

of price in selecting an FCM. Last, by 

requiring FCMs to report their leverage 

monthly, the proposed amendments 

would assist the Commission in 

monitoring each FCM’s overall risk 

profile, which would help the 

Commission to identify FCMs that 

should be monitored more closely for 

further developments that could weaken 

their financial position. 

Costs 

As stated above, all else equal, by 

requiring FCMs to include their residual 

interest target in the monthly report, 

and by making the contents of those 

reports public, the proposed rule would 

incent FCMs to set a higher target for 

their residual interest in customer 

segregated funds. However, maintaining 

a larger targeted residual interest would 

create some costs for FCMs. Proprietary 

funds deposited into customer 

segregated accounts by an FCM are only 

allowed to be invested in § 1.25 

investments and, therefore, are not 

available for other investments. In 

addition, placing additional capital in 

the customer segregated accounts 

reduces the amount of capital that an 

FCM has to meet operational needs, 

which would likely prompt the firm to 

raise or retain additional capital. 

Estimating the lost revenue that would 

result from the investment opportunities 

an FCM misses is not possible because 

the Commission is not able to estimate 

either the amount of increased residual 

interest that an FCM would, on average, 

maintain as the result of this proposed 

change, or the differential in return on 

investment between FCM funds placed 

into customer segregated accounts 

versus proprietary funds not held in 

such accounts. Similarly the 

Commission does not have adequate 

information to determine the average 

cost of capital for FCMs or the amount 

of additional capital that they would 

likely raise or retain as a consequence 

of this proposed change. The proposed 

requirement regarding monthly leverage 

statements will require FCMs to 

produce an additional report each 

month. The Commission anticipates that 

each FCM will incur a one-time cost in 

order to modify their systems to create 

the report, and then ongoing costs will 

be negligible because the report is likely 

to be automated. The Commission 

estimates that the one-time setup costs 

are likely to be between $2,800 and 

$5,700.100

Requests for Comment 101

Question 1: The Commission requests 

comment regarding the costs and 


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commenters should provide analysis and empirical 

data to support their views on the costs and benefits 

associated with the proposed rule, and should 

provide information to the Commission that would 

enable it to replicate and verify any quantitative 

estimates. 

benefits of these proposed rules, 

including making residual interest 

targets public information. Please 

explain and, if possible, quantify the 

relevant costs and benefits. 

Question 2: In addition, the 

Commission requests comment 

regarding the costs and benefits that 

would result from providing each FCM’s 

daily calculation of residual interest 

public. Would the disclosure of an 

FCM’s daily calculations of residual 

interest pose a risk to such FCM, the 

markets, to customers, or the public? If 

so, please explain. Or, conversely, 

would a lack of disclosure exacerbate 

risks to FCM customers or the public? 

If so, please explain. 

Question 3: Market participants have 

suggested that additional information 

from FCMs’ daily, bi-monthly, and 

monthly reports should be disclosed to 

the public. What alternatives should the 

Commission consider in this respect? 

What would be the costs and benefits of 

that alternative? 

Question 4: In addition, the 

Commission requests information or 

data that would assist the Commission 

in quantifying the cost to FCMs of 

placing additional proprietary funds 

into the customer segregated account 

and the benefit to customers of having 

such additional funds in the segregated 

accounts. 

§ 1.11 Risk Management Program for 

Futures Commission Merchants 

Proposed Changes 

As discussed in II.B above, proposed 

§ 1.11 would require an FCM that 

carries accounts for customers to 

establish a risk management unit that is 

independent from the business unit and 

reports directly to senior management. 

In addition, it would require each FCM 

to establish and document a risk 

management program, approved by the 

governing body of the FCM, that, at a 

minimum: (a) Identifies risks and 

establishes risk tolerance limits related 

to various risks that are approved by 

senior management; (b) includes 

policies and procedures for detecting 

breaches of risk tolerance limits, and for 

reporting them to senior management; 

(c) provides risk exposure reports 

quarterly and whenever a material 

change in the risk exposure of the FCM 

is identified; (d) includes annual review 

and testing of the risk management 

program; and (e) meets specific 

requirements related to segregation risk, 

operational risk, and capital risk. 

Regarding segregation risk, the 

proposed rule would require that each 

FCM must establish written policies and 

procedures that require, at a minimum: 

(1) Documented criteria for selecting 

depositories that would hold segregated 

funds; (2) a program to monitor 

depositories on an ongoing basis; (3) an 

account opening process that ensures 

the depository acknowledges that funds 

in the account are customers’ funds 

before any deposits are made to the 

account, and that also ensures accounts 

are titled appropriately; (4) a process for 

determining a residual interest target for 

the FCM that involves due diligence 

from senior management; (5) a process 

for the withdrawal of an FCM’s residual 

interest when such a withdrawal is not 

made for the benefit of the FCM’s 

customers; (6) a process for determining 

the appropriateness of investing funds 

in § 1.25 compliant investments; (7) 

procedures to assure that securities and 

other non-cash collateral held as 

segregated funds are properly valued 

and readily marketable and highly 

liquid; (8) procedures that help to 

ensure appropriate separation of duties 

between those who account for funds 

and are responsible for statutory and 

regulatory compliance vs. those who act 

in other capacities with the company 

(e.g., those who are responsible for 

treasury functions); (9) a process for the 

timely recording of all transactions; and 

(10) a program for annual training of 

FCM employees regarding the 

requirements for handling customer 

funds. 

The proposed rule would require 

automated financial risk management 

controls that address operational risk, 

and written procedures reasonably 

designed to ensure that an FCM has 

sufficient capital to be in compliance 

with the Act and regulations and to 

meet its liquidity needs for the 

foreseeable future. 

Benefits 

Establishing a risk management unit 

with adequate authority; qualified 

personnel; and financial, operational 

and other resources to carry out the Risk 

Management Program would enhance 

protection of customer funds by 

mitigating the risk that the effectiveness 

of the Program is compromised by a lack 

of resources. Moreover, separation of the 

Risk Management Unit from the 

Business Unit mitigates the risk that 

conflicts of interest could interfere with 

the effectiveness of the risk management 

unit in avoiding situations that may lead 

to a loss of customer funds. 

Furthermore, by requiring that the 

risk management unit report directly to 

senior management, § 1.11(d) would 

help ensure that the risk management 

unit’s operations and concerns receive 

prompt attention from personnel who 

are able to address any problems that 

arise, and also minimizes the risk that 

conflicts of interest could cause a 

breakdown in communications that 

undermines the effectiveness of the risk 

management unit or the Risk 

Management Program. Each of these 

elements, by promoting the risk 

management unit’s effectiveness, would 

help to ensure that the unit will identify 

and address emerging risks before such 

risks threaten the health of the FCM or 

the security of segregated customer 

funds. 

The Commission believes the 

establishment of the proposed risk 

management program would provide 

several benefits to FCMs, customers, 

and the public, in particular with 

respect to the protection of customer 

funds. 

a. The proposed requirement for 

FCMs to establish, as part of their risk 

management program, specific risk 

tolerance limits, would provide 

additional protection to FCMs by 

helping to ensure that they have a 

system in place to identify emergent 

risks to the business. By requiring an 

underlying methodology for establishing 

the limits, the proposed rule would 

promote reasoned decision making 

regarding the limits as they are set and 

updated. Quarterly review of the risk 

limits by senior management and 

annual review by the Governing Body 

would help to ensure that limits are 

current as the market, business, and 

customer base evolve, and also provide 

accountability for periodic evaluation of 

such risks at the most senior levels of 

the organization, which helps to ensure 

that senior leaders are proactively 

discussing and addressing the full range 

of risks that are facing the business. As 

a consequence, these measures would 

help ensure that an FCM is taking 

whatever steps are necessary in order to 

reduce and mitigate the effects of 

emerging risks. Moreover, customer 

funds held at the FCM may face 

elevated risk of loss due to misuse or 

operational errors during times of 

financial strain at the FCM. By 

protecting the health of the FCM, the 

proposed requirements mitigate the risk 

that financial strain at the FCM would 

lead to a loss of customer funds that it 

holds. 

b. By requiring policies and 

procedures for detecting breaches of the 

risk tolerance limits and notifying 

appropriate personnel, the proposed 


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rule would promote objectivity when 

monitoring of each risk that the policies 

address, thus mitigating the risk that 

poor individual judgment could cause 

important emerging risks to go 

unnoticed, or could prevent proper 

personnel from being notified, leading 

to a loss of customer funds. 

c. The contents of the proposed Risk 

Exposure Reports would help to ensure 

that attention is regularly given to an 

evaluation of each risk that is covered 

in the FCM’s Risk Management Program 

and that senior management and the 

Governing Body of the FCM are made 

aware of the findings. They will also 

help to ensure that the Risk 

Management Program is continuously 

updated to reflect changing risks that 

face the business by requiring 

recommendations to be included in 

such reports, which promotes the 

effectiveness of the Program in 

protecting customer funds. Moreover, 

status updates on any incomplete 

implementation of previous 

recommendations from such reports 

provide accountability at the most 

senior levels of the FCM regarding 

implementation of initiatives to improve 

the Program. 

d. Similar to above, review and testing 

of the risk management program on an 

annual basis as well as whenever there 

is a material change in the business, 

would help to ensure that the Risk 

Management Program continues to 

evolve as the risks facing the business 

evolve, thus promoting the effectiveness 

of the program, which in turn, would 

help protect the FCM. By requiring an 

analysis of adherence to the program the 

proposed requirement would promote 

compliance with it. And requiring the 

review and testing to be conducted by 

staff that are independent of the 

Business Unit or by an external third 

party promotes objectivity and rigor in 

the findings that would result, and 

requiring senior management and the 

Governing Body of the FCM to review 

the findings promptly helps to ensure 

that any breaches of compliance or other 

findings of the review are addressed 

promptly and effectively. As above, 

each of these elements promotes 

protection for the FCM, which in turn, 

reduces the likelihood that risk to the 

FCM could cause elevated risk of 

operational errors that could result in a 

loss of customer funds. 

e. Regarding segregation risk, the 

requirements set forth in proposed 

§ 1.11 would benefit customers and the 

financial integrity of markets by 

requiring FCMs to implement rigorous 

internal controls designed to detect and 

mitigate the risk that operational errors 

or fraud could lead to a loss of customer 

funds. More specifically, and as 

discussed above, proposed § 1.11 

requires FCMs to establish written 

policies and procedures that address 12 

components of segregation risk. The 

Commission addresses each of those 

components below. 

1. Proposed § 1.11(e)(3)(i)(A) would 

establish a minimum set of factors that 

the FCM would have to incorporate into 

its due diligence standards and 

depositories would have to meet those 

standards in order to be eligible to be 

selected by the FCM to hold customer 

segregated funds. As a consequence, 

customers would have greater clarity 

about what factors were considered as 

their FCM selected individual 

depositories, leading to market 

discipline that encourages the 

protection of customer funds. 

Documenting the process would 

enable regulators to review and audit for 

rigor of the process and adherence to it. 

Such documentation would help 

regulators identify risk creating 

operational patterns or errors that could 

increase risk to customer funds before 

those risks are realized. In addition, 

documenting such criteria helps to 

ensure that the depository is evaluated 

against substantive criteria that are 

relevant to the safety of customer funds 

held by the depository as a precondition 

for placing customer funds there. The 

proposed requirement, by specifying 

certain criteria that must be included in 

the FCM’s policies and procedures, 

would also promote market discipline 

by giving customers clarity about what 

factors, at a minimum, are considered as 

part of the FCM’s program for evaluating 

potential depositories. 

Together, these benefits help to 

ensure that the FCM and depository 

have developed and adhere to 

procedures that minimize risk to 

customer funds, which reduces the risk 

that an FCM would experience a 

shortfall in their customer segregated 

funds account. 

2. Regulation 1.11(e)(3)(i)(B) would 

require each FCM to establish a program 

to monitor depositories on an ongoing 

basis. This would mitigate the risk of 

loss of customer funds resulting from 

depository default or malfeasance 

because FCMs would be better able to 

discern emerging problems at the 

depository in time to move such funds 

to another depository before the 

customer segregated funds are affected. 

In addition, as above, documenting such 

a program would enable the 

Commission and DSRO to evaluate the 

FCM’s diligence in monitoring its 

depositories by auditing the FCM’s 

compliance with its own procedures in 

this respect, which would again lead to 

more effective protection of customer 

funds. 

3. The proposal makes it clear that 

before an FCM is permitted to deposit 

any customer segregated funds at a 

depository, the depository must agree 

that, if instructed to do so by the 

Director of DSIO or the Director of DCR, 

it will make such transfers without 

delay. Requiring the acknowledgment 

letter to be signed before any funds are 

deposited removes uncertainty about 

whether the depository has been put on 

notice that it is required to move funds 

without delay when directed by the 

Director of DSIO or the Director of DCR. 

In the event of a default by an FCM, the 

Commission and relevant DCOs would 

immediately move customer funds in 

order to move open positions to a 

different FCM. 

4. The proposal requires senior 

management to conduct due diligence to 

understand various factors that could 

impact the amount of residual interest 

that would be prudent to maintain in 

the segregated funds account, and then 

reach a determination about a targeted 

amount. The benefit of such a 

requirement is that it would protect 

customer funds by creating 

accountability for senior management. 

Requiring such due diligence helps 

ensure that senior management is 

attentive to the causes of segregated 

funds account underfunding. The 

requirement allows both flexibility and 

accountability in that it allows FCMs to 

account for relevant factors that vary 

across firms when determining an 

appropriate target, rather than requiring 

all FCMs to maintain a common target 

for residual interest. However, by 

requiring them to establish such a target 

and to conduct due diligence in doing 

so, it allows the Commission and 

DSROs to audit the FCMs to ensure that 

they reached their target through a 

reasoned decision-making process, and 

ensures that the respective boards 

approve and are responsible for the 

target. 

Maintaining a target enhances market 

discipline by creating public 

accountability for an FCM. It 

communicates to customers that the 

FCM intends to maintain a certain 

residual interest in the account, and 

gives customers an opportunity to 

consider, when selecting an FCM, the 

additional security that varied levels of 

residual interest may provide for their 

funds. 

5. A process for the withdrawal of 

residual interest that is not for the 

benefit of customers would help to 

ensure good communication and that 

senior managers are appropriately 

involved in the decision to remove 


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102See ‘‘Initial Recommendations for Customer 

Funds Protection’’ by the FIA Futures Markets 

Financial Integrity Task Force. 

residual interest from segregated 

customer accounts. Good 

communication, deliberate decisionmaking, and proper involvement of 

senior managers would promote 

accountability when an FCM is 

removing residual interest. These 

benefits are particularly important at 

times when FCMs experience financial 

stress because good communication, 

deliberate decision-making, and proper 

involvement of senior management in 

decisions related to residual interest 

may be more likely to fail at such times, 

creating risk to segregated customer 

funds. By requiring FCMs to establish 

and follow procedures for withdrawals 

of residual interest, the rule would help 

to ensure that such failures do not 

occur. 

An additional, related benefit is that 

by ensuring proper communication with 

and approval from relevant senior 

managers before such withdrawals 

occur, the proposed changes would 

enhance accountability among those 

managers for decisions that could create 

risk for segregated customer funds. 

6. FCMs have a range of potential 

investments that are compliant with 

§ 1.25. By requiring FCMs to establish a 

process for deciding how to invest those 

funds, the requirement would provide 

the Commission and DSRO with a 

standard by which such investment 

decisions could be judged, which would 

help prevent the FCM from investing 

primarily in the least credit-worthy 

§ 1.25 investments. FCMs have an 

incentive to invest customer funds in 

§ 1.25 compliant investments that offer 

the highest rate of return possible, but 

it is possible that the § 1.25 investments 

offering the highest rates of return are 

also less credit-worthy or less liquid 

than other § 1.25 investments. Requiring 

FCMs to set up, document and follow a 

process for assessing the 

appropriateness of investing segregated 

funds in § 1.25 investments ensures that 

FCMs take steps not only to determine 

whether an investment complies with 

§ 1.25 as required by current regulation, 

but that the investment is also evaluated 

with respect to any risk it may pose to 

the FCM’s primary responsibilities of 

preserving principal and maintaining 

liquidity when handling customer 

funds. In other words, this provision 

would help to prevent the possibility of 

a ‘‘race to the bottom’’ for FCMs 

investing in § 1.25 compliant assets. 

7. If the FCM is not able to get 

accurate pricing for § 1.25 assets, it is 

difficult to know whether or not 

sufficient funds are in the segregated 

account. A shortage (and thus, in the 

event of insolvency, a loss of customer 

funds) could occur simply because the 

FCM can’t accurately estimate the value 

of the assets that are there, or it could 

also make it easier for the FCM to 

intentionally skew their reports 

regarding funds in the customer 

segregated accounts by making favorable 

assumptions about the value of assets 

that are difficult to price. Requiring the 

FCM to establish a program for assessing 

the ease of pricing for § 1.25 assets helps 

reduce these risks and gives the 

Commission and DSRO an opportunity 

to understand the FCM’s procedures 

and to enforce the FCM’s compliance 

with them. This, in turn, promotes 

reasoned and disciplined decisionmaking with respect to the FCM’s 

investment of customer funds in § 1.25 

investments. Establishing procedures to 

evaluate the liquidity of § 1.25 

instruments will help FCMs minimize 

the risk of such problems. 

8. Appropriate internal controls are 

critical to the prevention of fraud. The 

Commission understands that FCMs 

typically require that certain duties are 

performed by separate people or 

separate groups of people in order to 

ensure that a proper system of checks 

and verification remains in place.102 In 

particular, FCMs generally ensure that 

the individuals responsible for reporting 

and associated calculations are separate 

from the individuals responsible for 

operational transfers of funds. In the 

absence of such internal controls, one 

person or group of people with access 

to both movement and reporting of 

funds could transfer funds and then, for 

a time, hide those transfers from senior 

management, auditors, and the public. 

The proposed rule would help protect 

customer funds by establishing a 

regulatory requirement that all FCMs 

develop procedures to ensure that the 

individuals responsible for calculating 

and reporting segregation account 

requirements and segregation account 

funds do not share duties with those 

who are responsible for transferring or 

investing segregated funds. This should 

result in controls to prevent fraudulent 

fund transfers. 

9. The Commission regulations 

already require timely recording of 

transactions in § 1.35(b), but this 

proposed addition would require that 

FCMs develop written policies and 

procedures ensure that they have a 

consistent process to achieve that 

outcome. Again, requiring FCMs to 

document their procedures helps 

protect customer funds by enabling the 

Commission and DSROs to audit for 

compliance, detecting and preventing 

operational issues that could pose risk 

to customer funds before those risks 

result in an actual loss to customer 

funds. 

10. Proper training of employees 

would help to ensure that employees 

understand the written procedures 

regarding segregated funds. The 

proposed training requirement provides 

flexibility for an FCM to determine 

whether it should develop the required 

training in house, or to pay a vendor to 

develop a training program. Training 

regarding the requirements of the Act 

and Commission regulations regarding 

handling customer funds will help to 

ensure that employees understand how 

the procedures and requirements related 

to customer funds apply to various 

situations they face in their work for the 

FCM. Training regarding the second and 

third points mentioned above will help 

to ensure that the Commission and 

DSRO are notified promptly whenever 

any of the circumstances covered in 

§ 1.12 occur, or whenever there is a 

breach of the FCM’s own policies and 

procedures, even if the circumstances in 

§ 1.12 have not occurred. Moreover, by 

requiring broad participation in training 

focused on these points, the proposed 

requirement would protect customer 

funds by encouraging a culture of 

accountability and transparency through 

self-disclosure. Training regarding the 

consequences of failing to comply will 

help to ensure that employees 

understand the seriousness with which 

the Commission regards violation of 

these standards, thereby providing an 

incentive to diligently adhere to them. 

In addition, requiring FCMs to provide 

the training annually helps ensure that 

the critical content of this training is not 

lost due to the passing of time, or 

employee turnover. 

In addition, by requiring automated 

financial risk management controls, the 

proposed Risk Management Program 

would reduce operational risk that 

could result from ‘‘fat finger’’ errors 

when submitting trades, or from 

technological ‘‘glitches’’ using 

automated trading. Several events have 

demonstrated that such operational 

risks are difficult to predict, tend to 

emerge so quickly that non-automated 

forms of risk management may not be 

able to contain them, and can threaten 

an FCM’s continued viability. 

Automated controls would help to 

reduce these operational risks, thereby 

providing additional protection to FCMs 

and mitigating the risk of loss to 

customer funds. 

Last, by requiring an FCM to develop 

and implement written policies that 

ensure it has sufficient capital and 

liquidity not only to comply with the 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67907 

103This assumes 2,000–10,000 hours per year 

from compliance attorneys (i.e., 1–5 full time 

compliance attorneys) and 0–10,000 hours per year 

from a senior risk management specialist (i.e., 0–5 

full time senior risk management specialists). The 

average compensation for a compliance attorney is 

$85.35/hour [$131,303 per year/(2000 hours per 

year)*1.3 is $85.35 per hour]; $85.35*2000 = 

$170,693.90 and $85.35*10,000 = $853,469.50. The 

average compensation for a senior risk management 

specialist is $83.13/hour [$166,251.00 per year/ 

(2000 hours per year)*1.3 is $83.13 per hour]; 

$83.13*0 = $0 and $83.13*10,000 = $1,080,631.50. 

104For initial costs, this estimates initial costs of 

50–250 hours from compliance attorneys, 10–100 

hours from risk management personnel, 36 hours 

(total) of time from the board, and 10–20 hours each 

from the CEO, CFO, COO, and CCO. The average 

compensation for a compliance attorney is $85.35/ 

hour [$131,303 per year/(2000 hours per year)*1.3 

is $85.35 per hour]; $85.35*50 = $4,267.35 and 

$85.35*250 = $21,336.77. The average 

compensation for a risk management specialist is 

$65.33/hour [$100,500 per year/(2000 hours per 

year)*1.3 is $65.33 per hour]; $65.33*10 = $653.25 

and $65.33*100 = $6,532.50. The average 

compensation for a member of a firm’s board of 

directors is estimated by the Commission to be 

$200.00/hour [$100,000 per year/(500 hours per 

year) is $200 per hour]; $200.00*36 = $7,200.00. 

The average compensation for a chief executive 

officer is estimated by the Commission to be 

$650.00/hour [$1,000,000 per year/(2000 hours per 

year)*1.3 is $650.00 per hour]; $650.00*10 = 

$6,500.00 and $650.00*20 = $13,000. The average 

compensation for both a chief financial officer and 

a chief operations officer is estimated by the 

Commission to be $455.00/hour [$700,000 per year/ 

(2000 hours per year)*1.3 is $455.00 per hour]; 

$455.00*10 = $4,550.00 and $455.00*20 = 

$9,100.00. The average compensation for a chief 

compliance officer is $110.97/hour [ $170,727 per 

year/(2000 hours per year)*1.3 = $110.97/hour]; 

$110.97*10 = $3,329.18 and $110.97*20 = 

$11,097.26. 

105For ongoing costs, this estimates annual costs 

of 20–200 hours from compliance attorneys, 50–300 

hours from risk management personnel, 48 hours 

(total) of time from the board, and 8–32 hours each 

from CEO, CFO, COO, and CCO. Using the same 

compensation figures listed above, this is $85.35 

*20 = $1,706.94 and $85.35*200 = $17,069.39 for 

a compliance attorney; $65.33*50 = $3266.25 and 

$65.33*300 = $19,597.50 for a risk management 

specialist; $200.00*48 = $9,600.00 for the board; 

$650.00*8 = $5,200.00 and $650.00*32 = 

$20,800.00 for the CEO; $455.00*8 = $3,640.00 and 

$455.00*32 = $14,560.00 for both the CFO and 

COO; and $110.97*8 = $887.78 and $110.97*32 = 

$3,551.12 for the CCO. The compensations of an 

average CEO and CFO are estimates by the 

Commission; the compensation of the board of 

directors is based on the average compensation of 

the boards of several large FCMs. All other figures 

are taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 

106This estimates 40–80 hours of time from a 

compliance attorney. The average compensation for 

a compliance attorney is $85.35/hour [$131,303 per 

year/(2000 hours per year)*1.3 is $85.35 per hour]; 

$85.35*40 = $3,413.88 and $85.35*80 = $6,827.76. 

These figures are taken from the 2011 SIFMA 

Report on Management and Professional Earnings 

in the Securities Industry. 

107This estimates 20–50 hours of compliance 

attorney time, 20–50 hours from risk management 

personnel, 12 hours of board time, and 2 hours from 

each of the CEO, CFO, COO, and CCO. The average 

compensation for a compliance attorney is $85.35/ 

hour [$131,303 per year/(2000 hours per year)*1.3 

is $85.35 per hour]; $85.35*20 = $1,706.94 and 

$85.35*50 = $4,267.35. The average compensation 

for a risk management specialist is $65.33/hour 

[$100,500 per year/(2000 hours per year)*1.3 is 

$65.33 per hour]; $65.33*20 = $1,306.50 and 

$65.33*50 = $3,266.25. The average compensation 

for a member of a firm’s board of directors is 

estimated by the Commission to be $200.00/hour 

[$100,000 per year/(500 hours per year) is $200 per 

hour]; $200.00*12 = $2,400.00. The average 

compensation for a chief executive officer is 

estimated by the Commission to be $650.00/hour 

[$1,000,000 per year/(2000 hours per year)*1.3 is 

$650.00 per hour]; $650.00*2 = $1,300.00. The 

average compensation for both a chief financial 

officer and a chief operations officer is estimated by 

Continued 

Act and Commission regulations but 

also to meet its foreseeable needs, the 

proposed rule would promote reasoned 

decision making regarding capital 

retention and allocation decisions 

because such decisions would have to 

be made according to the established 

policies and procedures, weighing the 

factors and inputs included therein. 

Moreover, written procedures could be 

used by the Commission and relevant 

SROs as the basis for audits to check for 

compliance with such procedures, 

which would help the Commission and 

relevant SRO identify operational 

problems that could lead to loss of 

customer funds. 

In many cases the proposed rules 

provide flexibility to FCMs by requiring 

that they develop and document their 

own policies and procedures rather than 

prescribing specific procedures for 

them. In so doing, the proposal gives 

FCMs an opportunity to tailor policies 

and procedures that accommodate their 

specific needs and operational patterns, 

which may vary from one FCM to 

another based on differences in their 

size, involvement in specific markets, 

and the characteristics of their investor 

base. This approach is likely to be less 

costly for FCMs when compared to the 

alternative of a more prescriptive 

approach because it is less likely to 

require changes to operational patterns 

if existing procedures are adequate to 

provide the same protections to 

customer funds. In addition, the 

flexibility of this approach benefits 

market participants and customers alike 

because it is the FCM that is in the best 

position to define the precise form of 

internal controls that will best protect 

customer funds from operational errors 

and fraud. 

In addition, as suggested above, 

requiring FCMs to document their 

policies and procedures regarding their 

Risk Management Program would 

enable the Commission and DSRO to 

audit for operational problems that 

could put customer funds at risk before 

those risks turn into actual losses. This 

would strengthen the critical first line of 

defense against operational errors and 

fraud. 

Costs 

The risk management unit, required 

by the proposed rule, would create 

certain personnel costs. The 

Commission estimates that such a unit 

would require between one and ten fulltime staff depending on the size and 

complexity of the FCM. Therefore, the 

Commission estimates that the annual 

cost for the risk management unit would 

be between $171,000 and $1,934,000.103

There are costs associated with the 

Risk Management Program proposed in 

§ 1.11. 

a. Each FCM would likely have to 

review its operations, business model, 

market conditions, customer base, and a 

number of other factors in order to 

identify the risks that it should be 

monitoring. In addition, each FCM 

would have to develop and document 

methodologies for establishing risk 

tolerance limits for each risk that they 

choose to monitor. Last, for each FCM, 

the risks and proposed limits for those 

risks would have to be reviewed and 

approved quarterly by its senior 

management and annually by the board. 

The Commission estimates that the 

initial cost for identifying relevant risks 

and developing and documenting 

methodologies for establishing 

thresholds would be between $28,800 

and $68,400.104 The ongoing cost for 

reviewing the risks and limits and 

approving them would be between 

$27,900 and $99,700 per year.105

b. Developing these policies and 

procedures for detecting breaches of the 

risk tolerance limits and notifying 

appropriate personnel would create an 

initial cost, but little ongoing cost since 

most of the monitoring costs are 

included in other elements (quarterly 

reports, annual audits, etc.). The 

Commission estimates that the initial 

cost to develop these policies and 

procedures is between $3,400 and 

$6,800.106

c. Many of the activities necessary for 

completing the quarterly review of risk 

thresholds will overlap with the 

activities necessary for completing the 

Risk Exposure Reports. However, some 

additional time will be required to 

compile the Report and to incorporate 

information that is distinct from that 

which is required for the quarterly 

review of risk thresholds. In addition, 

the FCM’s board and senior 

management are obligated to review the 

report. Therefore, the Commission 

estimates that each Risk Exposure 

Report will cost between $8,800 and 

$13,300 per year.107


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67908 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

the Commission to be $455.00/hour [$700,000 per 

year/(2000 hours per year)*1.3 is $455.00 per hour]; 

$455.00*2 = $910.00. The average compensation for 

a chief compliance officer is $110.97/hour [ 

$170,727 per year/(2000 hours per year)*1.3 = 

$110.97/hour]; $110.97*2 = $221.95. The 

compensations of an average CEO and CFO are 

estimates by the Commission; the compensation of 

the board of directors is based on the average 

compensation of the boards of several large FCMs. 

All other figures are taken from the 2011 SIFMA 

Report on Management and Professional Earnings 

in the Securities Industry. 

108This assumes four weeks’ worth of time from 

one to four intermediate compliance specialists. 

The average compensation of an intermediate 

compliance specialist is $37.90/hour [$58,303.00 

per year/(2000 hours per year)*1.3 is $37.90]; 

$37.90*40 hours/week*1 = $6,063.51 and 

$37.90*40 hours/week*4 = $24,254.05. These 

figures are taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 

109 Developing, documenting, and implementing 

the requisite policies and procedures would require 

personnel hours from compliance attorneys, senior 

management, and limited involvement from others 

such as risk management, HR, and IT. Those costs 

are would vary, perhaps significantly, depending on 

the extent to which each FCM already has 

compliant procedures in place and the extent to 

which such procedures may already be 

documented. However, the Commission has 

endeavored to estimate broad ranges of costs that 

would likely result from efforts to develop and 

document the requirements of § 1.11, to implement 

compliant procedures, and then to sustain such 

procedures on an ongoing basis. And while the 

benefits are enumerated separately because their 

substantive benefits, in several cases, vary from one 

requirement to the next, the substantive costs are, 

in many cases, overlapping, and therefore the 

Commission has addressed them collectively. 

110This estimate assumes 400–1000 hours of time 

from one or more compliance attorneys re: all 

aspects of the requirements (interpreting, 

summarizing, guiding compliance discussions, 

drafting, etc.), 80–160 hours from a firm’s chief 

compliance officer re: All aspects of the program, 

10–100 hours from risk management personnel re: 

bank selection, monitoring, process to assess § 1.25 

investment decisions, and due diligence to support 

targeted residual amount decision, 4–20 hours from 

a firm’s chief financial officer re: selection of target 

for residual funds and process for withdrawal of 

segregated account funds not for the benefit of FCM 

customers, 2–4 hours from a firm’s CEO, and 40– 

50 hours from board collectively re: discussion and 

approval of written policies and procedures. The 

average compensation for a compliance attorney is 

$85.35/hour [$131,303 per year/(2000 hours per 

year)*1.3 is $85.35 per hour]; $85.35*400 = 

$34,140.00 and $85.35*1000 = $85,350.00. The 

average compensation for a chief compliance officer 

is $110.97/hour [ $170,727 per year/(2000 hours per 

year)*1.3 = $110.97/hour]; $110.97*60 = $6,658.35 

and $110.97*100 = $11,097.26. The average 

compensation for a risk management specialist is 

$65.33/hour [$100,500 per year/(2000 hours per 

year)*1.3 is $65.33 per hour]; $65.33*10 = $653.25 

and $65.33*100 = $6,532.50. The average 

compensation for a chief financial officer is 

estimated by the Commission to be $455.00/hour 

[$700,000 per year/(2000 hours per year)*1.3 is 

$455.00 per hour]; $455.00*4 = $1,820.00 and 

$455.00*20 = $9,100.00. The average compensation 

for a chief executive officer is estimated by the 

Commission to be $650.00/hour [$1,000,000 per 

year/(2000 hours per year)*1.3 is $650.00 per hour]; 

$650.00*2 = $1,300.00 and $650.00*4 = $2,600.00. 

The average compensation for a member of a firm’s 

board of directors is estimated by the Commission 

to be $200.00/hour [$100,000 per year/(500 hours 

per year) is $200 per hour]; $200.00*40 = $8,00.00 

and $200.00*50 = $10,000.00. The compensations 

of an average CEO and CFO are estimates by the 

Commission; the compensation of the board of 

directors is based on the average compensation of 

the boards of several large FCMs. All other figures 

are taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 

111However, they are likely to outsource some 

pieces of the implementation (e.g. annual training 

would likely be developed by vendors to meet the 

needs of multiple market participants) which will 

mitigate associated costs. If a firm chooses to use 

training created by a vendor, that would likely 

reduce the HR one-time costs significantly. 

112This estimate assumes 100–200 hours of risk 

management personnel time (from employees of 

varying levels of pay) conducting initial due 

diligence on depositories and evaluating § 1.25 

investments, 800–1000 hours of human resources 

personnel time (400–500 at a junior level and 400– 

500 at a senior level) revising job descriptions to 

accommodate separation of roles and developing 

annual training, 20–400 hours of time from one or 

more compliance attorneys for retitling accounts, 

securing requisite acknowledgements from 

depositories, setting up quarterly audits, and 

general oversight of implementation of new policies 

and procedures, 4–12 weeks of the time of a firm’s 

Chief Compliance Officer, or 160–480 hours, and 

160–800 hours of the time of IT personnel (140–700 

at a junior to intermediate level and 20–100 at a 

senior level) as the firm will likely seek to automate 

some types of information collection and other 

steps necessary to support requirements. The 

average compensation for a senior risk management 

specialist is $108.06/hour [$166,251 per year/(2000 

d. The Commission estimates that 

review and testing of the Risk 

Management Program will cost between 

$6,000 and $24,300.108 An FCM must 

conduct such a review and testing 

annually as well as any time it 

experiences a material change in the 

business that is reasonably likely to alter 

the risk profile of the FCM. The 

Commission does not have adequate 

information to estimate how frequently 

such a change in the business will 

occur, so it has assumed one review and 

testing per year. 

e. Regarding the policies and 

procedures that are required to address 

segregation risk, proposed § 1.11 would 

create three sets of costs: (1) costs 

related to developing and documenting 

all required policies and procedures; (2) 

initial implementation costs; and (3) 

ongoing costs.109

1. The Commission estimates that 

developing and documenting requisite 

policies and procedures would require 

one or more compliance attorneys to be 

heavily involved interpreting and 

explaining the Act and Commission 

requirements to other affected 

employees, guiding other subject matter 

experts in the development of compliant 

operations, and drafting the required 

documentation. Risk management 

personnel would also likely be involved 

in developing procedures to review 

banks and § 1.25 investments as well as 

to support the due diligence that senior 

management will have to conduct in 

order to establish a target residual 

interest for the FCM. The CFO and other 

senior personnel reporting to the CFO 

would likely be involved with selecting 

a target for the firm’s residual interest 

and developing procedures for making 

withdrawals of residual interest for 

proprietary use. The CEO and board 

would be involved in reviewing and 

approving the policies and procedures 

required under § 1.11. The Commission 

estimates that the likely cost for 

developing and documenting the 

policies and procedures that would be 

required under the proposed § 1.11 

would be between $54,800 and 

$131,000.110

2. The policies and procedures must 

not only be documented, they must be 

implemented, which will create some 

one-time costs that will depend 

significantly on the extent to which an 

FCM already practices some of the 

operational procedures that the 

Commission is requiring here. While the 

Commission expects that some FCMs 

are likely to have certain policies and 

procedures in place already that comply 

with § 1.11, the Commission does not 

have adequate information to determine 

to what extent this is true. Therefore, for 

the purposes of estimation we have 

estimated the one-time costs for an 

entity that does not yet have any of the 

required policies and procedures in 

place. The Commission anticipates that 

in such a circumstance, implementing 

new policies and procedures would 

require risk management personnel to 

conduct initial due diligence on 

depositories and existing as well as 

prospective § 1.25 investments. Human 

Resource (‘‘HR’’) personnel would have 

to revise job descriptions to comply 

with policies to separate critical 

functions related to handling of 

customer funds, and would also have to 

develop new annual training.111 One or 

more compliance attorneys would be 

involved ensuring that accounts are 

titled appropriately, securing requisite 

acknowledgment letters from 

depositories, setting up quarterly audits 

of policies and procedures, and 

providing general oversight of the 

implementation process. IT personnel 

will likely be required to automate 

certain aspects of the information 

collection that is necessary, and the 

CCO would likely be involved on 

virtually a full-time basis for some 

period of time as well, overseeing the 

implementation of critical new policies 

and procedures. The Commission 

estimates the cost for such an 

implementation would range between 

$90,800 and $275,300.112


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67909 

hours per year)*1.3 is $108.06 per hour]; 

$108.06*100 = $10,806.00 and $108.06*500 = 

$54,030.00. The average compensation for a risk 

management specialist is $65.33/hour [$100,500 per 

year/(2000 hours per year)*1.3 is $65.33 per hour]; 

$65.33*100 = $6,532.50 and $65.33*500 = 

$32,665.00. The average compensation for a junior 

human resources representative is $40.95/hour 

[$62,989 per year/(2000 hours per year)*1.3 is 

$40.95 per hour]; $40.95*800 = $32,760.00 and 

$40.95*1000 = $40,950.00. The average 

compensation for a senior human resources 

representative is $71.45/hour [$109,921 per year/ 

(2000 hours per year)*1.3 is $71.45 per hour]; 

$71.45*100 = $7,144.87 and $71.45*500 = 

$35,724.33. The average compensation for a 

compliance attorney is $85.35/hour [$131,303 per 

year/(2000 hours per year)*1.3 is $85.35 per hour]; 

$85.35*20 = $1,706.94 and $85.35*400 = 

$34,138.78. The average compensation for a chief 

compliance officer is $110.97/hour [ $170,727 per 

year/(2000 hours per year)*1.3 = $110.97/hour]; 

$110.97*160 = $17,755.61 and $110.97*480 = 

$53,266.82. The average compensation for a 

programmer is $53.64/hour [$82,518 per year/(2000 

hours per year)*1.3 = $53.64/hour]; $53.64*140 = 

$7,509.14 and $53.64*700 = $37,545.69. The 

average compensation for a senior programmer is 

$74.56/hour [$114,714 per year/(2000 hours per 

year)*1.3 = $74.56/hour]; $74.56*20 = $1,491.28 

and $74.56*100 = $7,456.41. All figures are taken 

from the 2011 SIFMA Report on Management and 

Professional Earnings in the Securities Industry. 

113This estimate assumes 20+ hours per year 

from the CCO for due diligence and certification of 

compliance on annual report and reviewing 

quarterly audits, 40+ hours each per year from 

junior and senior risk management personnel 

evaluating § 1.25 investments for liquidity and 

marketability and monitoring depository 

institutions where customer segregated funds are 

held, 6+ hours per year from the CFO and other 

senior management for reviewing the target for the 

firm’s residual interest, and 20+ hours each per year 

from junior and senior HR—organizing and 

delivering annual training, as well as at least a day’s 

training for 20 employees, or 160 hours from an 

average financial employee, such as a general 

intermediate trader. The average compensation for 

a chief compliance officer is $110.97/hour 

[$170,727 per year/(2000 hours per year)*1.3 = 

$110.97/hour]; $110.97*20 = $2,219.45. The average 

compensation for a senior risk management 

specialist is $108.06/hour [$166,251 per year/(2000 

hours per year)*1.3 is $108.06 per hour]; 

$108.06*40 = $4,322.53. The average compensation 

for a risk management specialist is $65.33/hour 

[$100,500 per year/(2000 hours per year)*1.3 is 

$65.33 per hour]; $65.33*40 = $2,613.00. The 

average compensation for a chief financial officer is 

estimated by the Commission to be $455.00 per/ 

hour [$700,000 per year/(2000 hours per year)*1.3 

is $455.00 per hour]; $455.00*6 = $2,730. The 

average compensation for a junior human resources 

representative is $40.94/hour [$62,989.00 per year/ 

(2000 hours per year) = $40.94/hour]; $40.94*20 = 

$818.86. The average compensation for a senior 

human resources representative is $71.45/hour 

[$109,921.00 per year/(2000 hours per year) = 

$71.45/hour]; $71.45*20 = $1,428.97. The average 

compensation for a general intermediate trader is 

$36.48/hour [$56,130.00 per year/(2000 hours per 

year)*1.3 is $36.48 per hour]; $36.48*160 = 

$5,837.52. The compensations of an average CFO is 

an estimate by the Commission. All other figures 

are taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 

114This estimates 150–1500 hours of mid-level IT 

programming time and 30–120 hours of senior level 

IT personnel time. The average compensation for a 

programmer is $53.64/hour [$82,518 per year/(2000 

hours per year)*1.3 = $53.64/hour]; $53.64*150 = 

$8,045.51 and $53.64*1500 = $80,455.05. The 

average compensation for a senior programmer is 

$74.56/hour [$114,714 per year/(2000 hours per 

year)*1.3 = $74.56/hour]; $74.56*30 = $2,236.92 

and $74.56*120 = $8,947.69. All figures are taken 

from the 2011 SIFMA Report on Management and 

Professional Earnings in the Securities Industry. 

3. The costs necessary to sustain the 

policies and procedures required under 

§ 1.11 are difficult to estimate because 

they would depend on variables such as 

the size of the firm, the program of 

governing supervision that they 

develop, and the degree of automation 

they achieve in their various ongoing 

processes (monitoring depositories, 

evaluating § 1.25 investments, 

reevaluating residual funds target, etc.), 

and the degree to which their operations 

are already compliant with the policies 

and procedures they would develop 

pursuant to the proposed § 1.11. 

However, as a lower bound, the ongoing 

costs would include expenses related to 

the time for: (1) The CCO to review 

quarterly audits and conduct due 

diligence that is necessary before 

providing certification of compliance 

with the Act, regulations and its policies 

and procedures with respect to 

segregated funds in the annual report; 

(2) risk management personnel to 

evaluate § 1.25 investments for liquidity 

and marketability and to monitor 

depository institutions where customer 

segregated funds are held; (3) the CFO 

and other senior management to review 

and determine the continued 

appropriateness of the FCM’s target for 

residual interest; and (4) HR personnel 

to organize and deliver annual training. 

The Commission estimates that the 

lower bound for these costs is 

approximately $20,000 and that costs 

may be higher, depending on the 

variables mentioned above.113

In addition, FCMs would have to 

implement automated financial risk 

management controls that are 

reasonably designed to prevent entering 

of erroneous trades. The Commission 

anticipates that some, but not all, FCMs 

already have such systems in place. For 

those FCMs that do not yet have such 

systems in place, the Commission 

proposes that it would cost an FCM 

between $10,300 and $89,400 to 

implement such a system.114

§ 1.12 Maintenance of Minimum 

Financial Requirements by Futures 

Commission Merchants and Introducing 

Brokers 

Proposed Changes 

As described in the section by section 

discussion at II.C, the proposed changes 

to § 1.12 would alter the notice 

requirement so that it is no longer 

acceptable to give ‘‘telephonic notice to 

be confirmed, in writing, by facsimile.’’ 

Instead, all notices would be made in 

writing and submitted through an 

electronic medium acceptable to the 

Commission (currently, WinJammer). 

In addition, as described above in II.C, 

the proposed changes would require 

that if an FCM has a shortfall in net 

capital but is not sure of their financial 

condition, the FCM should not delay 

notifying the Commission about the 

shortfall in net capital. The FCM must 

communicate each piece of information 

(knowledge of the shortfall and 

knowledge of the financial condition of 

the FCM) to the Commission as soon as 

it is known. 

The proposed requirements in 

paragraphs (i), (j), (k) and (l) of § 1.12 

identify additional circumstances in 

which the FCM must provide immediate 

written notice to the Commission, 

relevant SRO and to the SEC if the FCM 

is also a broker-dealer. Those 

circumstances are: (1) If an FCM 

discovers that any of the funds in 

segregated accounts are invested in 

investments not permitted under § 1.25; 

(2) if an FCM does not have sufficient 

funds in any of their segregated 

accounts to meet their targeted residual 

interest; (3) if the FCM experiences a 

material adverse impact to its 

creditworthiness or ability to fund its 

obligations; (4) whenever the FCM has 

a material change in operations 

including changes to senior 

management, lines of business, clearing 

arrangements, or credit arrangements 

that could have a negative impact on the 

FCM’s liquidity; and (5) if the FCM 

receives a notice, examination report, or 

any other correspondence from a DSRO, 

the SEC, or a securities industry selfregulatory organization, the FCM must 

notify the Commission, and provide a 

copy of the communication as well as a 

copy of their response to the 

Commission. 

Last, proposed changes in paragraph 

(n) of § 1.12 would require that every 

notice or report filed with the 

Commission pursuant to § 1.12 would 

include a discussion of how the 

reporting event originated and what 

steps have been, or are being taken, to 

address the event. 

Benefits 

The proposed changes requiring that 

notice to the Commission be given in 

written form via specified forms of 

electronic communication not only 

adapt the rule to account for modern 

forms of communication, but also 

reduce the possibility of notification 

being delayed in reaching appropriate 

Commission staff. The proposed 

requirement would ensure that such 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67910 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

115This estimates 8–16 hours of time from both 

the CCO and the CFO, 10–20 from the General 

Counsel, 20–40 from a compliance attorney, and 

10–20 from a senior accountant. The average 

compensation for a chief compliance officer is 

$110.97/hour [ $170,727 per year/(2000 hours per 

year)*1.3 = $110.97/hour]; $110.97*2 = $221.95 and 

$110.97*4 = $443.89. The average compensation for 

a chief financial officer is estimated by the 

Commission to be $455.00/hour [$700,000 per year/ 

(2000 hours per year)*1.3 is $455.00 per hour]; 

$455.00*2 = $910.00 and $455.00*4 = $1,820.00. 

The average compensation for a general counsel is 

estimated by the Commission to be $260.00/hour 

[$400,000 per year/(2000 hours per year)*1.3 is 

$260.00 per hour]; $260.00*10 = $2,600.00 and 

$260.00*20 = $5,200.00. The average compensation 

for a senior accountant is $44.18/hour [$67,971 per 

year/(2000 hours per year)*1.3 = $44.18/hour]; 

$44.18*10 = $441.81 and $44.18*20 = $883.62. 

These figures are taken from the 2011 SIFMA 

Report on Management and Professional Earnings 

in the Securities Industry. 

116This estimates 20–90 hours of personnel time 

from a programmer and 10–20 hours of personnel 

time from a senior programmer. The average 

compensation for a programmer is $53.64/hour 

[$82,518 per year/(2000 hours per year)*1.3 = 

$53.64/hour]; $53.64*20 = $1,072.73 and $53.64*90 

= $4,827.30. The average compensation for a senior 

programmer is $74.56/hour [$114,714 per year/ 

(2000 hours per year)*1.3; $74.56*10 = $745.64 and 

$74.56*20 = $1,491.28. All figures are taken from 

the 2011 SIFMA Report on Management and 

Professional Earnings in the Securities Industry. 

117This estimates at least 8 hours per year from 

the CFO, the CCO, and the General Counsel. The 

average compensation for a chief compliance officer 

is $110.97/hour [ $170,727 per year/(2000 hours per 

year)*1.3 = $110.97/hour]; $110.97*8 = $887.78. 

The average compensation for a chief financial 

officer is estimated by the Commission to be 

$455.00/hour [$700,000 per year/(2000 hours per 

year)*1.3 is $455.00 per hour]; $455.00*8 = $3,640. 

The average compensation for a general counsel is 

estimated by the Commission to be $260.00/hour 

$400,000.00 per year/(2000 hours per year)*1.3 is 

$260.00 per hour]; $260.00*8 = $2,100.00. The 

figure for the CCO is taken from the 2011 SIFMA 

Report on Management and Professional Earnings 

in the Securities Industry; other compensations are 

estimates by the Commission. 

notices are submitted to WinJammer, 

which forwards notices to appropriate 

personnel within the Commission via 

email within a matter of minutes, if not 

seconds. 

With respect to the proposed change 

in § 1.12(a)(2), if an FCM knows that it 

does not have adequate capital to meet 

the requirements of § 1.17 or other 

capital requirements, and is also not 

able to calculate or determine its 

financial condition, it is likely that the 

FCM is in a period of extraordinary 

stress. In these circumstances, time is of 

the essence for the solvency of the FCM 

and to the protection of its customers 

and counterparties. Therefore, it is 

important that the Commission, DSRO, 

and SEC (if the FCM is also a brokerdealer) be notified immediately so that 

they can begin assessing the FCM’s 

condition, and if necessary, making 

preparations to allow the transfer of the 

customers’ positions to another FCM in 

the event that the FCM currently 

holding those positions has insufficient 

regulatory capital. These preparations 

help to ensure that the customers’ funds 

are protected in the event of the FCM’s 

default, and that the positions of its 

customers are transferred expeditiously 

to another FCM where those customers 

may continue to hold and control those 

positions without interruption to the 

customer’s positions. 

The situations enumerated in 

proposed §§ 1.12(i) and (j) are more 

specific indicators of potential or 

existing problems in the customer 

segregated funds accounts. Notifying the 

Commission in such circumstances will 

enable it to monitor steps the FCM is 

taking to address a shortfall in targeted 

residual interest, or to direct the FCM as 

it takes steps to address improperly 

invested segregated funds. In either 

case, the Commission will be able to be 

much more closely involved in 

rectifying the situation and ensuring the 

continued protection of customer 

segregated funds. 

The situations enumerated in 

proposed §§ 1.12(k) through (l) are 

circumstances indicating that the FCM 

is undergoing changes that could 

indicate or lead to financial strain. 

Alerting the Commission and relevant 

SRO in such circumstances will enable 

both to protect customer funds by 

monitoring the FCM more closely in 

order to ensure that any developing 

problems are identified quickly and 

addressed proactively by the FCM with 

the oversight of the Commission and 

relevant SRO. 

The proposed amendment requiring 

that the FCM notify the Commission 

whenever it receives a notice or results 

of an examination from the DSRO, SEC, 

or securities-industry self-regulatory 

body, would ensure that the 

Commission is aware of any significant 

developments affecting the FCM that 

have been observed or communicated 

by other regulatory bodies. Such 

communications could prompt the 

Commission to heighten its monitoring 

of specific FCMs, or create an 

opportunity for the Commission to work 

collaboratively and proactively with 

other regulators to address any concerns 

about how developments in the FCM’s 

business could affect customer funds. 

The proposed requirement that 

notifications to the Commission 

pursuant to § 1.12 include a discussion 

of what caused the reporting event and 

what has been, or is being done about 

the event would provide additional 

information to Commission staff that 

help them quickly gauge the potential 

severity of related problems that have 

been or are developing at the reporting 

FCM, IB, or SRO. It would also help 

Commission staff discern how 

effectively the reporting entity is 

responding to such problems, which 

could assist the staff in determining 

whether the situation is likely to be 

corrected quickly or to continue 

deteriorating. 

Costs 

As discussed above, the proposed rule 

requires that FCMs provide immediate 

notice to the Commission and its DSRO 

in five additional circumstances. These 

additional requirements create some 

minimal reporting costs when such 

circumstances arise. The Commission 

estimates that the total cost of 

completing and sending the requisite 

form is approximately $9,700 and 

$19,400 per form.115

Ongoing monitoring for any of the five 

additional circumstances that require 

reporting to the Commission, relevant 

SRO, and to the SEC if the FCM is a 

broker-dealer will also create some 

costs. In its consideration of the 

proposed rule, the Commission assumes 

that FCMs will automate the process for 

monitoring residual interest for any 

shortfall against the firm’s target. 

Furthermore, the Commission 

anticipates that FCMs will build on the 

systems that they already have in place 

to calculate residual interest once per 

day at the close of business. The 

incremental cost of modifying such 

systems to monitor residual interest 

compared to the target value on an 

ongoing basis is likely to be between 

$1,800 and $6,300.116 Identifying 

instances where their FCM has 

experienced a material adverse impact 

to its creditworthiness or ability to fund 

its obligations, as would be required by 

proposed § 1.12(k), would likely require 

deliberation among senior leaders at the 

FCM. Such deliberations, however, 

would likely be prompted by 

observations that such leaders make in 

the ordinary course of business, and 

therefore would not require proactive 

monitoring. The Commission estimates 

that deliberations among senior leaders 

to determine whether there is evidence 

suggesting a material decrease in the 

FCM’s creditworthiness has occurred 

would cost at least $6,600 per year.117

Material changes to the FCM’s 

leadership or business would create 

some incremental costs. Some of the 

material changes envisioned, such as 

changes in senior leadership, are 

discrete events that do not require 

monitoring in order to identify. On the 

other hand, events that constitute a 

material change in operations, credit 

arrangements, or ‘‘any change that could 

adversely impact the firm’s liquidity 


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118 § 1.12(l). 

119This estimates 20–40 hours of time each from 

the CCO and CFO. The average compensation for 

a chief compliance officer is $110.97/hour 

[$170,727 per year/(2000 hours per year)*1.3 = 

$110.97/hour]; $110.97*20 = $2,219.45 and 

$110.97*40 = $4,438.90. The average compensation 

for a chief financial officer is estimated by the 

Commission to be $455.00/hour [$700,000 per year/ 

(2000 hours per year)*1.3 is $455.00 per hour]; 

$455.00*20 = $9,100.00 and $455.00*40 = 

$18,200.00. The compensations of an average CFO 

is an estimate by the Commission. The figure for a 

CCO is taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 

120This estimates that the CFO, General Counsel, 

and CCO will each spend an additional 4–8 hours 

developing and reviewing the report. The average 

compensation for a chief financial officer is 

estimated by the Commission to be $455.00/hour 

[$700,000 per year/(2000 hours per year)*1.3 is 

$455.00 per hour]; $455.00*4 = $1,780.00 and 

$455.00*8 = $3,640.00. The average compensation 

for a general counsel is estimated by the 

Commission to be $260.00/hour [$400,000.00 per 

year/(2000 hours per year)*1.3 is $260.00 per hour]; 

$260.00*4 = $1,040.00 and $260.00*8 = $2,100.00. 

The average compensation for a chief compliance 

officer is $110.97/hour [ $170,727 per year/(2000 

hours per year)*1.3 = $110.97/hour]; $110.97*4 = 

$443.88 and $110.97*8 = $887.78. The figure for the 

CCO is taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry; other compensations are 

estimates by the Commission. 

121See NFA Interpretive Notice 9028—NFA 

Financial Requirements: The Electronic Filing of 

Financial Reports. Available at: http:// 

prodwebvip.futures.org/nfamanual/ 

NFAManual.aspx?RuleID=9028&Section=9. See 

also CME Advisory Notice: Enhanced Customer 

Protections & Rule Amendments, June 27, 2012. 

Available at: http://www.cmegroup.com/toolsinformation/lookups/advisories/clearing/AIB12- 

08.html. 

122 ‘‘PCAOB is a nonprofit corporation established 

by Congress to oversee the audits of public 

companies in order to protect the interests of 

investors and further the public interest in the 

preparation of informative, accurate and 

independent audit reports. The PCAOB also 

oversees the audits of broker-dealers, including 

compliance reports filed pursuant to federal 

securities laws, to promote investor protection.’’ 

See http://pcaobus.org/Pages/default.aspx. 

resources,’’ 118 would only be reliably 

recognized as a material change by 

someone with a broad knowledge of the 

firm’s operations and finances, so the 

Commission assumes that senior 

management would fulfill these 

requirements. However, identifying and 

addressing material changes to the 

business is a function that senior 

management already plays, and 

therefore monitoring for such changes 

would not create any incremental costs. 

The proposed rule would make it 

necessary for senior management, in 

addition to identifying changes to the 

business, to make a decision about 

whether or not those changes are 

material and therefore should be 

reported. The Commission proposes that 

the additional time senior management 

spends making determinations about the 

materiality of changes to the business, 

as defined by the proposed rule, would 

require approximately twenty hours of 

time from both the CCO and CFO. 

Therefore, the Commission estimates 

that the monitoring costs would be 

$11,300 and $22,600.119

The proposed requirement that 

notices or reports filed with the 

Commission pursuant to § 1.12 include 

a discussion of how the reporting event 

originated and what has been, or is 

being done to address the reporting 

event, will increase the cost of such 

reports. The Commission anticipates 

that this requirement would prompt the 

CFO, General Counsel, and CCO of a 

reporting entity to invest additional 

time in developing and reviewing the 

report. The Commission anticipates that 

the incremental cost associated with the 

additional time spent by the CFO, 

General Counsel, and CCO would be 

between $3,300 and $6,600 per 

report.120

Additional proposed changes would 

introduce only minimal, if any, 

additional costs. For example, all FCMs 

already use WinJammer to submit 

certain reports to DSROs and to the 

Commission, so there would not be any 

additional cost involved with 

§ 1.12(n)(3) requirement that such 

notices to be submitted through that 

platform rather than via fax.121 Nor is 

there any cost associated with this 

proposed change to § 1.12(a)(1). The 

FCM is still required to disclose its 

financial condition to the Commission, 

DSRO and SEC (if applicable) as soon as 

it can be ascertained. The proposed 

change does not alter the information 

that the FCM must gather, calculate, or 

report. It merely requires that each of 

the two pieces of information relevant to 

the requirements in § 1.12(a)(1–2) are 

submitted as soon as they are known. 

Request for Comment 

Question 5: The Commission requests 

additional information regarding the 

costs of these additional notification 

requirements. Specifically, how much 

time will information technology and 

compliance personnel have to invest in 

order to modify systems to calculate 

residual interest on a continual basis? 

How much time would be necessary to 

monitor for material changes in the 

business and what level of personnel 

would have to participate in that in 

order to draw reliable conclusions about 

whether or not a material event had 

occurred? 

§ 1.16 Qualifications and Reports of 

Accountants 

Proposed Changes 

As discussed above in II.E, the 

proposed changes would require that in 

order for an accountant to be qualified 

to conduct an audit of an FCM, that 

accountant would have to be registered 

with the Public Company Accounting 

Oversight Board (‘‘PCAOB’’),122 have 

undergone at least one examination by 

the PCAOB, and have addressed any 

deficiencies noted by the PCAOB within 

three years of the report noting such a 

deficiency. 

Second, the amendments would 

require that the governing body of the 

FCM ensure that the accountant engaged 

for an audit is duly qualified, and 

specifies certain qualifications that must 

be considered when evaluating an 

accountant for such purpose. 

Last, the Commission is proposing to 

require a public accountant to state in 

the audit opinion whether the audit was 

conducted in accordance with U.S. 

generally accepted auditing standards 

after full consideration of the auditing 

standards adopted by the PCAOB. 

Benefits 

By requiring accountants to be 

registered with PCAOB and to have 

undergone at least one examination by 

the same, the proposed rule would help 

to ensure that the accountant is 

qualified to audit publicly traded 

companies, which are often more 

complex than those that are privately 

held. As a consequence, the proposed 

requirement would promote selection of 

accounting firms that are more 

sophisticated and experienced than 

would necessarily be the case in the 

absence of the proposed amendment, 

which would help to ensure that the 

accountant is large enough to maintain 

independence in its examination and 

has adequate experience to deal with 

the unique aspects of an FCM’s business 

model, operational processes, and 

financial records. 

Requiring the FCM’s board to evaluate 

and approve accountants conducting 

audits for the FCM would tend to 

enhance protection of customer funds 

by increasing accountability among the 

board for any errors resulting from an 

accountant’s lack of relevant experience. 

Consequently, the requirement would 

incent the board to choose auditors 

carefully, or to provide diligent 

oversight as senior management makes 

such selections. This would promote 

selection of highly qualified 

accountants, which would help to 

ensure that audits are as effective as 

possible in identifying problems with 

operational controls, potential 

indications of fraud, or other warning 

signs that could enable senior 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67912 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

123CEA 4(d)(2), referenced in § 1.17, states, ‘‘It 

shall be unlawful for any person, including but not 

limited to any clearing agency of a contract market 

or derivatives transaction execution facility and any 

depository, that has received any money, securities, 

or property for deposit in a separate account as 

provided in paragraph (2) of this section, to hold, 

dispose of, or use any such money, securities, or 

property as belonging to the depositing futures 

commission merchant or any person other than the 

customers of such futures commission merchant.’’ 

124As stated above in II.F above, under the SEC 

proposal, a BD may impose the default haircuts of 

15 percent of the market value of readily marketable 

commercial paper, convertible debt, and 

nonconvertible debt instruments or 100 percent of 

the market value of nonmarketable commercial 

paper, convertible debt, and nonconvertible debt 

instruments. A BD, however, may impose lower 

haircut percentages for commercial paper, 

convertible debt, and nonconvertible debt 

instruments that are readily marketable, if the BD 

determines that the investments have only a 

minimal amount of credit risk pursuant to its 

written policies and procedures designed to assess 

the credit and liquidity risks applicable to a 

security. A BD that maintains written policies and 

procedures and determines that the credit risk of a 

security is minimal is permitted under the SEC 

proposal to apply the lesser haircut requirement 

currently specified in the SEC capital rule for 

commercial paper (i.e., between zero and 1⁄2 of 1 

percent), nonconvertible debt (i.e., between 2 

percent and 9 percent), and preferred stock (i.e., 10 

percent). 

125As stated above in II.F, in computing its 

adjusted net capital, an FCM is required to reduce 

the value of proprietary futures and securities 

positions included in its liquid assets by certain 

prescribed amounts or percentages of the market 

value (otherwise known as ‘‘haircuts’’) to discount 

for potential adverse market movements in the 

securities. 

management and the Commission or 

DSRO to protect customer funds more 

effectively. 

Costs 

The Commission anticipates that 

auditors that are registered with the 

PCAOB and that have undergone at least 

one examination by the PCAOB are 

likely to charge more for audits, than 

those that do not have those 

qualifications. However, the 

Commission does not have adequate 

information to estimate the difference in 

costs. 

Request for Comment 

Question 6: The Commission requests 

comment regarding the cost of audits for 

an FCM. Specifically, what is the range 

of costs and average cost of an audit 

conducted by auditors with the 

credentials required in the proposed 

rule? What is the range of costs and the 

average cost of an audit conducted by 

auditors without such qualifications? 

§ 1.17 Minimum Financial 

Requirements for Futures Commission 

Merchants And Introducing Brokers 123

Proposed Changes 

As described in the section by section 

discussion at II.F, the Commission is 

proposing to amend § 1.17 by adding a 

new provision that will authorize the 

Commission to require an FCM to cease 

operating as an FCM and transfer its 

customer accounts if the FCM is not 

able to certify and demonstrate 

sufficient access to liquidity to continue 

operating as a going concern. 

In addition, FCMs that are dual 

registrants (FCM and BD) are allowed to 

use the Securities and Exchange 

Commission’s broker-dealer 

approach 124 to evaluating the credit risk 

of securities that the FCM invests in and 

assigning smaller haircuts 125 to those 

that are deemed to be a low credit risk, 

should the SEC adopt as final its 

proposed rule to eliminate references to 

credit ratings. The proposed change to 

§ 17(c)(5)(v) would allow FCMs that are 

not dual registrants to use the same 

approach. Reducing the haircut assigned 

to low credit risk securities that the 

FCM invests in (which would 

potentially include some investments 

compliant with the requirements of 

§ 1.25), reduces the capital charge that 

the FCM must take for investing in those 

securities. 

Last, the proposed amendments 

would change the period of time that an 

FCM can wait for margin payments from 

a customer before taking a capital charge 

from three days to one day. 

Benefits 

As discussed in II.F, an FCM’s ability 

to meet capital requirements and 

segregation requirements is not 

necessarily a sufficient indicator of the 

FCM’s continued viability as a going 

concern. If an FCM does not have access 

to liquidity to meet identifiable, 

imminent financial obligations, the FCM 

will likely default, regardless of the 

amount of capital that is recognized on 

its balance sheet. In such circumstances, 

transferring customer positions to 

another FCM before the current FCM 

enters into bankruptcy provides 

additional protection to customer funds. 

Once the FCM enters into bankruptcy, 

the transfer of customer positions may 

be slowed by the trustee’s involvement, 

which could interrupt customers’ ability 

to actively manage those positions. In 

addition, if the FCM enters into 

bankruptcy before transferring 

customers’ positions, customer 

segregated funds may be subject to 

trustee fees. Transferring the positions 

before the FCM enters into bankruptcy, 

therefore, provides additional protection 

to customers by preserving their ability 

to continuously manage their accounts 

and by protecting their funds from being 

subject to trustee fees. 

By allowing FCMs that are not dual 

registrants to follow the same rules as 

those that are dual registrants, the 

change would harmonize the regulation 

of FCMs with respect to minimal 

financial requirements. This would 

place FCMs that are not dual registrants 

on a level playing field with those that 

are dual registrants, which contributes 

to the competitiveness of the financial 

markets. 

In § 1.17(c)(5)(viii), the Commission 

proposes to reduce the period of time an 

FCM can wait to receive margin call 

payments from customers before taking 

a capital charge, which will incent 

FCMs to exercise increased diligence 

when seeking such payments, and 

therefore will likely prompt customers 

to provide such payments more quickly. 

As a consequence, the risk that a debit 

balance could develop in a customer’s 

account due to tardy margin call 

payments would be reduced, and the 

amount of residual interest that the FCM 

would need to maintain in the 

segregated accounts in order to protect 

against the possibility that such debit 

balances could cause them to have less 

that is required in their segregated 

accounts would also be reduced. This 

provides benefits for the FCM by 

reducing the amount of capital that it 

must contribute to the customer 

segregated accounts, and for customers, 

by promoting more rapid margin call 

payments from other customers to 

support their own positions. 

Costs 

With respect to costs, the proposed 

amendment § 1.17(a)(4), allowing the 

Commission to require an FCM to 

transfer its customer positions if the 

FCM is not able to immediately certify 

that its liquidity is adequate to continue 

as a going concern, would give the 

Commission the authority to force the 

FCM to transfer its customer positions 

to another FCM in such circumstances. 

This could create additional costs for 

the FCM in two different ways. First, it 

is possible that while the FCM may not 

be able to immediately certify that it has 

sufficient liquidity to continue as a 

going concern but may nevertheless 

obtain sufficient liquidity before its 

impending obligations become due. If 

the FCM is forced to transfer its 

positions before it obtains the liquidity 

necessary to demonstrate that it may 

continue as a going concern, the FCM 

will have lost its FCM business. Second, 

if the FCM is working on obtaining 

sufficient liquidity to continue as a 

going concern, it may be able to obtain 

such liquidity under more favorable 

terms if it has time to consider multiple 

offers. However, if the FCM has a 


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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67913 

shortened timeline to consider offers 

before being forced to transfer its 

customer positions to another FCM, it 

may be forced to accept an offer that is 

less attractive than what otherwise 

would have been the case. 

Regarding the proposed amendment 

to § 1.17(c)(5)(v) changing the 

haircutting procedures for FCMs, 

lowering the amount of capital that the 

FCM must hold reduces the buffer it has 

to absorb any losses that result from its 

own investments. However, the 

Commission proposes that even in the 

absence of the amendment proposed 

here dual registrants will be able to use 

the SEC’s haircutting procedure. 

Therefore, only FCMs that are not dual 

registrants would be impacted by the 

proposed change to § 1.17. Moreover, 

the Commission proposes that FCMs 

that are not dual registrants do not 

typically invest in securities that would 

be subject to reduced haircuts under the 

SEC’s proposed rules, and therefore the 

change would not have a significant 

impact on the capital requirements for 

such FCMs. 

Reducing the period of time FCMs can 

wait for customers’ margin call 

payments before taking a capital charge 

may increase the capital charge that 

FCMs take due to tardy margin call 

payments. As a consequence, proposed 

§ 1.17(c)(5)(viii) would likely force 

FCMs to hold more capital, or to more 

diligently collect margin from customers 

on a prompt basis. The Commission 

does not have adequate information to 

estimate the amount of additional 

capital that FCMs would likely be 

required to hold, or the cost of that 

capital, and therefore is not able to 

quantify this cost at this time. 

Request for Comment 

Question 7: The Commission requests 

comment regarding whether FCMs that 

are not dual registrants typically invest 

in securities that would be subject to 

reduced haircutting procedures under 

the SEC’s proposed rules. If an FCM 

would be subject to reduced haircutting, 

please quantify the effect that such 

investments are likely to have on the 

capital requirements for such FCM. 

Question 8: In addition, the 

Commission requests information that 

would assist it in quantifying the costs 

and benefits associated with reducing 

the number of days an FCM can wait for 

margin call payments before taking a 

capital charge. Specifically, how much 

margin is typically owed by those 

customers? 

Question 9: The Commission also 

requests comment regarding the amount 

of additional capital that FCMs would 

likely be required to hold and the 

average cost of capital for an FCM. In 

addition, please provide data and 

calculations that would enable the 

Commission to replicate and validate 

the estimates you provide. 

§ 1.20 Futures Customer Funds To Be 

Segregated and Separately Accounted 

for 

Proposed Changes 

As described in the section by section 

discussion at II.G, the proposed 

amendments to § 1.20 reorganize the 

section, but also alter the substance of 

the section’s requirements in certain 

places. 

Proposed § 1.20 includes a new 

Appendix A which is a template for the 

acknowledgment letter that FCMs and 

DCOs must obtain from their 

depositories. The proposed changes 

would require FCMs and DCOs to use 

the letter in Appendix A to provide the 

acknowledgment that they must obtain, 

and to clarify that the acknowledgment 

letter must be obtained before 

depositing any funds with a depository. 

The proposed amendments to § 1.20 

also requires FCMs and DCOs file the 

acknowledgment letter with the 

Commission promptly, and to update 

the acknowledgment letter whenever 

there are changes to the business name, 

address, or account numbers referenced 

in the letter. Last, proposed § 1.20 

requires that customer funds deposited 

at a bank or trust company must be 

available for immediate withdrawal 

upon demand by the FCM or DCO, 

which effectively prevents them from 

placing funds into time-deposit 

accounts with depositories. 

Benefits 

Proposed § 1.20(d)(2) would require 

that FCMs and DCOs use the template 

in Appendix A when obtaining written 

acknowledgments from their 

depositories holding futures customer 

funds. Through this change would 

require depositories accepting customer 

funds to: (1) Recognize that the funds 

are customer segregated funds subject to 

the Act and CFTC regulations; (2) agree 

not to use the funds to secure any 

obligation of the FCM to the depository; 

(3) agree to allow the CFTC and the 

FCM’s SRO to examine accounts at any 

reasonable time; (4) agree to provide 

CFTC and SRO user login to have readonly access to segregated accounts 24 

hours a day; (5) and agree to release 

funds in segregated accounts when 

instructed to do so by an appropriate 

officer of FCM, the Director of DSIO, or 

the Director of DCR. 

These acknowledgments and 

commitments would result in important 

benefits. First, by acknowledging that 

the funds are subject to the Act and 

CFTC regulations, the depository would 

become accountable for complying with 

relevant statutory and regulatory 

requirements related to its handling of 

those funds. Second, the depository 

would acknowledge that the FCM is not 

permitted to use customer funds as 

belonging to any person other than the 

customer which deposited them, which 

would also prohibit an FCM from using 

customer funds to secure its own 

obligations. By requiring the FCM or 

DCO to obtain a statement from 

depositories holding customer funds 

acknowledging these limitations on use, 

the proposed rule would ensure that 

each depository is aware that the 

customers’ funds cannot be used to 

secure the FCM’s obligations to the 

depository. Third, the letter constitutes 

written permission by the depository to 

allow CFTC or DSRO officials to 

examine the FCM’s customer accounts 

at any reasonable time, and to view the 

those accounts online at any time. As a 

consequence, the letter would enable 

both the Commission and the DSRO to 

monitor actual balances at the 

depository more easily and regularly. 

This would increase the probability that 

any discrepancy between balances 

reported by the FCM on its daily 

customer segregation account reports, 

and balances actually held by the 

depository would be identified quickly 

by the Commission or the DSRO. 

Moreover, with standing authorization 

from the depository to examine 

customer segregated accounts, both the 

Commission and DSRO would be better 

able to move quickly to verify that there 

is a problem. 

The commitment to distribute funds 

when directed to do so by the Director 

of DSIO, the Director of DCR, or 

appropriate officials of the DSRO 

facilitates the immediate movement of 

customer funds, and avoids delay in the 

release such funds which expedites to 

the transfer the customers’ positions or 

to return the customers’ funds without 

delay. 

The acknowledgment letter also 

provides some assurances to the 

depository, namely, that it is not liable 

to the FCM for following instructions to 

distribute funds from customer 

segregated accounts at the direction of 

the Director of DSIO or the Director of 

DCR and that the depository is not 

responsible for the FCM’s compliance 

with the Act or Commission regulations 

beyond what is expressly stated in this 

letter. The letter places depositories 

holding customer funds on notice that 

they must release customer funds 

without delay when directed to do so by 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67914 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

126See Administrative Determination No. 29 of 

the Commodity Exchange Administration dated 

Sept. 28, 1937 stating, ‘‘the deposit, by a futures 

commission merchant, of customers’ funds * * * 

under conditions whereby such funds would not be 

subject to withdrawal upon demand would be 

repugnant to the spirit and purpose of the 

Commodity Exchange Act. All funds deposited in 

a bank should in all cases by subject to withdrawal 

on demand.’’ 

127This estimate assumes 10–40 hours of time 

from a compliance attorney and 10–20 hours from 

an office services supervisor. The average 

compensation for a compliance attorney is $85.35/ 

hour [$131,303 per year/(2000 hours per year)*1.3 

is $85.35 per hour]; $85.35*10 = $853.47 and 

$85.35*40 = $3,413.88. The average compensation 

for an office services supervisor is $40.15/hour 

[$61,776.00 per year/(2000 hours per year)*1.3 is 

$40.15 per hour]; $40.15*10 = $401.54 and 

$40.15*20 = $803.09. These figures are taken from 

the 2011 SIFMA Report on Management and 

Professional Earnings in the Securities Industry. 

128Total figures are taken from previous 

calculation. ($1,255.01+$4,216.97)/2 = $2,735.99; 

$2,735.99*1 = $2,735.99 and $2,735.99*30 = 

$82,079.69. 

129This estimate assumes one compliance 

attorney working full-time for 3–6 months, 50–200 

hours from an office services supervisor, 80–160 

hours of time from a risk management specialist, 

and 40–60 hours from an intermediate accountant. 

The average compensation for a compliance 

attorney is $85.35/hour [$131,303 per year/(2000 

hours per year)*1.3 is $85.35 per hour]; $85.35*40 

hours/week*4 weeks/month*3 months = $40,966.54 

and $85.35*40 hours/week*4 weeks/month*6 

months = $81,933.07. The average compensation for 

an office services supervisor is $40.15/hour 

[$61,776.00 per year/(2000 hours per year)*1.3 is 

$40.15 per hour]; $40.15*50 = $2,007.72 and 

$40.15*200 = $8,030.88. The average compensation 

for a risk management specialist is $65.33/hour 

[$100,500 per year/(2000 hours per year)*1.3 is 

$65.33 per hour]; $65.33*80 = $5,226.00 and 

$268.84*160 = $10,452.00. The average 

compensation for an intermediate accountant is 

$34.11/hour [$52,484.00 per year/(2000 hours per 

year)*1.3 is $34.11 per hour]; $34.11*40 = 

$1,364.58 and $34.11*60 = $2,046.88. These figures 

are taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 

the Director of DSIO or the Director of 

DCR. The assurance that the FCM will 

not hold the depository liable for 

following instructions from the Director 

of DSIO or of DCR should reduce this 

potential cause for delay in time-critical 

situations. Moreover, under the 

proposed amendments, depositories 

must sign the acknowledgment letter in 

Appendix A in order to receive funds 

from an FCM or DCO. If some 

depositories were not willing to sign the 

letter, it would reduce the number of 

available depositories for FCMs and 

DCOs and may force them to move some 

existing depository accounts. 

The benefit of requiring FCMs and 

DCOs to obtain an acknowledgment 

letter from their depository prior to or 

contemporaneously with transferring 

any customer funds to that depository is 

that it ensures that all the protections 

provided for by the depository’s consent 

to the terms of the letter are in place for 

the full time during which a depository 

holds customer segregated funds. In 

other words, it prevents the possibility 

of a gap in the protections created by the 

requirements of this section. 

By requiring FCMs and DCOs to 

submit the acknowledgment letters, 

signed by their depositories, to both the 

Commission and the relevant SRO, the 

proposed rules should make it easier for 

the Commission or relevant SRO to act 

quickly, when necessary, being 

confident that the correct legal 

permissions are in place. Additionally, 

requiring the letters to be retained for 

five years past the time when customer 

segregated funds are no longer held by 

each depository would ensure that 

proper documentation of all relevant 

acknowledgments and commitments is 

in the possession of each party that 

relies upon the existence of those 

commitments in order to effectuate the 

protections created by this section. 

Last, § 1.12(h) requires that funds 

deposited by an FCM be available for 

immediate withdrawal. If an FCM 

places customer funds in time-deposit 

accounts the depository has the 

contractual right to require a period of 

notice from the FCM before distributing 

funds at the FCM’s request. Under the 

proposed regulation, a period of notice 

would not be acceptable given the 

obligation that the FCM has to return 

customer funds to customers upon 

request. Moreover, placing funds in a 

time-deposit account could prevent the 

DCO, Commission, or Trustee from 

being able to effect the immediate 

movement of customer funds if required 

to do so in the event of a default by the 

FCM. Requiring that funds be available 

for immediate withdrawal at the request 

of the FCM ensures prompt access to 

customer funds by all concerned. 

Prohibiting FCMs from placing 

customer funds in time-deposit 

accounts would codify a long-standing 

staff interpretation that prohibits FCM’s 

from placing customer funds in such 

accounts.126 The interpretation and 

proposed amendment prohibit such 

deposits because time-deposit accounts, 

by law, must retain the right to a certain 

number of days advance notice before 

allowing a customer to withdrawal 

funds. This delay could prevent an FCM 

from returning all customer funds in a 

prompt manner if those customers all 

demanded their funds and could 

prevent the DCO from porting open 

positions to another FCM in the event 

that the FCM currently holding those 

funds defaulted. The benefits of 

codifying the current staff interpretation 

are that it will provide additional clarity 

about the legal force of the requirement, 

and will put the requirement in a 

location where relevant market 

participants are much more likely to see 

it, which reduces the likelihood that 

FCMs would violate this prohibition 

unknowingly. 

Costs 

FCMs and DCOs are likely to bear 

some initial and ongoing costs as a 

result of the proposed amendment 

requiring them to use the template in 

Appendix A to obtain the 

acknowledgment letter from their 

depositories. Regarding initial costs, the 

letter includes new requirements that 

existing depositories want to discuss 

with the FCM or DCO’s staff. In 

addition, some existing depositories 

may not be willing to sign the new 

letter, which would force the FCM or 

DCO to move any customer funds held 

by that depository to a different 

depository, creating certain due 

diligence and operational costs. The 

Commission estimates that the cost of 

obtaining a new acknowledgment letter 

from each existing depository is 

between $1,300 and $4,200.127 Based on 

conversations with industry 

participants, the Commission estimates 

that FCMs and DCOs would have 

approximately 1–30 depositories each, 

from which they must obtain a new 

acknowledgment letter. Therefore, the 

Commission estimates that the cost of 

obtaining new acknowledgment letters 

from existing depositories is between 

$2,700 and $82,000 per FCM or DCO.128

In addition, based on conversations 

with industry participants, the 

Commission estimates that identifying 

new potential depositories, conducting 

necessary due diligence, formalizing 

necessary agreements, opening 

accounts, and transferring funds to a 

new depository is likely to take between 

three to six months and is likely to 

require support from compliance 

attorneys, as well as operations, risk 

management, and administrative 

personnel. The Commission estimates 

that the cost of moving accounts from an 

existing depository that is not willing to 

sign the letter is between $50,000 and 

$102,000.129

Ongoing costs include those created 

by the additional requirements the FCM 

or DCO will have to explain to new 

depositories when obtaining the 

required letter. There may be additional 

operational costs involved with 

monitoring depositories for any change 

that would necessitate updating the 

letter. The per-entity cost of obtaining 

the letter from new depositories is likely 

to be the same as it would for obtaining 

the letter from existing depositories (i.e., 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67915 

130This assumes 20–50 hours per year from an 

office manager for monitoring costs. The average 

compensation for an office manager is $55.82/hour 

[$85,875 per year/(2000 hours per year)*1.3 = 

$55.82/hour]; $55.82*20 = $1,116.38 and $55.82*50 

= $2,790.94. This figure is taken from the 2011 

SIFMA Report on Management and Professional 

Earnings in the Securities Industry. 

131A copy of the NFA rule submission is 

available on the NFA Web site, 

www.nfa.futures.org. 

132This assumes 4–8 hours per account from a 

senior database administrator. The average 

compensation for a senior database administrator is 

$$68.09/hour [$104,755 per year/(2000 hours per 

year)*1.3 = $68.09/hour]; $68.09*4 hour = $272.36 

and $68.09/hour *8 hours = $554.73. This figure is 

taken from the 2011 SIFMA Report on Management 

and Professional Earnings in the Securities 

Industry. 

133This assumes 4–8 hours per account from a 

senior database administrator. The average 

compensation for a senior database administrator is 

$$68.09/hour [ $104,755 per year/(2000 hours per 

year)*1.3 = $68.09/hour]; $68.09*4 hour = $272.36 

and $68.09/hour *8 hours = $554.73. This figure is 

taken from the 2011 SIFMA Report on Management 

and Professional Earnings in the Securities 

Industry. 

134The final rulemaking is available on the 

Commission’s Web site, www.cftc.gov. 

135See proposed § 1.22. N.B., the current form of 

§ 1.22 also includes a prohibition against using one 

Continued 

$1,300 and $4,200). The Commission 

estimates that the ongoing cost 

associated with monitoring for changes 

that would require the 

acknowledgement letter to be updated is 

between $1,100 and $2,800 per year.130

The proposed requirement, embedded 

in the acknowledgment letter, that 

depositories provide to the Commission 

and DSRO online, read-only access to 

accounts where customer segregated 

funds are held, would create certain 

costs for depositories that would likely 

be passed onto FCMs. The NFA Board 

of Directors recently approved rule 

amendments that will require FCMs to 

provide their respective DSROs with online view-only access to customer 

segregated/secured amount bank 

account information. NFA has 

submitted the rule amendments to the 

Commission for approval.131 Therefore, 

the pending NFA rule and the 

Commission’s proposed requirement 

would require banks and trust 

companies to provide the Commission 

and the DSROs with the same read-only 

access to account information. The 

Commission estimates that the cost of 

this additional access is between $270 

and $540 per account.132

For all other depositories, the 

Commission believes that providing 

access read-only access to balances and 

transactions in cash accounts is possible 

with existing technology and therefore, 

for depositories that already provide 

such access to their customers, the cost 

of providing that access to the 

Commission and DSRO is likely to be 

relatively low. Based on conversations 

with industry participants, the 

Commission estimates that on average 

an FCM or DCO is likely to have 

approximately 5–30 accounts. The 

Commission estimates that the initial 

set-up cost of providing access to each 

account at depositories that already 

provide online access to their customers 

is approximately $270 and $550 per 

account.133

On the other hand, for depositories 

that do not currently provide such 

access to their customers, setting up the 

capability to provide it to the 

Commission and DSRO will require that 

the depository implement additional 

technology. The Commission does not 

have adequate data to estimate the cost 

for establishing such a system. 

The Commission proposes that the 

requirement embedded in the 

acknowledgment letter that depositories 

consent to release customer funds 

whenever requested to do so by the 

Director of DCR or Director of DSIO will 

not create any additional costs for 

FCMs, depositories, or market 

participants. 

The Commission does not anticipate 

any costs associated with proposed 

§ 1.20(h) prohibiting an FCM from 

placing customer funds in time-deposit 

accounts since it is codifying a current 

staff interpretation and FCMs already 

abide by this standard. 

The remaining requirements in 

proposed § 1.20 are virtually identical to 

those in the existing rule, but are 

reorganized in order to improve 

readability. The changes that are merely 

the result of reorganizing identical 

requirements do not result in any costs 

for market participants. 

Request for Comment 

Question 10: The Commission 

requests data from which to estimate the 

initial and ongoing costs for a 

depository to establish the capability to 

provide read-only access to account 

balances and transaction history. 

Question 11: The Commission 

requests comment from the public 

regarding the initial and ongoing cost of 

services provided by vendors that have 

the ability to provide regular 

confirmation of balances at depositories 

on both a scheduled and unscheduled 

basis. Also, would such services be 

applicable to custodial accounts, and 

accounts held at non-bank depositories 

(e.g. other FCMs or Money Market 

Mutual Funds)? 

Question 12: The Commission 

requests comment regarding whether 

depositories currently have systems that 

provide their customers with 

continuous read-only access to accounts 

where securities are held that provide: 

(1) Real time or end of day balances for 

each segregated account; and (2) 

descriptions of the types of assets 

contained in each account with balances 

associated with each type of asset. How 

do the capabilities of systems that 

provide continuous read-only access to 

customers vary across different types of 

depositories, foreign or domestic (i.e. 

banks, FCMs, DCOs, or Money Market 

Mutual Funds)? 

Question 13: If depositories do not 

currently have the ability to provide 

continuous read-only access to accounts 

holding customer funds that display 

transactions and balances for those 

accounts, what costs would be required 

in order to create such a system? 

Question 14: The Commission 

assumes that the costs and benefits 

enumerated above capture the range of 

costs and benefits that would be 

experienced by each type of depository. 

The Commission requests comment and 

quantification regarding any additional 

costs or benefits that would be 

experienced by certain types of 

depositories such FCMs, bank and trust 

companies, depositories of an 

international affiliate. 

§ 1.22 Use of Customer Funds 

Restricted 

Proposed Changes 

As described in the section by section 

discussion at II.H, the Commission 

recently approved amendments to the 

definition of the term ‘‘commodity and/ 

or options customer.’’ 134 In order to 

retain the meaning of the term 

‘‘commodity and/or options customer’’ 

as it was originally defined, the 

Commission is replacing the term with 

‘‘futures customer.’’ As above, the new 

term has the same meaning as the 

original definition of the term that it is 

replacing, and therefore there are no 

costs or benefits associated with this 

change. 

In addition, the proposed 

amendments to 1.22 clarify that the 

prohibition against use of a futures 

customer’s funds to extend credit to, or 

to purchase, margin, or settle the 

contracts of another person applies at all 

times. Last, the proposed amendments 

would clarify that in order to comply 

with the prohibition against using one 

customer’s funds to ‘‘purchase, margin, 

or settle the trades, contracts, or 

commodity options of, or to secure or 

extend the credit’’ 135 of any other 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67916 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

customer’s funds to ‘‘to purchase, margin, or settle 

the trades, contracts, or commodity options of, or 

to secure or extend the credit of, any person other 

than such customer or commodity option 

customer.’’ 

136The Commission recently approved final 

amendments to § 1.3 that revised the definition of 

the term ‘‘customer’’ to include commodity 

customers, options customers, and swap customers. 

A copy of the Federal Register release is available 

on the Commission’s Web site, www.cftc.gov. 

person, the FCM would be required to 

ensure that its residual interest in 

futures customer funds exceeds the sum 

of all its futures customer margin 

deficits. 

Benefits 

The benefit of the proposal is that it 

protects customer funds by requiring 

continual customer segregation 

balancing thereby avoiding the potential 

that an FCM could employ end-of-day 

balancing to obscure a shortfall the FCM 

experienced in the middle of the day. 

Under current regulations it is not 

permitted for an FCM to use one 

customer’s funds to purchase, margin, 

secure or settle positions for another 

customer. However, the current 

regulations do not specify how FCMs 

must comply with this requirement. The 

proposed rule would specify that FCMs 

must maintain residual interest in 

customer segregated accounts that is 

larger than the sum of all customer 

margin deficits, which would ensure 

that the FCM is not using one 

customer’s funds to purchase, margin, 

secure, or settle positions for another 

customer. Furthermore, when combined 

with the reporting requirements in 

§§ 1.10, 1.32, 22.2, and 30.7, which 

require the FCM to report both the sum 

of their customer margin deficits as well 

as their residual interest in customer 

segregated accounts, the proposed 

approach would provide the 

Commission and the public with 

sufficient information to verify that 

FCMs are not using one customer’s 

funds to purchase, margin, secure or 

settle positions for another customer. 

Costs 

If the sum of an FCM’s customer 

margin deficits is greater than the 

residual interest an FCM typically 

maintains in their customer accounts, 

then the FCM would have to increase 

the amount of residual interest it 

maintains in customer segregated 

accounts, which would reduce the range 

of investment options the FCM has for 

those additional funds and may prompt 

the FCM to maintain additional capital 

to meet operational needs. On the other 

hand, if an FCM typically maintains 

residual interest in customer segregated 

accounts that is greater than the sum of 

their customer margin deficits, then the 

proposed rule would not create any 

additional costs. In the past, the 

Commission has not required FCMs to 

report the sum of their customers’ 

margin deficits. Therefore, the 

Commission does not have adequate 

information to determine whether FCMs 

typically hold residual interest that is 

greater than the sum of their customers’ 

margin deficits and cannot estimate the 

cost of the proposed rule. 

Request for Comment 

Question 15: The Commission 

requests comment regarding whether 

FCMs typically maintain residual 

interest in their customer segregated 

accounts that is greater than the sum of 

their customer margin deficits, and data 

from which the Commission may 

quantify the average difference between 

the amount of residual interest an FCM 

maintains in customer segregated 

accounts and the sum of customer 

margin deficit. 

Question 16: How much additional 

residual interest would FCMs hold in 

their customer segregated accounts in 

order to comply with the proposed 

regulation? What is the opportunity cost 

to FCMs associated with increasing the 

amount of capital FCMs place in 

residual interest, and data that would 

allow the Commission to replicate and 

verify the calculated estimates provided. 

Question 17: The Commission request 

information regarding the additional 

amount of capital that FCMs would 

likely maintain in their customer 

segregated accounts, if any, to comply 

with the proposed regulation. What is 

the average cost of capital for an FCM? 

Please provide data and calculations 

that would allow the Commission to 

replicate and verify the cost of capital 

that you estimate? 

§ 1.23 Interest of Futures Commission 

Merchants in Segregated Funds; 

Additions and Withdrawals 

Proposed Changes 

As described in the section by section 

discussion at II.I, the proposed text 

changes the term ‘‘customer funds’’ to 

‘‘futures customer funds.’’ This is a 

conforming change in order to retain the 

same meaning once the term 

‘‘customer’’ is redefined in § 1.3.136 The 

Commission anticipates that there are 

no costs or benefits associated with this 

change. 

The proposed § 1.23 also places new 

restrictions regarding an FCM’s 

withdrawal of residual interest funds for 

proprietary use. Under the proposed 

§ 1.23, an FCM cannot withdraw funds 

for proprietary use unless they have 

prepared the daily segregation 

calculation from the previous business 

day and must adjust for any activity or 

events that may have decreased residual 

interest since close of business the 

previous day. In addition, an FCM is 

only permitted to withdrawal more than 

25% of its residual interest for 

proprietary use within one day if it: (1) 

Obtains a signature from the CEO, CFO 

or other senior official as described in 

§ 1.23(c)(1) confirming approval to make 

such a withdrawal; and (2) sends 

written notice to the CFTC and DSRO 

indicating that the requisite approvals 

from the CEO, CFO or other senior 

official has been obtained, providing 

reasons for the withdrawal, listing the 

names and amounts of funds provided 

to each recipient, and providing an 

affirmation from the signatory 

indicating that he or she has knowledge 

and reasonable belief that the FCM is 

still in compliance with segregation 

requirements after the withdrawal. 

In addition, if the FCM drops below 

its target threshold for residual interest 

because of a withdrawal of residual 

interest for proprietary use, the next day 

it must either replenish residual interest 

enough to surpass its target, or if senior 

leadership believes the original target is 

excessive, the FCM may revise its target 

in accordance with its policies and 

procedures established in proposed 

§ 1.11. 

Benefits 

The proposed restrictions on 

withdrawals of residual interest provide 

an additional layer of protection for 

customer funds contained in segregated 

accounts. An FCM may withdraw 

residual interest as long as it always 

maintains sufficient FCM funds in the 

account to cover any shortfall that exists 

in all of its customers’ segregated 

accounts. However, as a practical 

matter, the segregation requirements 

fluctuate constantly with market 

movements, and customer surpluses or 

deficits also fluctuate depending on the 

speed with which customers meet 

margin calls. As a consequence, an FCM 

is not expected to have a precise, realtime knowledge of the amount of 

residual interest it has in a segregated 

account. The Commission recognizes 

that any precise, real-time, single 

calculation would almost immediately 

become obsolete as the value of 

customers’ accounts and their 

obligations to the FCM continue to 

fluctuate. Moreover, a sufficient amount 

of residual interest to cover deficiencies 

in customers’ accounts at one point in 

time may be inadequate to cover such 

deficiencies an hour later, or even a few 

minutes later. Therefore, it is important 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67917 

137This assumes 6–8 hours of a compliance 

attorney’s time and 6–8 hours of an office manager’s 

time. The average compensation for a compliance 

attorney is $85.35/hour [$131,303 per year/(2000 

hours per year)*1.3 is $85.35 per hour]; $85.35*6 

= $512.08 and $85.35*8 = $682.78. The average 

compensation for an office manager is $55.82/hour 

[$85,875 per year/(2000 hours per year)*1.3 = 

$55.82/hour]; $55.82*6 = $334.91 and $55.82*8 = 

$446.55. These figures are taken from the 2011 

SIFMA Report on Management and Professional 

Earnings in the Securities Industry. 

for an FCM to maintain sufficient 

residual interest to cover both current 

deficiencies in customer accounts as 

well as any additional deficiencies that 

could develop over a relatively short 

period of time. Restrictions on 

withdrawals of residual interest help to 

ensure that the FCM does not withdraw 

too much residual interest, either 

knowingly or unknowingly, and 

jeopardize customer funds in the 

segregated account. 

Prohibiting any withdrawal of 

residual interest until the customer 

segregation account calculations are 

complete for the previous day and 

requiring the FCM take into account any 

subsequent developments in the market 

or the account that could impact the 

amount of residual interest before 

withdrawing funds protects customer 

funds by reducing the likelihood that 

lack of current information could cause 

the FCM to make a withdrawal from 

customer funds that is large enough to 

cause the account to fall below its 

segregated funds requirement. 

In addition, the proposed amendment 

would require several steps in order for 

an FCM to remove more than 25% of 

their residual interest in a single day. 

Large, single-day withdrawals of the 

FCM’s residual interest in the customer 

segregated account could be an 

indication of current or impending 

capital or liquidity strains at the FCM. 

The additional steps ensure that senior 

management is knowledgeable of and 

accountable for such withdrawals, that 

no shortfall in the customer segregated 

accounts is created by the withdrawals 

and that the CFTC and DSRO are both 

alerted and can monitor the FCM and its 

segregated accounts closely over 

subsequent days and weeks. Additional 

monitoring, in turn, would help to 

ensure that the integrity and sufficiency 

of the FCM’s customer segregated 

accounts are carefully protected. In 

addition, notifying the CFTC and DSRO 

gives both an opportunity to ask 

questions about the FCM’s reasonable 

reliance on its estimations of the 

adequacy of its funds necessary to meet 

segregation requirements. Such 

questions may give the Commission and 

DSRO comfort that the transaction does 

not indicate any strain on the FCMs 

financial position, or conversely, may 

raise additional questions and alert the 

CFTC and DSRO to the need for 

heightened monitoring of the FCM or 

further investigation of its activities. 

Also, while the proposed regulations 

would reduce the risk that customer 

funds could be missing in the event of 

an FCM’s bankruptcy, the proposed rule 

would establish a second layer of 

protection by ensuring that the 

Commission has records regarding the 

name and address of parties receiving 

funds from the distribution of residual 

interest. 

In addition, requiring an FCM to 

replenish its residual funds the 

following day any time a withdrawal 

causes it to drop below the FCM’s target 

amount helps to ensure that residual 

interest is not used by the firm to 

address liquidity needs in other parts of 

the firm unless those needs are very 

short-term in nature (i.e., less than 24 

hours). 

Costs 

These procedural requirements will 

create some costs for FCMs. Restricting 

an FCMs ability to withdraw residual 

interest until daily calculations have 

been completed may prevent the FCM 

from withdrawing funds quickly in 

order to meet certain operational needs, 

or to take advantage of specific 

investment opportunities. This 

restriction may also force the FCM to 

hold additional capital in order to 

reduce the potential that it would need 

funds from its residual interest in order 

to meet any operational needs. The 

Commission does not have adequate 

information to estimate the amount of 

additional capital that an FCM might be 

likely to hold, or the cost of capital for 

those funds. Moreover, calculating the 

opportunity cost for an FCM’s potential 

missed opportunities is not possible 

since, by definition, they depend on the 

alternative opportunities available to the 

FCM and the Commission does not have 

adequate information to determine what 

those opportunities might be. 

In addition, abiding by the procedures 

for withdrawals of residual interest for 

proprietary use, whether the 

withdrawals are less than or greater than 

25% of the FCM’s residual interest, 

would create operational costs as these 

percentages must be calculated and 

requisite permissions will require time 

to obtain. The additional cost created by 

procedures that are required for 

additional withdrawals below 25% of 

the FCM’s residual interest will depend 

significantly on the procedures the FCM 

develops, and the extent to which the 

FCM has already implemented similar 

procedures. The Commission does not 

have adequate information to estimate 

these incremental costs. If an FCM 

withdraws more than 25% in a given 

day they have to get certain signatures 

and have to send a notification to the 

Commission. It is also likely that the 

Commission would follow up with 

questions about the withdrawal. The 

Commission proposes that obtaining the 

necessary signatures, reviewing the 

notification sent to the Commission, and 

conducting any follow-up conversations 

would require time from an attorney 

and office staff personnel. Therefore, the 

Commission estimates that the 

additional cost to an FCM for complying 

with procedures to withdraw 25% or 

more of their residual interest in a single 

day is likely to be between $850 and 

$1,100 each time an FCM needs to make 

such withdrawals.137

Request for Comment 

Question 18: The Commission invites 

comment regarding the amount of 

additional capital that FCMs would 

likely hold because of restrictions on 

their ability to withdraw residual 

interest and the cost of capital for those 

funds. 

Question 19: In addition, the 

Commission requests comment 

regarding the extent to which FCMs 

already have procedures in place that 

would satisfy the requirements in 

§§ 1.11 and 1.23 regarding withdrawals 

of residual interest. For an FCM that do 

not have such procedures in place 

already, please quantify the additional 

cost that the FCM will bear as a 

consequence of complying with any 

policies and procedures it may develop 

and implement in order to satisfy the 

requirements of §§ 1.11 and 1.23 with 

respect to withdrawals of residual 

interest. 

§ 1.25 Investment of Customer Funds 

Proposed Changes 

As described in the section by section 

discussion at II.J, § 1.25 permits FCMs 

and DCOs to use customer funds to 

purchase securities from a counterparty 

under an agreement for the resale of the 

securities back to the counterparty. This 

type of transaction is often referred to as 

a ‘‘repo,’’ and in effect, is a 

collateralized loan by the FCM to its 

counterparty. Currently, § 1.25(b)(3)(v) 

establishes a counterparty concentration 

limit, prohibiting FCMs and DCOs from 

using more than 25% of the total funds 

in the customer segregated account to 

conduct reverse repos with a single 

counterparty. The proposed amendment 

would expand the definition of a 

counterparty to include additional 

entities under common ownership or 

control. The proposed amendment 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67918 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

138See §§ 1.32, 22.2, and 30.7. 

139FIA, ‘‘Initial Recommendations for Customer 

Funds Protection.’’ Available at: http://www.futures

industry.org/downloads/Initial_Recommendations

_for_Customer_Funds_Protection.pdf. 

incorporates the Commission’s 

interpretation of the existing rule, and 

therefore does not alter its meaning. 

Therefore, the Commission does not 

anticipate that the proposed amendment 

will create any costs or benefits. 

The additional proposed changes to 

§ 1.25 are conforming amendments 

proposed in order to harmonize this 

section with other amendments 

proposed in this release, and therefore 

do not create any additional costs or 

benefits. 

§ 1.26 Deposit of Instruments 

Purchased With Customer Funds 

Proposed Changes 

As described in the section by section 

discussion at II.K, proposed § 1.26 

would change the term ‘‘commodity or 

option customers’’ to ‘‘futures 

customers.’’ This is a conforming 

change in order to retain the same 

meaning once the term ‘‘customer’’ is 

redefined in § 1.3. 

In addition, the other changes 

proposed for § 1.26(a–b) require that 

FCMs and DCOs obtain a written 

acknowledgment letter from 

depositories in accordance with the 

requirements established in § 1.20. This 

change introduces significant additional 

specificity regarding the timing and 

content of the letter that FCMs and 

DCOs must obtain from their 

depositories. The specifics of those 

requirements, as well as the costs and 

benefits of them, are detailed in the 

discussion of costs and benefits for 

§ 1.20, discussed in the cost benefit 

considerations section related to § 1.20. 

If, however, an FCM or DCO invests 

funds with a money market mutual fund 

and those funds are held directly by the 

money market mutual fund or its 

affiliate, then the FCM or DCO must use 

the acknowledgment letter proposed in 

Appendix A of § 1.26 rather than the 

acknowledgment letters in the 

appendices of § 1.20. The content of the 

letter in § 1.26 is identical to those in 

§ 1.20 except that it includes three 

additional provisions related 

specifically to funds held by the money 

market mutual fund or its affiliate 

(‘‘MMMF’’). Specifically, it requires 

that: (1) the value of the fund must be 

computed and made available to the 

FCM or DCO by 9:00 a.m. of the 

following business day; (2) that the fund 

must be legally obligated to redeem 

shares and make payments to its 

customers (i.e. the FCM or DCO) by the 

following business day; and (3) the 

money market mutual fund does not 

have any agreements in place that 

would prevent the FCM or DCO from 

pledging or transferring fund shares. 

Benefits 

The benefits are largely the same as 

for the acknowledgment letters required 

in § 1.20, described above in the cost 

benefit section related to § 1.20. 

However, requiring FCMs and DCOs to 

have Money Market Mutual Funds 

(‘‘MMMFs’’) sign a different 

acknowledgment letter if customer 

funds are held directly with the money 

market mutual fund or its affiliate has 

some benefits. 

First, requiring the MMMF to 

compute the value of the fund and make 

that available to the FCM or DCO by 

9:00 a.m. the following business day 

ensures that FCMs will have the 

information they need in order to 

produce their daily segregation 

calculations by 12:00 p.m. the following 

business day (i.e., three hours later), 

which is an existing requirement for 

FCMs.138 This is important not only 

because it enables the FCM to comply 

with the requirement to produce 

segregation calculations by 12:00 p.m. 

the following day, but because under 

the proposed rule, FCMs would not be 

allowed to withdraw residual interest 

until the daily segregation calculations 

are completed. Second, by requiring the 

fund to redeem shares and make 

payments to their customers by the 

following business day, the proposed 

requirement prohibits MMMFs from 

entering into any agreement with an 

FCM or DCO that gives the MMMF a 

contractual right to delay payment, thus 

preventing similar risks to what would 

occur if FCMs were allowed to place 

funds in time-deposit accounts. Last, by 

prohibiting the MMMF from imposing 

restrictions that would prevent the FCM 

or DCO from pledging or transferring 

fund shares, the letter would ensure that 

FCMs are able to use their shares as 

collateral at the DCO and that those 

shares could be transferred from one 

FCM to another in the event of the first 

FCM’s default. 

Costs 

As discussed above in the cost benefit 

considerations section related to § 1.20 

the NFA already requires electronic 

read-only access to customer accounts, 

so the Commission does not anticipate 

that providing the same access to the 

Commission will create additional costs. 

In addition, if an FCM or DCO 

currently has an account with a money 

market mutual fund that, either directly 

or through an affiliate, holds its own 

funds, and that fund is either not 

compliant with the additional 

provisions of the letter in Appendix A 

§ 1.26 or is unwilling to sign the 

proposed acknowledgment letter, the 

FCM or DCO would bear some costs 

related to identifying a compliant 

money market mutual fund, conducting 

due diligence, and moving its accounts 

to that fund. This would force the FCM 

or DCO to identify a new MMMF that 

is qualified to accept its customer funds, 

creating the same costs that are 

described above in the cost benefit 

considerations section related to § 1.20. 

Request for Comment 

Question 20: The Commission 

requests comment regarding the 

likelihood that money market mutual 

funds holding segregated funds from 

FCMs or DCOs are not compliant with 

the additional terms contained in the 

proposed acknowledgment letter. In 

addition, what costs would an FCM or 

DCO bear when identifying a compliant 

money market mutual fund and 

transferring their customer funds to that 

money market? 

Question 21: In addition, the 

Commission requests comment 

regarding whether the requirements 

contained in the acknowledgment letter, 

discussed in § 1.20, would impact 

money market mutual funds differently 

from any other depositories. 

§ 1.29 Gains and Losses Resulting 

From Investment of Customer Funds 

Proposed Changes 

As described in the section by section 

discussion at II.L, under the 

Commission’s existing regulations, 

§ 1.29(a) states that FCMs or DCOs 

investing customer funds in § 1.25 

investments are entitled to the return on 

those investments. Proposed § 1.29(b) 

provides that FCMs or DCOs investing 

customer segregated funds in 

instruments described in § 1.25 also 

bear sole responsibility for the losses 

that result from those investments. 

Benefits and Costs of the Proposed 

Changes 

This change was recommended by 

FIA, which stated its belief that the FCM 

or DCO’s responsibility for losses in 

§ 1.25 investments ‘‘is clear and is 

implicit in the Act and the 

Commission’s rules.’’ 139 The 

Commission believes that market 

participants already recognize this and 

act accordingly. Therefore the 

Commission does not believe that 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67919 

proposed § 1.29(b) would create any 

additional costs. 

§ 1.30 Loans by Futures Commission 

Merchants; Treatment of Proceeds 

Proposed Changes 

As described in the section by section 

discussion at II.M, § 1.30 permits the 

FCM to lend its own funds to a 

customer on securities and property 

pledged by the customer, effectively 

performing a collateral transformation 

service. The proposed amendment to 

§ 1.30 clarifies that, while an FCM may 

provide secured loans to a customer, it 

may not make loans to a customer on an 

unsecured basis or use a customer’s 

futures or options positions as security 

for a loan from the FCM to that 

customer. 

Benefits 

The proposed prohibition against 

FCMs providing unsecured loans to 

customers reduces counterparty risk 

borne by the FCM position because it 

prevents the FCM from accumulating 

exposures to customers that have not 

margined their positions. In addition, 

the proposed rule would prohibit an 

FCM from using a customer’s positions 

to secure loans made to customers, 

which would also reduce the FCM’s 

counterparty risk. If an FCM used a 

customer’s positions to secure a loan to 

that customer, the FCM would be using 

the same collateral to secure two 

different liabilities: the liability 

associated with the open position; and 

the liability associated with the 

unsecured loan. By prohibiting FCMs 

from using a customer’s positions to 

secure a loan to that customer, the 

proposed rule would prevent the 

additional exposure that would 

otherwise result from using the same 

collateral to secure two different 

liabilities, which again, reduces the 

FCM’s counterparty risk. 

In addition, to the extent that the 

proposed change would force customers 

to obtain such loans from another 

lender, it diversifies the counterparty 

risk across multiple entities. That 

benefits the FCM that would otherwise 

bear more concentrated customer risk, 

and likely would be good for the 

markets more generally because of the 

additional protection that it provides to 

any clearinghouse of which the FCM is 

a member. 

Costs 

Regarding costs associated with the 

proposed restriction—customers that 

need or prefer to use borrowed funds to 

meet their initial and maintenance 

margin requirements for certain 

positions would be forced to obtain 

loans necessary to fund their futures or 

options positions from another lender. 

That would increase the customer’s 

operational costs since they would have 

to transfer funds from one institution to 

another and would have to administer 

both accounts. In addition, it is likely 

that lenders will conduct more due 

diligence than would be the case if the 

FCM were to loan the requisite funds, 

which will create additional costs 

related to such a loan, both for the 

customer and for the party lending the 

funds. 

Request for Comment 

Question 22: The Commission 

requests comment regarding how often 

FCMs currently make loans to 

customers on either a secured or 

unsecured basis, and what the processes 

and terms typify such loans (including 

details regarding the process for 

evaluating credit risk, size of such loans, 

payment terms, collateral, and any other 

details that commenters believe the 

Commission should consider). 

Question 23: In addition, the 

Commission requests information 

regarding the additional operational 

costs that customers would bear if they 

have to obtain a loan from an entity 

other than the FCM holding their funds 

in a customer segregated account. If 

possible, please quantify the additional 

costs. 

§ 1.32 Reporting of Segregated 

Account Computation and Details 

Regarding the Holding of Customer 

Funds 

Proposed Changes 

As described in the section by section 

discussion at II.N, The proposed 

changes would allow an FCM that is not 

a dual registrant to follow the same 

procedures as dual registrants (FCM/ 

BDs) when assessing a haircut to 

securities purchased with customer 

funds if the FCM determines that those 

securities have minimal credit risk. This 

is the same change as is proposed in 

§ 1.17 except that in § 1.17 the proposed 

change refers to securities purchased by 

an FCM with its own capital, whereas 

the proposed change here would apply 

to securities purchased with customer 

funds. The change proposed here would 

create the same costs and benefits as 

described above in the cost benefit 

considerations section related to § 1.17. 

In addition, the proposed changes 

would: (1) Require FCMs to report daily 

Segregation Statements to the 

Commission and their DSRO 

electronically by noon the following 

business day; (2) require that twice per 

month, each FCM submit a detailed list 

of depositories report listing of all the 

depositories and custodians where 

customers segregated funds are held, 

including the amount of customer funds 

held by each entity and a break-down of 

the different categories of § 1.25 

investments held by each entity; and (3) 

require that the detailed list of 

depositories be submitted to the 

Commission electronically by 11:59 

p.m. the following business day and that 

both Segregation Statements and 

Detailed list of depositories be retained 

by the FCM in accordance with § 1.31. 

Benefits 

Requiring FCMs to submit their daily 

calculations to the Commission and 

DSRO, together with the proposed 

amendments to §§ 1.20 and 1.26 giving 

the Commission and DSRO electronic 

access to view the balances of all 

depository accounts where customer 

segregated funds are held, will enable 

the Commission and DSRO to better 

protect customer funds by more closely 

monitoring for any discrepancies 

between the assets in segregated 

accounts reported by the FCM and their 

depositories. The ability of the 

Commission and DSRO to check for 

discrepancies more regularly, without 

notice, is likely to provide an additional 

disincentive to fraud. Moreover, it will 

enable both the Commission and DSROs 

to monitor for any trends that would 

indicate operational or financial 

problems are developing at the FCM, 

which would give the Commission an 

opportunity to enhance its supervision 

and to intervene, if necessary, to protect 

customer segregated funds. 

The detailed list of depositories 

would provide additional information to 

the Commission and DSRO beyond 

what would be available to both by 

virtue of the electronic read-only access 

that has been proposed in §§ 1.20, 1.26, 

and 30.7. First, the detailed list of 

depositories will provide additional 

account detail including the types of 

securities and investments that 

constitute each account’s assets rather 

than existing reports that only include 

the total value securities. Second, the 

reports will account for any pending 

transactions that would not necessarily 

be apparent when viewing a depository 

account online. Third, FCMs will, in 

these reports, provide to the 

Commission and DSRO a reconciled 

balance, which would not be available 

to the Commission or DSRO simply by 

viewing an FCM’s depository accounts 

online. Each of these additional forms of 

information would enable the 

Commission and DSRO to provide better 

oversight and create additional 

accountability for the FCM. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67920 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

140See Segregated Investment Detail Report at: 

http://www.nfa.futures.org/NFA-compliance/NFAfutures-commission-merchants/fcm-reporting.pdf. 

141While many auditors and market participants 

have noted the importance of controls testing, the 

Commission understands that currently, many 

audits tend to emphasize substantive testing and 

give lesser attention to controls testing. See Public 

Roundtable to Discuss Additional Customer 

Protections, August 9, 2012. A recording of the 

roundtable is available at: http://www.cftc.gov/

PressRoom/Events/opaevent_cftcstaff080912. See 

[customer protection roundtable from 8/9]. 

142See Public Roundtable to Discuss Additional 

Customer Protections, August 9, 2012. A recording 

of the roundtable is available at: http://www.cftc.

gov/PressRoom/Events/opaevent_cftcstaff080912 

See [roundtable on Aug 9th]. 

143This estimate assumes 160–240 hours of time 

from both a compliance attorney and a senior 

Costs 

FCMs are already calculating 

segregated funds information daily and 

reporting the results to the NFA via 

WinJammer by noon the following day. 

Similarly, the detailed list of 

depositories that would be required to 

be submitted twice per month is already 

required by NFA to be produced and 

submitted to NFA via WinJammer.140

Requiring FCMs to submit these reports 

to the Commission via the same 

platform should not create any 

additional costs. 

§ 1.52 Self-Regulatory Organization 

Adoption and Surveillance of Minimum 

Financial Requirements 

Proposed Changes 

As described in the section by section 

discussion at II.O, the proposed 

amendments to 1.52 would revise the 

supervisory program that SROs are 

required to create and adopt. In 

addition, for SROs that choose to 

delegate the function to examine FCMs 

that are members of two or more SROs 

to a DSRO, the amended rules would 

require a plan that establishes a Joint 

Audit Committee which, in turn, must 

propose, approve, and oversee the 

implementation of a Joint Audit 

Program. The amended rules specify a 

number of additional requirements for 

the SRO supervisory program as well as 

for the Joint Audit Program. 

Benefits 

Regarding SROs’ supervisory 

programs, the proposed amendments 

would provide significant additional 

protection to FCMs’ counterparties, 

investors, and customers by ensuring 

that SRO audits of member FCMs are 

thorough and effective. The proposed 

amendments would help to ensure 

thorough audits by requiring that an 

SRO’s audit program be designed to 

address ‘‘all areas of risk to which 

futures commission merchants can 

reasonably be foreseen to be subject,’’ 

that the scope and focus of such audits 

would be determined by the risk profile 

that the SRO develops for each FCM, 

and that the audit itself include both 

controls testing as well as substantive 

testing. The last requirement, in 

particular, would help to ensure that 

audits give adequate attention to testing 

and review of internal controls, which 

are critical to help ensure that each FCM 

is not only compliant with capital and 

segregation requirements at the time of 

the audit, but that they continue to 

operate in such a manner after the audit 

is completed by preventing fraud or 

operational errors that could jeopardize 

the FCM and its customers.141

By requiring that the supervisory 

program for the SRO must be compliant 

with U.S. Generally Accepted Auditing 

Standards and standards prescribed by 

the Public Company Accounting 

Oversight Board, the proposed rules 

would ensure that the SROs’ 

supervisory programs draw from 

established best practices, and that they 

address the full range of issues that 

would impact the effectiveness of the 

SRO’s audits of FCMs. This benefit is 

enhanced by the proposed list of 

specific issues that each SRO must 

address in the standards they develop 

for their supervisory program. And by 

promoting audits that are thorough, the 

proposed rules would, again, promote 

protection of the FCM’s counterparties, 

investors, and customers. 

By requiring that an examinations 

expert evaluate the SRO’s supervisory 

program at least once every two years, 

and that the results of such 

examinations include a discussion and 

recommendation of any new or best 

practices, the proposed rules would 

ensure that the supervisory program and 

SRO audits continue to build on best 

practices, for audits, which further 

promotes thorough and effective audits 

of FCMs. 

The proposed rules for the Joint Audit 

Program would require the Joint Audit 

Program to: (1) Establish standards 

covering all the same issues; (2) require 

controls testing as well as substantive 

testing; (3) address all areas of risk to 

which the registered FCM can 

reasonably be foreseen to be subject; (4) 

conform to U.S. generally accepted 

auditing standards and as well as those 

prescribed by the Public Company 

Accounting Oversight Board; and (5) 

have an examinations expert evaluate 

the Joint Audit Program at least once 

every two years. Therefore, the 

proposed rules would produce identical 

benefits related to audits conducted by 

a DSRO. 

In addition, by requiring that the 

DSRO audits include examination of an 

FCM’s compliance with rules and 

regulations governing minimum net 

capital, obligations to segregate 

customer funds, financial reporting 

requirements, etc., the proposed rule 

would ensure that these critical 

elements of the FCM’s operations and 

finances are reviewed during each audit. 

Each of these elements safeguard 

customers. Additionally, by requiring 

the Joint Audit Committee to develop 

procedures to identify high risk firms 

and perform enhanced monitoring of 

such firms, the proposed rules would 

help to ensure that any risk to customer 

funds that begins to materialize (e.g. the 

FCM’s residual interest begins to drop) 

is identified and corrected quickly, thus 

reducing the risk of a loss of customer 

funds. 

In addition, commenters at the 

Commission’s August 9th roundtable on 

customer protection noted that when 

audits take several months to complete, 

the findings are less relevant when they 

are delivered to the business than they 

would have been if they were 

communicated more promptly.142

Therefore, by requiring that the Joint 

Audit Program maintain adequate levels 

of staff with adequate training and 

experience, the proposed requirements 

would facilitate timely completion of 

audits, which is likely to enhance the 

protection of customer funds by 

promoting more prompt identification 

and correction of weaknesses identified 

in such audits. Moreover, if auditors are 

not independent of the FCM they are 

auditing, their findings may be 

compromised by conflicts of interest. By 

requiring standards related to 

independence together with annual 

ethics training, the proposed rule would 

help to ensure that the results of any 

audit conducted by the DSRO are not 

compromised by the influence of any 

conflict of interests. Each of these, in 

turn, facilitate thorough, effective, and 

timely audits, which help protect the 

FCM’s customers, counterparties, and 

investors by ensuring that the FCM’s 

financial reports are accurate, and that 

internal controls are reviewed and 

tested. 

Costs 

SROs are already required to establish 

and operate supervisory programs for 

auditing FCMs. The proposed 

amendments require further detail and 

documentation with regard to specific 

elements of such supervisory programs. 

The Commission estimates that the cost 

for developing these policies and 

procedures would be between $20,700 

and $31,000 per SRO.143


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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accountant. The average compensation for a 

compliance attorney is $85.35/hour [$131,303 per 

year/(2000 hours per year)*1.3 is $85.35 per hour]; 

$85.35 *160 = $13,655.51 and $85.35 *240 = 

$20,483.27. The average compensation for a senior 

accountant is $44.18/hour [$67,971.00 per year/ 

(2000 hours per year)*1.3 is $44.18 per hour]; 

$44.18*160 = $7,068.98 and $44.18*240 = 

$10,603.48. These figures are taken from the 2011 

SIFMA Report on Management and Professional 

Earnings in the Securities Industry. 

144This estimate assumes 20–50 hours of time 

from both a compliance attorney and an 

intermediate accountant. The average compensation 

for a compliance attorney is $85.35/hour [$131,303 

per year/(2000 hours per year)*1.3 is $85.35 per 

hour]; $85.35*20 = $1,706.94 and $85.35*50 = 

$4,267.35. The average compensation for an 

intermediate accountant is $34.11/hour [$52,484.00 

per year/(2000 hours per year)*1.3 is $34.11 per 

hour]; $34.11*20 = $682.29 and $34.11*50 = 

$1,705.73. These figures are taken from the 2011 

SIFMA Report on Management and Professional 

Earnings in the Securities Industry. 

145This estimate assumes 320–400 hours from an 

office services supervisor and 40–80 hours from 

both a compliance attorney and a senior accountant. 

The average compensation for an office services 

supervisor is $40.15/hour [$61,776.00 per year/ 

(2000 hours per year)*1.3 is $40.15 per hour]; 

$40.15*320 = $12,849.41 and $40.15*400 = 

$16,061.76. The average compensation for a 

compliance attorney is $85.35/hour [$131,303 per 

year/(2000 hours per year)*1.3 is $85.35 per hour]; 

$85.35*40 = $3,413.88 and $85.35*80 = $6,827.76. 

The average compensation for a senior accountant 

is $44.18/hour [$67,971.00 per year/(2000 hours per 

year)*1.3 is $44.18 per hour]; $44.18*40 = 

$1,767.25 and $44.18*80 = $3,534.49. These figures 

are taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 146See § 1.52(c)(2)(iii). 

147The material risks addressed must include, 

without limitation, ‘‘the nature of investments made 

by the futures commission merchant (including 

credit quality, weighted average maturity, and 

weighted average coupon); the futures commission 

merchant’s creditworthiness, leverage, capital, 

liquidity, principal liabilities, balance sheet 

leverage and other lines of business; risks to the 

futures commission merchant created by its 

affiliates and their activities, including investment 

of customer funds in an affiliated entity; and any 

significant liabilities, contingent or otherwise, and 

material commitments.’’ 

The Joint Audit Committee would 

have to develop policies and procedures 

concerning the application of the Joint 

Audit Program in the examination of 

FCMs. The standards would have to, at 

minimum, conform to the U.S. GAAS 

and would also have to address the 

items in § 1.52(c)(2)(iii). The 

development of such policies and 

procedures is likely to require input 

from one attorney and one senior 

accountant at each SRO, and therefore 

the Commission estimates that such 

involvement will cost each SRO 

between $2,400 and $6,000.144 In 

addition, the work required to further 

develop Joint Audit Program is likely to 

be supported by full time staff at the 

DSRO. The Commission estimates that 

such support will cost the DSRO 

between $18,000 and $26,400.145 In 

addition the Joint Audit Program would 

be required to have an examinations 

expert review the policies and 

procedures they develop. 

Ongoing costs to the SRO and Joint 

Audit Program would include fees 

charged by the examinations expert for 

a review every other year, the 

incremental cost of more extensive 

controls testing when auditing each 

FCM, and the incremental cost resulting 

from standards that the SRO develops to 

comply with the list of standards that 

must be addressed in the supervisory 

program.146 The Commission does not 

have adequate information to estimate 

the ongoing costs for biennial reviews 

by an examinations expert, or the 

incremental costs of additional controls 

testing or ongoing compliance with 

standards that the FCMs develop 

pursuant to § 1.52(c)(2)(iii). 

Request for Comment 

Question 24: The Commission 

requests comment regarding the costs 

associated with increased controls 

testing. To what extent do SROs 

currently conduct controls testing when 

auditing FCMs? What additional testing 

would likely be involved in order to 

comply with the proposed regulations? 

Question 25: In addition, the 

Commission requests comment 

regarding the costs for an expert 

examiner to conduct a review such as 

the one contemplated in the proposed 

rules. 

Question 26: Also, regarding costs 

associated with the Joint Audit 

Committee and Joint Audit Program, 

which costs are likely to be borne by the 

SROs and which are likely to be borne 

by the DSROs? 

§ 1.55 Public Disclosures by Futures 

Commission Merchants 

Proposed Changes 

As described in the section by section 

discussion at II.P, the proposed rules 

would add new provisions to the 

disclosure document that FCMs are 

required to provide to prospective 

customers, detailed in § 1.55(b). The 

new provisions would require the 

disclosure document to contain a 

statement that: (1) Customer funds are 

not protected by insurance in the event 

of the bankruptcy or insolvency of the 

FCM, or if customer funds are 

misappropriated in the event of fraud; 

(2) customer funds are not protected by 

SIPC, even if the FCM is a BD registered 

with the SEC; (3) customer funds are not 

insured by a DCO in the event of the 

bankruptcy or insolvency of the FCM 

holding the customer funds; (4) each 

customer’s funds are not held in an 

individual segregated account by an 

FCM, but rather are commingled in one 

or more accounts; (5) FCMs may invest 

funds deposited by customers in 

investments listed in § 1.25; and (6) 

funds deposited by customers may be 

deposited with affiliated entities of the 

FCM, including affiliated banks and 

brokers. 

In addition, the proposed rule would 

require each FCM to provide a Firm 

Specific Disclosure Document that 

would address firm specific information 

regarding its business, operations, risk 

profile, and affiliates that would be 

material to a customer’s decision to 

entrust funds to and do business with 

the FCM. 

As stated above, the Firm Specific 

Disclosure Document would be made 

available on the FCM’s Web site and 

would provide material information 

about: (1) General firm contact 

information; (2) the names, business 

contacts, and backgrounds for the FCM’s 

senior management and members of the 

FCM’s board of directors; (3) a 

discussion of the significant types of 

business activities and product lines 

that the FCM engages in and the 

approximate percentage of the FCM’s 

assets and capital devoted to each line 

of business; (4) the FCM’s business on 

behalf of its customers, including types 

of accounts, markets traded, 

international businesses, and 

clearinghouses and carrying brokers 

used, and the futures commission 

merchant’s policies and procedures 

concerning the choice of bank 

depositories, custodians, and other 

counterparties; (5) a discussion of the 

material risks of entrusting funds to the 

FCM and an explanation of how such 

risks may be material to its 

customers; 147 (6) the name and Web site 

address of the FCM’s DSRO and the 

location of annual audited financial 

statements; (7) a discussion of any 

material administrative, civil, criminal, 

or enforcement actions pending or any 

enforcement actions taken in the last 

three years (8) a basic overview of 

customer fund segregation, FCM 

collateral management and investments, 

and of FCMs and joint FCM/BDs; (9) 

information regarding how customers 

may file complaints about the FCM with 

the Commission or appropriate DSRO; 

(10) certain financial data from the most 

recent month-end when the disclosure 

document is prepared; and (11) a 

summary of the FCMs current risk 

practices, controls and procedures. 

FCMs would be required to update 

the Firm Specific Disclosure Document 

at least annually. 

As described in the section by section 

discussion at II.P, FCMs would also be 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67922 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

148 In the Public Roundtable to Discuss 

Additional Customer Protections on August 9, 2012, 

participants suggested that FCMs may not provide 

all customers and potential customers with 

equivalent access to firm-specific data. See http:// 

www.cftc.gov/PressRoom/Events/ 

opaevent_cftcstaff080912. 

As a result, larger customers may be able to 

conduct more thorough due diligence when 

selecting an FCM. The proposed requirements 

would help ensure that all customers have access 

to FCM-specific data that is helpful when 

evaluating the risks that would be relevant to 

customer funds entrusted to an FCM. 

required to disclose on their Web sites 

their daily Segregation Schedule, daily 

Secured Amount Schedule, and daily 

Cleared Swaps Segregation Schedule. 

Each FCM would be required to 

maintain 12 months of the segregation 

and secured schedules on its Web site. 

Each FCM would also be required to 

disclose on its Web site as well as 

summary schedules of its adjusted net 

capital, net capital, and excess net 

capital for the 12 most recent monthend dates as well as the Statement of 

Financial Condition, Segregation 

Schedule, Secured Amount Schedule, 

Cleared Swaps Segregation Schedule, 

and all footnotes related to the above 

statements and schedules from its most 

current year end annual report that is 

certified by an independent public 

accountant. 

Benefits 

As explained above in the section by 

section discussion at II.P, current 

regulations require FCMs to provide a 

risk disclosure to potential customers 

before accepting customer funds. That 

risk disclosure statement is primarily 

intended to provide a customer with 

disclosure of the market risks of 

engaging in futures trading. The 

proposed additions to that disclosure 

would help to ensure that customers are 

aware of certain non-firm-specific risks 

that have been relevant in recent FCM 

bankruptcies and that could be relevant 

in the event of future FCM bankruptcies 

or insolvencies. 

The Firm Specific Disclosure 

Document that would be required by the 

proposed rules would address firmspecific risk, which would give 

potential customers additional 

information that they could use when 

conducting due diligence and selecting 

an FCM. By requiring that the disclosure 

address several specific topics, the 

proposed rule would ensure that certain 

topics that are relevant are addressed, 

even if potential customers might not 

otherwise think to ask about them when 

selecting or conducting due diligence on 

potential FCMs. 

Specifically, by requiring the 

disclosure to provide information about 

the business activities and product lines 

the FCM engages in, and the percentage 

of the FCM’s assets and capital that are 

used in each type of activity, the 

proposed rules would assist customers 

in acquiring information that may assist 

them in determining the extent to which 

the FCM’s business is focused on 

providing the types of services that the 

customer needs, and the extent to which 

other business interests could impact 

either the focus or stability of the FCM. 

By requiring that FCMs provide the 

policies and procedures by which it 

selects depositories, the proposed rules 

would assist potential and existing 

customers in evaluating the sufficiency 

of due diligence conducted by the FCM 

when selecting such depositories. This 

additional measure of transparency 

would incent FCMs to be rigorous in 

conducting such due diligence because 

potential or existing customers that are 

not satisfied with the FCM’s policies 

and procedures in this respect could 

take their business elsewhere. 

Requiring FCMs to discuss their 

business on behalf of customers, the 

proposed rules would ensure that 

customers and potential customers are 

able to make a more thorough 

assessment of risks that the FCM or 

customer funds held by the FCM might 

bear due to the markets or businesses in 

which the FCM is active, the 

clearinghouses and carrying brokers it 

uses, or the depositories that hold funds 

on behalf of the FCM. Such an 

assessment could impact customers’ 

decisions as they select the FCM(s) with 

which they will conduct business. 

Moreover, additional transparency 

would promote market discipline, 

which would provide additional 

incentive for FCMs to manage such risks 

diligently. 

By requiring FCMs to disclose 

material risks together with an 

explanation of how such risks may be 

material to its customers, the proposed 

rules would ensure that the FCM is 

responsible to identify and 

communicate such risks, which helps to 

ensure that potential and existing 

customers would be aware of those risks 

when placing or keeping funds on 

deposit with the FCM. In the absence of 

such a requirement, potential or existing 

customers may not know the FCM’s 

business as well as the FCM does, and 

therefore may not ask about certain risks 

that are material to customers, may not 

have access to adequate information to 

determine the magnitude of such risks, 

or may not understand how certain risks 

could impact the FCM’s customers.148

The proposed amendment would make 

the FCM responsible both to identify 

and provide information regarding all 

material risks and to provide 

explanations that would help educate 

customers about how such risks could 

affect them. 

Requiring FCMs to provide 

information regarding how they may file 

a complaint about the FCM with the 

Commission or the firm’s DSRO would 

help to ensure that if customers perceive 

problems at an FCM, those concerns are 

communicated to the proper regulatory 

bodies, giving the Commission and 

DSRO an opportunity to investigate 

further, if appropriate. As a 

consequence, the required information 

would promote more effective oversight 

by the Commission and DSRO. 

By requiring that FCMs provide an 

overview of customer fund segregation 

and FCM collateral management and 

investment, the proposed rules would 

promote the protection of customer 

funds by enhancing market discipline 

through customer education. The 

proposed rules would help customers 

understand how statutory and 

regulatory requirements are designed to 

provide protections for their funds, and 

what steps FCMs must take in order to 

comply with such regulations. Educated 

customers, in turn, provide an 

additional layer of accountability for the 

FCM in complying with such 

requirements. Moreover, customers will 

be better able to understand public 

disclosures regarding disciplinary 

actions against FCMs, updates regarding 

material risks to customer funds, 

financial disclosures made by the FCM, 

and to make informed decisions in 

response. 

In particular, the disclosures 

proposed in § 1.55(k)(10) could assist 

customers in evaluating fellow customer 

risk that they would bear at each FCM 

with which they consider doing 

business. By requiring FCMs to disclose 

specific financial data as of the most 

recent month-end when the disclosure 

document is produced, the proposed 

requirements would further ensure that 

all customers have access to data that 

would be helpful when considering 

potential risks associated with 

entrusting funds to the FCM. 

Requiring FCMs to disclose the dollar 

value of their proprietary trading margin 

requirements as a percentage of margin 

required for futures customers, Cleared 

Swap Customers, and 30.7 Customers 

would help customers understand the 

magnitude of risk created by the FCM’s 

proprietary positions relative to the 

magnitude of risk created by customers’ 

positions. This information could 

prompt customers to ask additional 

questions about the relationship 

between the risks created by the firm’s 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67923 

149This assumes 40–200 hours from a compliance 

attorney, 10–50 hours from a senior accountant, 40– 

60 hours from an office services supervisor, and 5 

hours from the CCO. The average compensation for 

a compliance attorney is $85.35/hour [$131,303 per 

year/(2000 hours per year)*1.3 is $85.35 per hour]; 

$85.35 *40 = $3,143.88 and $$85.35 *200 = 

$17,069.39. The average compensation for a senior 

accountant is $44.18/hour [$67,971.00 per year/ 

(2000 hours per year)*1.3 is $44.18 per hour]; 

$44.18*10 = $441.81 and $44.18*50 = $2,209.06. 

The average compensation for an office services 

supervisor is $40.15/hour [$61,776.00 per year/ 

(2000 hours per year)*1.3 is $40.15 per hour]; 

$40.15*40 = $1,606.18 and $40.15*60 = $2,409.26. 

The average compensation for a chief compliance 

officer is $110.97/hour [ $170,727 per year/(2000 

hours per year)*1.3 = $110.97/hour]; $110.97*5 = 

$554.86. These figures are taken from the 2011 

SIFMA Report on Management and Professional 

Earnings in the Securities Industry. 

150This estimate assumes 40–80 hours from a 

compliance attorney, 20–40 hours from an 

intermediate accountant, and 30–60 hours from an 

office services supervisor. The average 

compensation for a compliance attorney is $85.35/ 

hour [$131,303 per year/(2000 hours per year)*1.3 

is $85.35 per hour]; $85.35*40 = $3,413.88 and 

$85.35*80 = $6,827.768. The average compensation 

for an intermediate accountant is $34.11/hour 

[$52,484.00 per year/(2000 hours per year)*1.3 is 

$34.11 per hour]; $34.11*40 = $1364.58 and 

$34.11*80 = $2729.17. The average compensation 

for an office services supervisor is $40.15/hour 

[$61,776.00 per year/(2000 hours per year)*1.3 is 

$40.15 per hour]; $40.15*20 = $803.09 and $40.15 

*60 = $2,409.26. These figures are taken from the 

2011 SIFMA Report on Management and 

Professional Earnings in the Securities Industry. 

proprietary trading and trading on 

behalf of customers. It could also 

prompt questions about how the firm’s 

operations related to proprietary trading 

may impact their operations related to 

customer accounts. 

By requiring FCMs to disclose the 

number of customers that constitute 

50% of the FCMs total funds held for 

futures customers, Cleared Swaps 

Customers, and 30.7 Customers, 

customers would have additional 

insight into the potential exposure that 

the FCM could have due to a default by 

one of its largest customers. 

The aggregate notional value of nonhedged, principal over-the-counter 

transactions into which the FCM has 

entered, when calculated and reported 

for each class of swaps, would give 

customers some sense of the potential 

exposure the FCM has due to potential 

changes in the value of its proprietary 

portfolio. 

The aggregate amount of financing 

FCMs provide for customer transactions 

involving illiquid financial products 

would give customers additional insight 

into the potential challenges FCMs 

would face if a fellow customer 

defaulted and the FCM had to liquidate 

such products in order to mitigate the 

losses caused by the customer’s default. 

Requiring FCMs to disclose the 

amount, source, and purpose of any 

unsecured and uncommitted short term 

funding the FCM has access to would 

help potential and existing customers 

gain insight into the FCM’s capacity to 

meet unexpected liquidity needs that 

might occur due to a fellow customer’s 

default. 

Requiring FCMs to disclose the 

percentage of customer debts the FCM 

experienced during the past 12-month 

period, as compared to the balance of 

funds held for futures customers, 

Cleared Swaps Customers, and 30.7 

Customers would give customers a 

sense for how effective the firm’s risk 

management program is, as well as a 

sense for the quality of the customer 

pool that the FCM has accepted. 

Requiring FCMs to provide a 

summary of their current risk 

management practices, controls and 

procedures would give customers 

insight into the procedures that FCMs 

use to manage the risks associated with 

fellow customers, which would be 

valuable to customers when evaluating 

potential fellow customer risk at various 

FCMs. 

By requiring each FCM to adopt 

policies and procedures reasonably 

designed to ensure that its advertising 

and solicitation activities are not 

misleading to its FCM customers, the 

proposed rules would strengthen 

accountability for communication 

related to an FCM’s sales and 

solicitation activities. Moreover, the 

Commission and DSROs would be better 

equipped to monitor FCMs’ internal 

controls related to sales and solicitation, 

and compliance with those controls, if 

FCMs have established policies and 

procedures. In this way, the proposed 

rules would promote consistently 

reliable communication associated with 

each FCM’s sales and solicitation 

efforts. 

By requiring FCMs to update the 

disclosure proposed in rule 1.55(i) 

annually as well as any time there is a 

‘‘material change to its business 

operation, financial condition and other 

factors material to the customer’s 

decision to entrust the customer’s funds 

and otherwise do business with the 

futures commission merchant,’’ and 

requiring the FCM to provide each 

updated disclosure to its customers, the 

rule would make FCMs responsible to 

communicate with customers whenever 

such events occur. This requirement 

would help to ensure that the FCM’s 

financial condition, business operations, 

or other important factors do not change 

in material ways without customers 

being aware of such changes, and would 

likely prompt some customers to 

conduct additional due diligence in 

such situations in order to determine 

whether their funds are at risk, which 

would provide additional accountability 

for FCMs. 

By requiring FCMs to provide their 

daily Segregation Schedules, daily 

Secured Amount Schedules, and daily 

Cleared Swaps Segregation Schedules, 

as well as additional month end and 

annual financial data, the proposed 

rules would facilitate transparency. All 

of the information that firms would be 

required to post on their Web site is 

information that would be public based 

on the requirements of this rule even if 

it were not posted on each FCM’s Web 

site. However, if the schedules 

mentioned above were not posted on 

each FCM’s Web site, market 

participants would have to submit a 

request to the Commission in order to 

access that information. Requiring each 

FCM to post the above schedules and 

data on its Web site would help to 

ensure that market participants are 

aware that it is available, and would 

also improve the speed and efficiency of 

obtaining it. 

Similarly, by requiring FCMs to 

provide a link to the Web site of the 

NFA’s Basic System facilitate 

transparency by promoting awareness of 

the additional information that is public 

regarding each FCM’s investment of 

customer funds and by minimizing 

search costs for obtaining that 

information. 

Costs 

FCMs would have to create the Firm 

Specific Disclosure Document which 

would likely require time from 

compliance, legal, accounting, and 

administrative personnel. The 

Commission estimates that the cost for 

producing the content of the initial 

disclosure would be between $6,000 

and $22,200.149 In addition, each FCM 

would have to update the disclosure 

annually as well as any time there is a 

material change to the business that 

could affect the customer’s willingness 

to do business with the FCM. Producing 

the content of each update is likely to 

be less costly than the initial disclosure, 

since some parts of the disclosure will 

likely remain the same from one version 

to the next. The Commission estimates 

that such updates would cost between 

$6,000 and $12,000.150

Posting the Firm Specific Disclosure 

Document and the schedules and data 

that would be required by § 1.55(o) 

would require firms to update their Web 

site on a daily, monthly, and annual 

basis with the information that would 

be required under § 1.55(o). The 

Commission estimates that these 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67924 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

151This assumes 10–30 minutes of time per day 

from a programmer. The average compensation for 

a programmer is $53.64/hour [$82,518 per year/ 

(2000 hours per year)*1.3 = $53.64/hour]; 

$53.64*43 = $2,145.47 and $53.64*130 is $6,972.77. 

updates would cost between $2,300 and 

$7,000 per year.151

Request for Comment 

Question 27: What modifications to 

the requirements of § 1.55(k)(10) should 

the Commission consider in order to 

ensure that the data provided from 

FCMs’ most recent month-end is 

valuable to customers evaluating 

potential fellow customer risk? 

• In particular, Is there additional 

information FCMs could provide related 

to the value of the FCM’s proprietary 

margin requirements and customers’ 

margin requirements that would assist 

current and potential customers when 

conducting due diligence on an FCM? 

• Is there additional information 

FCMs could provide that would give 

customers a more complete picture of its 

ability to meet unexpected liquidity 

needs that could occur due to the 

default of one of its customers? 

Question 28: Would the data from an 

FCM’s most recent month-end be more 

valuable to customers if it were coupled 

together with similar data or the same 

data from other points in time? If so, 

what points in time should the 

Commission consider? 

§ 22.2 Futures Commission Merchants: 

Treatment of Cleared Swaps and 

Associated Cleared Swap Customer 

Collateral 

Proposed Changes 

As described in the section by section 

discussion at II.Q, the proposed 

amendments to § 22.2 would 

incorporate changes with respect to 

protection of funds for customers 

trading cleared swaps that are identical 

to the changes proposed for protection 

of futures customer funds. Those 

changes include: (1) Incorporating the 

same change to haircutting procedures 

as was proposed above in § 1.17 and 

§ 1.32 but for swaps; (2) requiring the 

FCM to send daily Segregation 

Calculations for cleared swaps to the 

Commission and DSRO; and (3) 

requiring that segregated investment 

detail report that FCMs produce twice 

per month, listing assets on deposit at 

each depository, to be sent to CFTC and 

DSRO electronically by 11:59 p.m. the 

following business day. Records of both 

reports would be required to be 

maintained in accordance with § 1.31. 

In addition, the proposed rule would 

specify that FCMs must maintain 

residual interest in customer segregated 

accounts that is larger than the sum of 

all customer margin deficits. This 

proposed requirement is substantially 

identical to the proposed requirement in 

§§ 1.22 and 30.7. 

Benefits 

As discussed above with reference to 

§ 1.32, requiring FCMs to submit their 

daily segregation reports to the 

Commission and DSRO will enhance 

protection of customer funds by giving 

both of them additional information 

that, together with permission to view 

depository accounts online at any time, 

would enable both the Commission and 

DSRO to monitor those accounts more 

closely for any discrepancies that may 

result from operational errors or fraud. 

Moreover, requiring FCMs to submit 

their detailed list of depositories to the 

Commission and DSRO twice per month 

would give both organizations 

additional information that could help 

them perform spot checks to ensure that 

the FCM is valuing and haircutting 

securities correctly and, more generally, 

to verify that the value of each account 

that is computed by the FCM is 

accurate. 

As described in the discussion of cost 

and benefit considerations related to 

§ 1.22, by requiring that FCMs maintain 

residual interest in their cleared swap 

customer segregated accounts, the 

proposed rule would ensure that the 

FCM is not using one customer’s funds 

to purchase, margin, secure, or settle 

positions for another customer and 

when combined with the reporting 

requirements in § 22.2 would provide 

the Commission and the public with 

sufficient information to verify that 

FCMs are not using one customer’s 

funds to purchase, margin, secure or 

settle positions for another customer. 

Costs 

With respect to costs, as described 

above, changes to the reporting 

requirements codify requirements that 

are already established by the DSROs. 

Therefore, the additional requirements 

will not introduce new costs for market 

participants. On the other hand, 

reducing the haircut increases the 

likelihood that adverse developments 

affecting the FCM’s § 1.25 investments 

could cause financial strain for the 

FCM, or could cause losses that the 

FCM would not be able to cover, either 

of which could increase risk to customer 

funds. However, as described above in 

the cost benefit considerations section 

related to § 1.17, the Commission 

proposes that FCMs that are dual 

registrants will be able to use the SEC’s 

haircutting procedures, and that FCMs 

that are not dual registrants do not 

typically invest in securities that would 

be subject to reduced haircuts under the 

SEC’s proposed rules. 

By requiring FCMs to maintain 

residual interest in the cleared swap 

customer segregated accounts that is 

greater than the sum of their customers’ 

margin deficits, the proposed rule 

would create costs and benefits that are 

substantially identical to those 

described in the cost and benefit 

considerations related to § 1.22. As 

discussed in that section, the 

Commission does not have information 

to determine whether FCMs typically 

maintain residual interest in their 

cleared swap customer segregated 

accounts that is greater than or less than 

the sum of their customers’ margin 

deficits, and requests information 

sufficient to make such a determination, 

and to quantify the associated costs, if 

any. 

Request for Comment 

Question 29: The Commission 

requests comment regarding whether 

FCMs typically maintain residual 

interest in their customer segregated 

accounts that is greater than the sum of 

their customer margin deficits, and data 

from which the Commission may 

quantify the average difference between 

the amount of residual interest an FCM 

maintains in customer segregated 

accounts and the sum of customer 

margin deficit. 

Question 30: How much additional 

residual interest would FCMs hold in 

their customer segregated accounts in 

order to comply with the proposed 

regulation? What is the opportunity cost 

to FCMs associated with increasing the 

amount of capital FCMs place in 

residual interest, and data that would 

allow the Commission to replicate and 

verify the calculated estimates provided. 

Question 31: The Commission request 

information regarding the additional 

amount of capital that FCMs would 

likely maintain in their customer 

segregated accounts, if any, to comply 

with the proposed regulation. What is 

the average cost of capital for an FCM? 

Please provide data and calculations 

that would allow the Commission to 

replicate and verify the cost of capital 

that you estimate? 

§ 22.17 Policies and Procedures 

Governing Disbursements of Cleared 

Swaps Customer Collateral From 

Cleared Swap Customer Accounts 

Proposed Changes 

As described in the section by section 

discussion at in II.Q, proposed § 22.17 

would impose restrictions on an FCM’s 

withdrawal of its residual interest, and 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67925 

152The additional specificity incorporates the 

same requirements for acknowledgment and 

agreement that are contained in the templates in the 

appendices of §§ 1.20 and 1.26. 

153The same requirements as are proposed for 

futures customers’ funds and cleared swaps 

customers’ funds, including a requirement for the 

FCM to abide by its policies and procedures 

required in § 1.11. 

154As a result of the proposed changes, the rules 

in § 30.7 for the protection of 30.7 Customer Funds 

would be substantially the same as the rules for the 

protection of segregated customer funds under 4(d) 

and §§ 1.11–1.32, and the rules for the protection 

of cleared swaps customer funds in § 22. However, 

there are a few proposed changes to § 30.7 that are 

dissimilar to current or proposed regulations 

protecting futures customer funds and cleared swap 

customer funds. They are: (1) the definition of the 

minimum amount that must be deposited in a 30.7 

Account for each 30.7 Customer is different than in 

the corresponding requirements in 1.20 and 22.2. 

The difference is due to the fact that 30.7 

Customers’ funds may be deposited overseas under 

a different regulatory regime and the proposed rule 

would require an FCM to comply with the highest 

requirement that is relevant to those funds, whether 

it is the U.S. or the foreign regime; (2) the list of 

acceptable depositories for 30.7 Funds includes 

banks or trusts outside of the U.S. with more than 

$1 billion in regulatory capital, and various other 

participants of foreign boards of trade and their 

depositories; and (3) 30.7 limits the amount of 

funds from a 30.7 Account that can be held outside 

the U.S. 155See § 30.7(a). 

requires that if a withdrawal of residual 

interest for proprietary use causes the 

FCM to fall below its targeted residual 

interest that the funds be replenished 

the following business day or the 

residual interest target be lowered in 

accordance with its policies and 

procedures established under § 1.11. 

Benefits and Costs of the Proposed 

Changes 

The costs and benefits are similar to 

those created by §§ 1.23 and 1.11 but 

apply to customer funds in Cleared 

Swaps Customer Accounts rather than 

customer segregated accounts, and 

therefore are in addition to those 

specified in §§ 1.23 and 1.11. 

§ 30.1 Definitions 

Proposed Changes 

Proposed § 30.1 establishes 

definitions for ‘‘30.7 Customer,’’ ‘‘30.7 

Account,’’ and ‘‘30.7 Customer Funds.’’ 

The first is defined as any foreign 

futures or foreign option customer, 

together with any foreign-domiciled 

person who trades in foreign futures or 

foreign options trough an FCM. ‘‘30.7 

Account’’ and ‘‘30.7 Customer Funds’’ 

are then defined accordingly. These 

definitions would replace the terms 

‘‘foreign futures or foreign options 

customer,’’ ‘‘foreign futures or foreign 

options customer account,’’ and 

‘‘foreign futures or foreign options 

customer funds,’’ respectively. The 

existing term ‘‘foreign futures or foreign 

options customer’’ only includes U.S.- 

domiciled customers that deposit funds 

with an FCM for use in trading foreign 

futures or foreign options. The proposed 

definitions, on the other hand, would 

include both U.S. and foreign customers 

that deposit funds with an FCM for use 

in trading foreign futures or foreign 

options. 

Benefits and Costs of the Proposed 

Changes 

These definitions play a ‘gatekeeping’ 

function with respect to other rules by 

determining what customers are 

included as ‘‘30.7 Customers.’’ 

However, the costs and benefits of these 

changes are attributable to the 

substantive requirements related to the 

definitions, and therefore are discussed 

in the cost benefit considerations related 

to § 30.7. 

§ 30.7 Treatment of Foreign Futures or 

Foreign Options Secured Amount 

Proposed Changes 

As described in the section by section 

discussion at II.R, the proposed 

amendments would: (1) Incorporate the 

funds of foreign-domiciled investors 

deposited with an FCM for investment 

in foreign futures and foreign options 

within the protections provided in 30.7; 

(2) eliminate the Alternative Method 

and require the Net Equity Liquidation 

Method for calculating 30.7 customer 

segregation requirements; (3) add 

specificity to the written 

acknowledgments that FCMs and DCOs 

must obtain from their depositories by 

providing required templates; 152 (4) add 

restrictions on withdrawing from 

residual interest; 153 (5) require that 30.7 

Customer Funds deposited in a bank 

must be available for immediate 

withdrawal at the request of the FCM; 

(6) clarify that the FCM is responsible 

for any losses related to investing 30.7 

Customer Funds in investments that 

comply with § 1.25; (7) add a 

prohibition against making unsecured 

loans to customers or using the funds in 

the customer’s trading account as 

security for the loan; (8) require daily 

segregation reports and detailed list of 

depositories be submitted to the 

Commission and DSRO, and that 

targeted residual interest be included in 

both of those reports; (9) allow FCMs 

that are not dual registrants to use the 

broker-dealer (‘‘BD’’) procedure for 

assigning a smaller haircut to 

instruments with low default risk; (10) 

establish a limit on the amount of funds 

in a 30.7 Account that can be held 

outside the United States; 154 and (11) 

require FCMs to maintain residual 

interest in 30.7 Accounts that is larger 

than the sum of all 30.7 Customer 

margin deficits. This proposed 

requirement is substantially identical to 

the proposed requirement in §§ 1.22 and 

22.2. 

A. Compared to Customer Protections 

Under §§ 1.20–1.32 and § 22 

The result of the proposed changes is 

that the regulatory requirements 

established in § 30.7 for the protection 

of 30.7 Customer Funds would be 

substantially the same as those 

established for segregated customer 

funds under 4(d) and §§ 1.11–1.32, and 

for cleared swaps customer funds in 

§ 22. However, the 30.7 regime would 

have distinct requirements with respect 

to: (1) the definition of the minimum 

amount that must be deposited in a 30.7 

Account for each 30.7 Customer is 

different than in the corresponding 

requirements in §§ 1.12 and 22.2.155 The 

difference is due to the fact that 30.7 

Customers’ funds may be deposited 

overseas under a different regulatory 

regime. The rule requires that FCMs 

abide by the highest requirement that is 

relevant to those funds, whether it is the 

United States or the foreign regime; (2) 

the list of acceptable depositories for 

30.7 Funds includes banks or trusts 

outside of the United States with more 

than $1 billion in regulatory capital, and 

various other participants of foreign 

boards of trade and their depositories; 

and (3) 30.7 limits the amount of funds 

from a 30.7 Account that can be held 

outside the United States. Of these three 

differences, the third is the only one 

created by the proposed rule, and 

therefore is the only one incorporated in 

the cost benefit considerations 

discussion. 

Benefits and Costs of the Proposed 

Changes 

The proposed changes would 

establish regulations for the protection 

of customer funds deposited for trading 

in foreign futures and options that, with 

limited exceptions, is substantively 

identical to the protections that exist for 

futures customer funds and cleared 

swaps customer funds. Therefore, many 

of the costs and benefits of the changes 

that are proposed are identical to those 

described above in the cost benefit 

considerations related to §§ 1.11–1.32 

and § 22. 

1. Incorporating funds of foreigndomiciled investors deposited with an 

FCM for investment in foreign futures 

and foreign options within the 

protections provided in 30.7 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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156FIA ‘‘Initial Recommendations for Customer 

Funds Protection,’’ p. 10. 

157Questions posed to the public have been 

numbered for commenters’ convenience. The 

Commission requests that commenters identify the 

Benefits 

Currently, when an FCM receives 

funds from foreign customers for use in 

trading foreign futures and foreign 

options, the FCM may choose, but is not 

required, to keep foreign customer funds 

in a segregated account. If the funds are 

not kept in a segregated account, they 

are not subject to the same level of 

oversight and protection as other 

customer funds. For example, those 

funds are not incorporated in the daily 

or bi-monthly calculations that are 

submitted to the Commission and 

DSRO, and the FCM is permitted to use 

the assets of one foreign customer to 

cover the obligations of another foreign 

customer, may allow a net deficiency to 

exist in the funds of foreign customers 

held for use in foreign futures or foreign 

options, and is allowed to commingle 

such funds with the FCM’s proprietary 

funds and use them as part of its 

business capital. 

The benefit or requiring customer 

funds to be kept in segregated accounts 

is that those funds would receive the 

same protections as funds deposited by 

U.S.-domiciled investors. This enhances 

the safety of funds deposited by both 

U.S. and foreign investors by ensuring 

that the FCM maintains sufficient funds 

in segregated accounts to satisfy its 

obligations regarding all customer funds 

that have been deposited at the FCM. 

The proposed change would extend 

equivalent oversight and protection to 

the money, securities and property 

received by an FCM for or on behalf of 

a foreign-domiciled customer for foreign 

futures or foreign options trading. 

Specifically, FCMs would be required to 

hold the funds of foreign-domiciled 

customers in 30.7 secured accounts, to 

include such funds in daily and bimonthly calculations of 30.7 

requirements and funds set aside for 

30.7 customers, and to abide by other 

policies and procedures regarding 

handling of customer funds. This is a 

benefit because FCMs would be 

required to hold sufficient funds in 30.7 

accounts at all times to cover the 

obligations they have to their foreigndomiciled customers as well as their 

U.S.-domiciled customers. Various 

regulations designed to ensure that this 

requirement is met at all times would 

also apply, including the § 30.7(g) 

restrictions on an FCM’s withdrawal of 

its residual interest which is 

commingled with customer 30.7 funds, 

and policies and procedures developed 

by the FCM pursuant to § 1.11 that are 

designed to ensure safe handling of such 

funds. 

Application of the additional 

protections designed for customer funds 

will help to ensure that in the event an 

FCM has insufficient regulatory capital, 

all 30.7 Customer Funds are available to 

be ported to another FCM. This benefit 

is relevant both to foreign-domiciled 

customers and to U.S.-domiciled 

customers holding money at an FCM 

where foreign-domiciled customers also 

hold funds because, as described above, 

in the event of a bankruptcy both groups 

of customers are entitled to equivalent 

protections regardless of whether their 

funds were held apart in separate 

accounts. Consequently, under the 

current rules, if an FCM keeps foreigndomiciled customer funds out of 30.7 

accounts and then defaults, there may 

not be sufficient funds to cover the 

obligations of the FCM to all of their 

U.S.-domiciled as well as foreigndomiciled customers. If this occurs, all 

customers would receive a pro-rata 

share of the funds that were kept in 30.7 

accounts, regardless of which 

customers’ funds were kept in the 30.7 

account. U.S.-domiciled customers 

would possibly suffer a pro rata loss of 

their funds in the event of the FCM’s 

bankruptcy because an FCM may not 

have included foreign-domiciled 

customer funds in 30.7 accounts. The 

proposed rule would prevent this 

situation from occurring, thus providing 

increased protection not only to the 

foreign-domiciled customers that 

deposited funds, but to the U.S.- 

domiciled customers as well. 

According to FIA, ‘‘FCMs have 

generally adopted policies and 

procedures designed to provide 

protections to all customers trading on 

foreign boards of trade that are 

comparable to the protections afforded 

customers trading on U.S. futures 

markets.’’ 156 If true, the proposed 

change would not create substantial 

costs or benefits in periods of normal 

activity for the FCM. However, under 

current regulations, FCMs still have the 

ability to diverge from the 

aforementioned practices they have 

generally adopted, and can pull foreigndomiciled customer funds out of 30.7 

accounts and use those funds as if they 

were their own. It is precisely in a time 

of stress for an FCM that these 

protections for customer funds are most 

needed to prevent the FCM from 

commingling such funds with its own 

capital and using it to meet the general 

obligations of the firm. It is not possible 

to quantify the value of the additional 

protection that would be provided to 

non-U.S.-based customers on the basis 

of the proposed change. To do so would 

require data sufficient to estimate the 

probability and expected magnitude of 

losses due to lesser protections for funds 

deposited by foreign-domiciled 

customers, and the Commission does 

not have such data. The Commission, 

however, requests public comment 

regarding these benefits, and 

specifically requests any data 

commenters can provide that would 

assist the Commission in quantifying 

such benefits. 

Costs 

With respect to costs the Commission 

understands that in practice, FCMs have 

generally adopted practices that provide 

equivalent protections to funds 

deposited by customers domiciled in 

the U.S. and those who are not. 

Therefore, during normal operations the 

proposed requirement would not create 

any additional costs. However, the 

proposed amendment will prevent an 

FCM from using foreign-domiciled 

customer funds for trading foreign 

futures and foreign options as its own 

capital, thus reducing the FCM’s 

liquidity which increases risk to the 

FCM in times of stress. As a 

consequence, the FCM will have an 

incentive to keep more capital in order 

to protect itself since it will no longer 

be able to use such funds to meet or 

secure its own obligations. The 

Commission does not have adequate 

data to quantify the cost of FCMs’ 

decreased liquidity or the cost of the 

additional capital they may hold as a 

result. Doing so would require estimates 

of probabilities regarding the likelihood 

of an FCM’s liquidity crisis, likelihood 

they hold foreign-domiciled customer 

funds for use in foreign futures and 

foreign options trading, the amount of 

such funds, the duration of the liquidity 

crisis, and a number of other factors that 

the Commission does not have adequate 

information to estimate. 

Request for Comment 

Question 32: The Commission 

requests comment from the public 

regarding the extent to which FCMs 

currently provide equivalent protections 

to U.S.-domiciled and foreign-domiciled 

customers for trading foreign futures 

and foreign options, as well as the 

probability and expected size of losses 

that foreign-domiciled customers may 

face due to lesser regulatory protection. 

In addition, the Commission requests 

comment about any additional impact 

this change may have on U.S. domiciled 

investors, foreign investors, or the 

public.157


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number of the question they are addressing when 

responding to specific questions posed by the 

Commission. 

2. Eliminate the Alternative Method 

and require the Net Equity Liquidation 

Method for calculating 30.7 Customer 

segregation requirements 

Benefits 

Under the current regulations FCMs 

are allowed to use the Alternative 

Method, which only requires the 

maintenance of sufficient funds in the 

foreign futures or foreign options 

account to satisfy the margin required 

on open positions plus or minus any 

unrealized gains or losses on such 

positions, and any funds representing 

option premiums or funds necessary to 

margin or guarantee such options. 

By removing the Alternative Method, 

which the Commission understands is 

not in use, and requiring the Net 

Liquidating Equity Method, the 

proposed rules benefit customers by 

reducing the risk that a shortfall in 

customer funds could exist where an 

FCM operates in compliance with 

Commission regulations. More 

specifically, by requiring the FCM to 

segregate in separate accounts sufficient 

funds to satisfy the full account equities 

of all of its customers trading foreign 

futures or foreign options, the FCM 

would have sufficient funds in 

segregated accounts to meet all of their 

obligations to all such customers at any 

time, including in the event the FCM 

defaults. Further, in the event of default, 

the proposed regulations would 

facilitate the transfer of assets to another 

FCM by assuring the receiving FCM that 

there are sufficient funds to cover the 

liabilities that it may be assuming. 

Costs 

With respect to costs, as described 

above, the Commission understands that 

in practice, all FCMs are currently using 

the Net Liquidating Equity Method. 

However, FCMs currently have the 

option to switch to the Alternative 

Method, which they would have an 

incentive to do if the FCM needed 

additional liquidity. The proposal 

would prohibit an FCM switching to the 

Alternative Method, thereby preventing 

an FCM from using some portion of 

customer funds as if it were its own 

operational capital. In doing so, the 

proposed rule would reduce the FCM’s 

options for obtaining liquidity. 

The Commission does not have 

adequate data to quantify the cost of this 

change. Doing so would require 

estimates of probabilities regarding the 

likelihood of an FCM’s liquidity crisis, 

likelihood they hold foreign-domiciled 

customer funds for use in foreign 

futures and foreign options trading, the 

amount of such funds, the amount that 

are typically required to margin open 

positions for 30.7 Customers, and a 

number of other factors that the 

Commission does not have adequate 

information to estimate. However, as 

above, the Commission notes that it 

does not believe that FCMs should 

consider any customer funds a source of 

liquidity. 

3. Specific requirements contained in 

the written acknowledgments that FCMs 

and DCOs must obtain from their 

depositories 

The costs and benefits resulting from 

this change are similar to those 

discussed the cost benefit 

considerations sections related to 

§§ 1.20 and 1.26, but affect 30.7 

Customer funds rather than futures 

customer funds, and therefore are in 

addition to the costs and benefits 

discussed in the cost benefit 

considerations sections related to § 1.20 

and § 1.26. 

4. Restrictions on withdrawing from 

residual interest, including a 

requirement for the FCM to abide by its 

policies and procedures required in 

§ 1.11 

The costs and benefits resulting from 

this change are similar to those 

discussed the cost benefit sections 

related to §§ 1.23 and 1.11, but affect 

30.7 Customer funds rather than futures 

customer funds, and therefore are in 

addition to the costs and benefits 

discussed in cost benefit considerations 

sections related to §§ 1.23 and 1.11. 

5. Require that 30.7 Customer Funds 

deposited in a bank must be available 

for immediate withdrawal at the request 

of the FCM 

The costs and benefits resulting from 

this change are similar to those 

discussed cost benefit considerations 

sections related to §§ 1.20, but affect 

30.7 Customer Funds rather than futures 

customer funds, and therefore are in 

addition to the costs and benefits 

discussed in the cost benefit 

considerations section related to § 1.20. 

6. Clarification that the FCM is 

responsible for any losses related to 

investing 30.7 Customer Funds in 

investments that comply with § 1.25 

The costs and benefits resulting from 

this change are similar to those 

discussed in the cost benefit 

considerations section related to § 1.29, 

but affect 30.7 Customer Funds rather 

than futures customer funds, and 

therefore are in addition to the costs and 

benefits discussed in the cost benefit 

considerations sections related to 

§§ 1.20 and 1.29. 

7. Prohibition against making 

unsecured loans to customers and 

against using the funds in the 

customer’s trading account as security 

for the loan 

The costs and benefits resulting from 

this change are similar to those 

discussed the cost benefit 

considerations section related to § 1.30, 

but affect 30.7 Customer funds rather 

than futures customer funds, and 

therefore are in addition to the costs and 

benefits discussed in that section. 

8. Require daily segregation reports 

and segregated investment detail reports 

be submitted to the Commission and 

DSRO, and that targeted residual 

interest be included in those reports 

The costs and benefits resulting from 

this change are similar to those 

discussed the cost benefit 

considerations sections related to § 1.32, 

but affect 30.7 Customer funds rather 

than futures customer funds, and 

therefore are in addition to the costs and 

benefits discussed in that section. 

9. Allow FCMs that are not dual 

registrants to abide by the BD procedure 

for assigning a smaller haircut to 

investments purchased with customer 

funds that have low default risk 

The costs and benefits resulting from 

this change are similar to those 

discussed in the cost benefit sections 

related to §§ 1.32 and 22.2, but affect 

30.7 Customer funds rather than futures 

customer funds, and therefore are in 

addition to the costs and benefits 

discussed in those sections. 

Question 

Question 33: However, the 

Commission requests comment 

regarding the extent to which 30.7 

Customer funds held outside the United 

States may be invested in instruments 

that are subject to reduced haircuts 

under the proposed SEC rules, and the 

effect that will have on the capital 

requirements of U.S. domiciled FCMs. 

10. Proposed § 30.7(c) limits the 

amount of funds from a 30.7 Account 

that can be held outside the U.S. 

Funds held overseas are subject to 

different regulatory and bankruptcy 

regimes that may not offer comparable 

protections for customer funds, creating 

additional repatriation risks to those 

funds. For example, if an FCM carrying 

30.7 funds, some of which were held in 

depositories outside the U.S., were to 

default, it is possible that the Trustee 

would not be able to recover sufficient 

funds to repay all the FCM’s obligations 

to 30.7 Customers. As noted above, this 

is especially true if the funds are 

deposited with an overseas affiliate of 

the FCM, as the likelihood of coincident 

bankruptcies of affiliated financial firms 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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158 5 U.S.C. 601 et seq. 

159 47 FR 18618 (Apr. 30, 1982). 

160 Id. at 18619. 

161 Id. 

162See 66 FR 45605, 45609, Aug. 29, 2001. 

is exceedingly high. In such an event, 

the funds held at the affiliate would be 

distributed in accordance with the 

insolvency rules of the foreign 

jurisdiction. In such a case each 30.7 

Customer would likely receive a prorata share of the funds that the Trustee 

is able recover, when the Trustee is able 

to recover them. The proposed limit on 

amount of funds that can be held 

outside the U.S. would ensure that as 

much of the customers’ funds as 

possible remain subject to the U.S. 

regulatory and bankruptcy regimes, 

eliminating repatriation risk to those 

funds. By eliminating this risk for a 

larger percentage of the 30.7 funds, the 

proposed rule promotes higher recovery 

rates for 30.7 account funds if the FCM 

defaults, which helps ensure that 30.7 

Customers receive the largest pro rata 

distribution possible. 

Regarding costs, the proposed change 

effectively prohibits FCMs from 

increasing the amount of 30.7 Customer 

Funds they hold overseas. This 

restriction may reduce the return that 

FCMs may be able to achieve through 

their investment of customer funds. 

11. As described in the discussion of 

cost and benefit considerations related 

to § 1.22, by requiring that FCMs 

maintain residual interest in segregated 

accounts, the proposed rule would 

ensure that the FCM is not using one 

customer’s funds to purchase, margin, 

secure, or settle positions for another 

customer and when combined with the 

reporting requirements in § 30.7 would 

provide the Commission and the public 

with sufficient information to verify that 

FCMs are not using one customer’s 

funds to purchase, margin, secure or 

settle positions for another customer. 

Regarding costs, by requiring FCMs to 

maintain residual interest in their 30.7 

Accounts that is greater than the sum of 

their 30.7 Customers’ margin deficits, 

the proposed rule would create costs 

and benefits that are substantially 

identical to those described in the cost 

and benefit considerations related to 

§ 1.22. As discussed in that section, the 

Commission does not have information 

to determine whether FCMs typically 

maintain residual interest in their 30.7 

Accounts that is greater than or less 

than the sum of their 30.7 Customers’ 

margin deficits, and requests 

information sufficient to make such a 

determination, and to quantify the 

associated costs, if any. 

Additional Requests for Comment 

Related to the Commission’s Proposed 

Consideration of Costs and Benefits 

Question 34: The Commission 

requests comment on all aspects of its 

proposed consideration of the costs and 

benefits of the rulemaking. More 

specifically, the Commission requests 

dollar estimates of the costs and the 

value of the benefits of the proposed 

rules described herein, including 

supporting data. In addition, the 

Commission requests comment on 

whether there are additional costs or 

benefits related to the proposed rules 

that the Commission should consider, as 

well as whether there are alternative 

approaches that would be more effective 

in light of the purpose of the proposal. 

Commenters should provide analysis 

and empirical data to support their 

views on the costs and benefits 

associated with the proposed rule. 

Question 35: The Commission 

requests comment regarding the 

different ways in which the proposed 

rules will impact FCMs that are 

different sizes and that are operating 

with different business models. In 

particular, are there any specific 

proposed requirements that would be 

particularly costly for either small or 

large FCMs to follow? Are there any 

specific proposed requirements that 

would be especially costly for FCMs 

with a particular business model to 

follow? If so, please explain and where 

possible please quantify specific costs. 

Question 36: The Commission 

requests comment regarding the effects 

of the proposed amendments on the 

composition of the FCM industry 

including bank subsidiaries versus 

stand-alone FCMs, large versus small, 

retail customer oriented versus 

wholesale, possible consolidation, etc. 

Please explain and provide supporting 

data. 

Question 37: The Commission also 

requests comment regarding the 

potential impact of the proposed 

regulations on specific groups of 

customers. Will the proposed rules 

make it more difficult for certain groups 

of customers to obtain FCM services? 

IV. Administrative Compliance 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 158 requires Federal agencies, in 

promulgating regulations, to consider 

the impact of those regulations on small 

entities. The Commission has 

previously established certain 

definitions of ‘‘small entities’’ to be used 

by the Commission in evaluating the 

impact of its rules on small entities in 

accordance with the RFA.159 The 

proposed regulations would affect FCMs 

and DCOs. The Commission previously 

has determined that FCMs are not small 

entities for purposes of the RFA, and, 

thus, the requirements of the RFA do 

not apply to FCMs.160 The 

Commission’s determination was based, 

in part, upon the obligation of FCMs to 

meet the minimum financial 

requirements established by the 

Commission to enhance the protection 

of customers’ segregated funds and 

protect the financial condition of FCMs 

generally.161 The Commission also has 

previously determined that DCOs are 

not small entities for the purpose of the 

RFA.162 Accordingly, the Chairman, on 

behalf of the Commission, hereby 

certifies pursuant to 5 U.S.C. 605(b) that 

the proposed regulations will not have 

a significant economic impact on a 

substantial number of small entities. 

The Commission invites comments on 

the impact of this proposed regulation 

on small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(‘‘PRA’’) provides that a federal agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid control 

number issued by the Office of 

Management and Budget (‘‘OMB’’). This 

proposed rulemaking contains several 

collections of information that have not 

been approved previously by OMB. The 

collections contained in this rulemaking 

are proposed to be mandatory. 

To avoid double accounting for the 

PRA burden hours of collections that 

already have been assigned control 

numbers by OMB, or for burden hours 

contained in pending collections of 

information—in particular existing 

collection 3038–0024 and proposed 

revisions thereto, and existing 

collections 3038–0052 and 3038–0091— 

this PRA analysis contains only burden 

estimates for collections of information 

that have not previously been submitted 

to OMB. The Commission seeks 

comment on those collections of 

information contained in this 

rulemaking that would increase the 

burden hours contained in each of the 

related currently valid or proposed 

collections. 

In particular, the Commission will 

submit to OMB information collection 

requests (‘‘ICR’’) that address the new 

collection burdens that would result 

from the finalization of these proposed 

rules on or before the publication of the 

proposed rules, as required by 44 U.S.C. 

3506(c)(2)(B) and 5 CFR 1320.11. All 

interested parties may submit comments 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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on this analysis and the associated ICR 

to the Commission and to OMB, as 

provided below. 

The Commission will protect 

proprietary information according to the 

Freedom of Information Act (‘‘FOIA’’) 

and 17 CFR part 145, ‘‘Commission 

Records and Information.’’ In addition, 

section 8(a)(1) of the Act strictly 

prohibits the Commission, unless 

specifically authorized by the Act, from 

making public ‘‘data and information 

that would separately disclose the 

business transactions or market 

positions of any person and trade 

secrets or names of customers.’’ The 

Commission is also required to protect 

certain information contained in a 

government system of records according 

to the Privacy Act of 1974. 

1. Collections of Information 

The proposed amendments would 

require FCMs to adopt new policies and 

procedures, keep records related to such 

policies and procedures and submit 

reports of such policies and procedures, 

including certain management 

approvals, to the Commission. In 

addition, the proposals alter existing 

FCM reporting requirements in process 

and substance, including changes to 

certain schedules and proposed 

schedules to the Form 1–FR–FCM (the 

Segregation Schedule and Secured 

Amount Schedule); changes to the 

process for filing such schedules and 

additional frequency for such filings; 

and requiring detailed information 

supporting such schedules to also be 

reported to the Commission and the 

FCM’s designated self-regulatory 

organization. 

Further FCMs and depositories 

accepting customer funds will be 

required to obtain acknowledgment 

letters in specified formats and file them 

directly with the Commission and the 

FCM’s designated self-regulatory 

organization. Records will have to be 

kept of approvals of certain withdrawals 

made of an FCM’s residual interest in 

customer funds and further reported to 

the Commission. Additional notices will 

also be required to be filed with the 

Commission under the proposed 

amendments. The examination process 

of SROs and DSROs is proposed to be 

amended with new recordkeeping and 

reporting requirements being imposed, 

as well as a required report to be 

obtained from an examinations expert 

and filed with the Commission. Lastly, 

disclosures made by FCMs to customers 

will be enhanced and records of such 

disclosures will have to be maintained 

and reported to the Commission. 

As noted, some of these proposed 

amendments will result in the alteration 

of existing regulations covered by 

existing collections which have already 

been assigned OMB control numbers. 

Others will result in additional or new 

collection burdens, which will be 

incorporated into the most relevant 

existing collection maintained by the 

Commission and previously approved 

by or submitted for approval to OMB. 

a. Proposed Revision to Collection 

3038–0024 

Collection 3038–0024 is currently in 

force, with its control number having 

been provided by OMB. In addition, the 

collection was proposed to be revised in 

May 2011, with the approval of and 

issuance of a control number by OMB 

presently pending. Certain collections 

contained in this rulemaking would 

result in further revisions to the 

collection, as discussed herein. 

First, the Segregation Schedules and 

the Secured Amount Schedule, required 

to be filed under § 1.10, have been 

proposed to be changed to reflect the 

FCM’s target for residual amounts and 

the sum of margin deficits. The 

proposed amendments will also 

increase the frequency of filing these 

schedules to daily under §§ 1.32 and 

30.7. However, daily computations were 

previously required with respect to the 

subject matter of these schedules and 

monthly filing procedure for these 

schedules is already in place, and these 

schedules are already subject to an OMB 

control number. Thus, the revision of 

collection 3038–0024 requires only 

incremental change to capture the new 

elements of § 1.10. One time initial 

system changes, if any, that will need to 

be made to effect daily filing of the 

detail previously required in the 

monthly report is anticipated to require 

between 40 and 80 burden hours for the 

approximately 72 firms required to 

comply with the new provisions of 

§ 1.10, depending on the size of the firm 

the complexity of their systems. The 

additional filing requirement, which 

may be effected electronically by the 

approximately 72 firms that will be 

required to make daily filings, is 

anticipated to increase the burdens 

associated with § 1.10 by an anticipated 

10–20 minutes for each of the 

approximately 20 days per month that 

such reports were not previously 

required to be filed. 

Additionally, the proposed 

amendments include new requirements 

for FCMs to establish comprehensive 

risk management programs under new 

§ 1.11, and maintain associated 

recordkeeping as well as furnish reports 

related to such risk management 

programs to the Commission and the 

FCM’s DSRO. Included within the risk 

management programs will be specific 

requirements for FCMs to establish and 

maintain written policies and 

procedures regarding the safeguarding 

of all customer funds. 

Collection burdens associated with 

the safeguarding of customer funds 

under the Commission’s regulations 

prior to the proposed amendments are 

already subject to OMB control 

numbers. Accordingly, the proposed 

revisions to collection 3038–0024 

require only incremental change to 

capture the new elements of § 1.11. The 

estimated burden associated with § 1.11 

will be divided into two components, a 

onetime cost to establish the written 

policies and procedures and an annual 

burden to maintain the such policies 

and procedures. Currently there are 72 

respondents subject to this change, 

many of which are expected simply to 

establish and maintain policies and 

procedures around their existing risk 

management programs. The estimated 

number of hours to create the initial set 

of policies and procedures by 

consolidation of existing risk 

management practices is anticipated to 

average 75 hours across the 72 

respondents that will be obligated to 

comply. The estimated total annual 

maintenance burden on each 

respondent is anticipated increase by an 

average 25 hours annually across the 72 

recordkeepers. 

The collection is further being revised 

to reflect additional proposed 

requirements for notifications under 

§ 1.12, and the additional required 

filings contained in the proposed 

amendments under §§ 1.20, 1.23, 1.32, 

and 30.7. Currently there are 72 

respondents estimated to be subject to 

these changes. The total of all proposed 

changes to the Schedules of the Form 1– 

FR, which is already subject to an OMB 

control number, is anticipated to be 

incremental, and it is estimated that the 

proposed changes will add 15 minutes 

to the preparation and filing of each 

report. 

The proposed revision to § 1.12(i) will 

require FCMs to report to the 

Commission if the FCM discovers or is 

informed that it has invested funds held 

for futures customers in instruments 

that are not permitted investments 

under § 1.25. This new report will be 

done on an as required basis. It is 

estimated that this report will be 

completed by two respondents per year 

with a burden of one hour for each 

report. 

The proposed revision to § 1.12(j) will 

require FCMs to immediately report to 

the Commission if a withdrawal of 

funds from accounts holding futures 

customers funds causes the amount on 


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deposit in such accounts to be less than 

the FCM’s targeted excess or residual 

interest in such accounts, or if the 

residual interest is less than the sum of 

all margin deficits. The accounting 

needed to make these reports is already 

conducted under the Commission’s 

regulations for the purpose of ensuring 

compliance with the Commission’s 

existing customer protection 

regulations. Once an event requiring 

notice is identified, it is anticipated that 

five respondents per year will be 

obligated to provide notices to the 

Commission under § 1.12(j), with an 

additional burden of up to two hours for 

each notice. 

The Commission is also proposing to 

amend paragraphs (k) and (l) of § 1.12 

which will require an FCM to provide 

notice to the Commission in the event 

of a material change in the financial 

condition of the firm or the firm’s 

operations. These new reports each will 

be prepared and submitted on an as 

required basis, and are similar to other 

notices required to be filed by FCMs in 

Parts 1 and 190, for example, of the 

Commission’s regulations. Moreover, 

FCMs are already subject to significant 

regulations in Part 1 that require each 

FCM to continuously monitor their 

financial condition and report shortfalls 

in net capital. It is estimated that the 

notices that would be required under 

paragraphs (k) and (l) of § 1.12 will be 

made by five respondents per year with 

a burden of up to three hours for each 

notice. 

FCMs will be required under § 1.20 to 

obtain and submit to the Commission 

written acknowledgments, in a form and 

format being proposed and expected to 

be required by the Commission, from 

any depository institution, including 

certain DCOs, at which futures customer 

funds will be segregated. It is estimated 

that the execution and filing of new 

acknowledgment letters will be 

completed by five respondents per year 

with a burden of up to two hours for 

completion and filing. It is estimated 

that the maintaining of acknowledgment 

letters prescribed by the Commission 

will be conducted by as many as 40 

depository institutions annually with an 

estimated burden of 45 minutes per 

respondent. 

FCMs are currently required to obtain 

and maintain in its files an 

acknowledgment letter from 

depositories for each account holding 

customer funds, in the form specified by 

the Commission. The obtaining and 

maintaining of the acknowledgement 

letters will be done on an as required 

basis and are already subject to an OMB 

control number. Proposed revisions to 

§ 1.20(d) additionally would require 

FCMs to retain and file these 

acknowledgment letters electronically 

with the Commission. This new 

retention and filing will be done on an 

as required basis. It is estimated that the 

filing of an estimated 1 to 2 new 

acknowledgment letters will be 

conducted by 72 respondents per year, 

with a burden of 30 minutes associated 

with the retention and filing of each of 

these acknowledgments. 

Finally with respect to § 1.20, a 

derivatives clearing organization may 

adopt and submit to the Commission 

rules providing for the segregation of 

customer funds that may be carried by 

the DCO that would substitute for the 

acknowledgment letters completed by 

other depositories. It is anticipated that 

approximately 17 of the DCOs registered 

with the Commission will adopt and 

submit such rules, with an estimated 

burden of 45 hours for the adoption and 

submission of such rules. The DCO also 

must obtain acknowledgment letters 

from any depository institution at which 

the DCO places segregated funds, and 

these depository institutions must 

provide the Commission with direct 

access to the customer account 

information at all times. It is anticipated 

that as many as 40 depository 

institutions may complete such letters, 

and provide ongoing access to the 

Commission, with a one-time burden of 

45 minutes per respondent for the 

completion of such letters, and an 

estimated annual burden of 60 hours 

associated with providing account 

access to the Commission. 

Similarly, § 30.7(d) is being revised to 

require FCMs that maintain 30.7 

Customer Accounts to obtain and 

maintain in its files, an 

acknowledgment letter from 

depositories for each account holding 

30.7 Customer Funds, in the form 

specified by the Commission, and § 1.26 

provides for the same from any 

institution segregating customer funds 

in a money market mutual fund 

account. The proposed revisions to 

these regulations require FCMs to file 

such acknowledgment letters 

electronically with the Commission. 

The obtaining and maintaining of the 

acknowledgement letters will be done 

on an as required basis. It is estimated 

that the maintaining of acknowledgment 

letters will be completed by 56 

respondents with a burden of 45 

minutes per respondent. The 

completion of the acknowledgment 

letters by the depositories, estimated at 

approximately 90 institutions, is 

expected to be 45 minutes per letter. 

Additionally, the requirement that these 

acknowledgement letters be 

electronically filed with the 

Commission is anticipated to result in 6 

minutes of burden to 56 respondents per 

year with respect to the proposed 

revisions to § 30.7 and the same for the 

proposed revisions to § 1.26. 

The Commission is also proposing to 

amend § 1.23(c) to require an FCM to 

immediately file written notice with the 

Commission if the firm withdraws more 

than 25 percent of its residual interest 

in segregated accounts. This new filing 

will be done on an as required basis. It 

is estimated that the filing of these 

notices will be completed by ten 

respondents per year with a burden of 

one hour for each filing. 

Pursuant to the proposed revisions of 

§§ 1.32(c) and (d), the Segregation 

Statement shall be completed on a daily 

basis and filed by noon the following 

business day. Although the rule 

proposed herein now require daily filing 

of the Segregation Statement, it should 

be noted that the Segregation Statement 

is statement is already required to be 

prepared and retained on a daily basis, 

thus the additional time electronically 

filing the statement on a daily basis is 

minimal. Currently there are 72 

respondents subject to this change. The 

estimated total annual burden on each 

respondent is 2 hours. 

Pursuant to the proposed revisions of 

§ 1.32(g) each FCM that holds customer 

funds is required to file the segregated 

investment detail report twice monthly. 

Although the rule proposed herein 

requires twice monthly filing of the 

segregated investment detail report, it 

should be noted that the segregated 

investment detail report is already 

required to be prepared twice monthly 

by the FCM’s designated self-regulatory 

organization. Thus the additional time 

to electronically file the statement with 

the Commission is minimal. Currently 

there are 72 respondents subject to this 

change. The estimated total annual 

burden on each respondent is 5 minutes 

per report. 

Similar to the proposed revisions of 

§ 1.32 discussed above, § 30.7(m) 

requires that the Statement of Secured 

Amounts shall be completed on a daily 

basis and filed electronically by noon 

the following business day. Although 

the rule proposed herein now require 

daily filing of the Secured Amounts 

Statement, it should be noted that the 

Secured Amounts is statement is 

already required to be prepared and 

retained on a daily basis, thus the 

additional time electronically filing the 

statement on a daily basis is minimal. 

Currently there are 56 respondents 

subject to this change. The estimated 

total annual burden on each respondent 

is 2 hours. 


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Revisions to § 30.7(i) will also require 

that FCMs keep records of customer 

funds including a daily valuation of 

each instrument and supporting 

documentation of such daily valuation. 

Currently there are 56 respondents 

subject to this change. The estimated 

total annual burden on each respondent 

is 100 hours. 

Finally, § 1.55 would require public 

disclosures to be made by an FCM to its 

customers respecting the limitations 

applicable to and risks associated with 

the segregation of funds, among other 

things. It is anticipated that 72 FCMs 

will provide such notices through the 

standardization of account opening 

documents or distribution of the notices 

therewith. Each FCM is expected to 

expend up to 4–20 hours incorporating 

the notice, which is prescribed by 

regulation, into its account opening 

process for customers that will establish 

new accounts, and up to 10 minutes per 

customer providing the notices on a 

one-time basis to as many as 3,000 

customers and accounts opened by 

existing customers. 

b. Proposed Revision to Collection 

3038–0052 

The above-referenced collection titled 

‘‘Part 38—Designated Contract Markets’’ 

includes all burden associated with 

§ 1.52, ‘‘Self-regulatory organization 

adoption and surveillance of minimum 

financial requirements’’. The proposed 

amendments include additional 

requirements for SROs to adopt for their 

examination procedures, including the 

requirement to have examination 

programs reviewed by an examinations 

expert and having the report of such 

examinations expert filed with the 

Commission at least once every two 

years. Regulation 1.52 already contains 

significant requirements with respect to 

the examination programs to be 

established and maintained by SROs, 

which are subject already to an OMB 

control number. The increase in the 

burden under this collection for the 

adoption of enhanced examination 

procedures, including the recordkeeping 

and reporting, to the extent such may be 

necessary by any SRO to which § 1.52 

is necessary, is estimated to add up to 

50 burden hours to as many as 15 

DCMs. 

c. Proposed Revision to Collection 

3038–0091 

Collection 3038–0091was established 

with the adoption of Part 22 of the 

Commissions regulations concerning 

Cleared Swaps in .February 2012 The 

proposed amendments would require 

revisions to this collection with respect 

to recordkeeping and reporting 

associated with additional filings of the 

Cleared Swaps Segregation Schedule 

daily under § 22.2(g), and the associated 

recordkeeping and reporting with 

respect to notices of withdrawals under 

a newly proposed § 22.17. The 

collection burden associated with the 

proposed amendments is anticipated to 

increase by 10 minutes per day and is 

anticipated to affect 100 entities. 

2. Information Collection Comments 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the proposed 

information collection requirements 

discussed above. Pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission will 

consider public comments on such 

proposed requirements in: 

Æ Evaluating whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have a 

practical use; 

Æ Evaluating the accuracy of the 

estimated burden of the proposed 

information collection requirements, 

including the degree to which the 

methodology and the assumptions that 

the Commission employed were valid; 

Æ Enhancing the quality, utility, and 

clarity of the information proposed to be 

collected; and 

Æ Minimizing the burden of the 

proposed information collection 

requirements on FCMs, SDs, and MSPs, 

including through the use of appropriate 

automated, electronic, mechanical, or 

other technological information 

collection techniques, e.g., permitting 

electronic submission of responses. 

Copies of the submission from the 

Commission to OMB are available from 

the CFTC Clearance Officer, 1155 21st 

Street NW., Washington, DC 20581, 

(202) 418–5160 or from http:// 

RegInfo.gov. Organizations and 

individuals desiring to submit 

comments on the proposed information 

collection requirements should send 

those comments to the OMB Office of 

Information and Regulatory Affairs at: 

Æ The Office of Information and 

Regulatory Affairs, Office of 

Management and Budget, Room 10235, 

New Executive Office Building, 

Washington, DC 20503, Attn: Desk 

Officer of the Commodity Futures 

Trading Commission; 

Æ (202) 395–6566 (fax); or 

Æ OIRAsubmissions@omb.eop.gov 

(email). 

Please provide the Commission with 

a copy of submitted comments so that 

all comments can be summarized and 

addressed in the final rulemaking. 

Please refer to the ADDRESSES section of 

this rulemaking for instructions on 

submitting comments to the 

Commission. OMB is required to make 

a decision concerning the proposed 

information collection requirements 

between thirty (30) and sixty (60) days 

after publication of the NPRM in the 

Federal Register. Therefore, a comment 

to OMB is best assured of receiving full 

consideration if OMB (as well as the 

Commission) receives it within thirty 

(30) days of publication of this NPRM. 

The time frame for commenting on the 

PRA does not affect the deadline 

established by the Commission on the 

proposed rules, provided in the DATES

section of this rulemaking. 

V. Text of Proposed Rules 

List of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Consumer protection, Reporting and 

recordkeeping requirements. 

17 CFR Part 3 

Associated persons, Brokers, 

Commodity futures, Customer 

protection, Major swap participants, 

Registration, Swap dealers. 

17 CFR Part 22 

Brokers, Clearing, Consumer 

protection, Reporting and recordkeeping 

requirements, Swaps. 

17 CFR Part 30 

Commodity futures, Consumer 

protection, Currency, Reporting and 

recordkeeping requirements. 

17 CFR Part 140 

Authority delegations (Government 

agencies), Organization and functions 

(Government agencies). 

In consideration of the foregoing and 

pursuant to the authority contained in 

the Act, as indicated herein, the 

Commission hereby proposes to amend 

chapter I of title 17 of the Code of 

Federal Regulations as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

1. The authority citation for part 1 

continues to be read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6m, 6n, 6o, 6p, 

6r, 6s, 7, 7a, 7b, 8, 9, 10a 12, 12a, 12c, 13a, 

13a–1, 16, 16a, 19, 21, 23, and 24 as amended 

by Title VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Pub. L. 

111–203, 124 Stat. 1376 (2010). 

2. Amend § 1.3 by revising paragraph 

(rr) to read as follows: 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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§ 1.3 Definitions. 

* * * * * 

(rr) Foreign futures or foreign options 

secured amount. This term means all 

money, securities and property received 

by a futures commission merchant from, 

for, or on behalf of 30.7 Customers as 

defined in § 30.1 of this chapter: 

(1) To margin, guarantee, or secure 

foreign futures contracts and all money 

accruing to such 30.7 Customers as the 

result of such contracts; 

(2) In connection with foreign options 

transactions representing premiums 

payable or premiums received, or to 

guarantee or secure performance on 

such transactions; and 

(3) All money accruing to such 30.7 

Customers as the result of trading in 

foreign futures contracts or foreign 

options. 

* * * * * 

3. Amend § 1.10 by: 

a. Revising paragraph (b)(1)(ii); 

b. Adding paragraph (b)(5); and 

c. Revising paragraphs (c)(1), (c)(2)(i), 

(d)(1)(v), (d)(2)(iv), (d)(2)(vi), and 

(g)(2)(ii). 

The revisions and addition read as 

follows: 

§ 1.10 Financial reports of futures 

commission merchants and introducing 

brokers. 

* * * * * 

(b) * * * 

(1) * * * 

(ii) In addition to the monthly 

financial reports required by paragraph 

(b)(1)(i) of this section, each person 

registered as a futures commission 

merchant must file a Form 1–FR–FCM 

as of the close of its fiscal year, which 

must be certified by an independent 

public accountant in accordance with 

§ 1.16, and must be filed no later than 

60 days after the close of the futures 

commission merchant’s fiscal year: 

Provided, however, that a registrant 

which is registered with the Securities 

and Exchange Commission as a 

securities broker or dealer must file this 

report not later than the time permitted 

for filing an annual audit report under 

§ 240.17a–5(d)(5) of this title. 

* * * * * 

(5) Each futures commission merchant 

must file with the Commission the 

measure of the future commission 

merchant’s leverage (i.e., total balance 

sheet assets, less any instruments 

guaranteed by the U.S. Government and 

held as an asset or to collateralize an 

asset (e.g., a reverse repo) divided by 

total capital (the sum of stockholders’ 

equity and subordinated debt) all 

computed in accordance with U.S. 

generally accepted accounting 

principles as of the close of business 

each month. The filing is required to be 

made to the Commission within 17 

business days of the close of the futures 

commission merchant’s month end. 

(c) Where to file reports. (1) Form 1– 

FR filed by an introducing broker 

pursuant to paragraph (b)(2) of this 

section need be filed only with, and will 

be considered filed when received by, 

the National Futures Association. Other 

reports or information provided for in 

this section will be considered filed 

when received by the Regional office of 

the Commission with jurisdiction over 

the state in which the registrant’s 

principal place of business is located (as 

set forth in § 140.02 of this chapter) and 

by the designated self-regulatory 

organization, if any; and reports or other 

information required to be filed by this 

section by an applicant for registration 

will be considered filed when received 

by the National Futures Association. 

Any report or information filed with the 

National Futures Association pursuant 

to this paragraph shall be deemed for all 

purposes to be filed with, and to be the 

official record of, the Commission. 

(2)(i) All filings or other notices 

prepared by a futures commission 

merchant pursuant to this section must 

be submitted to the Commission in 

electronic form using a form of user 

authentication assigned in accordance 

with procedures established by or 

approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission, if the futures 

commission merchant or a designated 

self-regulatory organization has 

provided the Commission with the 

means necessary to read and to process 

the information contained in such 

report. A Form 1–FR required to be 

certified by an independent public 

accountant in accordance with § 1.16 

which is filed by a futures commission 

merchant must be filed electronically. 

* * * * * 

(d) * * * 

(1) * * * 

(v) For a futures commission 

merchant only, the statements of 

segregation requirements and funds in 

segregation for customers trading on 

U.S. commodity exchanges and for 

customers’ dealer options accounts, the 

statement of secured amounts and funds 

held in separate accounts for 30.7 

Customers (as defined in § 30.1 of this 

chapter) in accordance with § 30.7 of 

this chapter, and the statement of 

cleared swaps customer segregation 

requirements and funds in cleared 

swaps customer accounts under section 

4d(f) of the Act as of the date for which 

the report is made; and 

* * * * * 

(2) * * * 

(iv) For a futures commission 

merchant only, the statements of 

segregation requirements and funds in 

segregation for customers trading on 

U.S. commodity exchanges and for 

customers’ dealer options accounts, the 

statement of secured amounts and funds 

held in separate accounts for 30.7 

Customers (as defined in § 30.1 of this 

chapter) in accordance with § 30.7 of the 

chapter, and the statement of cleared 

swaps customers segregation 

requirements and funds in cleared 

swaps customer accounts under section 

4d(f) of the Act as of the date for which 

the report is made; 

* * * * * 

(vi) A reconciliation, including 

appropriate explanations, of the 

statement of the computation of the 

minimum capital requirements pursuant 

to § 1.17 of this part and, for a futures 

commission merchant only, the 

statements of segregation requirements 

and funds in segregation for customers 

trading on U.S. commodity exchanges 

and for customers’ dealer option 

accounts, the statement of secured 

amounts and funds held in separate 

accounts for 30.7 Customers (as defined 

in § 30.1 of this chapter) in accordance 

with § 30.7 of this chapter, and the 

statement of cleared swaps customer 

segregation requirements and funds in 

cleared swaps customer accounts under 

section 4d(f) of the Act, in the certified 

Form 1–FR with the applicant’s or 

registrant’s corresponding uncertified 

most recent Form 1–FR filing when 

material differences exist or, if no 

material differences exist, a statement so 

indicating; and 

* * * * * 

(g) * * * 

(2) * * * 

(ii) The following statements and 

footnote disclosures thereof: the 

Statement of Financial Condition in the 

certified annual financial reports of 

futures commission merchants and 

introducing brokers; the Statements (to 

be filed by a futures commission 

merchant only) of Segregation 

Requirements and Funds in Segregation 

for customers trading on U.S. 

commodity exchanges and for 

customers’ dealer options accounts, the 

Statement (to be filed by a futures 

commission merchant only) of Secured 

Amounts and Funds held in Separate 

Accounts for 30.7 Customers (as defined 

in § 30.1of this chapter) in accordance 

with § 30.7 of this chapter, and the 

Statement (to be filed by futures 


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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67933 

commission merchants only) of Cleared 

Swaps Customer Segregation 

Requirements and Funds in Cleared 

Swaps Customer Accounts under 

section 4d(f) of the Act. 

* * * * * 

4. Add § 1.11 to read as follows: 

§ 1.11 Risk Management Program for 

Futures Commission Merchants. 

(a) Applicability. Nothing in this 

section shall apply to a futures 

commission merchant that does not 

accept any money, securities, or 

property (or extend credit in lieu 

thereof) to margin, guarantee, or secure 

any trades or contracts that result from 

soliciting or accepting orders for the 

purchase or sale of any commodity 

interest. 

(b) Definitions. For purposes of this 

section: 

(1) ‘‘Business Unit’’ means any 

department, division, group, or 

personnel of a futures commission 

merchant or any of its affiliates, whether 

or not identified as such that: 

(i) Engages in soliciting or in 

accepting orders for the purchase or sale 

of any commodity interest and that, in 

or in connection with such solicitation 

or acceptance of orders, accepts any 

money, securities, or property (or 

extends credit in lieu thereof) to margin, 

guarantee, or secure any trades or 

contracts that result or may result 

therefrom; or 

(ii) Otherwise handles Segregated 

Funds, including managing, investing, 

and overseeing the custody of 

Segregated Funds, or any 

documentation in connection therewith, 

other than for risk management 

purposes; and 

(iii) Any personnel exercising direct 

supervisory authority of the 

performance of the activities described 

in paragraph (b)(1)(i) or (ii) of this 

section. 

(2) ‘‘Customer’’ means a futures 

customer as defined at § 1.3 of this part, 

Cleared Swaps Customer as defined at 

§ 22.1 of this chapter, and 30.7 

Customer as defined at § 30.1 of this 

chapter. 

(3) ‘‘Governing Body’’ means the 

proprietor, if the futures commission 

merchant is a sole proprietorship; a 

general partner, if the futures 

commission merchant is a partnership; 

the board of directors if the futures 

commission merchant is a corporation; 

the chief executive officer, the chief 

financial officer, the manager, the 

managing member, or those members 

vested with the management authority if 

the futures commission merchant is a 

limited liability company or limited 

liability partnership. 

(4) ‘‘Segregated Funds’’ means money, 

securities, or other property held by a 

futures commission merchant in 

separate accounts pursuant to § 1.20 of 

this part for futures customers, pursuant 

to § 22.2 of this chapter for Cleared 

Swaps Customers, and pursuant to 

§ 30.7 of this chapter for § 30.7 

Customers; and 

(5) ‘‘Senior Management’’ means, any 

officer or officers specifically granted 

the authority and responsibility to fulfill 

the requirements of senior management 

by the Governing Body. 

(c) Risk Management Program. (1) 

Each futures commission merchant shall 

establish, maintain, and enforce a 

system of risk management policies and 

procedures designed to monitor and 

manage the risks associated with the 

activities of the futures commission 

merchant as such. For purposes of this 

section, such policies and procedures 

shall be referred to collectively as a 

‘‘Risk Management Program.’’ 

(2) Each futures commission merchant 

shall maintain written policies and 

procedures that describe the Risk 

Management Program of the futures 

commission merchant. 

(3) The Risk Management Program 

and the written risk management 

policies and procedures, and any 

material changes thereto, shall be 

approved in writing by the Governing 

Body of the futures commission 

merchant. 

(4) Each futures commission merchant 

shall furnish a copy of its written risk 

management policies and procedures to 

the Commission and its designated selfregulatory organization upon 

application for registration and 

thereafter upon request. 

(d) Risk management unit. As part of 

the Risk Management Program, each 

futures commission merchant shall 

establish and maintain a risk 

management unit with sufficient 

authority; qualified personnel; and 

financial, operational, and other 

resources to carry out the risk 

management program established 

pursuant to this section. The risk 

management unit shall report directly to 

Senior Management and shall be 

independent from the Business Unit. 

(e) Elements of the Risk Management 

Program. The Risk Management 

Program of each futures commission 

merchant shall include, at a minimum, 

the following elements: 

(1) Identification of risks and risk 

tolerance limits. (i) The Risk 

Management Program shall take into 

account market, credit, liquidity, foreign 

currency, legal, operational, settlement, 

segregation, technological, capital, and 

any other applicable risks together with 

a description of the risk tolerance limits 

set by the futures commission merchant 

and the underlying methodology in the 

written policies and procedures. The 

risk tolerance limits shall be reviewed 

and approved quarterly by Senior 

Management and annually by the 

Governing Body. Exceptions to risk 

tolerance limits shall be subject to 

written policies and procedures. 

(ii) The Risk Management Program 

shall take into account risks posed by 

affiliates, all lines of business of the 

futures commission merchant, and all 

other trading activity engaged in by the 

futures commission merchant. The Risk 

Management Program shall be 

integrated into risk management at the 

consolidated entity level. 

(iii) The Risk Management Program 

shall include policies and procedures 

for detecting breaches of risk tolerance 

limits set by the futures commission 

merchant, and alerting supervisors 

within the risk management unit and 

Senior Management, as appropriate. 

(2) Periodic Risk Exposure Reports. (i) 

The risk management unit of each 

futures commission merchant shall 

provide to Senior Management and to 

its Governing Body quarterly written 

reports setting forth all applicable risk 

exposures of the futures commission 

merchant; any recommended or 

completed changes to the Risk 

Management Program; the 

recommended time frame for 

implementing recommended changes; 

and the status of any incomplete 

implementation of previously 

recommended changes to the Risk 

Management Program. For purposes of 

this section, such reports shall be 

referred to as ‘‘Risk Exposure Reports.’’ 

The Risk Exposure Reports also shall be 

provided to the Senior Management and 

the Governing Body immediately upon 

detection of any material change in the 

risk exposure of the futures commission 

merchant. 

(ii) Furnishing to the Commission. 

Each futures commission merchant shall 

furnish copies of its Risk Exposure 

Reports to the Commission within five 

(5) business days of providing such 

reports to its Senior Management. 

(3) Specific risk management 

considerations. The Risk Management 

Program of each futures commission 

merchant shall include, but not be 

limited to, policies and procedures 

necessary to monitor and manage the 

following risks: 

(i) Segregation Risk. The written 

policies and procedures shall be 

reasonably designed to ensure that 

Segregated Funds are separately 

accounted for and segregated or secured 

as belonging to Customers as required 


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by the Act and Commission regulations 

and must, at a minimum, include or 

address the following: 

(A) A process for the evaluation of 

depositories of Segregated Funds, 

including, at a minimum, documented 

criteria that any depository that will 

hold Segregated Funds, including an 

entity affiliated with the futures 

commission merchant, must meet, 

including criteria addressing the 

depository’s capitalization, 

creditworthiness, operational reliability, 

and access to liquidity. The criteria 

should further consider the extent to 

which Segregated Funds are 

concentrated with any depository or 

group of depositories. The criteria also 

should include the availability of 

deposit insurance and the extent of the 

regulation and supervision of the 

depository; 

(B) A program to monitor an approved 

depository on an ongoing basis to assess 

its continued satisfaction of the futures 

commission merchant’s established 

criteria, including a thorough due 

diligence review of each depository at 

least annually; 

(C) An account opening process for 

depositories, including documented 

authorization requirements, procedures 

that ensure that Segregated Funds are 

not deposited with a depository prior to 

the futures commission merchant 

receiving the acknowledgment letter 

required from such depository pursuant 

to § 1.20 of this part, and §§ 22.2 and 

30.7 of this chapter, and procedures that 

ensure that such account is properly 

titled to reflect that it is holding 

Segregated Funds pursuant to the Act 

and Commission regulations; 

(D) A process for establishing a 

targeted amount of residual interest that 

the futures commission merchant seeks 

to maintain as its residual interest in the 

Segregated Funds accounts and such 

process must be designed to reasonably 

ensure that the futures commission 

merchant maintains the targeted 

residual amounts and remains in 

compliance with the Segregated Funds 

requirements at all times. The policies 

and procedures must require that Senior 

Management, in establishing the total 

amount of the targeted residual interest 

in the Segregated Funds accounts, 

perform appropriate due diligence and 

consider various factors, as applicable, 

relating to the nature of the futures 

commission merchant’s business 

including, but not limited to, the 

composition of the futures commission 

merchant’s Customer base, the general 

creditworthiness of the Customer base, 

the general trading activity of the 

Customers, the types of markets and 

products traded by the Customers, the 

proprietary trading of the futures 

commission merchant, the general 

volatility and liquidity of the markets 

and products traded by Customers, the 

futures commission merchant’s own 

liquidity and capital needs, and the 

historical trends in Customer Segregated 

Fund balances, including margin debit 

and net deficit balances in Customers’ 

accounts. The analysis and calculation 

of the targeted amount of the future 

commission merchant’s residual interest 

must be described in writing with the 

specificity necessary to allow the 

Commission and the futures 

commission merchant’s designated selfregulatory organization to duplicate the 

analysis and calculation and test the 

assumptions made by the futures 

commission merchant. The adequacy of 

the targeted residual interest and the 

process for establishing the targeted 

residual interest must be reassessed 

periodically by Senior Management and 

revised as necessary; 

(E) A process for the withdrawal of 

cash, securities, or other property from 

accounts holding Segregated Funds, 

where the withdrawal is not for the 

purpose of payments to or on behalf of 

the futures commission merchant’s 

Customers. Such policies and 

procedures must satisfy the 

requirements of § 1.23 of this part, 

§ 22.17 of this chapter, or § 30.7 of this 

chapter, as applicable; 

(F) A process for assessing the 

appropriateness of specific investments 

of Segregated Funds in permitted 

investments in accordance with § 1.25 

of this part. Such policies and 

procedures must take into consideration 

the market, credit, counterparty, 

operational, and liquidity risks 

associated with such investments, and 

assess whether such investments 

comply with the requirements in § 1.25 

of this part including that the futures 

commission merchant manage the 

permitted investments consistent with 

the objectives of preserving principal 

and maintaining liquidity; 

(H) Procedures requiring the 

appropriate separation of duties among 

individuals responsible for compliance 

with the Act and Commission 

regulations relating to the protection 

and financial reporting of Segregated 

Funds, including the separation of 

duties among personnel that are 

responsible for advising customers on 

trading activities, approving or 

overseeing cash receipts and 

disbursements (including investment 

operations), and recording and reporting 

financial transactions. The policies and 

procedures must require that any 

movement of funds to affiliated 

companies and parties are properly 

approved and documented; 

(I) A process for the timely recording 

of all transactions, including 

transactions impacting Customers’ 

accounts, in the firm’s books of record; 

(J) A program for conducting annual 

training of all finance, treasury, 

operations, regulatory, compliance, 

settlement, and other relevant officers 

and employees regarding the segregation 

requirements for Segregated Funds 

required by the Act and regulations, the 

requirements for notices under § 1.12 of 

this part, procedures for reporting of 

suspected breaches of the policies and 

procedures required by this section to 

the chief compliance officer, without 

fear of retaliation, and the consequences 

of failing to comply with the segregation 

requirements of the Act and regulations; 

and 

(K) Policies and procedures for 

assessing the liquidity, marketability 

and mark-to-market valuation of all 

securities or other non-cash assets held 

as Segregated Funds, including 

permitted investments under § 1.25 of 

this part, to ensure that all non-cash 

assets held in the Customer segregated 

accounts, both customer-owned 

securities and investments in 

accordance with § 1.25 of this part, are 

readily marketable and highly liquid. 

Such policies and procedures must 

require daily measurement of liquidity 

needs with respect to Customers; 

assessment of procedures to liquidate all 

non-cash collateral in a timely manner 

and without significant effect on price; 

and application of appropriate collateral 

haircuts that accurately reflect market 

and credit risk. 

(ii) Operational Risk. The Risk 

Management Program shall include 

automated financial risk management 

controls reasonably designed to prevent 

the placing of erroneous orders, 

including those that exceed pre-set 

capital, credit, or volume thresholds. 

The Risk Management Program shall 

ensure that the use of automated trading 

programs is subject to policies and 

procedures governing the use, 

supervision, maintenance, testing, and 

inspection of such programs. 

(iii) Capital Risk. The written policies 

and procedures shall be reasonably 

designed to ensure that the futures 

commission merchant has sufficient 

capital to be in compliance with the Act 

and the regulations, and sufficient 

capital and liquidity to meet the 

reasonably foreseeable needs of the 

futures commission merchant. 

(4) Supervision of the Risk 

Management Program. The Risk 

Management Program shall include a 

supervisory system that is reasonably 


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designed to ensure that the policies and 

procedures required by this section are 

diligently followed. 

(f) Review and testing. (1) The Risk 

Management Program of each futures 

commission merchant shall be reviewed 

and tested on at least an annual basis, 

or upon any material change in the 

business of the futures commission 

merchant that is reasonably likely to 

alter the risk profile of the futures 

commission merchant. 

(2) The annual reviews of the Risk 

Management Program shall include an 

analysis of adherence to, and the 

effectiveness of, the risk management 

policies and procedures, and any 

recommendations for modifications to 

the Risk Management Program. The 

annual testing shall be performed by 

qualified internal audit staff that are 

independent of the Business Unit or by 

a qualified third party audit service 

reporting to staff that are independent of 

the Business Unit. The results of the 

annual review of the Risk Management 

Program shall be promptly reported to 

and reviewed by the chief compliance 

officer, Senior Management, and 

Governing Body of the futures 

commission merchant. 

(3) Each futures commission merchant 

shall document all internal and external 

reviews and testing of its Risk 

Management Program and written risk 

management policies and procedures 

including the date of the review or test; 

the results; any deficiencies identified; 

the corrective action taken; and the date 

that corrective action was taken. Such 

documentation shall be provided to 

Commission staff, upon request. 

(g) Distribution of risk management 

policies and procedures. The Risk 

Management Program shall include 

procedures for the timely distribution of 

its written risk management policies 

and procedures to relevant supervisory 

personnel. Each futures commission 

merchant shall maintain records of the 

persons to whom the risk management 

policies and procedures were 

distributed and when they were 

distributed. 

(h) Recordkeeping. (1) Each futures 

commission merchant shall maintain 

copies of all written approvals required 

by this section. 

(2) All records or reports, including, 

but not limited to, the written policies 

and procedures and any changes 

thereto, that a futures commission 

merchant is required to maintain 

pursuant to this regulation shall be 

maintained in accordance with § 1.31 

and shall be made available promptly 

upon request to representatives of the 

Commission. 

5. Amend § 1.12 by revising 

paragraphs (a)(1) and (2), (b)(1), (2), and 

(4), (c), (d), (e), (f)(2) through (4), 

(f)(5)(i), (g), (h), and (i), and by adding 

new paragraphs (j), (k), (l), (m), and (n), 

to read as follows: 

§ 1.12 Maintenance of minimum financial 

requirements by futures commission 

merchants and introducing brokers. 

(a) * * * 

(1) Give notice, as set forth in 

paragraph (n) of this section, that the 

applicant’s or registrant’s adjusted net 

capital is less than required by § 1.17 of 

this part or by other capital rule, 

identifying the applicable capital rule. 

The notice must be given immediately 

after the applicant or registrant knows 

or should have known that its adjusted 

net capital is less than required by any 

of the aforesaid rules to which the 

applicant or registrant is subject; and 

(2) Provide together with such notice 

documentation, in such form as 

necessary, to adequately reflect the 

applicant’s or registrant’s capital 

condition as of any date on which such 

person’s adjusted net capital is less than 

the minimum required; Provided, 

however, that if the applicant or 

registrant cannot calculate or otherwise 

immediately determine its financial 

condition, it must provide the notice 

required by paragraph (a)(1) of this 

section and include in such notice a 

statement that the entity cannot 

presently calculate its financial 

condition. The applicant or registrant 

must provide similar documentation of 

its financial condition for other days as 

the Commission may request. 

(b) * * * 

(1) 150 percent of the minimum dollar 

amount required by § 1.17(a)(1)(i)(A) of 

this part; 

(2) 110 percent of the amount 

required by § 1.17(a)(1)(i)(B) of this part; 

* * * * * 

(4) For securities brokers or dealers, 

the amount of net capital specified in 

Rule 17a–11(c) of the Securities and 

Exchange Commission (17 CFR 

240.17a–11(c)), must file notice to that 

effect, as set forth in paragraph (n) of 

this section, as soon as possible and no 

later than twenty-four (24) hours of such 

event. 

(c) If an applicant or registrant at any 

time fails to make or keep current the 

books and records required by these 

regulations, such applicant or registrant 

must, on the same day such event 

occurs, provide notice of such fact as 

specified in paragraph (n) of this 

section, specifying the books and 

records which have not been made or 

which are not current, and as soon as 

possible, but not later than forty-eight 

(48) hours after giving such notice, file 

a report as required by paragraph (n) of 

this section stating what steps have been 

and are being taken to correct the 

situation. 

(d) Whenever any applicant or 

registrant discovers or is notified by an 

independent public accountant, 

pursuant to § 1.16(e)(2) of this part, of 

the existence of any material 

inadequacy, as specified in § 1.16(d)(2) 

of this part, such applicant or registrant 

must give notice of such material 

inadequacy, as provided in paragraph 

(n) of this section, as soon as possible 

but not later than twenty-four (24) hours 

of discovering or being notified of the 

material inadequacy. The applicant or 

registrant must file, in the manner 

provided for under paragraph (n) of this 

section, a report stating what steps have 

been and are being taken to correct the 

material inadequacy within forty-eight 

(48) hours of filing its notice of the 

material inadequacy. 

(e) Whenever any self-regulatory 

organization learns that a member 

registrant has failed to file a notice or 

report as required by this section, that 

self-regulatory organization must 

immediately report this failure by 

notice, as provided in paragraph (n) of 

this section. 

(f) * * * 

(2) Whenever a registered futures 

commission merchant determines that 

any position it carries for another 

registered futures commission merchant 

or for a registered leverage transaction 

merchant must be liquidated 

immediately, transferred immediately or 

that the trading of any account of such 

futures commission merchant or 

leverage transaction merchant shall be 

only for purposes of liquidation, 

because the other futures commission 

merchant or the leverage transaction 

merchant has failed to meet a call for 

margin or to make other required 

deposits, the carrying futures 

commission merchant must 

immediately give notice, as provided in 

paragraph (n) of this section, of such a 

determination. 

(3) Whenever a registered futures 

commission merchant determines that 

an account which it is carrying is 

undermargined by an amount which 

exceeds the futures commission 

merchant’s adjusted net capital 

determined in accordance with § 1.17 of 

this part, the futures commission 

merchant must immediately provide 

notice, as provided in paragraph (n) of 

this section, of such a determination to 

the designated self-regulatory 

organization and the Commission. This 

paragraph (f)(3) shall apply to any 

account carried by the futures 


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67936 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

commission merchant, whether a 

customer, noncustomer, omnibus or 

proprietary account. For purposes of 

this paragraph (f)(3), if any person has 

an interest of 10 percent or more in 

ownership or equity in, or guarantees, 

more than one account, or has 

guaranteed an account in addition to its 

own account, all such accounts shall be 

combined. 

(4) A futures commission merchant 

shall provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever any commodity 

interest account it carries is subject to a 

margin call, or call for other deposits 

required by the futures commission 

merchant, that exceeds the futures 

commission merchant’s excess adjusted 

net capital, determined in accordance 

with § 1.17 of this part, and such call 

has not been answered by the close of 

business on the day following the 

issuance of the call. This applies to all 

accounts carried by the futures 

commission merchant, whether 

customer, noncustomer, or omnibus, 

that are subject to margining, including 

commodity futures, cleared swaps, and 

options. In addition to actual margin 

deposits by an account owner, a futures 

commission merchant may also take 

account of favorable market moves in 

determining whether the margin call is 

required to be reported under this 

paragraph. 

(5)(i) A futures commission merchant 

shall provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever its excess adjusted 

net capital is less than six percent of the 

maintenance margin required by the 

futures commission merchant on all 

positions held in accounts of a 

noncustomer other than a noncustomer 

who is subject to the minimum financial 

requirements of: 

(A) A futures commission merchant, 

or 

(B) The Securities and Exchange 

Commission for a securities broker or 

dealer. 

* * * * * 

(g) A futures commission merchant 

shall provide notice, as provided in 

paragraph (n) of this section, of a 

substantial reduction in capital as 

compared to that last reported in a 

financial report filed with the 

Commission pursuant to § 1.10 of this 

part. This notice shall be provided as 

follows: 

(1) If any event or series of events, 

including any withdrawal, advance, 

loan or loss cause, on a net basis, a 

reduction in net capital (or, if the 

futures commission merchant is 

qualified to use the filing option 

available under § 1.10(h) of this part, 

tentative net capital as defined in the 

rules of the Securities and Exchange 

Commission) of 20 percent or more, 

notice must be provided as provided in 

paragraph (n) of this section within two 

business days of the event or series of 

events causing the reduction stating the 

reason for the reduction and steps the 

futures commission merchant will be 

taking to ensure an appropriate level of 

net capital is maintained by the futures 

commission merchant; and 

(2) If equity capital of the futures 

commission merchant or a subsidiary or 

affiliate of the futures commission 

merchant consolidated pursuant to 

§ 1.17(f) of this part (or 17 CFR 

240.15c3–1e) would be withdrawn by 

action of a stockholder or a partner or 

a limited liability company member or 

by redemption or repurchase of shares 

of stock by any of the consolidated 

entities or through the payment of 

dividends or any similar distribution, or 

an unsecured advance or loan would be 

made to a stockholder, partner, sole 

proprietor, limited liability company 

member, employee or affiliate, such that 

the withdrawal, advance or loan would 

cause, on a net basis, a reduction in 

excess adjusted net capital (or, if the 

futures commission merchant is 

qualified to use the filing option 

available under § 1.10(h) of this part, 

excess net capital as defined in the rules 

of the Securities and Exchange 

Commission) of 30 percent or more, 

notice must be provided as provided in 

paragraph (n) of this section at least two 

business days prior to the withdrawal, 

advance or loan that would cause the 

reduction: Provided, however, That the 

provisions of paragraphs (g)(1) and (g)(2) 

of this section do not apply to any 

futures or securities transaction in the 

ordinary course of business between a 

futures commission merchant and any 

affiliate where the futures commission 

merchant makes payment to or on 

behalf of such affiliate for such 

transaction and then receives payment 

from such affiliate for such transaction 

within two business days from the date 

of the transaction. 

(3) Upon receipt of such notice from 

a futures commission merchant, or upon 

a reasonable belief that a substantial 

reduction in capital has occurred or will 

occur, the Director of the Division of 

Swap Dealer and Intermediary 

Oversight or the Director’s designee may 

require that the futures commission 

merchant provide or cause a Material 

Affiliated Person (as that term is defined 

in § 1.14(a)(2) of this part) to provide, 

within three business days from the date 

of request or such shorter period as the 

Division Director or designee may 

specify, such other information as the 

Division Director or designee 

determines to be necessary based upon 

market conditions, reports provided by 

the futures commission merchant, or 

other available information. 

(h) Whenever a person registered as a 

futures commission merchant knows or 

should know that the total amount of its 

funds on deposit in segregated accounts 

on behalf of customers trading on 

designated contract markets, or the 

amount of funds on deposit in 

segregated accounts for customers 

transacting in Cleared Swaps under part 

22 of this chapter, or that the total 

amount set aside on behalf of customers 

trading on non-United States markets 

under part 30 of this chapter, is less 

than the total amount of such funds 

required by the Act and the regulations 

to be on deposit in segregated or secured 

amount accounts on behalf of such 

customers, the registrant must report 

such deficiency immediately by notice 

to the registrant’s designated selfregulatory organization and the 

Commission, as provided in paragraph 

(n) of this section. 

(i) A futures commission merchant 

must provide immediate notice, as set 

forth in paragraph (n) of this section, 

whenever it discovers or is informed 

that it has invested funds held for 

futures customers trading on designated 

contract markets pursuant to § 1.20 of 

this part, Cleared Swaps Customer 

Collateral, as defined in § 22.1 of this 

chapter, or 30.7 Customer Funds, as 

defined in § 30.1 of this chapter, in 

instruments that are not permitted 

investments under § 1.25 of this part, or 

has otherwise violated the requirements 

governing the investment of funds 

belonging to customers under § 1.25 of 

this part. 

(j) A futures commission merchant 

must provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever the futures 

commission merchant does not hold a 

sufficient amount of funds in segregated 

accounts for futures customers under 

§ 1.20 of this part, in segregated 

accounts for Cleared Swaps Customers 

under part 22 of this chapter, or in 

secured amount accounts for customers 

trading on foreign market under part 30 

of this chapter to meet the futures 

commission merchant’s targeted 

residual interest in the segregated or 

secured amount accounts pursuant to its 

policies and procedures required under 

§ 1.11 of this part, or whenever the 

futures commission merchant’s amount 

of residual interest in any such accounts 

is less than the sum of all margin 

deficits for such accounts. 


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(k) A futures commission merchant 

must provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever the futures 

commission merchant, or the futures 

commission merchant’s parent or 

material affiliate, experiences a material 

adverse impact to its creditworthiness 

or ability to fund its obligations. 

(l) A futures commission merchant 

must provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever the futures 

commission merchant experiences a 

material change in its operations or risk 

profile, including a change in the senior 

management of the futures commission 

merchant, the establishment or 

termination of a line of business, a 

material adverse change in the futures 

commission merchant’s clearing 

arrangements, or a material adverse 

change to the futures commission 

merchant’s credit arrangements, 

including any change that could 

adversely impact the firm’s liquidity 

resources. 

(m) In the event that a futures 

commission merchant receives a notice, 

examination report, or any other 

correspondence from a designated selfregulatory organization, the Securities 

and Exchange Commission or a 

securities industry self-regulatory 

organization, the futures commission 

merchant must immediately file a copy 

of such notice, examination report, or 

any other correspondence, and the 

registrant’s response, as appropriate, as 

provided in paragraph (n) of this 

section. 

(n) Notice. (1) Every notice and report 

required to be filed by this section by a 

futures commission merchant or a selfregulatory organization must be filed 

with the Commission, with the 

designated self-regulatory organization, 

if any, and with the Securities and 

Exchange Commission, if such registrant 

is a securities broker or dealer. Every 

notice and report required to be filed by 

this section by an applicant for 

registration as a futures commission 

merchant must be filed with the 

National Futures Association (on behalf 

of the Commission), with the designated 

self-regulatory organization, if any, and 

with the Securities and Exchange 

Commission, if such applicant is a 

securities broker or dealer. Every notice 

or report that is required to be filed by 

this section by a futures commission 

merchant or a self-regulatory 

organization must include a discussion 

of how the reporting event originated 

and what steps have been, or are being 

taken, to address the reporting event. 

(2) Every notice and report which an 

introducing broker or applicant for 

registration as an introducing broker is 

required to file by paragraphs (a), (c), 

and (d) of this section must be filed with 

the National Futures Association (on 

behalf of the Commission), with the 

designated self-regulatory organization, 

if any, and with every futures 

commission merchant carrying or 

intending to carry customer accounts for 

the introducing broker or applicant for 

registration as an introducing broker. 

Any notice or report filed with the 

National Futures Association pursuant 

to this paragraph shall be deemed for all 

purposes to be filed with, and to be the 

official record of, the Commission. 

Every notice or report that is required to 

be filed by this section by an 

introducing broker or applicant for 

registration as an introducing broker 

must include a discussion of how the 

reporting event originated and what 

steps have been, or are being taken, to 

address the reporting event. 

(3) Every notice or report that is 

required to be filed by a futures 

commission merchant with the 

Commission or with a designated selfregulatory organization under this 

section must be in writing and must be 

filed via electronic transmission using a 

form of user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission; Provided, however, 

that if the registered futures commission 

merchant cannot file the notice or report 

using the electronic transmission 

approved by the Commission due to a 

transmission or systems failure, the 

futures commission merchant must 

immediately contact the Commission’s 

Regional office with jurisdiction over 

the futures commission merchant as 

provided in § 140.02 of this chapter, and 

by email to FCMNotice@CFTC.gov. Any 

such electronic submission must clearly 

indicate the futures commission 

merchant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. 

6. Amend § 1.15 by revising paragraph 

(a)(4) to read as follows: 

§ 1.15 Risk assessment reporting 

requirements for futures commission 

merchants. 

(a) * * * 

(4) The reports required to be filed 

pursuant to paragraphs (a)(1) and (2) of 

this section must be filed via electronic 

transmission using a form of user 

authentication assigned in accordance 

with procedures established by or 

approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. 

* * * * * 

7. Amend § 1.16 by revising 

paragraphs (a)(4), (b)(1), (c)(1), (c)(2), 

and (f)(1)(i)(C), and by adding paragraph 

(b)(4) to read as follows: 

§ 1.16 Qualifications and reports of 

accountants. 

(a) * * * 

(4) Customer. The term ‘‘customer’’ 

means customer, as defined in § 1.3 of 

this part, and 30.7 Customer, as defined 

in § 30.1 of this chapter. 

(b) Qualifications of accountants. (1) 

The Commission will recognize any 

person as a certified public accountant 

who is duly registered and in good 

standing as such under the laws of the 

place of his residence or principal 

office; Provided, however, that a 

certified public accountant engaged to 

conduct an examination of a futures 

commission merchant must be 

registered with the Public Company 

Accounting Oversight Board, have 

undergone an examination by the Public 

Company Accounting Oversight Board, 

and any deficiencies noted during such 

examination must have been remediated 

to the satisfaction of the Public 

Company Accounting Oversight Board 

within three years of such report. 

* * * * * 

(4) The governing body of each 

futures commission merchant must 

ensure that the certified public 

accountant engaged is duly qualified to 

perform an audit of the futures 

commission merchant. Such an 

evaluation of the qualifications of the 

certified public accountant should 

include, among other issues, the 

certified public accountant’s experience 

in auditing futures commission 

merchants, the depth of the certified 

public accountant’s staff, the certified 

public accountant’s knowledge of the 

Act and Regulations, the size and 

geographic location of the futures 

commission merchant, and the 

independence of the certified public 

accountant. 

(c) * * * 

(1) Technical requirements. The 

accountant’s report must: 

(i) Be dated; 

(ii) Indicate the city and State where 

issued; and 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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(iii) Identify without detailed 

enumeration the financial statements 

covered by the report. 

(2) Representations as to the audit. 

The accountant’s report must state 

whether the audit was made in 

accordance with U.S. generally accepted 

auditing standards after full 

consideration to the auditing standards 

adopted by the Public Company 

Accounting Oversight Board, and must 

designate any auditing procedures 

deemed necessary by the accountant 

under the circumstances of the 

particular case which have been omitted 

and the reasons for their omission. 

However, nothing in this paragraph 

(c)(2) shall be construed to imply 

authority for the omission of any 

procedure which independent 

accountants would ordinarily employ in 

the course of an audit made for the 

purposes of expressing the opinion 

required by paragraph (c)(3) of this 

section. 

* * * * * 

(f)(1) * * * 

(i) * * * 

(C) Any copy that under this 

paragraph (f)(1)(i) is required to be filed 

with the Commission must be filed via 

electronic transmission using a form of 

user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. 

* * * * * 

8. Amend § 1.17 by revising 

paragraphs (a)(4), (b)(2), (b)(7), (c)(5)(v), 

(c)(5)(viii), and (c)(5)(ix) to read as 

follows: 

§ 1.17 Minimum financial requirements for 

futures commission merchants and 

introducing brokers. 

(a) * * * 

(4) A futures commission merchant 

who is not in compliance with this 

section, or is unable to demonstrate 

such compliance as required by 

paragraph (a)(3) of this section, or who 

cannot certify to the Commission 

immediately upon request and 

demonstrate with verifiable evidence 

that it has sufficient access to liquidity 

to continue operating as a going 

concern, must transfer all customer 

accounts and immediately cease doing 

business as a futures commission 

merchant until such time as the firm is 

able to demonstrate such compliance; 

Provided, however, The registrant may 

trade for liquidation purposes only 

unless otherwise directed by the 

Commission and/or the designated selfregulatory organization; And, Provided 

further, That if such registrant 

immediately demonstrates to the 

satisfaction of the Commission or the 

designated self-regulatory organization 

the ability to achieve compliance, the 

Commission or the designated selfregulatory organization may in its 

discretion allow such registrant up to a 

maximum of 10 business days in which 

to achieve compliance without having 

to transfer accounts and cease doing 

business as required above. Nothing in 

this paragraph (a)(4) shall be construed 

as preventing the Commission or the 

designated self-regulatory organization 

from taking action against a registrant 

for non-compliance with any of the 

provisions of this section. 

* * * * * 

(b) * * * 

(2) Customer. This term means a 

futures customer as defined in § 1.3 of 

this chapter, a cleared over the counter 

customer as defined in paragraph (b)(10) 

of this section, and a 30.7 Customer as 

defined in § 30.1 of this chapter. 

* * * * * 

(7) Customer account. This term 

means an account in which commodity 

futures, options or cleared over the 

counter derivative positions are carried 

on the books of the applicant or 

registrant which is an account that is 

included in the definition of customer 

as defined in § 1.17(b)(2). 

* * * * * 

(c) * * * 

(5) * * * 

(v) In the case of securities and 

obligations used by the applicant or 

registrant in computing net capital, and 

in the case of a futures commission 

merchant that invests funds deposited 

by futures customers as defined in § 1.3 

of this part, Cleared Swaps Customers as 

defined in § 22.1 of this chapter, and 

30.7 Customers as defined in § 30.1 of 

this chapter in securities as permitted 

investments under § 1.25 of this part, 

the deductions specified in Rule 

240.15c3–1(c)(2)(vi) or Rule 240.15c3– 

1(c)(2)(vii) of the Securities and 

Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi) and 17 CFR 

240.15c3–1(c)(2)(vii)) (‘‘securities 

haircuts’’). Futures commission 

merchants that establish and enforce 

written policies and procedures to 

assess the credit risk of commercial 

paper, convertible debt instruments, or 

nonconvertible debt instruments in 

accordance with Rule 240.15c3– 

1(c)(2)(vi) of the Securities and 

Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)) may apply the 

lower haircut percentages specified in 

Rule 240.15c3–1(c)(2)(vi) for such 

commercial paper, convertible debt 

instruments and nonconvertible debt 

instruments. Futures commission 

merchants must maintain their written 

policies and procedures in accordance 

with § 1.31 of this part; 

* * * * * 

(viii) In the case of a futures 

commission merchant, for 

undermargined customer commodity 

futures accounts and commodity option 

customer accounts the amount of funds 

required in each such account to meet 

maintenance margin requirements of the 

applicable board of trade or if there are 

no such maintenance margin 

requirements, clearing organization 

margin requirements applicable to such 

positions, after application of calls for 

margin or other required deposits which 

are outstanding no more than one 

business day. If there are no such 

maintenance margin requirements or 

clearing organization margin 

requirements, then the amount of funds 

required to provide margin equal to the 

amount necessary, after application of 

calls for margin or other required 

deposits outstanding no more than one 

business day, to restore original margin 

when the original margin has been 

depleted by 50 percent or more: 

Provided, To the extent a deficit is 

excluded from current assets in 

accordance with paragraph (c)(2)(i) of 

this section such amount shall not also 

be deducted under this paragraph 

(c)(5)(viii). In the event that an owner of 

a customer account has deposited an 

asset other than cash to margin, 

guarantee or secure his account, the 

value attributable to such asset for 

purposes of this subparagraph shall be 

the lesser of (A) the value attributable to 

the asset pursuant to the margin rules of 

the applicable board of trade, or (B) the 

market value of the asset after 

application of the percentage 

deductions specified in this paragraph 

(c)(5); 

(ix) In the case of a futures 

commission merchant, for 

undermargined commodity futures and 

commodity option noncustomer and 

omnibus accounts the amount of funds 

required in each such account to meet 

maintenance margin requirements of the 

applicable board of trade or if there are 

no such maintenance margin 

requirements, clearing organization 

margin requirements applicable to such 

positions, after application of calls for 

margin or other required deposits which 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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are outstanding no more than one 

business day. If there are no such 

maintenance margin requirements or 

clearing organization margin 

requirements, then the amount of funds 

required to provide margin equal to the 

amount necessary after application of 

calls for margin or other required 

deposits outstanding no more than one 

business day to restore original margin 

when the original margin has been 

depleted by 50 percent or more: 

Provided, To the extent a deficit is 

excluded from current assets in 

accordance with paragraph (c)(2)(i) of 

this section such amount shall not also 

be deducted under this paragraph 

(c)(5)(ix). In the event that an owner of 

a noncustomer or omnibus account has 

deposited an asset other than cash to 

margin, guarantee or secure his account 

the value attributable to such asset for 

purposes of this subparagraph shall be 

the lesser of the value attributable to 

such asset pursuant to the margin rules 

of the applicable board of trade, or the 

market value of such asset after 

application of the percentage 

deductions specified in this paragraph 

(c)(5); 

* * * * * 

9. Revise § 1.20 to read as follows: 

§ 1.20 Futures customer funds to be 

segregated and separately accounted for. 

(a) General. A futures commission 

merchant must separately account for 

all futures customer funds and segregate 

such funds as belonging to its futures 

customers. A futures commission 

merchant shall deposit futures customer 

funds under an account name which 

clearly identifies them as futures 

customer funds and shows that such 

funds are segregated as required by 

sections 4d(a) and 4d(b) of the Act and 

this part. A futures commission 

merchant must at all times maintain in 

the separate account or accounts money, 

securities and property in an amount at 

least sufficient in the aggregate to cover 

its total obligations to all futures 

customers. The futures commission 

merchant must perform appropriate due 

diligence as required by § 1.11 of this 

part on any and all locations of futures 

customer funds, as specified in 

paragraph (b) of this section, to ensure 

that the location in which the futures 

commission merchant has deposited 

such funds is a financially sound entity. 

(b) Location of futures customer 

funds. A futures commission merchant 

may deposit futures customer funds, 

subject to the risk management policies 

and procedures of the futures 

commission merchant required by § 1.11 

of this part, with the following 

depositories: 

(1) A bank or trust company; 

(2) A derivatives clearing 

organization; or 

(3) Another futures commission 

merchant. 

(c) Limitation on the holding of 

futures customer funds outside of the 

United States. A futures commission 

merchant may hold futures customer 

funds with a depository outside of the 

United States only in accordance with 

§ 1.49 of this part. 

(d) Written acknowledgment from 

depositories. (1) A futures commission 

merchant must obtain a written 

acknowledgment from each bank, trust 

company, derivatives clearing 

organization, or futures commission 

merchant prior to or contemporaneously 

with the opening of an account by the 

futures commission merchant with such 

depositories; Provided, however, that a 

written acknowledgment need not be 

obtained from a derivatives clearing 

organization that has adopted and 

submitted to the Commission rules that 

provide for the segregation of futures 

customer funds in accordance with all 

relevant provisions of the Act and the 

rules and orders promulgated 

thereunder. 

(2) The written acknowledgment must 

be in the form as set out in Appendix 

A to this part. 

(3) A futures commission merchant 

may deposit futures customer funds 

only with a depository that provides the 

Commission and the futures 

commission merchant’s designated selfregulatory organization with direct, 

read-only access to account information 

on 24-hour a day basis. The Commission 

and the futures commission merchant’s 

designated self-regulatory organization 

must receive the direct access when the 

account is opened. The written 

acknowledgment must contain the 

futures commission merchant’s 

authorization to the depository to 

provide direct and immediate account 

access to the Commission and the 

futures commission merchant’s 

designated self-regulatory organization 

without further notice to or consent 

from the futures commission merchant. 

(4) A futures commission merchant 

may deposit futures customer funds 

only with a depository that agrees to 

provide the Commission and the futures 

commission merchant’s designated selfregulatory organization with a copy of 

the executed written acknowledgment 

within three business days of the 

opening of the account. The 

Commission must receive the written 

acknowledgment from the depository 

via electronic mail at 

acknowledgmentletters@cftc.gov. The 

written acknowledgment must contain 

the futures commission merchant’s 

authorization to the depository to 

provide the written acknowledgment to 

the Commission and to the futures 

commission merchant’s designated selfregulatory organization without further 

notice to or consent from the futures 

commission merchant. 

(5) A futures commission merchant 

may deposit futures customer funds 

only with a depository that agrees to 

reply promptly and directly to the 

Commission’s or to the futures 

commission merchant’s designated selfregulatory organization’s requests for 

confirmation of account balances or 

other account information without 

further notice to or consent from the 

futures commission merchant. The 

written acknowledgment must contain 

the futures commission merchant’s 

authorization to the depository to 

respond directly and immediately to 

requests from the Commission or the 

futures commission merchant’s 

designated self-regulatory organization 

for confirmation of account balances 

and other account information without 

further notice to or consent from the 

futures commission merchant. 

(6) The futures commission merchant 

shall promptly file a copy of the written 

acknowledgment with the Commission 

in the manner specified by the 

Commission and in no event later than 

the later of: 

(i) The effective date of this rule; or 

(ii) Three business days after the 

account is opened. 

(7) A futures commission merchant 

shall amend the written 

acknowledgment and promptly file the 

amended acknowledgment with the 

Commission within 120 days of any 

changes in the following: 

(i) The name or business address of 

the futures commission merchant; 

(ii) The name or business address of 

the bank, trust company, derivatives 

clearing organization or futures 

commission merchant receiving futures 

customer funds; or 

(iii) The account number(s) under 

which futures customer funds are held. 

(8) A futures commission merchant 

must maintain each written 

acknowledgment readily accessible in 

its files in accordance with § 1.31 of this 

part, for as long as the account remains 

open, and thereafter for the period 

provided in § 1.31 of this part. 

(e) Commingling. (1) A futures 

commission merchant may for 

convenience commingle the futures 

customer funds that it receives from, or 

on behalf of, multiple futures customers 

in a single account or multiple accounts 

with one or more of the depositories 

listed in paragraph (b) of this section. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67940 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

(2) A futures commission merchant 

shall not commingle futures customer 

funds with the money, securities or 

property of such futures commission 

merchant, or with any proprietary 

account of such futures commission 

merchant, or use such funds to secure 

or guarantee the obligation of, or extend 

credit to, such futures commission 

merchant or any proprietary account of 

such futures commission merchant; 

Provided, however, a futures 

commission merchant may deposit 

proprietary funds in segregated accounts 

as permitted under § 1.23 of this part. 

(3) A futures commission merchant 

may not commingle futures customer 

funds with funds deposited by 30.7 

Customers as defined in § 30.1 of this 

chapter and set aside in separate 

accounts as required by part 30 of this 

chapter, or with funds deposited by 

Cleared Swaps Customers as defined in 

§ 22.1 of this chapter and held in 

segregated accounts pursuant to Section 

4d(f) of the Act; Provided, however, that 

a futures commission merchant may 

commingle futures customer funds with 

funds deposited by 30.7 Customers or 

Cleared Swaps Customers if expressly 

permitted by a Commission regulation 

or order, or by a derivatives clearing 

organization rule approved in 

accordance with § 39.15(b)(2) of this 

chapter. 

(f) Limitation on use of futures 

customer funds. (1) A futures 

commission merchant shall treat and 

deal with the funds of a futures 

customer as belonging to such futures 

customer. A futures commission 

merchant shall not use the funds of a 

futures customer to secure or guarantee 

the commodity interests, or to secure or 

extend the credit, of any person other 

than the futures customer for whom the 

funds are held. 

(2) A futures commission merchant 

shall obligate futures customer funds to 

a derivatives clearing organization, a 

futures commission merchant, or any 

depository solely to purchase, margin, 

guarantee, secure, transfer, adjust or 

settle trades, contracts or commodity 

option transactions of futures 

customers; Provided, however, that a 

futures commission merchant is 

permitted to use the funds belonging to 

a futures customer that are necessary in 

the normal course of business to pay 

lawfully accruing fees or expenses on 

behalf of the futures customer’s 

positions including commissions, 

brokerage, interest, taxes, storage and 

other fees and charges. 

(3) No person, including any 

derivatives clearing organization or any 

depository, that has received futures 

customer funds for deposit in a 

segregated account, as provided in this 

section, may hold, dispose of, or use any 

such funds as belonging to any person 

other than the futures customers of the 

futures commission merchant which 

deposited such funds. 

(g) Derivatives clearing organizations. 

(1) General. All futures customer funds 

received by a derivatives clearing 

organization from a member to 

purchase, margin, guarantee, secure or 

settle the trades, contracts or commodity 

options of the clearing member’s futures 

customers and all money accruing to 

such futures customers as the result of 

trades, contracts or commodity options 

so carried shall be separately accounted 

for and segregated as belonging to such 

futures customers, and a derivatives 

clearing organization shall not hold, use 

or dispose of such futures customer 

funds except as belonging to such 

futures customers. A derivatives 

clearing organization shall deposit 

futures customer funds under an 

account name that clearly identifies 

them as futures customer funds and 

shows that the futures customer funds 

are segregated as required by section 

4(d)(a) and 4d(b) of the Act and this 

part. 

(2) Location of futures customer 

funds. A derivatives clearing 

organization may deposit futures 

customer funds with a bank or trust 

company, which shall include a Federal 

Reserve Bank with respect to deposits of 

a systemically important derivatives 

clearing organization. 

(3) Limitation on the holding of 

futures customer funds outside of the 

United States. A derivatives clearing 

organization may hold futures customer 

funds with a depository outside of the 

United States only in accordance with 

§ 1.49 of this part. 

(4) Written acknowledgment from 

depositories. (i) A derivatives clearing 

organization must obtain a written 

acknowledgment from each depository 

prior to or contemporaneously with the 

opening of a futures customer funds 

account; 

(ii) The written acknowledgment must 

be in the form as set out in Appendix 

A to this part; 

(iii) A derivatives clearing 

organization may deposit futures 

customer funds only with a depository 

that provides the Commission with 

direct, read-only access to account 

information on 24-hour a day basis. The 

Commission must receive the direct 

access when the account is opened. The 

written acknowledgment must contain 

the derivatives clearing organization’s 

authorization to the depository to 

provide direct and immediate account 

access to the Commission without 

further notice to or consent from the 

derivatives clearing organization; 

(iv) A derivatives clearing 

organization may deposit futures 

customer funds only with a depository 

that agrees to provide the Commission 

with a copy of the executed written 

acknowledgment within three business 

days of the opening of the account. The 

Commission must receive the written 

acknowledgment from the depository 

via electronic mail at 

acknowledgmentletters@cftc.gov. The 

written acknowledgment must contain 

the derivatives clearing organization’s 

authorization to the depository to 

provide the written acknowledgment to 

the Commission without further notice 

to or consent from the derivatives 

clearing organization; 

(v) A derivatives clearing organization 

may deposit futures customer funds 

only with a depository that agrees to 

reply promptly and directly to the 

Commission’s requests for confirmation 

of account balances or other account 

information without further notice to or 

consent from the derivatives clearing 

organization. The written 

acknowledgment must contain the 

derivatives clearing organization’s 

authorization to the depository to 

respond directly and immediately to 

requests from the Commission for 

confirmation of account balances and 

other account information without 

further notice to or consent from the 

derivatives clearing organization; 

(vi) A derivatives clearing 

organization shall promptly file a copy 

of the written acknowledgment with the 

Commission in the manner specified by 

the Commission and in event later than 

the later of: 

(A) The effective date of this rule; or 

(B) Three business days after the 

account is opened. 

(vii) A derivatives clearing 

organization shall amend the written 

acknowledgment and promptly file the 

amended acknowledgment with the 

Commission within 120 days of any 

changes in the following: 

(A)The name or business address of 

the derivatives clearing organization; 

(B) The name or business address of 

the depository receiving futures 

customer funds; or 

(C) The account number(s) under 

which futures customer funds are held. 

(viii) A derivatives clearing 

organization must maintain each written 

acknowledgment readily accessible in 

its files in accordance with § 1.31 of this 

part, for as long as the account remains 

open, and thereafter for the period 

provided in § 1.31 of this part. 

(5) Commingling. (i) A derivatives 

clearing organization may for 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
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convenience commingle the futures 

customer funds that it receives from, or 

on behalf of, multiple futures 

commission merchants in a single 

account or multiple accounts with one 

or more of the depositories listed in 

paragraph (g)(2) of this section. 

(ii) A derivatives clearing organization 

shall not commingle futures customer 

funds with the money, securities or 

property of such derivatives clearing 

organization or with any proprietary 

account of any of its clearing members, 

or use such funds to secure or guarantee 

the obligations of, or extend credit to, 

such derivatives clearing organization or 

any proprietary account of any of its 

clearing members. 

(iii) A derivatives clearing 

organization may not commingle funds 

held for futures customers with funds 

deposited by clearing members on 

behalf of their 30.7 Customers as 

defined in § 30.1 of this chapter and set 

aside in separate accounts as required 

by part 30 of this chapter, or with funds 

deposited by clearing members on 

behalf of their Cleared Swaps Customers 

as defined in § 22.1 of this chapter and 

held in segregated accounts pursuant 

section 4d(f) of the Act; Provided, 

however, that a derivatives clearing 

organization may commingle futures 

customer funds with funds deposited by 

clearing members on behalf of their 30.7 

Customers or Cleared Swaps Customers 

if expressly permitted by a Commission 

regulation or order, or by a derivatives 

clearing organization rule approved in 

accordance with § 39.15(b)(2) of this 

chapter. 

(h) Immediate availability of bank 

and trust company deposits. All futures 

customer funds deposited by a futures 

commission merchant or a derivatives 

clearing organization with a bank or 

trust company must be immediately 

available for withdrawal upon the 

demand of the futures commission 

merchant or derivatives clearing 

organization. 

(i) Requirements as to Amount. (1) For 

purposes of this paragraph (i), the term 

‘‘account’’ shall mean the entries on the 

books and records of a futures 

commission merchant pertaining to the 

futures customer funds of a particular 

futures customer. 

(2) The futures commission merchant 

must reflect in the account that it 

maintains for each futures customer: 

(i) The market value of any futures 

customer funds that it receives from 

such customer, as adjusted by: 

(A) Any uses permitted under § 1.20(f) 

of this part; 

(B) Any accruals on permitted 

investments of such collateral under 

§ 1.25 of this part that, pursuant to the 

futures commission merchant’s 

customer agreement with that customer, 

are creditable to such customer; 

(C) Any gains and losses with respect 

to contracts for the purchase or sale of 

a commodity for future delivery and any 

options on such contracts; 

(D) Any charges lawfully accruing to 

the futures customer, including any 

commission, brokerage fee, interest, tax, 

or storage fee; and 

(E) Any appropriately authorized 

distribution or transfer of such 

collateral. 

(ii) The amount of collateral required 

for the futures customer’s contracts for 

the purchase or sale of a commodity for 

future delivery and any options on such 

contracts at each derivatives clearing 

organization on which the futures 

commission merchant is a member, or 

by each other futures commission 

merchant through which the futures 

commission merchant clears futures 

customer contracts, and the total of such 

required collateral amounts. 

(3)(i) If the market value of futures 

customer funds in the account of a 

futures customer is positive after 

adjustments, then that account has a 

credit balance. If the market value of 

futures customer funds in the account of 

a futures customer is negative after 

adjustments, then that account has a 

debit balance. 

(ii) If the value of the futures customer 

funds, as calculated in paragraph 

(i)(2)(i) of this section, for a futures 

customer’s account is less than the total 

amount of collateral required for that 

account’s contracts for the purchase or 

sale of a commodity for future delivery 

and any options on such contracts at 

derivatives clearing organizations, as 

calculated in paragraph (i)(2)(ii) of this 

section, the difference is a margin 

deficit. 

(4) The futures commission merchant 

must maintain in segregation an amount 

equal to the sum of any credit balances 

that the futures customers of the futures 

commission merchant have in their 

accounts, excluding from such sum any 

debit balances that the futures 

customers of the futures commission 

merchant have in their accounts. In 

addition, the futures commission 

merchant must at all times maintain 

residual interest in segregated fund 

sufficient to exceed the sum of all 

margin deficits that the futures 

customers of the futures commission 

merchant have in their accounts. Such 

residual interest may not be withdrawn 

pursuant to § 1.23 of this part. 

Appendix A to § 1.20— 

Acknowledgment Letter for CFTC 

Regulation 1.20 Customer Segregated 

Account 

[Date] 

[Name and Address of Bank, Trust 

Company, Derivatives Clearing Organization 

or Futures Commission Merchant] 

We refer to the Segregated Account(s) 

which [Name of Futures Commission 

Merchant or Derivatives Clearing 

Organization] (‘‘we’’ or ‘‘our’’) have opened 

or will open with [Name of Bank, Trust 

Company, Derivatives Clearing Organization 

or Futures Commission Merchant] (‘‘you’’ or 

‘‘your’’) entitled: 

[Name of Futures Commission Merchant or 

Derivatives Clearing Organization] [if 

applicable, add ‘‘FCM Customer Omnibus 

Account’’] CFTC Regulation 1.20 Customer 

Segregated Account 

Account Number(s): [ ] 

You acknowledge and agree that we have 

opened or will open the above-referenced 

Account(s) for the purpose of depositing, as 

applicable, money, securities and other 

property (collectively the ‘‘Funds’’) of our 

customers who trade commodities, options, 

swaps, other cleared OTC derivatives 

products and other products, as required by 

Commodity Futures Trading Commission 

(‘‘CFTC’’) Regulations, including Regulation 

1.20, as amended; that the Funds held by 

you, hereafter deposited in the Account(s) or 

accruing to the credit of the Accounts, will 

be separately accounted for and segregated 

on your books from our own funds and all 

other accounts maintained by us in 

accordance with the provisions of the 

Commodity Exchange Act, as amended (the 

‘‘Act’’), and Part 1 of the CFTC’s regulations, 

as amended; and that the Funds must 

otherwise be treated in accordance with the 

provisions of the Act and CFTC regulations. 

Furthermore, you acknowledge and agree 

that such Funds may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, nor may they be 

used by us to secure credit from you. You 

further acknowledge and agree that the 

Funds in the Account(s) shall not be subject 

to any right of offset or lien for or on account 

of any indebtedness, obligations or liabilities 

we may now or in the future have owing to 

you. This prohibition does not affect your 

right to recover funds advanced in the form 

of cash transfers you make in lieu of 

liquidating non-cash assets held in the 

Account(s) for purposes of variation 

settlement or posting initial (original) margin. 

In addition, you agree that the Account(s) 

may be examined at any reasonable time by 

an appropriate officer, agent or employee of 

the CFTC or a self-regulatory organization of 

which we are a member, and this letter 

constitutes the authorization and direction of 

the undersigned to permit any such 

examination or audit to take place. You agree 

to respond promptly and directly to requests 

for confirmation of account balances and 

other account information from an 

appropriate officer, agent, or employee of the 

CFTC or a self-regulatory organization of 

which we are a member, without further 

notice to or consent from the futures 


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commission merchant or derivatives clearing 

organization, as applicable. You also agree 

that, immediately upon instruction by the 

director of the Division of Swap Dealer and 

Intermediary Oversight of the CFTC or the 

director of the Division of Clearing and Risk 

of the CFTC, or any successor divisions, or 

such directors’ designees, or any appropriate 

official of a self-regulatory organization of 

which we are a member, you will provide 

any and all information regarding or related 

to the Funds or the Accounts as shall be 

specified in such instruction and as directed 

in such instruction. You further agree that 

you will provide the CFTC and our 

designated self-regulatory organization with 

the necessary software, a user log-in, and 

password that will allow the CFTC and our 

designated self-regulatory organization to 

have read-only access to the accounts listed 

above on your Web site or via an alternative 

electronic medium on a 24-hour a day basis. 

You acknowledge and agree that the Funds 

in the Account(s) shall be released 

immediately, subject to the requirements of 

U.S. or non-U.S. law as applicable, upon 

proper notice and instruction from an 

appropriate officer or employee of us or from 

the director of the Division of Clearing and 

Risk of the CFTC, the director of the Division 

of Swap Dealer and Intermediary Oversight 

of the CFTC, or any successor divisions, or 

such directors’ designees. 

We will not hold you responsible for acting 

pursuant to any instruction from the CFTC or 

the self-regulatory organization upon which 

you have relied after having taken reasonable 

measures to assure that such instruction was 

provided to you by the director of the 

Division of Clearing and Risk of the CFTC, 

the director of the Division of Swap Dealer 

and Intermediary Oversight of the CFTC, or 

any successor divisions, or such directors’ 

designees, or any appropriate official of a 

self-regulatory organization of which we are 

a member. 

In the event that we become subject to 

either a voluntary or involuntary petition for 

relief under the U.S. Bankruptcy Code, we 

acknowledge that you will have no obligation 

to release the Funds held in the Account(s), 

except upon instruction of the Trustee in 

Bankruptcy or pursuant to the Order of the 

respective U.S. Bankruptcy Court. 

Notwithstanding anything in the foregoing to 

the contrary, nothing contained herein shall 

be construed as limiting your right to assert 

any right of set off against or lien on assets 

other than assets maintained in the 

Account(s), nor to impose such charges 

against us or any proprietary account 

maintained by us with you. Further, it is 

understood that amounts represented by 

checks, drafts or other items shall not be 

considered to be part of the Account(s) until 

finally collected. Accordingly, checks, drafts 

and other items credited to the Account(s) 

and subsequently dishonored or otherwise 

returned to you, or reversed, for any reason 

and any claims relating thereto, including but 

not limited to claims of alteration or forgery, 

may be charged back to the Account(s), and 

we shall be responsible to you as a general 

endorser of all such items whether or not 

actually so endorsed. You may conclusively 

presume that any withdrawal from the 

Account(s) and the balances maintained 

therein are in conformity with the Act and 

CFTC regulations without any further 

inquiry, provided that you have no notice of 

or actual knowledge of, or could not 

reasonably know of, a violation of the Act or 

other provision of law by us; and you shall 

not in any manner not expressly agreed to 

herein be responsible for ensuring 

compliance by us with the provisions of the 

Act and CFTC regulations. You may, and are 

hereby authorized to, obey the order, 

judgment, decree or levy of any court of 

competent jurisdiction or any governmental 

agency with jurisdiction, which order, 

judgment, decree or levy relates in whole or 

in part to the Account(s). In any event, you 

shall not be liable by reason of any such 

action or omission to act, to us or to any 

other person, firm, association or corporation 

even if thereafter any such order, decree, 

judgment or levy shall be reversed, modified, 

set aside or vacated. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns, including for the 

avoidance of doubt, regardless of the change 

in name of any party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter, to the extent 

that such prior agreement is inconsistent 

with the terms hereof. In the event of any 

conflict between this letter agreement and 

any other agreement between the parties in 

connection with the Account(s), this letter 

agreement shall govern with respect to 

matters specific to Section 4d of the Act and 

the CFTC’s regulations, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning the enclosed 

copy of this letter. You further acknowledge 

and agree to provide a copy of this fully 

executed letter directly to the CFTC (via 

electronic mail to 

acknowledgmentletters@cftc.gov) and our 

designated self-regulatory organization. 

[Name of Futures Commission Merchant or 

Derivatives Clearing Organization] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Bank, Trust Company, 

Derivatives Clearing Organization or Futures 

Commission Merchant] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 

DATE: 

10. Revise § 1.22 to read as follows: 

§ 1.22 Use of futures customer funds 

restricted. 

(a) No futures commission merchant 

shall use, or permit the use of, the 

futures customer funds of one futures 

customer to purchase, margin, or settle 

the trades, contracts, or commodity 

options of, or to secure or extend the 

credit of, any person other than such 

futures customer. The prohibition on 

the use of one futures customer’s funds 

to extend credit to, or to purchase, 

margin, or settle the contracts of another 

person applies at all times. For this 

purpose, a futures commission 

merchant which operationally 

commingles the funds of its futures 

customers must ensure that at all times 

its residual interest in futures customer 

funds exceeds the sum of the margin 

deficits of all of its futures customers. 

(b) Futures customer funds shall not 

be used to carry trades or positions of 

the same futures customer other than in 

contracts for the purchase of sale of any 

commodity for future delivery or for 

options thereon traded through the 

facilities of a designated contract 

market. 

11. Revise § 1.23 to read as follows: 

§ 1.23 Interest of futures commission 

merchant in segregated futures customer 

funds; additions and withdrawals. 

(a)(1) The provision in sections 

4d(a)(2) and 4d(b) of the Act and the 

provision in § 1.20 of this part that 

prohibit the commingling of futures 

customer funds with the funds of a 

futures commission merchant, shall not 

be construed to prevent a futures 

commission merchant from having a 

residual financial interest in the futures 

customer funds segregated as required 

by the Act and the regulations in this 

part and set apart for the benefit of 

futures customers; nor shall such 

provisions be construed to prevent a 

futures commission merchant from 

adding to such segregated futures 

customer funds such amount or 

amounts of money, from its own funds 

or unencumbered securities from its 

own inventory, of the type set forth in 

§ 1.25 of this part, as it may deem 

necessary to ensure any and all futures 

customers’ accounts from becoming 

undersegregated at any time. 

(2) If a futures commission merchant 

discovers at any time that it is holding 

insufficient funds in segregated 

accounts to meet its obligations under 

§§ 1.20 and 1.22 of this part, the futures 

commission merchant shall 

immediately deposit sufficient funds 

into segregation to bring the account 

into compliance. 

(b) A futures commission merchant 

may not withdraw funds on any 

business day for its own proprietary use 

from an account or accounts holding 

futures customer funds unless the 

futures commission merchant has 

prepared the daily segregation 


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calculation required by § 1.32 of this 

part as of the close of business on the 

previous business day. A futures 

commission merchant that has 

completed its daily segregation 

calculation may make withdrawals for 

its own use, to the extent of its actual 

residual financial interest in funds held 

in segregated futures accounts, adjusted 

to reflect market activity and other 

events that may have decreased the 

amount of the firm’s residual financial 

interest since the close of business on 

the previous business day, including the 

withdrawal of securities held in 

segregated safekeeping accounts held by 

a bank, trust company, derivatives 

clearing organization or other futures 

commission merchant. Such 

withdrawal(s), however, shall not result 

in the funds of one futures customer 

being used to purchase, margin or carry 

the trades, contracts or commodity 

options, or extend the credit of any 

other futures customer or other person. 

(c) Notwithstanding paragraphs (a) 

and (b) of this section, each futures 

commission merchant shall establish a 

targeted residual interest (i.e., excess 

funds) that is in an amount that, when 

maintained as its residual interest in the 

segregated funds accounts, reasonably 

ensures that the futures commission 

merchant shall remain in compliance 

with the segregated funds requirements 

at all times. Each futures commission 

merchant shall establish policies and 

procedures designed to reasonably 

ensure that the futures commission 

merchant maintains the targeted 

residual amounts in segregated funds at 

all times. The futures commission 

merchant shall maintain sufficient 

capital and liquidity, and take such 

other appropriate steps as are necessary 

or appropriate, to reasonably ensure that 

such amount of targeted residual 

interest is maintained as the futures 

commission merchant’s residual interest 

in the segregated funds accounts at all 

times. In determining the amount of the 

targeted residual interest, the futures 

commission merchant shall analyze all 

relevant factors affecting the amounts in 

segregated funds from time to time, 

including without limitation various 

factors, as applicable, relating to the 

nature of the futures commission 

merchant’s business including, but not 

limited to, the composition of the 

futures commission merchant’s 

customer base, the general 

creditworthiness of the customer base, 

the general trading activity of the 

customers, the types of markets and 

products traded by the customers, the 

proprietary trading of the futures 

commission merchant, the general 

volatility and liquidity of the markets 

and products traded by customers, the 

futures commission merchant’s own 

liquidity and capital needs, and the 

historical trends in Customer segregated 

fund balances and debit balances in 

Customers’ and undermargined 

accounts. The analysis and calculation 

of the targeted amount of the future 

commission merchant’s residual interest 

must be described in writing with the 

specificity necessary to allow the 

Commission and the futures 

commission merchant’s designated selfregulatory organization to duplicate the 

analysis and calculation and test the 

assumptions made by the futures 

commission merchant. The adequacy of 

the targeted residual interest and the 

process for establishing the targeted 

residual interest must be reassessed 

periodically by the futures commission 

merchant and revised as necessary. 

Notwithstanding any other provision of 

this section, a futures commission 

merchant must at all times maintain an 

amount of residual interest in segregated 

accounts that exceeds the sum of all 

margin deficits of its futures customers 

under § 1.20 of this part, and such 

residual interest may not be withdrawn 

by the futures commission merchant. 

(d) Notwithstanding any other 

paragraph of this section, a futures 

commission merchant may not 

withdraw funds for its own proprietary 

use, in a single transaction or a series of 

transactions on a given business day, 

from futures accounts if such 

withdrawal(s) would exceed 25 percent 

of the futures commission merchant’s 

residual interest in such accounts as 

reported on the daily segregation 

calculation required by § 1.32 of this 

part and computed as of the close of 

business on the previous business day, 

unless: 

(1) The futures commission 

merchant’s Chief Executive Officer, 

Chief Finance Officer or other senior 

official that is listed as a principal of the 

futures commission merchant on its 

Form 7–R and is knowledgeable about 

the futures commission merchant’s 

financial requirements and financial 

position pre-approves in writing the 

withdrawal, or series of withdrawals; 

(2) The futures commission merchant 

files written notice of the withdrawal or 

series of withdrawals, with the 

Commission and with its designated 

self-regulatory organization immediately 

after the Chief Executive Officer, Chief 

Finance Officer or other senior official 

as described in paragraph (c)(1) of this 

section pre-approves the withdrawal or 

series of withdrawals. The written 

notice must: 

(i) Be signed by the Chief Executive 

Officer, Chief Finance Officer or other 

senior official as described in paragraph 

(c)(1) of this section that pre-approved 

the withdrawal, and give notice that the 

futures commission merchant has 

withdrawn or intends to withdraw more 

than 25 percent of its residual interest 

in segregated accounts holding futures 

customer funds; 

(ii) Include a description of the 

reasons for the withdrawal or series of 

withdrawals; 

(iii) List the amount of funds provided 

to each recipient and each recipient’s 

name; 

(iv) Include the current estimate of the 

amount of the futures commission 

merchant’s residual interest in the 

futures accounts after the withdrawal; 

(v) Contain a representation by the 

Chief Executive Officer, Chief Finance 

Officer or other senior official as 

described in paragraph (c)(1) of this 

section that pre-approved the 

withdrawal, or series of withdrawals, 

that, after due diligence, to such 

person’s knowledge and reasonable 

belief, the futures commission merchant 

remains in compliance with the 

segregation requirements after the 

withdrawal. The Chief Executive 

Officer, Chief Finance Officer or other 

senior official as described in paragraph 

(c)(1) of this section must consider the 

daily segregation calculation as of the 

close of business on the previous 

business day and any other factors that 

may cause a material change in the 

futures commission merchant’s residual 

interest since the close of business the 

previous business day, including known 

unsecured futures customer debits or 

deficits, current day market activity and 

any other withdrawals made from the 

futures accounts; and 

(vi) Any such written notice filed 

with the Commission must be filed via 

electronic transmission using a form of 

user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instruction issued by or approved by the 

Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. Any written notice 

filed must be followed up with direct 

communication to the Regional office of 

the Commission that has supervisory 

authority over the futures commission 

merchant whereby the Commission 

acknowledges receipt of the notice; and 


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(3) After making a withdrawal 

requiring the approval and notice 

required in paragraphs (c)(1) and (2) of 

this section, and before the completion 

of its next daily segregated funds 

calculation, no futures commission 

merchant may make any further 

withdrawals from accounts holding 

futures customer funds, except to or for 

the benefit of commodity and option 

customers, without, for each 

withdrawal, obtaining the approval 

required under paragraph (c)(1) of this 

section and filing a written notice in the 

manner specified under paragraph (c)(2) 

of this section with the Commission and 

its designated self-regulatory 

organization signed by the Chief 

Executive Officer, Chief Finance Officer, 

or other senior official. The written 

notice must: 

(i) List the amount of funds provided 

to each recipient and each recipient’s 

name; 

(ii) Disclose the reason for each 

withdrawal; 

(iii) Confirm that the Chief Executive 

Officer, Chief Finance Officer, or other 

senior official (and identify of the 

person if different from the person who 

signed the notice) pre-approved the 

withdrawal in writing; 

(iv) Disclose the current estimate of 

the futures commission merchant’s 

remaining total residual interest in the 

segregated accounts holding futures 

customer funds after the withdrawal; 

and 

(v) Include a representation that, after 

due diligence, to the best of the notice 

signatory’s knowledge and reasonable 

belief the futures commission merchant 

remains in compliance with the 

segregation requirements after the 

withdrawal. 

(e) If a futures commission merchant 

withdraws funds from futures accounts 

for its own proprietary use, and the 

withdrawal causes the futures 

commission merchant to not hold 

sufficient funds in the futures accounts 

to meet its targeted residual interest, as 

required to be computed under § 1.11 of 

this part, the futures commission 

merchant should deposit its own funds 

into the futures accounts to restore the 

account balance to the targeted residual 

interest amount by the close of business 

on the next business day, or, if 

appropriate, revise the futures 

commission merchant’s targeted amount 

of residual interest pursuant to the 

policies and procedures required by 

§ 1.11 of this part. Notwithstanding the 

foregoing, if at any time the futures 

commission merchant’s residual interest 

in customer accounts is less than the 

sum of its futures customers’ margin 

deficits as set forth in § 1.20(i) of this 

part, the futures commission merchant 

must immediately restore the residual 

interest to exceed the sum of such 

margin deficits. Any proprietary funds 

deposited in the futures accounts must 

be unencumbered and otherwise 

compliant with § 1.25 of this part, as 

applicable. 

12. Amend § 1.25 by removing 

paragraph (b)(6) and by revising 

paragraphs (b)(3)(v), (c)(3), (d)(7), 

(d)(11), and (e) to read as follows: 

§ 1.25 Investment of customer funds. 

* * * * * 

(b) * * * 

(3) * * * 

(v) Counterparty concentration limits. 

Securities purchased by a futures 

commission merchant or derivatives 

clearing organization from a single 

counterparty, or from one or more 

counterparties under common 

ownership or control, subject to an 

agreement to resell the securities to the 

counterparty or counterparties, shall not 

exceed 25 percent of total assets held in 

segregation or under § 30.7 of this 

chapter by the futures commission 

merchant or derivatives clearing 

organization. 

* * * * * 

(c) * * * 

(3) A futures commission merchant or 

derivatives clearing organization shall 

maintain the confirmation relating to 

the purchase in its records in 

accordance with § 1.31 of this part and 

note the ownership of fund shares (by 

book-entry or otherwise) in a custody 

account of the futures commission 

merchant or derivatives clearing 

organization in accordance with § 1.26 

of this part. The futures commission 

merchant or the derivatives clearing 

organization shall obtain the 

acknowledgment letter required by 

§ 1.26 of this part from an entity that has 

substantial control over the fund shares 

purchased with customer funds and has 

the knowledge and authority to facilitate 

redemption and payment or transfer of 

the customer funds. Such entity may 

include the fund sponsor or depository 

acting as custodian for fund shares. 

* * * * * 

(d) * * * 

(7) Securities transferred to the 

futures commission merchant or 

derivatives clearing organization under 

the agreement are held in a safekeeping 

account with a bank as referred to in 

paragraph (d)(2) of this section, a 

Federal Reserve Bank, a derivatives 

clearing organization, or the Depository 

Trust Company in an account that 

complies with the requirements of 

§ 1.26 of this part. 

* * * * * 

(11) The transactions effecting the 

agreement are recorded in the record 

required to be maintained under § 1.27 

of this part of investments of customer 

funds, and the securities subject to such 

transactions are specifically identified 

in such record as described in paragraph 

(d)(1) of this section and further 

identified in such record as being 

subject to repurchase and reverse 

repurchase agreements. 

* * * * * 

(e) Deposit of firm-owned securities 

into segregation. A futures commission 

merchant may deposit unencumbered 

securities of the type specified in this 

section, which it owns for its own 

account, into a customer account. A 

futures commission merchant must 

include such securities, transfers of 

securities, and disposition of proceeds 

from the sale or maturity of such 

securities in the record of investments 

required to be maintained by § 1.27 of 

this part. All such securities may be 

segregated in safekeeping only with a 

bank, trust company, derivatives 

clearing organization, or other registered 

futures commission merchant in 

accordance with the provisions of § 1.20 

of this part. For purposes of this section 

and §§ 1.27, 1.28, 1.29, and 1.32 of this 

part, securities of the type specified by 

this section that are owned by the 

futures commission merchant and 

deposited into a customer account shall 

be considered customer funds until 

such investments are withdrawn from 

segregation in accordance with the 

provisions of § 1.23 of this part. 

Investments permitted by § 1.25 that are 

owned by the futures commission 

merchant and deposited into a futures 

customer account pursuant to § 1.26 of 

the part shall be considered futures 

customer funds until such investments 

are withdrawn from segregation in 

accordance with § 1.23 of this part. 

Investments permitted by § 1.25 that are 

owned by the futures commission 

merchant and deposited into a Cleared 

Swaps Customer Account, as defined in 

§ 22.1 of this chapter, shall be 

considered Cleared Swaps Customer 

Collateral, as defined in § 22.1 of this 

chapter, until such investments are 

withdrawn from segregation in 

accordance with § 22.17 of this chapter. 

* * * * * 

13. Revise § 1.26 to read as follows: 

§ 1.26 Deposit of instruments purchased 

with futures customer funds. 

(a) Each futures commission merchant 

who invests futures customer funds in 

instruments described in § 1.25 of this 

part, except for investments in money 

market mutual funds, shall separately 

account for such instruments as futures 


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customer funds and segregate such 

instruments as funds belonging to such 

futures customers in accordance with 

the requirements of § 1.20 of this part. 

Each derivatives clearing organization 

which invests money belonging or 

accruing to futures customers of its 

clearing members in instruments 

described in § 1.25 of this part, except 

for investments in money market 

mutual funds, shall separately account 

for such instruments as customer funds 

and segregate such instruments as 

customer funds belonging to such 

futures customers in accordance with 

§ 1.20 of this part. 

(b) Each futures commission merchant 

or derivatives clearing organization 

which invests futures customer funds in 

money market mutual funds, as 

permitted by § 1.25 of this part, shall 

separately account for such funds and 

segregate such funds as belonging to 

such futures customers. Such funds 

shall be deposited under an account 

name which clearly shows that they 

belong to futures customers and are 

segregated as required by sections 4d(a) 

and 4d(b) of the Act and this part. Each 

futures commission merchant or 

derivatives clearing organization, upon 

opening such an account, shall obtain 

and maintain readily accessible in its 

files in accordance with § 1.31 of this 

part, for as long as the account remains 

open, and thereafter for the period 

provided in § 1.31 of this part, a written 

acknowledgment and shall file such 

acknowledgment in accordance with the 

requirements of § 1.20 of this part. In the 

event such funds are held directly with 

the money market mutual fund or its 

affiliate, the written acknowledgment 

letter shall be in the form as set out in 

Appendix A to this section. In the event 

such funds are held with a depository 

the written acknowledgment letter shall 

be in the form as set out in Appendix 

A to § 1.20 of this part. In either case, 

the written acknowledgment letter shall 

be obtained, provided to the 

Commission and designated selfregulatory organizations, and retained as 

required under § 1.20 of this part. 

Appendix to § 1.26—Acknowledgment 

Letter for CFTC Regulation 1.26 

Customer Segregated Money Market 

Mutual Fund Account 

[Date] 

[Name and Address of Money Market 

Mutual Fund] 

We propose to invest funds held by [Name 

of Futures Commission Merchant or 

Derivatives Clearing Organization] (‘‘we’’ or 

‘‘our’’) on behalf of our customers in shares 

of [Name of Money Market Mutual Fund] 

(‘‘you’’ or ‘‘your’’) under account(s) entitled 

(or shares issued to): 

[Name of Futures Commission Merchant or 

Derivatives Clearing Organization] [if 

applicable, add ‘‘FCM Customer Omnibus 

Account’’] CFTC Regulation 1.26 Customer 

Segregated Money Market Mutual Fund 

Account 

[If applicable, include any abbreviated 

name of the Account(s) as reflected in the 

Depository’s electronic systems (provided 

any such abbreviated name must reflect that 

the Account(s) is a CFTC regulated customer 

segregated account)] 

Account Number(s): [llll ] 

(collectively, the ‘‘Account(s)’’). 

You acknowledge and agree that we are 

holding these funds, including any shares 

issued and amounts accruing in connection 

therewith (collectively, the ‘‘Shares’’), for the 

benefit of our customers who trade 

commodities, options, cleared OTC 

derivatives products and other products 

(‘‘Commodity Customers’’), as required by 

Commodity Futures Trading Commission 

(‘‘CFTC’’) Regulation 1.26, as amended; that 

the Shares held by you, hereafter deposited 

in the Account(s) or accruing to the credit of 

the Accounts, will be separately accounted 

for and segregated on your books from our 

own funds and from any other funds or 

accounts held by us in accordance with the 

provisions of the Commodity Exchange Act, 

as amended (the ‘‘Act’’), and Part 1 of the 

CFTC’s regulations, as amended; and that the 

Shares must otherwise be treated in 

accordance with the provisions of the Act 

and CFTC regulations. 

Furthermore, you acknowledge and agree 

that such Shares may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, nor may they be 

used by us to secure credit from you. You 

further acknowledge and agree that the 

Shares in the Account(s) shall not be subject 

to any right of offset or lien for or on account 

of any indebtedness, obligations or liabilities 

we may now or in the future have owing to 

you. 

In addition, you agree that the Account(s) 

may be examined at any reasonable time by 

an appropriate officer, agent or employee of 

the CFTC or a self-regulatory organization, 

and this letter constitutes the authorization 

and direction of the undersigned to permit 

any such examination or audit to take place. 

You agree to respond promptly and directly 

to requests for confirmation of account 

balances and other account information from 

an appropriate officer, agent, or employee of 

the CFTC or a self-regulatory organization of 

which we are a member, without further 

notice to or consent from the futures 

commission merchant or the derivatives 

clearing organization, as applicable. You also 

agree that, immediately upon instruction by 

the director of the Division of Swap Dealer 

and Intermediary Oversight of the CFTC or 

the director of the Division of Clearing and 

Risk of the CFTC, or any successor divisions, 

or such directors’ designees, or any 

appropriate official of a self-regulatory 

organization of which we are a member, you 

will provide any and all information 

regarding or related to the Shares or the 

Accounts as shall be specified in such 

instruction and as directed in such 

instruction. You further agree that you will 

provide the CFTC and our designated selfregulatory organization with the necessary 

software, a user log-in, and password that 

will allow the CFTC and our designated selfregulatory organization to have read-only 

access to the accounts listed above on your 

Web site on a 24-hour a day basis. 

You acknowledge and agree that the Shares 

in the Account(s) shall be released 

immediately, subject to the requirements of 

U.S. or non-U.S. law as applicable, upon 

proper notice and instruction from an 

appropriate officer or employee of us or from 

the director of the Division of Clearing and 

Risk of the CFTC, or from the director of the 

Division of Swap Dealer and Intermediary 

Oversight, or any successor divisions, or such 

directors’ designees. We will not hold you 

responsible for acting pursuant to any 

instruction from the CFTC or from the selfregulatory organization upon which you have 

relied after having taken reasonable measures 

to assure that such instruction was provided 

to you by the director of the Division of 

Clearing and Risk of the CFTC, or the director 

of the Division of Swap Dealer and 

Intermediary Oversight, or any successor 

divisions, or such directors’ designees, or any 

appropriate official of a self-regulatory 

organization of which we are a member. You 

further acknowledge that we will provide to 

the CFTC a copy of this acknowledgment. In 

the event we become subject to either a 

voluntary or involuntary petition for relief 

under the U.S. Bankruptcy Code, we 

acknowledge that you will have no obligation 

to release the Shares held in the Account(s), 

except upon instruction of the Trustee in 

Bankruptcy or pursuant to the Order of the 

respective U.S. Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of set off against or lien on 

assets other than assets maintained in the 

Account(s), nor to impose such charges 

against us or any proprietary account 

maintained by us with you. Further, it is 

understood that amounts represented by 

checks, drafts or other items shall not be 

considered to be part of the Account(s) until 

finally collected. Accordingly, checks, drafts 

and other items credited to the Account(s) 

and subsequently dishonored or otherwise 

returned to you, or reversed, for any reason 

and any claims relating thereto, including but 

not limited to claims of alteration or forgery, 

may be charged back to the Account(s), and 

we shall be responsible to you as a general 

endorser of all such items whether or not 

actually so endorsed. You may conclusively 

presume that any withdrawal from the 

Account(s) and the balances maintained 

therein are in conformity with the Act and 

CFTC regulations without any further 

inquiry, provided that you have no notice of 

or actual knowledge of, or could not 

reasonably know of, a violation of the Act or 

other provision of law by us; and you shall 

not in any manner not expressly agreed to 

herein be responsible for ensuring 

compliance by us with the provisions of the 

Act and CFTC regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 


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governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

such action or omission to act, to us or to any 

other person, firm, association or corporation 

even if thereafter any such order, decree, 

judgment or levy shall be reversed, modified, 

set aside or vacated. 

We are permitted to invest our Commodity 

Customers’ funds in money market mutual 

funds pursuant to CFTC Regulation 1.25. 

That rule sets forth the following conditions, 

among others, with respect to any investment 

in a money market mutual fund: 

(1) The net asset value of the fund must be 

computed by 9:00 a.m. of the business day 

following each business day and be made 

available to us by that time; 

(2) The fund must be legally obligated to 

redeem an interest in the fund and make 

payment in satisfaction thereof by the close 

of the business day following the day on 

which we make a redemption request except 

as otherwise specified in CFTC Regulation 

1.25(c)(5)(ii); and, 

(3) The agreement under which we invest 

our Commodity Customers’ funds must not 

contain any provision that would prevent us 

from pledging or transferring fund shares. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns, including for the 

avoidance of doubt, regardless of the change 

in name of any party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter, to the extent 

that such prior agreement is inconsistent 

with the terms hereof. In the event of any 

conflict between this letter agreement and 

any other agreement between the parties in 

connection with the Account(s), this letter 

agreement shall govern with respect to 

matters specific to Section 4d of the Act and 

the CFTC’s regulations, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning the enclosed 

copy of this letter. You further acknowledge 

and agree to provide a copy of this fully 

executed letter directly to the CFTC (via 

electronic mail to 

acknowledgmentletters@cftc.gov) and our 

designated self-regulatory organization in 

accordance with CFTC Regulation 1.20. 

[Name of Futures Commission Merchant or 

Derivatives Clearing Organization] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Money Market Mutual Fund] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 

Date: 

14. Revise § 1.29 to read as follows: 

§ 1.29 Gains and losses resulting from 

investment of customer funds. 

(a) The investment of customer funds 

in instruments described in § 1.25 of 

this part shall not prevent the futures 

commission merchant or derivatives 

clearing organization so investing such 

funds from receiving and retaining as its 

own any incremental income or interest 

income resulting therefrom. 

(b) The futures commission merchant 

or derivatives clearing organization, as 

applicable, shall bear sole responsibility 

for any losses resulting from the 

investment of customer funds in 

instruments described in § 1.25 of this 

part. No investment losses shall be 

borne or otherwise allocated to the 

customers of the futures commission 

merchant and, if customer funds are 

invested by a derivatives clearing 

organization in its discretion, to the 

futures commission merchant. 

15. Revise § 1.30 to read as follows: 

§ 1.30 Loans by futures commission 

merchants; treatment of proceeds. 

Nothing in these regulations shall 

prevent a futures commission merchant 

from lending its own funds to customers 

on securities and property pledged by 

such customers, or from repledging or 

selling such securities and property 

pursuant to specific written agreement 

with such customers. The proceeds of 

such loans used to purchase, margin, 

guarantee, or secure the trades, 

contracts, or commodity options of 

customers shall be treated and dealt 

with by a futures commission merchant 

as belonging to such customers, in 

accordance with and subject to the 

provisions of the Act and these 

regulations. A futures commission 

merchant may not loan funds on an 

unsecured basis to finance customers’ 

trading, nor may a futures commission 

merchant loan funds to customers 

secured by the customer accounts of 

such customers. 

16. Amend § 1.32 by revising the 

section heading and paragraphs (b) and 

(c) and by adding paragraphs (d), (e), (f), 

(g), (h), (i), (j), and (k), to read as follows: 

§ 1.32 Reporting of segregated account 

computation and details regarding the 

holding of futures customer funds 

* * * * * 

(b) In computing the amount of 

futures customer funds required to be in 

segregated accounts, a futures 

commission merchant may offset any 

net deficit in a particular futures 

customer’s account against the current 

market value of readily marketable 

securities, less applicable deductions 

(i.e., ‘‘securities haircuts’’) as set forth in 

Rule 15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (17 CFR 

241.15c3–1(c)(2)(vi)), held for the same 

futures customer’s account. Futures 

commission merchants that establish 

and enforce written policies and 

procedures to assess the credit risk of 

commercial paper, convertible debt 

instruments, or nonconvertible debt 

instruments in accordance with Rule 

240.15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)) may apply the 

lower haircut percentages specified in 

Rule 240.15c3–1(c)(2)(vi) for such 

commercial paper, convertible debt 

instruments and nonconvertible debt 

instruments. The futures commission 

merchant must maintain a security 

interest in the securities, including a 

written authorization to liquidate the 

securities at the futures commission 

merchant’s discretion, and must 

segregate the securities in a safekeeping 

account with a bank, trust company, 

derivatives clearing organization, or 

another futures commission merchant. 

For purposes of this section, a security 

will be considered readily marketable if 

it is traded on a ‘‘ready market’’ as 

defined in Rule 15c3–1(c)(11)(i) of the 

Securities and Exchange Commission 

(17 CFR 240.15c3–1(c)(11)(i)). 

(c) Each futures commission merchant 

is required to document its segregation 

computation required by paragraph (a) 

of this section by preparing a Statement 

of Segregation Requirements and Funds 

in Segregation for Customers Trading on 

U.S. Commodity Exchanges contained 

in the Form 1–FR–FCM as of the close 

of each business day. Nothing in this 

paragraph shall affect the requirement 

that a futures commission merchant at 

all times maintain sufficient money, 

securities and property to cover its total 

obligations to all futures customers, in 

accordance with § 1.20 of this part. 

(d) Each futures commission 

merchant is required to submit to the 

Commission and to the firm’s 

designated self-regulatory organization 

the daily Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Commodity Exchanges required by 

paragraph (c) of this section by noon the 

following business day. 

(e) Each futures commission merchant 

shall file the Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Commodity Exchanges required by 

paragraph (c) of this section in an 

electronic format using a form of user 

authentication assigned in accordance 

with procedures established or 

approved by the Commission. 

(f) Each futures commission merchant 

is required to submit to the Commission 


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and to the firm’s designated selfregulatory organization a report listing 

the names of all banks, trust companies, 

futures commission merchants, 

derivatives clearing organizations, or 

any other depository or custodian 

holding futures customer funds as of the 

fifteenth day of the month, or the first 

business day thereafter, and the last 

business day of each month. This report 

must include: 

(1) The name and location of each 

entity holding futures customer funds; 

(2) The total amount of futures 

customer funds held by each entity 

listed in paragraph (f)(1) of this section; 

and 

(3) The total amount of cash and 

investments that each entity listed in 

paragraph (f)(1) of this section holds for 

the futures commission merchant. The 

futures commission merchant must 

report the following investments: 

(i) Obligations of the United States 

and obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities); 

(ii) General obligations of any State or 

of any political subdivision of a State 

(municipal securities); 

(iii) General obligation issued by any 

enterprise sponsored by the United 

States (government sponsored enterprise 

securities); 

(iv) Certificates of deposit issued by a 

bank; 

(v) Commercial paper fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; 

(vi) Corporate notes or bonds fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; and 

(vii) Interests in money market mutual 

funds. 

(g) Each futures commission merchant 

must report the total amount of futures 

customer-owned securities held by the 

futures commission merchant as margin 

collateral and must list the names and 

locations of the depositories holding 

such margin collateral. 

(h) Each futures commission 

merchant must report the total amount 

of futures customer funds that have 

been used to purchase securities under 

agreements to resell the securities 

(reverse repurchase transactions). 

(i) Each futures commission merchant 

must report which, if any, of the 

depositories holding futures customer 

funds under paragraph (f)(1) of this 

section are affiliated with the futures 

commission merchant. 

(j) Each futures commission merchant 

shall file the detailed list of depositories 

required by paragraph (f) of this section 

by 11:59 p.m. the next business day in 

an electronic format using a form of user 

authentication assigned in accordance 

with procedures established or 

approved by the Commission. 

(k) Each futures commission merchant 

shall retain its daily segregation 

computation and the Statement of 

Segregation Requirements and Funds in 

Segregation for Customers Trading on 

U.S. Commodity Exchanges required by 

paragraph (c) of this section, and its 

detailed list of depositories required by 

paragraph (f) of this section, together 

with all supporting documentation, in 

accordance with the requirements of 

§ 1.31 of this part. 

17. Revise § 1.52 to read as follows: 

§ 1.52 Self-regulatory organization 

adoption and surveillance of minimum 

financial requirements. 

(a) For purposes of this section, the 

following terms are defined as follows: 

(1) ‘‘Examinations expert’’ is defined 

as a Nationally recognized accounting 

and auditing firm with substantial 

expertise in audits of futures 

commission merchants, risk assessment 

and internal control reviews, and is an 

accounting and auditing firm that is 

acceptable to the Commission; 

(2) ‘‘Generally accepted auditing 

standards’’ is defined as U.S. generally 

accepted auditing standards, developed 

by the Auditing Standards Board of the 

American Institute of Certified Public 

Accountants; and 

(3) ‘‘Material weakness’’ is defined as 

a deficiency, or a combination of 

deficiencies, in internal control over 

financial reporting such that there is a 

reasonable possibility that a material 

misstating of the entities financial 

statements and regulatory computations 

will not be prevented or detected on a 

timely basis by the entity’s internal 

controls; 

(b)(1) Each self-regulatory 

organization must adopt rules 

prescribing minimum financial and 

related reporting requirements for 

members who are registered futures 

commission merchants, registered retail 

foreign exchange dealers, or registered 

introducing brokers. The self-regulatory 

organization’s minimum financial and 

related reporting requirements must be 

the same as, or more stringent than, the 

requirements contained in §§ 1.10 and 

1.17 of this part, for futures commission 

merchants and introducing brokers, and 

§§ 5.7 and 5.12 of this chapter for retail 

foreign exchange dealers; provided, 

however, that a self-regulatory 

organization may permit its member 

registrants that are registered with the 

Securities and Exchange Commission as 

securities brokers or dealers to file (in 

accordance with § 1.10(h) of this part) a 

copy of their Financial and Operational 

Combined Uniform Single Report under 

the Securities Exchange Act of 1934 

(‘‘FOCUS Report’’), Part II, Part IIA, or 

Part II CSE, as applicable, in lieu of 

Form 1–FR; provided, further, that such 

self-regulatory organization must 

require such member registrants to 

provide all information in Form 1–FR 

that is not included in the FOCUS 

Report Part provided by such member 

registrant. The definition of adjusted net 

capital must be the same as that 

prescribed in § 1.17(c) of this chapter for 

futures commission merchants and 

introducing brokers, and § 5.7(b)(2) of 

this chapter for futures commission 

merchants offering or engaging in retail 

forex transactions and for retail foreign 

exchange dealers. 

(2) In addition to the requirements set 

forth in paragraph (b)(1) of this section, 

each self-regulatory organization that 

has a futures commission merchant 

member registrant must adopt rules 

prescribing risk management 

requirements for futures commission 

merchant member registrants that shall 

be the same as, or more stringent than, 

the requirements contained in § 1.11 of 

this part. 

(c)(1) Each self-regulatory 

organization must establish and operate 

a supervisory program that includes 

written policies and procedures 

concerning the application of such 

supervisory program in the examination 

of its member registrants for the purpose 

of assessing whether each member 

registrant is in compliance with the 

applicable self-regulatory organization 

and Commission regulations governing 

minimum net capital and related 

financial requirements, the obligation to 

segregate customer funds, risk 

management requirements, financial 

reporting requirements, recordkeeping 

requirements, and sales practice and 

other compliance requirements. The 

supervisory program also must address 

the following elements: 

(i) Adequate levels and independence 

of examination staff. A self-regulatory 

organization must maintain staff of an 

adequate size, training, and experience 

to effectively implement a supervisory 

program. Staff of the self-regulatory 

organization, including officers, 

directors, and supervising committee 

members, must maintain independent 

judgment and its actions must not 

impair its independence nor appear to 

impair its independence in matters 

related to the supervisory program. The 

self-regulatory organization must 


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provide annual ethics training to all 

staff with responsibilities for the 

supervisory program. 

(ii) Ongoing surveillance. A selfregulatory organization’s ongoing 

surveillance of member registrants must 

include the review and analysis of 

financial reports and regulatory notices 

filed by member registrants with the 

designated self-regulatory organization. 

(iii) High-risk firms. A self-regulatory 

organization’s supervisory program 

must include procedures for identifying 

member registrants that are determined 

to pose a high degree of potential 

financial risk, including the potential 

risk of loss of customer funds. High-risk 

member registrants must include firms 

experiencing financial or operational 

difficulties, failing to meet segregation 

or net capital requirements, failing to 

maintain current books and records, or 

experiencing material inadequacies in 

internal controls. Enhanced monitoring 

for high risk firms should include, as 

appropriate, daily review of net capital, 

segregation, and secured calculations, to 

assess compliance with self-regulatory 

organization and Commission 

requirements. 

(iv) On-site examinations. (A) A selfregulatory organization must conduct 

routine periodic on-site examinations of 

member registrants. Member futures 

commission merchants and retail 

foreign exchange dealers must be 

subject to on-site examinations no less 

frequently than once every eighteen 

months. A self-regulatory organization 

shall establish a risk-based method of 

establishing the scope of each on-site 

examination; provided, however, that 

the scope of each on-site examination of 

a futures commission merchant or retail 

foreign exchange dealer must include an 

assessment of whether the registrant is 

in compliance with applicable 

Commission and self-regulatory 

organization minimum capital, 

customer fund protection, 

recordkeeping, and reporting 

requirements. 

(B) A self-regulatory organization 

must establish the frequency of on-site 

examinations of member introducing 

brokers that do not operate pursuant to 

guarantee agreements with futures 

commission merchants or retail foreign 

exchange dealers using a risk-based 

approach; provided, however, that each 

introducing broker is subject to an onsite examination no less frequently than 

once every three years. 

(C) A self-regulatory organization 

must conduct on-site examinations of 

member registrants in accordance with 

uniform examination programs and 

procedures that have been submitted to 

the Commission. 

(v) Adequate documentation. A selfregulatory organization must adequately 

document all aspects of the operation of 

the supervisory program, including the 

conduct of risk-based scope setting and 

the risk-based surveillance of high-risk 

member registrants, and the imposition 

of remedial and punitive action(s) for 

material violations. 

(2) In addition to the requirements set 

forth in paragraph (c)(1) of this section, 

the supervisory program of a selfregulatory organization that has a 

registered futures commission merchant 

member must satisfy the following 

requirements: 

(i) The supervisory program must set 

forth in writing the examination 

standards that the self-regulatory 

organization must apply in its 

examination of its registered futures 

commission merchant member. The 

supervisory program must be based on 

controls testing as well as substantive 

testing and must address all areas of risk 

to which futures commission merchants 

can reasonably be foreseen to be subject. 

The determination as to which elements 

of the supervisory program are to be 

performed on any examination must be 

based on the risk profile of each 

registered futures commission merchant 

member as well as any additional areas 

of risk to be addressed in such 

examination. 

(ii) All aspects of the supervisory 

program, including the standards 

pursuant to paragraph (c)(2)(iii) of this 

section, must, at minimum, conform to 

generally accepted auditing standards 

after giving full consideration to those 

auditing standards as prescribed by the 

Public Company Accounting Oversight 

Board. 

(iii) The supervisory program must, at 

a minimum, have standards addressing 

the following: 

(A) The ethics of an examiner; 

(B) The independence of an examiner; 

(C) The supervision, review, and 

quality control of an examiner’s work 

product; 

(D) The evidence and documentation 

to be reviewed and retained in 

connection with an examination; 

(E) The sampling size and techniques 

used in an examination; 

(F) The examination risk assessment 

process; 

(G) The examination planning 

process; 

(H) Materiality assessment; 

(I) Quality control procedures to 

ensure that the examinations maintain 

the level of quality expected; 

(J) Communications between an 

examiner and the regulatory oversight 

committee of the self-regulatory 

organization of which the registered 

futures commission merchant is a 

member; 

(K) Communications between an 

examiner and a futures commission 

merchant’s audit committee of the board 

of directors or other similar governing 

body; 

(L) Analytical review procedures; 

(M) Record retention; and 

(N) Required items for inclusion in 

the examination report, such as repeat 

violations, material items, and high risk 

issues. 

(iv) A self-regulatory organization 

must cause an examinations expert to 

evaluate the supervisory program and 

such self-regulatory organization’s 

application of the supervisory program 

at least once every two years. 

(A) The self-regulatory organization 

must obtain from such examinations 

expert a written report that includes the 

following: 

(1) An affirmation that the 

examinations expert has evaluated the 

supervisory program, including the 

sufficiency of the risk-based approach 

and the internal controls testing thereof, 

and comments and recommendations in 

connection with such evaluation from 

such examinations expert; 

(2) An affirmation that the 

examinations expert has evaluated the 

application of the supervisory program 

by the self-regulatory organization, and 

comments and recommendations in 

connection with such evaluation from 

such examinations expert; 

(3) The examinations expert’s opinion 

as to whether the supervisory program 

is reasonably likely to identify a 

material weakness in internal controls 

over financial and/or regulatory 

reporting and in any of the other items 

that are the subject of an examination 

conducted in accordance with the 

supervisory program; and 

(4) A discussion and recommendation 

of any new or best practices as 

prescribed by industry sources, 

including, but not limited to, those from 

the American Institute of Certified 

Public Accountants, the Institute of 

Internal Auditors, and The Risk 

Management Association. 

(B) The self-regulatory organization 

must provide the written report to the 

Commission no later than fifteen days 

following the receipt thereof. Upon 

resolution of any questions or comments 

raised by the Commission, and upon 

notice from the Commission that it has 

no further comments or questions on the 

supervisory program as amended (by 

reason of the examinations expert’s 

proposals, considerations of the 

Commission’s questions or comments, 

or otherwise), the self-regulatory 

organization shall commence applying 


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such supervisory program as the 

standard for examining its registered 

futures commission merchant members. 

(v) The supervisory program must 

require the self-regulatory organization 

to report to its risk and/or audit 

committee of the board of directors with 

timely reports of the activities and 

findings of the supervisory program to 

assist the risk and/or audit committee of 

the board of directors to fulfill its 

responsibility of overseeing the 

examination function. 

(vi) The initial supervisory program 

shall be established as follows. Within 

120 days following the effective date of 

this section, or such other time as the 

Commission may approve, the selfregulatory organization shall submit a 

proposed supervisory program to the 

Commission for its review and 

comment, together with a written report 

that includes the elements found in 

paragraphs (c)(2)(iv)(A)(1) and (3) of this 

section from an examinations expert 

who has evaluated the supervisory 

program. Upon resolution of any 

questions or comments raised by the 

Commission, and upon notice from the 

Commission that it has no further 

comments or questions on the proposed 

supervisory program as amended (by 

reason of the considerations of the 

Commission’s questions or comments or 

otherwise), the self-regulatory 

organizations shall commence applying 

such supervisory program as the 

standard for examining its members that 

are registered as futures commission 

merchants. 

(d)(1) Any two or more self-regulatory 

organizations may file with the 

Commission a plan for delegating to a 

designated self-regulatory organization, 

for any registered futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker that is a 

member of more than one such selfregulatory organization, the function of: 

(i) Monitoring and examining for 

compliance with the minimum financial 

and related reporting requirements and 

risk management requirements, 

including policies and procedures 

relating to the receipt, holding, 

investing and disbursement of customer 

funds, adopted by such self-regulatory 

organizations and the Commission in 

accordance with paragraphs (b) and (c) 

of this section; and 

(ii) Receiving the financial reports and 

notices necessitated by such minimum 

financial and related reporting 

requirements; provided, however, that 

the self-regulatory organization that 

delegates the functions set forth in this 

paragraph (d)(1) shall remain 

responsible for its member registrants’ 

compliance with the regulatory 

obligations, and if such self-regulatory 

organization becomes aware that a 

delegated function is not being 

performed as required under this 

section, the self-regulatory organization 

shall promptly take any necessary steps 

to address any noncompliance. 

(2) If a plan established pursuant to 

paragraph (d)(1) of this section applies 

to any registered futures commission 

merchant, then such plan must include 

the following elements: 

(i) The Joint Audit Committee. The 

self-regulatory organizations that choose 

to participate in the plan shall form a 

Joint Audit Committee, consisting of all 

self-regulatory organizations in the plan 

as members. The members of the Joint 

Audit Committee shall establish, 

operate and maintain a Joint Audit 

Program in accordance with the 

requirements of this section to ensure an 

effective and a high quality program for 

examining futures commission 

merchants, to designate the designated 

self-regulatory organizations that will be 

responsible for the examinations of 

futures commission merchants pursuant 

to the Joint Audit Program, and to 

satisfy such additional obligations set 

forth in this section in order to facilitate 

the examinations of futures commission 

merchants by their respective 

designated self-regulatory organizations. 

(ii) The Joint Audit Program. The Joint 

Audit Program must, at minimum, 

satisfy the following requirements. 

(A) The purpose of the Joint Audit 

Program must be to assess whether each 

registered futures commission merchant 

member of the Joint Audit Committee 

members is in compliance with the Joint 

Audit Program and Commission 

regulations governing minimum net 

capital and related financial 

requirements, the obligation to segregate 

customer funds, risk management 

requirements, including policies and 

procedures relating to the receipt, 

holding, investment, and disbursement 

of customer funds, financial reporting 

requirements, recordkeeping 

requirements, and sales practice and 

other compliance requirements. 

(B) The Joint Audit Program must 

include written policies and procedures 

concerning the application of the Joint 

Audit Program in the examination of the 

registered futures commission merchant 

members of the Joint Audit Committee 

members. 

(C)(1) Adequate levels and 

independence of examination staff. A 

designated self-regulatory organization 

must maintain staff of an adequate size, 

training, and experience to effectively 

implement the Joint Audit Program. 

Staff of the designated self-regulatory 

organization, including officers, 

directors, and supervising committee 

members, must maintain independent 

judgment and its actions must not 

impair its independence nor appear to 

impair its independence in matters 

related to the Joint Audit Program. The 

designated self-regulatory organization 

must provide annual ethics training to 

all staff with responsibilities for the 

Joint Audit Program. 

(2) Ongoing surveillance. A 

designated self-regulatory organization’s 

ongoing surveillance of futures 

commission merchant member 

registrants over which it has oversight 

responsibilities must include the review 

and analysis of financial reports and 

regulatory notices filed by such member 

registrants with the designated selfregulatory organization. 

(3) High-risk firms. The Joint Audit 

Program must include procedures for 

identifying futures commission 

merchant member registrants over 

which it has oversight responsibilities 

that are determined to pose a high 

degree of potential financial risk, 

including the potential risk of loss of 

customer funds. High-risk member 

registrants must include firms 

experiencing financial or operational 

difficulties, failing to meet segregation 

or net capital requirements, failing to 

maintain current books and records, or 

experiencing material inadequacies in 

internal controls. Enhanced monitoring 

for high risk firms should include, as 

appropriate, daily review of net capital, 

segregation, and secured calculations, to 

assess compliance with self-regulatory 

and Commission requirements. 

(4) On-site examinations. A 

designated self-regulatory organization 

must conduct routine periodic on-site 

examinations of futures commission 

merchant member registrants over 

which it has oversight responsibilities. 

Such member registrants must be 

subject to on-site examinations no less 

frequently than once every eighteen 

months. A designated self-regulatory 

organization shall establish a risk-based 

method of establishing the scope of each 

on-site examination, provided, however, 

that the scope of each on-site 

examination of a futures commission 

merchant must include an assessment of 

whether the registrant is in compliance 

with applicable Commission and selfregulatory organization minimum 

capital, customer fund protection, 

recordkeeping, and reporting 

requirements. A designated selfregulatory organization must conduct 

on-site examinations of futures 

commission merchant registrants in 

accordance with the Joint Audit 

Program. 


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(D) The Joint Audit Committee 

members must adequately document all 

aspects of the operation of the Joint 

Audit Program, including the conduct of 

risk-based scope setting and the riskbased surveillance of high-risk member 

registrants, and the imposition of 

remedial and punitive action(s) for 

material violations. 

(E) The Joint Audit Program must set 

forth in writing the examination 

standards that a designated selfregulatory organization must apply in 

its examination of a registered futures 

commission merchant. The Joint Audit 

Program must be based on controls 

testing as well as substantive testing and 

must address all areas of risk to which 

registered futures commission 

merchants can reasonably be foreseen to 

be subject. The determination as to 

which elements of the Joint Audit 

Program are to be performed on any 

examination must be based on the risk 

profile of each registered futures 

commission merchant as well as any 

additional areas of risk to be addressed 

in such examination. 

(F) All aspects of the Joint Audit 

Program, including the standards 

required pursuant to paragraph 

(d)(2)(ii)(G) of this section, must, at 

minimum, conform to generally 

accepted auditing standards after full 

consideration to those auditing 

standards as prescribed by the Public 

Company Accounting Oversight Board. 

(G) The Joint Audit Program must 

have standards addressing those items 

listed in paragraph (c)(2)(iii) of this 

section. 

(H) The initial Joint Audit Program 

shall be established as follows. Within 

120 days following the effective date of 

this section, or such other time as the 

Commission may approve, the Joint 

Audit Committee members shall submit 

a proposed initial Joint Audit Program 

to the Commission for its review and 

comment, together with a written report 

that includes the elements found in 

paragraphs (d)(2)(ii)(I)(1) and (3) of this 

section from an examinations expert 

who has evaluated the Joint Audit 

Program. Upon resolution of any 

questions or comments raised by the 

Commission, and upon notice from the 

Commission that it has no further 

comments or questions on the proposed 

Joint Audit Program as amended (by 

reason of the considerations of the 

Commission’s questions or comments or 

otherwise), the designated selfregulatory organizations shall 

commence applying such Joint Audit 

Program as the standard for examining 

their respective registered futures 

commission merchants. 

(I) Following the establishment of the 

Joint Audit Program, no less frequently 

than once every two years, the Joint 

Audit Committee members must cause 

an examinations expert to evaluate the 

Joint Audit Program and each 

designated self-regulatory organization’s 

application of the Joint Audit Program. 

The Joint Audit Committee members 

must obtain from such examinations 

expert a written report, and must 

provide the written report to the 

Commission no later than forty-five 

days prior to the annual meeting of the 

members of the Joint Audit Committee 

to be held in that year pursuant to 

paragraph (d)(2)(iii)(A) of this section. 

The written report must include the 

following: 

(1) An affirmation that the 

examinations expert has evaluated the 

Joint Audit Program, including the 

sufficiency of the risk-based approach 

and the internal controls testing thereof, 

and comments and recommendations in 

connection with such evaluation from 

such examinations expert; 

(2) An affirmation that the 

examinations expert has evaluated the 

application of the Joint Audit Program 

by each designated self-regulatory 

organization, and comments and 

recommendations in connection with 

such evaluation from such examinations 

expert; 

(3) The examinations expert’s opinion 

as to whether the Joint Audit Program 

is reasonably likely to identify a 

material deficiency in internal controls 

over financial and/or regulatory 

reporting and in any of the other items 

that are the subject of an examination 

conducted in accordance with the Joint 

Audit Program; and 

(4) A discussion and recommendation 

of any new or best practices as 

prescribed by industry sources, 

including, but not limited to, those from 

the American Institute of Certified 

Public Accountants, the Internal Audit 

Association and The Risk Management 

Association. 

(J) The Joint Audit Program must 

require each Joint Audit Committee 

member to report to its risk and/or audit 

committee of the board of directors with 

timely reports of the activities and 

findings of the Joint Audit Program to 

assist the risk and/or audit committee of 

the board of directors to fulfill its 

responsibility of overseeing the 

examination function. 

(iii) Meetings of the Joint Audit 

Committee. (A) No less frequently than 

once every year, the Joint Audit 

Committee members must meet to 

consider whether changes to the Joint 

Audit Program are appropriate, and in 

considering such, in meetings 

corresponding to the biennial written 

report obtained from an examinations 

expert pursuant to paragraph (d)(2)(ii)(I) 

of this section, the Joint Audit 

Committee members must consider such 

written report, including the results of 

the examinations expert’s assessment of 

the Joint Audit Program and any 

additional recommendations. The 

Commission’s questions, comments and 

proposals must also be considered. 

Upon notice from the Commission that 

it has no further comments or questions 

on the Joint Audit Program as amended 

(by reason of the examinations expert’s 

proposals, considerations of the 

Commission’s questions, comments and 

proposals, or otherwise), the designated 

self-regulatory organizations shall 

commence applying such Joint Audit 

Program as the standard for examining 

their respective registered futures 

commission merchants. 

(B) In addition to the items 

considered in paragraph (d)(2)(iii)(A) of 

this section, the Joint Audit Committee 

members must consider the following 

items during the annual meeting: 

(1) The role of the Joint Audit 

Committee and its members as it relates 

to self-regulatory organization 

responsibilities; 

(2) Developing and maintaining the 

Joint Audit Program for all designated 

self-regulatory organizations to follow 

with no exceptions; 

(3) Coordinating self-regulatory 

organization responsibilities with those 

of independent certified public 

accountants, the Commission and other 

regulators and self-regulatory 

organizations (e.g., the Securities and 

Exchange Commission, the Financial 

Industry Regulatory Authority, and 

others, as the case may be for futures 

commission merchants subject to 

regulation by multiple regulators and 

self-regulatory organizations); 

(4) Coordinating and sharing 

information between the Joint Audit 

Committee members, including issues 

and industry concerns in connection 

with examinations of futures 

commission merchants; 

(5) Identifying industry financial and 

regulatory reporting issues and financial 

and operational internal control issues 

and modifying the Joint Audit Program 

accordingly; 

(6) Issuing an annual risk alert for 

futures commission merchants; 

(7) Issuing an annual examination 

alert for certified public accountants 

and designated self-regulatory 

organization examiners; 

(8) Responding to industry issues; 

(9) Providing industry feedback to 

Commission proposals; and 


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(10) Developing and maintaining a 

standard of ethics and independence 

with which all examination units of the 

Joint Audit Committee members must 

comply. 

(C) Minutes must be taken of all 

meetings and distributed to all members 

on a timely basis. 

(D) The Commission must receive 

timely prior notice of each meeting, 

have to right to attend and participate in 

each meeting and receive written copies 

of the reports and minutes required 

pursuant to paragraphs (d)(2)(ii)(J) and 

(d)(2)(iii)(C) of this section, respectively. 

(3) The plan referenced in paragraph 

(d)(1) of this section shall not be 

effective without Commission approval 

pursuant to paragraph (h) of this 

section. 

(e) Any plan filed under this section 

may contain provisions for the 

allocation of expenses reasonably 

incurred by designated self-regulatory 

organizations among the self-regulatory 

organizations participating in such a 

plan. 

(f) A plan’s designated self-regulatory 

organizations must report to: 

(1) That plan’s other self-regulatory 

organizations any violation of such 

other self-regulatory organizations’ rules 

and regulations for which the 

responsibility to monitor or examine has 

been delegated to such designated selfregulatory organization under this 

section; and 

(2) The Director of the Division of 

Swap Dealer and Intermediary 

Oversight of the Commission any 

violation of a self-regulatory 

organization’s rules and regulations or 

any violation of the Commission’s 

regulations for which the responsibility 

to monitor, audit, or examine has been 

delegated to such designated selfregulatory organization under this 

section. 

(g) The Joint Audit Committee 

members may, among themselves, 

establish programs to provide access to 

any necessary financial or related 

information. 

(h) After appropriate notice and 

opportunity for comment, the 

Commission may, by written notice, 

approve such a plan, or any part of the 

plan, if it finds that the plan, or any part 

of it: 

(1) Is necessary or appropriate to serve 

the public interest; 

(2) Is for the protection and in the 

interest of customers; 

(3) Reduces multiple monitoring and 

multiple examining for compliance with 

the minimum financial rules of the 

Commission and of the self-regulatory 

organizations submitting the plan of any 

futures commission merchant, retail 

foreign exchange dealer, or introducing 

broker that is a member of more than 

one self-regulatory organization; 

(4) Reduces multiple reporting of the 

financial information necessitated by 

such minimum financial and related 

reporting requirements by any futures 

commission merchant, retail foreign 

exchange dealer, or introducing broker 

that is a member of more than one selfregulatory organization; 

(5) Fosters cooperation and 

coordination among the self-regulatory 

organizations; and 

(6) Does not hinder the development 

of a registered futures association under 

section 17 of the Act. 

(i) After the Commission has 

approved a plan, or part thereof, under 

paragraph (h) of this section, a selfregulatory organization delegating the 

functions described in paragraph (d)(1) 

of this section must notify each of its 

members that are subject to such a plan: 

(1) Of the limited scope of the 

delegating self-regulatory organization’s 

responsibility for such a member’s 

compliance with the Commission’s and 

self-regulatory organization’s minimum 

financial and related reporting 

requirements; and 

(2) Of the identity of the designated 

self-regulatory organization that has 

been delegated responsibility for such a 

member; provided, however, that the 

self-regulatory organization that 

delegates, pursuant to paragraph (d) of 

this section, the functions set forth in 

paragraphs (b) and (c) of this section 

shall remain responsible for its member 

registrants’ compliance with the 

regulatory obligations, and if such selfregulatory organization becomes aware 

that a delegated function is not being 

performed as required under this 

section, the self-regulatory organization 

shall promptly take any necessary steps 

to address any noncompliance. 

(j) The Commission may at any time, 

after appropriate notice and opportunity 

for hearing, withdraw its approval of 

any plan, or part thereof, established 

under this section, if such plan, or part 

thereof, ceases to adequately effectuate 

the purposes of section 4f(b) of the Act 

or of this section. 

(k) Whenever a registered futures 

commission merchant, a registered retail 

foreign exchange dealer, or a registered 

introducing broker holding membership 

in a self-regulatory organization ceases 

to be a member in good standing of that 

self-regulatory organization, such selfregulatory organization must, on the 

same day that event takes place, give 

electronic notice of that event to the 

Commission at its Washington, DC, 

headquarters and send a copy of that 

notification to such futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker. 

(l) Nothing in this section shall 

preclude the Commission from 

examining any futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker for 

compliance with the minimum financial 

and related reporting requirements, and 

the risk management requirements, as 

applicable, to which such futures 

commission merchant, retail foreign 

exchange dealer, or introducing broker 

is subject. 

(m) In the event a plan is not filed 

and/or approved for each registered 

futures commission merchant, retail 

foreign exchange dealer, or introducing 

broker that is a member of more than 

one self-regulatory organization, the 

Commission may design and, after 

notice and opportunity for comment, 

approve a plan for those futures 

commission merchants, retail foreign 

exchange dealers, or introducing brokers 

that are not the subject of an approved 

plan (under paragraph (h) of this 

section), delegating to a designated selfregulatory organization the 

responsibilities described in paragraph 

(d) of this section. 

18. Amend § 1.55 by revising 

paragraphs (b)(2) through (8) and by 

adding paragraphs (b)(9) through (14), 

(i), (j), (k), (l), (m), (n), and (o), to read 

as follows: 

§ 1.55 Public disclosures by futures 

commission merchants 

* * * * * 

(b) * * * 

(2) The funds you deposit with a 

futures commission merchant for 

trading futures positions are not 

protected by insurance in the event of 

the bankruptcy or insolvency of the 

futures commission merchant, or in the 

event your funds are misappropriated 

due to fraud. 

(3) The funds you deposit with a 

futures commission merchant for 

trading futures positions are not 

protected by the Securities Investor 

Protection Corporation even if the 

futures commission merchant is 

registered with the Securities and 

Exchange Commission as a broker or 

dealer. 

(4) The funds you deposit with a 

futures commission merchant are not 

guaranteed or insured by a derivatives 

clearing organization in the event of the 

bankruptcy or insolvency of the futures 

commission merchant, or if the futures 

commission merchant is otherwise 

unable to refund your funds. 

(5) The funds you deposit with a 

futures commission merchant are not 

held by the futures commission 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67952 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

merchant in a separate account for your 

individual benefit. Futures commission 

merchants commingle the funds 

received from customers in one or more 

accounts and you may be exposed to 

losses incurred by other customers if the 

futures commission merchant does not 

have sufficient capital to cover such 

other customers’ trading losses. 

(6) The funds you deposit with a 

futures commission merchant may be 

invested by the futures commission 

merchant in certain types of financial 

instruments that have been approved by 

the Commission for the purpose of such 

investments. Permitted investments are 

listed in Commission Regulation 1.25 

and include: U.S. government securities; 

municipal securities; money market 

mutual funds; and certain corporate 

notes and bonds. The futures 

commission merchant may retain the 

interest and other earnings realized from 

its investment of customer funds. You 

should be familiar with the types of 

financial instruments that a futures 

commission merchant may invest 

customer funds in. 

(7) Futures commission merchants are 

permitted to deposit customer funds 

with affiliated entities, such as affiliated 

banks, securities brokers or dealers, or 

foreign brokers. You should inquire as 

to whether your futures commission 

merchant deposits funds with affiliates 

and assess whether such deposits by the 

futures commission merchant with its 

affiliates increases the risks to your 

funds. 

(8) You should consult your futures 

commission merchant concerning the 

nature of the protections available to 

safeguard funds or property deposited 

for your account. 

(9) Under certain market conditions, 

you may find it difficult or impossible 

to liquidate a position. This can occur, 

for example, when the market reaches a 

daily price fluctuation limit (‘‘limit 

move’’). 

(10) All futures positions involve risk, 

and a ‘‘spread’’ position may not be less 

risky than an outright ‘‘long’’ or ‘‘short’’ 

position. 

(11) The high degree of leverage 

(gearing) that is often obtainable in 

futures trading because of the small 

margin requirements can work against 

you as well as for you. Leverage 

(gearing) can lead to large losses as well 

as gains. 

(12) In addition to the risks noted in 

the paragraphs enumerated above, you 

should be familiar with the futures 

commission merchant you select to 

entrust your funds for trading futures 

positions. The Commodity Futures 

Trading Commission requires each 

futures commission merchant to make 

publicly available on its Web site firm 

specific disclosures and financial 

information to assist you with your 

assessment and selection of a futures 

commission merchant. Information 

regarding this futures commission 

merchant may be obtained by visiting 

our Web site, www.[Web site address]. 

ALL OF THE POINTS NOTED 

ABOVE APPLY TO ALL FUTURES 

TRADING WHETHER FOREIGN OR 

DOMESTIC. IN ADDITION, IF YOU 

ARE CONTEMPLATING TRADING 

FOREIGN FUTURES OR OPTIONS 

CONTRACTS, YOU SHOULD BE 

AWARE OF THE FOLLOWING 

ADDITIONAL RISKS: 

(13) Foreign futures transactions 

involve executing and clearing trades on 

a foreign exchange. This is the case even 

if the foreign exchange is formally 

‘‘linked’’ to a domestic exchange, 

whereby a trade executed on one 

exchange liquidates or establishes a 

position on the other exchange. No 

domestic organization regulates the 

activities of a foreign exchange, 

including the execution, delivery, and 

clearing of transactions on such an 

exchange, and no domestic regulator has 

the power to compel enforcement of the 

rules of the foreign exchange or the laws 

of the foreign country. Moreover, such 

laws or regulations will vary depending 

on the foreign country in which the 

transaction occurs. For these reasons, 

customers who trade on foreign 

exchanges may not be afforded certain 

of the protections which apply to 

domestic transactions, including the 

right to use domestic alternative dispute 

resolution procedures. In particular, 

funds received from customers to 

margin foreign futures transactions may 

not be provided the same protections as 

funds received to margin futures 

transactions on domestic exchanges. 

Before you trade, you should familiarize 

yourself with the foreign rules which 

will apply to your particular 

transaction. 

(14) Finally, you should be aware that 

the price of any foreign futures or option 

contract and, therefore, the potential 

profit and loss resulting therefrom, may 

be affected by any fluctuation in the 

foreign exchange rate between the time 

the order is placed and the foreign 

futures contract is liquidated or the 

foreign option contract is liquidated or 

exercised. 

THIS BRIEF STATEMENT CANNOT, 

OF COURSE, DISCLOSE ALL THE 

RISKS AND OTHER ASPECTS OF THE 

COMMODITY MARKETS 

I hereby acknowledge that I have 

received and understood this risk 

disclosure statement. 

lllllllllllllllllll

Date 

lllllllllllllllllll

Signature of Customer 

* * * * * 

(i) Notwithstanding any other 

provision of this section, no futures 

commission merchant may enter into a 

customer account agreement or first 

accept funds from a customer, unless 

the futures commission merchant 

discloses to the customer all 

information about the futures 

commission merchant, including its 

business, operations, risk profile, and 

affiliates, that would be material to the 

customer’s decision to entrust such 

funds to and otherwise do business with 

the futures commission merchant and 

that is otherwise necessary for full and 

fair disclosure. In connection with the 

disclosure of such information, the 

futures commission merchant shall 

provide material information about the 

topics described in paragraph (k) of this 

section, expanding upon such 

information as necessary to keep such 

disclosure from being misleading, 

whether through omission or otherwise. 

The futures commission merchant shall 

also disclose the same information 

required by this paragraph to all 

customers existing on the effective date 

of this paragraph even if the futures 

commission merchant and such existing 

customers have previously entered into 

a customer account agreement or the 

futures commission merchant has 

already accepted funds from such 

existing customers. The futures 

commission merchant shall update the 

information required by this section as 

and when necessary, but at least 

annually, to keep such information 

accurate and complete and shall 

promptly disclose such updated 

information to all of its customers. In 

connection with such obligation to 

update information, the futures 

commission merchant shall take into 

account any material change to its 

business operation, financial condition 

and other factors material to the 

customer’s decision to entrust the 

customer’s funds and otherwise do 

business with the futures commission 

merchant since its most recent 

disclosure pursuant to this paragraph, 

and for this purpose shall without 

limitation consider events that require 

periodic reporting required to be filed 

pursuant to § 1.12 of this part. For 

purposes of this section, the disclosures 

required pursuant to this paragraph (i) 

will be referred to as the ‘‘Disclosure 

Documents.’’ The Disclosure Documents 

shall provide a detailed table of contents 

referencing and describing the 

Disclosure Documents. 


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(j)(1) Each futures commission 

merchant shall make the Disclosure 

Documents available to each customer 

to whom disclosure is required pursuant 

to paragraph (i) of this section (for 

purposes of this section, its ‘‘FCM 

Customers’’) and to the general public. 

(2) A futures commission merchant 

shall make the Disclosure Documents 

available to FCM Customers and to the 

general public by posting a copy of the 

Disclosure Documents on the futures 

commission merchant’s Web site. A 

futures commission merchant, however, 

may use an electronic means other than 

its Web site to make the Disclosure 

Documents available to its FCM 

Customers; provided that: 

(i) The electronic version of the 

Disclosure Documents shall be 

presented in a format that is readily 

communicated to the FCM Customers. 

Information is readily communicated to 

the FCM Customers if it is accessible to 

the ordinary computer user by means of 

commonly available hardware and 

software and if the electronically 

delivered document is organized in 

substantially the same manner as would 

be required for a paper document with 

respect to the order of presentation and 

the relative prominence of information; 

and 

(ii) A complete paper copy of the 

Disclosure Documents shall be provided 

to an FCM Customer upon request. 

(k) Specific Topics. The futures 

commission merchant shall provide 

material information about the 

following specific topics: 

(1) The futures commission 

merchant’s name, address of its 

principal place of business, phone 

number, fax number, and email address; 

(2) The names and business addresses 

of the futures commission merchant’s 

directors and senior management, 

including titles, business background, 

areas of responsibility, and the nature of 

duties of each; 

(3) The significant types of business 

activities and product lines engaged in 

by the futures commission merchant, 

and the approximate percentage of the 

futures commission merchant’s assets 

and capital that are used in each type of 

activity; 

(4) The futures commission 

merchant’s business on behalf of its 

customers, including types of accounts, 

markets traded, international 

businesses, and clearinghouses and 

carrying brokers used, and the futures 

commission merchant’s policies and 

procedures concerning the choice of 

bank depositories, custodians, and other 

counterparties; 

(5) The material risks, accompanied 

by an explanation of how such risks 

may be material to its customers, of 

entrusting funds to the futures 

commission merchant, including, 

without limitation, the nature of 

investments made by the futures 

commission merchant (including credit 

quality, weighted average maturity, and 

weighted average coupon); the futures 

commission merchant’s 

creditworthiness, leverage, capital, 

liquidity, principal liabilities, balance 

sheet leverage and other lines of 

business; risks to the futures 

commission merchant created by its 

affiliates and their activities, including 

investment of customer funds in an 

affiliated entity; and any significant 

liabilities, contingent or otherwise, and 

material commitments; 

(6) The name of the futures 

commission merchant’s designated selfregulatory organization and its Web site 

address and the location where the 

annual audited financial statements of 

the futures commission merchant is 

made available; 

(7) Any material administrative, civil, 

enforcement, or criminal action then 

pending, and any enforcement actions 

taken in last three years; 

(8) A basic overview of customer fund 

segregation, futures commission 

merchant collateral management and 

investments, futures commission 

merchants, and joint futures 

commission merchant/broker dealers; 

(9) Information on how a customer 

may obtain information regarding filing 

a complaint about the futures 

commission merchant with the 

Commission or with the firm’s 

designated self-regulatory organization: 

and 

(10) The following financial data as of 

the most recent month-end when the 

Disclosure Document is prepared: 

(i) The futures commission 

merchant’s total equity, regulatory 

capital, and net worth, all computed in 

accordance with U.S. Generally 

Accepted Accounting Principles and 

§ 1.17 of this part, as applicable; 

(ii) The dollar value of the futures 

commission merchant’s proprietary 

margin requirements as a percentage of 

the aggregate margin requirement for 

futures customers, Cleared Swaps 

Customers, and 30.7 Customers; 

(iii) The number of futures customers, 

Cleared Swaps Customers, and 30.7 

Customers that comprise 50 percent of 

the futures commission merchant’s total 

funds held for futures customers, 

Cleared Swaps Customers, and 30.7 

Customers, respectively; 

(iv) The aggregate notional value, by 

asset class, of all non-hedged, principal 

over-the-counter transactions into 

which the futures commission merchant 

has entered; 

(v) The amount, generic source and 

purpose of any unsecured lines of credit 

(or similar short-term funding) the 

futures commission merchant has 

obtained but not yet drawn upon; 

(vi) The aggregated amount of 

financing the futures commission 

merchant provides for customer 

transactions involving illiquid financial 

products for which it is difficult to 

obtain timely and accurate prices; and 

(vii) The percentage of futures 

customer, Cleared Swaps Customer, and 

30.7 Customer receivable balances that 

the futures commission merchant had to 

write-off as uncollectable during the 

past 12-month period, as compared to 

the current balance of funds held for 

futures customers, Cleared Swaps 

Customers, and 30.7 Customers; and 

(11) A summary of the futures 

commission merchant’s current risk 

practices, controls and procedures. 

(l) In addition to the foregoing, each 

futures commission merchant shall 

adopt policies and procedures 

reasonably designed to ensure that 

advertising and solicitation activities by 

each such futures commission merchant 

and any introducing brokers associated 

with such futures commission merchant 

are not misleading to its FCM Customers 

in connection with their decision to 

entrust funds to and otherwise do 

business with such futures commission 

merchant. 

(m) The Disclosure Document 

required by paragraph (i) of this section 

is in addition to the Risk Disclosure 

Statement required under paragraph (a) 

of this section. 

(n) All Disclosure Documents, with 

each Disclosure Document dated the 

date of first use, shall be maintained in 

accordance with § 1.31 and shall be 

made available promptly upon request 

to representatives of its designated selfregulatory organization, representatives 

of the Commission, and representatives 

of applicable prudential regulators. 

(o)(1) Each futures commission 

merchant shall make the following 

financial information publicly available 

on its Web site: 

(i) The daily Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Exchanges for the most current 12- 

month period; 

(ii) The daily Statement of Secured 

Amounts and Funds Held in Separate 

Accounts for 30.7 Customers Pursuant 

to Commission Regulation 30.7 for the 

most current 12-month period; 

(iii) The daily Statement of Cleared 

Swaps Customer Segregation 

Requirements and Funds in Cleared 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67954 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

Swaps Customer Accounts Under 

Section 4d(f) of the Act for the most 

current 12-month period; 

(iv) A summary schedule of the 

futures commission merchant’s adjusted 

net capital, net capital, and excess net 

capital, all computed in accordance 

with § 1.17 of this part and reflecting 

balances as of the month-end for the 12 

most recent months; and 

(v) The Statement of Financial 

Condition, the Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Exchanges, the Statement of Secured 

Amounts and Funds Held in Separate 

Accounts for 30.7 Customers Pursuant 

to Commission Regulation 30.7, the 

Statement of Cleared Swaps Customer 

Segregation Requirements and Funds in 

Cleared Swaps Customer Accounts 

Under Section 4d(f) of the Act, an all 

related footnotes to the above schedules 

that are part of the futures commission 

merchant’s most current certified 

annual report pursuant to § 1.16 of this 

part. 

(2) Each futures commission merchant 

must include a statement on its Web site 

that is available to the public that 

financial information regarding the 

futures commission merchant, including 

how the futures commission merchant 

invests and holds customer funds, may 

be obtained from the National Futures 

Association and include a link to the 

Web site of the National Futures 

Association’s Basic System where 

information regarding the futures 

commission merchant’s investment of 

customer funds is maintained. 

(3) Each futures commission merchant 

must include a statement on its Web site 

that is available to the public that 

additional financial information on all 

futures commission merchants is 

available from the Commodity Futures 

Trading Commission, and include a link 

to the Commodity Futures Trading 

Commission’s web page for financial 

data for futures commission merchants. 

PART 3—REGISTRATION 

19. The authority citation for part 3 

continues to read as follows: 

Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 

2, 6a, 6b, 6b–1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 

6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c, 

16a, 18, 19, 21, and 23, as amended by Title 

VII of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act, Pub. L. 111– 

203, 124 Stat. 1376 (Jul. 21, 2010). 

20. Amend § 3.3 by revising paragraph 

(f)(2) to read as follows: 

§ 3.3 Chief compliance officer. 

* * * * * 

(f) * * * 

(2) The annual report shall be 

furnished electronically to the 

Commission not more than 60 days after 

the end of the fiscal year of the futures 

commission merchant, swap dealer, or 

major swap participant, simultaneously 

with the submission of Form 1–FR– 

FCM, as required under § 1.10(b)(2)(ii) 

of this chapter, simultaneously with the 

Financial and Operational Combined 

Uniform Single Report, as required 

under § 1.10(h) of this chapter, or 

simultaneously with the financial 

condition report, as required under 

section 4s(f) of the Act, as applicable. 

* * * * * 

PART 22—CLEARED SWAPS 

21. The authority citation for part 22 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 6d, 7a–1 as 

amended by Title VII of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, 

Pub. L. 111–203, 124 Stat. 1376 (Jul. 21, 

2010). 

22. Amend § 22.2 by revising 

paragraphs (d)(1), (e)(1), (f)(2), (f)(4), 

(f)(5)(iii)(B), and (g)(2), and by adding 

paragraphs (f)(6) and (g)(3) through (10) 

to read as follows: 

§ 22.2 Futures Commission Merchants: 

Treatment of Cleared Swaps and 

Associated Cleared Swap Customer 

Collateral. 

* * * * * 

(d) Limitations on use. (1) No futures 

commission merchant shall use, or 

permit the use of, the Cleared Swaps 

Customer Collateral of one Cleared 

Swaps Customer to purchase, margin, or 

settle the Cleared Swaps or any other 

trade or contract of, or to secure or 

extend the credit of, any person other 

than such Cleared Swaps Customer. 

Cleared Swaps Customer Collateral shall 

not be used to margin, guarantee, or 

secure trades or contracts of the entity 

constituting a Cleared Swaps Customer 

other than in Cleared Swaps, except to 

the extent permitted by a Commission 

rule, regulation or order. For this 

purpose, a futures commission 

merchant which operationally 

commingles the funds of its Cleared 

Swaps Customers must ensure that at all 

times its residual interest in Cleared 

Swaps Customer Accounts exceeds the 

sum of the margin deficits of all of its 

Cleared Swaps Customers. 

* * * * * 

(e) * * * 

(1) Permitted investments. A futures 

commission merchant may invest 

money, securities, or other property 

constituting Cleared Swaps Customer 

Collateral in accordance with § 1.25 of 

this chapter, which shall apply to such 

money, securities, or other property as 

if they comprised customer funds or 

customer money subject to segregation 

pursuant to section 4d(a) of the Act and 

the regulations thereunder; Provided, 

however, that the futures commission 

merchant shall bear sole responsibility 

for any losses resulting from the 

investment of customer funds in 

instruments described in § 1.25 of this 

chapter. No investment losses shall be 

borne or otherwise allocated to Cleared 

Swaps Customers of the futures 

commission merchant. 

* * * * * 

(f) * * * 

(2) The futures commission merchant 

must reflect in the account that it 

maintains for each Cleared Swaps 

Customer the market value of any 

Cleared Swaps Customer Collateral that 

it receives from such customer, as 

adjusted by: 

(i) Any uses permitted under § 22.2(d) 

of this part; 

(ii) Any accruals on permitted 

investments of such collateral under 

§ 22.2(e) of this part that, pursuant to 

the futures commission merchant’s 

customer agreement with that customer, 

are creditable to such customer; 

(iii) Any gains and losses with respect 

to Cleared Swaps; 

(iv) Any charges lawfully accruing to 

the Cleared Swaps Customer, including 

any commission, brokerage fee, interest, 

tax, or storage fee; and 

(v) Any appropriately authorized 

distribution or transfer of such 

collateral. 

* * * * * 

(4) The futures commission merchant 

must, at all times, maintain in 

segregation, in its FCM Physical 

Locations and/or its Cleared Swaps 

Customer Accounts at Permitted 

Depositories, an amount equal to the 

sum of any credit balances that the 

Cleared Swaps Customers of the futures 

commission merchant have in their 

accounts, excluding from such sum any 

debit balances that the Cleared Swaps 

Customers of the futures commission 

merchant have in their accounts. 

(5) * * * 

(iii) * * * 

(B) Reduce such market value by 

applicable percentage deductions (i.e., 

‘‘securities haircuts’’) as set forth in 

Rule 15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (§ 240.15c3– 

1(c)(2)(vi) of this title). Futures 

commission merchants that establish 

and enforce written policies and 

procedures to assess the credit risk of 

commercial paper, convertible debt 

instruments, or nonconvertible debt 

instruments in accordance with Rule 


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240.15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)) may apply the 

lower haircut percentages specified in 

Rule 240.15c3–1(c)(2)(vi) for such 

commercial paper, convertible debt 

instruments and nonconvertible debt 

instruments. The portion of the debit 

balance, not exceeding 100 percent, that 

is secured by the reduced market value 

of such readily marketable securities 

shall be included in calculating the sum 

referred to in paragraph (f)(4) of this 

section. 

(6) The FCM must reflect in the 

account it maintains for each Cleared 

Swaps Customer the amount of 

collateral required for the Cleared 

Swaps Customer’s Cleared Swaps at 

each derivatives clearing organization 

on which the futures commission 

merchant is a member, or by each other 

futures commission merchant through 

which the futures commission merchant 

clears Cleared Swaps, and the total of 

such required collateral amounts. If the 

value of the Cleared Swaps Customer 

Collateral, as calculated in this section, 

for a Cleared Swaps Customer is less 

than the total amount of collateral 

required for that Cleared Swaps 

Customer’s Cleared Swaps at such 

derivatives clearing organizations and 

such other futures commission 

merchants, the difference is a margin 

deficit. The futures commission 

merchant must at all times maintain a 

residual interest in Cleared Swaps 

Customer Accounts sufficient to exceed 

the sum of all margin deficits that 

Cleared Swaps Customers of the futures 

commission merchant have in their 

accounts. Such residual interest may not 

be withdrawn pursuant to any provision 

of this chapter. 

(g) * * * 

(2) Each futures commission merchant 

is required to document its segregation 

computation required by paragraph 

(g)(1) of this section by preparing a 

Statement of Cleared Swaps Customer 

Segregation Requirements and Funds in 

Cleared Swaps Customer Accounts 

Under 4d(f) of the CEA contained in the 

Form 1–FR–FCM as of the close of 

business each business day. 

(3) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization the daily 

Statement of Cleared Swaps Customer 

Segregation Requirements and Funds in 

Cleared Swaps Customer Accounts 

Under 4d(f) of the CEA required by 

paragraph (g)(2) of this section by noon 

the following business day. 

(4) Each futures commission merchant 

shall file the Statement of Cleared 

Swaps Customer Segregation 

Requirements and Funds in Cleared 

Swaps Customer Accounts Under 4d(f) 

of the CEA required by paragraph (g)(2) 

of this section in an electronic format 

using a form of user authentication 

assigned in accordance with procedures 

established or approved by the 

Commission. 

(5) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization a report listing 

of the names of all banks, trust 

companies, futures commission 

merchants, derivatives clearing 

organizations, or any other depository or 

custodian holding Cleared Swaps 

Customer Collateral as of the fifteenth 

day of the month, or the first business 

day thereafter, and the last business day 

of each month. This report must 

include: 

(i) The name and location of each 

entity holding Cleared Swaps Customer 

Collateral; 

(ii) The total amount of Cleared 

Swaps Customer Collateral held by each 

entity listed in this paragraph (g)(5); and 

(iii) The total amount of cash and 

investments that each entity listed in 

this paragraph (g)(5) holds for the 

futures commission merchant. The 

futures commission merchant must 

report the following investments: 

(A) Obligations of the United States 

and obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities); 

(B) General obligations of any State or 

of any political subdivision of a State 

(municipal securities); 

(C) General obligation issued by any 

enterprise sponsored by the United 

States (government sponsored enterprise 

securities); 

(D) Certificates of deposit issued by a 

bank; 

(E) Commercial paper fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; 

(F) Corporate notes or bonds fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; and 

(G) Interests in money market mutual 

funds. 

(6) Each futures commission merchant 

must report the total amount of 

customer owned securities held by the 

futures commission merchant as Cleared 

Swaps Customer Collateral and must list 

the names and locations of the 

depositories holding customer owned 

securities. 

(7) Each futures commission merchant 

must report the total amount of Cleared 

Swaps Customer Collateral that has 

been used to purchase securities under 

agreements to resell the securities 

(reverse repurchase transactions). 

(8) Each futures commission merchant 

must report which, if any, of the 

depositories holding Cleared Swaps 

Customer Collateral under paragraph 

(g)(5) of this section are affiliated with 

the futures commission merchant. 

(9) Each futures commission merchant 

shall file the detailed list of depositories 

required by paragraph (g)(5) of this 

section by 11:59 p.m. the next business 

day in an electronic format using a form 

of user authentication assigned in 

accordance with procedures established 

or approved by the Commission. 

(10) Each futures commission 

merchant shall retain its daily 

segregation computation and the 

Statement of Cleared Swaps Customer 

Segregation Requirements and Funds in 

Cleared Swaps Customer Accounts 

under section 4d(f) of the CEA required 

by paragraph (g)(2) of this section and 

the detailed listing of depositories 

required by paragraph (g)(5) of this 

section, together with all supporting 

documentation, in accordance with 

§ 1.31 of this chapter. 

23. Add § 22.17 to read as follows: 

§ 22.17 Policies and procedures governing 

disbursements of Cleared Swaps Customer 

Collateral from Cleared Swaps Customer 

Accounts. 

(a) The provision in section 4d(f)(2) of 

the Act that prohibits the commingling 

of Cleared Swaps Customer Collateral 

with the funds of a futures commission 

merchant, shall not be construed to 

prevent a futures commission merchant 

from having a residual financial interest 

in the funds segregated as required by 

the Act and the regulations in this part 

and set apart for the benefit of Cleared 

Swaps Customers; nor shall such 

provisions be construed to prevent a 

futures commission merchant from 

adding to such segregated funds such 

amount or amounts of money, from its 

own funds or unencumbered securities 

from its own inventory, of the type set 

forth in § 1.25 of this chapter, as it may 

deem necessary to ensure any and all 

Cleared Swaps Customer Accounts are 

not undersegregated at any time. 

(b) A futures commission merchant 

may not withdraw funds on any 

business day for its own proprietary use 

from a Cleared Swaps Customer 

Account unless the futures commission 

merchant has prepared the daily 

segregation calculation required by 

§ 22.2 of this part as of the close of 

business on the previous business day. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67956 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

A futures commission merchant that has 

completed its daily segregation 

calculation may make withdrawals for 

its own use, to the extent of its actual 

residual financial interest in funds held 

in segregated accounts, including the 

withdrawal of securities held in 

segregated safekeeping accounts held by 

a bank, trust company, derivatives 

clearing organization or other futures 

commission merchant. Such 

withdrawal(s) shall not result in the 

funds of one Cleared Swaps Customer 

being used to purchase, margin or carry 

the trades, contracts or swaps positions, 

or extend the credit of any other Cleared 

Swaps Customer or other person. 

Notwithstanding any other provision of 

this chapter, a futures commission 

merchant must at all times maintain an 

amount of residual interest in Cleared 

Swaps Customer Accounts for the 

benefit of Cleared Swaps Customers that 

exceeds the sum of all Cleared Swaps 

Customers’ margin deficits and such 

residual interest may not be withdrawn 

by the futures commission merchant. 

(c) A futures commission merchant 

may not withdraw funds for its own 

proprietary use, in a single transaction 

or a series of transactions on a given 

business day, from Cleared Swaps 

Customer Accounts if such 

withdrawal(s) would exceed 25 percent 

of the futures commission merchant’s 

residual interest in such accounts as 

reported on the daily segregation 

calculation required by § 22.2 of this 

part and computed as of the close of 

business on the previous business day, 

unless: 

(1) The futures commission 

merchant’s Chief Executive Officer, 

Chief Finance Officer or other senior 

official that is listed as a principal of the 

futures commission merchant on its 

Form 7–R and is knowledgeable about 

the futures commission merchant’s 

financial requirements and financial 

position pre-approves in writing the 

withdrawal, or series of withdrawals; 

(2) The futures commission merchant 

files written notice of the withdrawal or 

series of withdrawals, with the 

Commission and with its designated 

self-regulatory organization immediately 

after the Chief Executive Officer, Chief 

Finance Officer or other senior official 

pre-approves the withdrawal or series of 

withdrawals. The written notice must: 

(i) Be signed by the Chief Executive 

Officer, Chief Finance Officer or other 

senior official that pre-approved the 

withdrawal, and give notice that the 

futures commission merchant has 

withdrawn or intends to withdraw more 

than 25 percent of its residual interest 

in such accounts holding Cleared Swaps 

Customer Accounts funds; 

(ii) Include a description of the 

reasons for the withdrawal or series of 

withdrawals; 

(iii) List the amount of funds provided 

to each recipient and the name of each 

recipient; 

(iv) Include the current estimate of the 

amount of the futures commission 

merchant’s residual interest in the 

swaps customer funds after the 

withdrawal; 

(v) Contain a representation by the 

Chief Executive Officer, Chief Finance 

Officer or other senior official that preapproved the withdrawal, or series of 

withdrawals, that, after due diligence, to 

such person’s knowledge and 

reasonable belief, the futures 

commission merchant remains in 

compliance with the segregation 

requirements after the withdrawal. The 

Chief Executive Officer, Chief Finance 

Officer or other senior official must 

consider the daily segregation 

calculation as of the close of business on 

the previous business day and any other 

factors that may cause a material change 

in the futures commission’s residual 

interest since the close of business the 

previous business day, including known 

unsecured customer debits or deficits, 

current day market activity and any 

other withdrawals made from the 

Cleared Swaps Customer Accounts; and 

(vi) Any such written notice filed 

with the Commission must be filed via 

electronic transmission using a form of 

user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instruction issued by or approved by the 

Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. Any written notice 

filed must be followed up with direct 

communication to the Regional office of 

Commission which has supervisory 

authority over the futures commission 

merchant whereby the Commission 

acknowledges receipt of the notice; and 

(3) After making a withdrawal 

requiring the approval and notice 

required in paragraphs (c)(1) and (2) of 

this section, and before the next daily 

segregated funds calculation, no futures 

commission merchant may make any 

further withdrawals from accounts 

holding Cleared Swaps Customer 

Account funds, except to or for the 

benefit of Cleared Swaps Customers, 

without complying with paragraph 

(c)(1) of this section and filing a written 

notice with the Commission under 

(c)(2)(vi) of this section and its 

designated self-regulatory organization 

signed by the Chief Executive Officer, 

Chief Finance Officer, or other senior 

official. The written notice must: 

(i) List the amount of funds provided 

to each recipient and each recipient’s 

name; 

(ii) Disclose the reason for each 

withdrawal; 

(iii) Confirm that the Chief Executive 

Officer, Chief Finance Officer, or other 

senior official (and identify of the 

person if different from the person who 

signed the notice) pre-approved the 

withdrawal in writing; 

(iv) Disclose the current estimate of 

the futures commission merchant’s 

remaining total residual interest in the 

segregated accounts holding Cleared 

Swaps Customer Account funds after 

the withdrawal; and 

(v) Include a representation that to the 

best of the notice signatory’s knowledge 

and reasonable belief the futures 

commission merchant remains in 

compliance with the segregation 

requirements after the withdrawal. 

(d) If a futures commission merchant 

withdraws funds from Cleared Swaps 

Customer Accounts for its own 

proprietary use, and the withdrawal 

causes the futures commission merchant 

to not hold sufficient funds in Cleared 

Swaps Customer Accounts to meet its 

targeted residual interest, as required to 

be computed under § 1.11 of this 

chapter, the futures commission 

merchant must deposit its own funds 

into the Cleared Swaps Customer 

Accounts to restore the targeted amount 

of residual interest on the next business 

day, or, if appropriate, revise the futures 

commission merchant’s targeted amount 

of residual interest pursuant to the 

policies and procedures required by 

§ 1.11 of this chapter. Notwithstanding 

the foregoing, if at any time the futures 

commission merchant’s residual interest 

in Cleared Swaps Customer Accounts is 

less than the sum of its Cleared Swaps 

Customers’ margin deficits, the futures 

commission merchant must 

immediately restore the residual interest 

to exceed the sum of such margin 

deficits. Any proprietary funds 

deposited in Cleared Swaps Customer 

Accounts must be unencumbered and 

otherwise compliant with § 1.25 of this 

chapter, as applicable. 

(e) Notwithstanding any other 

provision of this part, a futures 

commission merchant may not 

withdraw funds for its own proprietary 

use from a Cleared Swaps Customer 

Account unless the futures commission 

merchant follows its policies and 

procedures required by § 1.11 of this 

chapter. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67957 

PART 30—FOREIGN FUTURES AND 

FOREIGN OPTIONS TRANSACTIONS 

24. The authority citation for part 30 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 4, 6, 6c, and 12a, 

as amended by Title VII of the Dodd-Frank 

Wall Street Reform and Consumer Protection 

Act, Pub. L. 111–203, 124 Stat. 1376 (Jul. 21, 

2010). 

25. Amend § 30.1 by adding 

paragraphs (f), (g), and (h) to read as 

follows: 

§ 30.1 Definitions. 

* * * * * 

(f) 30.7 Customer means any foreign 

futures or foreign options customer as 

defined in paragraph (c) of this section 

as well as any foreign-domiciled person 

who trades in foreign futures or foreign 

options through a futures commission 

merchant; Provided, however, that an 

owner or holder of a proprietary account 

as defined in paragraph (y) of § 1.3 of 

this chapter shall not be deemed to be 

a 30.7 customer. 

(g) 30.7 Account means any account 

maintained by a futures commission 

merchant for or on behalf of 30.7 

Customers to hold money, securities, or 

other property to margin, guarantee, or 

secure foreign futures or foreign option 

positions. 

(h) 30.7 Customer Funds means any 

money, securities, or other property 

received by a futures commission 

merchant from, for, or on behalf of 30.7 

Customers to margin, guarantee, or 

secure foreign futures or foreign option 

positions, or money, securities, or other 

property accruing to 30.7 Customers as 

a result of foreign futures and foreign 

option positions. 

26. Revise § 30.7 to read as follows: 

§ 30.7 Treatment of foreign futures or 

foreign options secured amount. 

(a) General. Except as provided in this 

section, a futures commission merchant 

must at all times maintain in a separate 

account or accounts money, securities 

and property in an amount at least 

sufficient to cover or satisfy all of its 

obligations to 30.7 Customers 

denominated as the foreign futures or 

foreign options secured amount. In 

computing the foreign futures or foreign 

options secured amount, a futures 

commission merchant may offset any 

net deficit in a particular 30.7 

Customer’s Account against the current 

market value of readily marketable 

securities held for the same particular 

30.7 Customer’s Account as provided 

for in paragraph (l) of this section. The 

amount that must be deposited in such 

separate account or accounts for 30.7 

Customers must be no less than the 

amount required to be held in a separate 

account or accounts for or on behalf of 

30.7 Customers pursuant to any law, or 

rule, regulation or order thereunder, or 

any rule of any self-regulatory 

organization authorized thereunder, in 

the jurisdiction in which the depository 

or the 30.7 Customer, as appropriate, is 

located. In addition, the futures 

commission merchant must at all times 

maintain residual interest in separate 

accounts for 30.7 Customers sufficient 

to exceed the sum of all margin deficits 

that the 30.7 Customers of the futures 

commission merchant have in their 30.7 

Accounts. Such residual interest may 

not be withdrawn pursuant to any 

provision of this section. If the value of 

a 30.7 Customer’s Funds for a 30.7 

Account is less than the total amount of 

collateral required for that 30.7 

Customer’s 30.7 Account for foreign 

futures or foreign options, the difference 

is a margin deficit. 

(b) Location of 30.7 Customer Funds. 

A futures commission merchant shall 

deposit the foreign futures or foreign 

options secured amount under an 

account name that clearly identifies the 

funds as belonging to 30.7 Customers 

and shows that the foreign futures or 

foreign options secured amount is set 

aside as required by this part. A futures 

commission merchant may deposit 

funds set aside as the foreign futures or 

foreign options secured amount with the 

following depositories: 

(1) A bank or trust company located 

in the United States; 

(2) A bank or trust company located 

outside the United States that has in 

excess of $1 billion of regulatory capital; 

(3) A futures commission merchant 

registered as such with the Commission; 

(4) A derivatives clearing 

organization; 

(5) The clearing organization of any 

foreign board of trade; 

(6) A member of any foreign board of 

trade; or 

(7) Such member’s or clearing 

organization’s designated depositories. 

(c) Limitation on holding foreign 

futures or foreign options secured 

amount outside of the United States. A 

futures commission merchant may not 

deposit or hold the foreign futures or 

foreign options secured amount in 

accounts maintained outside of the 

United States with any of the 

depositories listed in paragraph (b) of 

this section except to meet margin 

requirements, including prefunding 

margin requirements, established by 

rule, regulation, or order of foreign 

boards of trade or foreign clearing 

organizations, or to meet margin calls 

issued by foreign brokers carrying the 

30.7 Customers’ foreign futures and 

foreign option positions; Provided, 

however, that a futures commission 

merchant may deposit an additional 

amount of up to 10 percent of the total 

amount of funds necessary to meet 

margin and prefunding margin 

requirements to avoid daily transfers of 

funds between the futures commission 

merchant’s 30.7 Accounts maintained in 

the United States and those maintained 

outside of the United States. An FCM 

must deposit 30.7 Customer Funds 

under the laws and regulations of the 

foreign jurisdiction that provide the 

greatest degree of protection to such 

funds. An FCM may not by contract or 

otherwise waive any of the protections 

afforded customer funds under the laws 

of the foreign jurisdiction. 

(d) Written acknowledgment from 

depositories. (1) Each futures 

commission merchant must obtain a 

written acknowledgment from each 

depository as set out in Appendix E to 

this part in accordance with the 

requirements of this part; Provided, 

however, that an acknowledgment need 

not be obtained from a derivatives 

clearing organization that has adopted 

and submitted to the Commission rules 

that provide for the separate holding of 

the foreign futures or foreign options 

secured amount, in accordance with all 

relevant provisions of the Act, this part 

and the regulations and orders 

promulgated thereunder, of all funds 

held on behalf of 30.7 Customers and all 

instruments purchased with funds set 

aside as the foreign futures or foreign 

options secured amount as provided for 

under paragraph (i) of this section. 

(2) The written acknowledgment must 

be in the form as set out in Appendix 

E to this part: Provided, however, that if 

the futures commission merchant 

invests funds set aside as the foreign 

futures or foreign options secured 

amount in money market mutual funds 

as a permitted investment under 

paragraph (i) of this section and in 

accordance with the terms and 

conditions of § 1.25(c) of this chapter, 

the written acknowledgment with 

respect to such investment must be in 

the form as set out in Appendix F to this 

part. 

(3) A futures commission merchant 

may deposit 30.7 Customer Funds only 

with a depository that provides the 

Commission and the futures 

commission merchant’s designated selfregulatory organization with direct, 

read-only access to account information 

on 24-hour a day basis. The Commission 

and the futures commission merchant’s 

designated self-regulatory organization 

must receive the direct access when the 

account is opened. The written 

acknowledgment must contain the 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67958 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

futures commission merchant’s 

authorization to the depository to 

provide direct and immediate account 

access to the Commission and the 

futures commission merchant’s 

designated self-regulatory organization. 

(4) A futures commission merchant 

may deposit 30.7 Customer Funds only 

with a depository that agrees to provide 

the Commission and the futures 

commission merchant’s designated selfregulatory organization with a copy of 

the executed written acknowledgment 

within three business days of the 

opening of the account. The 

Commission must receive the written 

acknowledgment from the depository 

via electronic mail at 

acknowledgmentletters@cftc.gov. The 

written acknowledgment must contain 

the futures commission merchant’s 

authorization to the depository to 

provide the written acknowledgment to 

the Commission and to the futures 

commission merchant’s designated selfregulatory organization without further 

notice to or consent from the futures 

commission merchant. 

(5) A futures commission merchant 

may deposit 30.7 Customer Funds only 

with a depository that agrees to reply 

promptly and directly to the 

Commission’s or to the futures 

commission merchant’s designated selfregulatory organization’s requests for 

confirmation of account balances or 

other account information without 

further notice to or consent from the 

futures commission merchant. The 

written acknowledgment must contain 

the futures commission merchant’s 

authorization to the depository to 

respond directly and immediately to 

requests from the Commission or the 

futures commission merchant’s 

designated self-regulatory organization 

for confirmation of account balances 

and other account information without 

further notice to or consent from the 

futures commission merchant. 

(6) The futures commission merchant 

shall promptly file a copy of the written 

acknowledgment with the Commission 

in the manner specified by the 

Commission and in no event later than 

the later of: 

(i) The effective date of this rule; or 

(ii) Three business days after the 

account is opened. 

(7) The futures commission merchant 

shall amend the written 

acknowledgment and promptly file the 

amended written acknowledgment with 

the Commission within 120 days of any 

changes in the following: 

(i) The name or business address of 

the futures commission merchant; 

(ii) The name or business address of 

the depository; or 

(iii) The account number(s) under 

which the foreign futures or foreign 

options secured amount are held. 

(8) Each futures commission merchant 

must maintain each written 

acknowledgment readily accessible in 

its files in accordance with § 1.31 of this 

chapter, for as long as the account 

remains open, and thereafter for the 

period provided in § 1.31 of this 

chapter. 

(e) Commingling. (1) A futures 

commission merchant may commingle 

the funds set aside as the foreign futures 

or foreign options secured amount that 

it receives from, or on behalf of, 

multiple 30.7 Customers in a single 

account or multiple accounts with one 

or more of the depositories listed in 

paragraph (b) of this section. 

(2) A futures commission merchant 

may not commingle the funds set aside 

as the foreign futures or foreign options 

secured amount held for 30.7 Customers 

with the money, securities or property 

of such futures commission merchant, 

with any proprietary account of such 

futures commission merchant, or use 

such funds to secure or guarantee the 

obligations of, or extend credit to, such 

futures commission merchant or any 

proprietary account of such futures 

commission merchant; Provided, 

however, a futures commission 

merchant may deposit proprietary funds 

into 30.7 Customer Accounts as 

permitted under paragraph (g) of this 

section. 

(3) A futures commission merchant 

may not commingle funds held for 30.7 

Customers with funds deposited by 

futures customers as defined in § 1.3 of 

this chapter and held in account 

segregated pursuant to Section 4d(a) and 

4d(b) of the Act or with funds deposited 

by Cleared Swap Customers as defined 

under § 22.1 of this chapter and held in 

segregated accounts pursuant to Section 

4d(f) of the Act, or with funds of any 

account holders of the futures 

commission merchant unrelated to 

trading foreign futures or foreign 

options; Provided, however, that a 

futures commission merchant may 

commingle 30.7 Customer funds with 

funds deposited by futures customers or 

Cleared Swaps Customers pursuant to 

the terms of a Commission regulation or 

order authorizing such commingling. 

(f) Limitations on use of 30.7 

Customer Funds. (1) A futures 

commission merchant shall not use, or 

permit the use of, the funds of one 30.7 

Customer to purchase, margin or settle 

the trades, contracts, or commodity 

options of, or to secure or extend credit 

to, any person other than such 30.7 

Customer. This prohibition on the use of 

the funds of one 30.7 customer to 

extend credit to, or to purchase, margin 

or settle the trades, contracts, or 

commodity options of another 30.7 

Customer applies at all times. For this 

purpose, a futures commission 

merchant which operationally 

commingles the funds of its 30.7 

Customers must ensure that at all times 

its residual interest in funds set aside as 

the foreign futures or foreign options 

secured amount exceeds the sum of all 

its 30.7 Customers’ margin deficits. 

(2) A futures commission merchant 

may not impose or permit the 

imposition of a lien on any funds set 

aside as the foreign futures or foreign 

options secured amount, including any 

residual financial interest of the futures 

commission merchant in such funds. 

(3) A futures commission merchant 

may not include in funds set aside as 

the foreign futures or foreign options 

secured amount any money invested in 

securities, memberships, or obligations 

of any clearing organization or board of 

trade. A futures commission merchant 

may not include in funds set aside as 

the foreign futures or foreign options 

secured amount any other money, 

securities, or property held by a member 

of a foreign board of trade, board of 

trade, or clearing organization, except if 

the funds are deposited to margin, 

secure, or guarantee 30.7 Customers’ 

foreign futures or foreign options 

positions and the futures commission 

merchant obtains the written 

acknowledgment from the member of 

the foreign board of trade, board of 

trade, or clearing organization as 

required by paragraph (d) of this 

section. 

(g) Futures commission merchant’s 

residual financial interest and 

withdrawal of funds. (1) The provision 

in paragraph (e) of this section, which 

prohibits the commingling of funds set 

aside as the foreign futures or foreign 

options secured amount with the funds 

of a futures commission merchant, shall 

not be construed to prevent a futures 

commission merchant from having a 

residual financial interest in the funds 

set aside as required by the regulations 

in this part for the benefit of 30.7 

Customers; nor shall such provisions be 

construed to prevent a futures 

commission merchant from adding to 

such set aside funds such amount or 

amounts of money, from its own funds 

or unencumbered securities from its 

own inventory, of the type set forth in 

§ 1.25 of this chapter, as it may deem 

necessary to ensure any and all 30.7 

Accounts from becoming undersecured 

at any time. 

(2) A futures commission merchant 

may not withdraw funds on any 

business day for its own proprietary use 


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from an account or accounts holding the 

foreign futures and foreign options 

secured amount unless the futures 

commission merchant has prepared the 

daily 30.7 calculation required by 

paragraph (l) of this section as of the 

close of business on the previous 

business day. A futures commission 

merchant that has completed its daily 

30.7 calculation may make withdrawals 

to its own order, to the extent of its 

actual residual financial interest in 

funds held in 30.7 Accounts, including 

the withdrawal of securities held in 

secured amount safekeeping accounts 

held by a bank, trust company, contract 

market, clearing organization, member 

of a foreign board of trade, or other 

futures commission merchant. Such 

withdrawal(s) shall not result in the 

funds of one 30.7 Customer being used 

to purchase, margin or carry the foreign 

futures or foreign options positions, or 

extend the credit of any other 30.7 

Customer or other person. 

Notwithstanding any other provision of 

this section, a futures commission 

merchant must at all times maintain an 

amount of residual interest in separate 

accounts for the benefit of 30.7 

Customers that exceeds the sum of all 

30.7 Customers’ margin deficits and 

such residual interest may not be 

withdrawn by the futures commission 

merchant. 

(3) A futures commission merchant 

may not withdraw funds for its own 

proprietary use, in a single transaction 

or a series of transactions on a given 

business day, from an account or 

accounts holding 30.7 Customer Funds 

if such withdrawal(s) would exceed 25 

percent of the futures commission 

merchant’s residual interest in such 

accounts as reported on the daily 

secured amount calculation required by 

paragraph (l) of this section and 

computed as of the close of business on 

the previous business day, unless the 

futures commission merchant’s Chief 

Executive Officer, Chief Finance Officer 

or other senior official that is listed as 

a principal of the futures commission 

merchant on its Form 7–R and is 

knowledgeable about the futures 

commission merchant’s financial 

requirements and financial position preapproves in writing the withdrawal, or 

series of withdrawals. 

(4) A futures commission merchant 

must file written notice of the 

withdrawal or series of withdrawals that 

exceed 25 percent of the futures 

commission merchant’s residual interest 

in 30.7 Customer Funds as computed 

under paragraph (h)(2) of this section 

with the Commission and with its 

designated self-regulatory organization 

immediately after the Chief Executive 

Officer, Chief Finance Officer or other 

senior official as described in paragraph 

(g)(2) of this section pre-approves the 

withdrawal or series of withdrawals. 

The written notice must: 

(i) Be signed by the Chief Executive 

Officer, Chief Finance Officer or other 

senior official that pre-approved the 

withdrawal, and give notice that the 

futures commission merchant has 

withdrawn or intends to withdraw more 

than 25 percent of its residual interest 

in accounts holding 30.7 Customer 

Funds; 

(ii) Include a description of the 

reasons for the withdrawal or series of 

withdrawals; 

(iii) List the amount of funds provided 

to each recipient and the name of each 

recipient; 

(iv) Include the current estimate of the 

amount of the futures commission 

merchant’s residual interest in the 30.7 

Customer Funds after the withdrawal; 

(v) Contain a representation by the 

Chief Executive Officer, Chief Finance 

Officer or other senior official as 

described in paragraph (g)(3) of this 

section that pre-approved the 

withdrawal, or series of withdrawals, 

that to such person’s knowledge and 

reasonable belief, the futures 

commission merchant remains in 

compliance with the secured amount 

requirements after the withdrawal. The 

Chief Executive Officer, Chief Finance 

Officer or other appropriate senior 

official as described in paragraph (g)(2) 

of this section must consider the daily 

30.7 calculation as of the close of 

business on the previous business day 

and any other factors that may cause a 

material change in the futures 

commission’s residual interest since the 

close of business the previous business 

day, including known unsecured 

customer debits or deficits, current day 

market activity and any other 

withdrawals made from the 30.7 

Customer Accounts; and 

(vi) Any such written notice filed 

with the Commission must be filed via 

electronic transmission using a form of 

user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instruction issued by or approved by the 

Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. Any written notice 

filed must be followed up with direct 

communication to the Regional office of 

Commission which has supervisory 

authority over the futures commission 

merchant whereby the Commission 

acknowledges receipt of the notice. 

(5) After making a withdrawal 

requiring the approval and notice 

required in paragraphs (c)(1) and (2) of 

this section, and before the next daily 

secured amount calculation, no futures 

commission merchant may make any 

further withdrawals from accounts 

holding 30.7 Customer Funds, except to 

or for the benefit of 30.7 Customers, 

without, for each withdrawal, obtaining 

the approval required under paragraph 

(c)(1) of this section and filing a written 

notice with the Commission under 

paragraph (g)(4)(vi) of this section and 

its designated self-regulatory 

organization signed by the Chief 

Executive Officer, Chief Finance Officer, 

or other senior official. The written 

notice must: 

(i) List the amount of funds provided 

to each recipient and each recipient’s 

name; 

(ii) Disclose the reason for each 

withdrawal; 

(iii) Confirm that the Chief Executive 

Officer, Chief Finance Officer, or other 

senior official (and identify of the 

person if different from the person who 

signed the notice) pre-approved the 

withdrawal in writing; 

(iv) Disclose the current estimate of 

the futures commission merchant’s 

remaining total residual interest in the 

secured accounts holding 30.7 Customer 

Funds after the withdrawal; and 

(v) Include a representation that to the 

best of the notice signatory’s knowledge 

and reasonable belief the futures 

commission merchant remains in 

compliance with the secured amount 

requirements after the withdrawal. 

(6) If a futures commission merchant 

withdraws funds from the separate 

accounts holding 30.7 Customer Funds 

for its own proprietary use, and the 

withdrawal causes the futures 

commission merchant to not hold 

sufficient funds in the separate accounts 

for the benefit of the 30.7 Customers to 

meet its targeted residual interest, as 

required to be computed under § 1.11 of 

this chapter, the futures commission 

merchant must deposit its own funds 

into the separate accounts for the benefit 

of 30.7 Customers to restore the account 

balance to the targeted residual interest 

amount on the next business day, or, if 

appropriate, revise the futures 

commission merchant’s targeted amount 

of residual interest pursuant to the 

policies and procedures required by 

§ 1.11 of this chapter. Notwithstanding 

the foregoing, if at any time the futures 

commission merchant’s residual interest 

in separate accounts for the benefit of 

30.7 Customers is less than the sum of 


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67960 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

its 30.7 Customer’s margin deficits, the 

futures commission merchant must 

immediately restore the residual interest 

to exceed the sum of such margin 

deficits. Any proprietary funds 

deposited in the 30.7 Customer 

Accounts must be unencumbered and 

otherwise compliant with § 1.25 of this 

section, as applicable. 

(7) Notwithstanding any other 

provision of this part, a futures 

commission merchant may not 

withdraw funds for its own proprietary 

use from 30.7 Accounts unless the 

futures commission merchant follows 

its policies and procedures required by 

§ 1.11 of this chapter. 

(h) Permitted investments and 

deposits of 30.7 Customer Funds. (1) A 

futures commission merchant may 

invest 30.7 Customer Funds subject to, 

and in compliance with, the terms and 

conditions of § 1.25 of this chapter. 

Regulation 1.25 of this chapter shall 

apply to the investment of 30.7 

Customer Funds as if such funds 

comprised customer funds or customer 

money subject to segregation pursuant 

to section 4d of the Act and the 

regulations thereunder. 

(2) Each futures commission merchant 

that invests money, securities or 

property on behalf of 30.7 Customers 

must keep a record showing the 

following: 

(i) The date on which such 

investments were made; 

(ii) The name of the person through 

whom such investments were made; 

(iii) The amount of money or current 

market value of securities so invested; 

(iv) A description of the obligations in 

which such investments were made, 

including CUSIP or ISIN numbers; 

(v) The identity of the depositories or 

other places where such investments are 

maintained; 

(vi) The date on which such 

investments were liquidated or 

otherwise disposed of and the amount 

of money received or current market 

value of securities received as a result 

of such disposition; 

(vii) The name of the person to or 

through whom such investments were 

disposed of; and 

(viii) A daily valuation for each 

instrument and readily available 

documentation supporting the daily 

valuation for each instrument. Such 

supporting documentation must be 

sufficient to enable third parties to 

verify the valuations and the accuracy of 

any information from external sources 

used in those valuations. 

(3) Any 30.7 Customer Funds 

deposited in a bank or trust company 

located in the United States or in a 

foreign jurisdiction must be available for 

immediate withdrawal upon the 

demand of the futures commission 

merchant. 

(4) Futures commission merchants 

that invest 30.7 Customer Funds in 

instruments described in § 1.25 of this 

chapter shall include such instruments 

in the computation of its secured 

amount requirements, required under 

paragraph (l) of this section, at values 

that at no time exceed current market 

value, determined as of the close of the 

market on the date for which such 

computation is made. 

(i) Responsibility for § 1.25 investment 

losses. A futures commission merchant 

shall bear sole financial responsibility 

for any losses resulting from the 

investment of 30.7 Customer Funds in 

instruments described in § 1.25 of this 

chapter. No investment losses shall be 

borne or otherwise allocated to the 30.7 

Customers of the futures commission 

merchant. 

(j) Loans by futures commission 

merchants; Treatment of proceeds. A 

futures commission merchant may lend 

its own funds to 30.7 Customers on 

securities and property pledged, or from 

repledging or selling such securities and 

property pursuant to specific written 

agreement with such 30.7 Customers. 

The proceeds of such loans used to 

purchase, margin, guarantee, or secure 

the trades, contracts, or commodity 

options of 30.7 Customers shall be 

treated and dealt with by a futures 

commission merchant as belonging to 

such 30.7 Customers. A futures 

commission merchant may not loan 

funds on an unsecured basis to finance 

a 30.7 Customer’s foreign futures and 

foreign options trading, nor may a 

futures commission merchant loan 

funds to a 30.7 Customer secured by the 

30.7 Customer’s trading account. 

(k) Permitted withdrawals. A futures 

commission merchant may withdraw 

funds from 30.7 Customer Accounts in 

an amount necessary in the normal 

course of business to margin, guarantee, 

secure, transfer, or settle 30.7 

Customers’ foreign futures or foreign 

option positions with a foreign broker or 

clearing organization. A futures 

commission merchant also may 

withdraw funds from 30.7 Customer 

Accounts to pay commissions, 

brokerage, interest, taxes, storage, and 

other charges lawfully accruing in 

connection with the 30.7 Customers’ 

foreign futures and foreign options 

positions. 

(l) Daily computation of 30.7 

Customer secured amount requirement 

and details regarding the holding and 

investing of 30.7 Customer Funds. (1) 

Each futures commission merchant is 

required to prepare a Statement of 

Secured Amounts and Funds Held in 

Separate Accounts for 30.7 Customers 

pursuant to Commission Regulation 

30.7 contained in the Form 1–FR–FCM 

as of the close of each business day. 

Futures commission merchants that 

invest funds set aside as the foreign 

futures or foreign options secured 

amount in instruments described in 

§ 1.25 of this chapter shall include such 

instruments in the computation of its 

secured amount requirements at values 

that at no time exceed current market 

value, determined as of the close of the 

market on the date for which such 

computation is made. Nothing in this 

paragraph shall affect the requirement 

that a futures commission merchant at 

all times maintain sufficient money, 

securities and property to cover its total 

obligations to all 30.7 Customers, in 

accordance with paragraph (a) of this 

section. 

(2) A futures commission merchant 

may offset any net deficit in a particular 

30.7 Customer’s Account against the 

current market value of readily 

marketable securities, less deductions 

(i.e. ‘‘securities haircuts’’) as set forth in 

Rule 15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)), held for the same 

particular 30.7 Customer’s Account in 

computing the daily Foreign Futures 

and Foreign Options Secured Amount. 

Futures commission merchants that 

establish and enforce written policies 

and procedures to assess the credit risk 

of commercial paper, convertible debt 

instruments, or nonconvertible debt 

instruments in accordance with Rule 

240.15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)) may apply the 

lower haircut percentages specified in 

Rule 240.15c3–1(c)(2)(vi) for such 

commercial paper, convertible debt 

instruments and nonconvertible debt 

instruments. The futures commission 

merchant must maintain a security 

interest in the securities, including a 

written authorization to liquidate the 

securities at the futures commission 

merchant’s discretion, and must set 

aside the securities in a safekeeping 

account compliant with paragraph (c) of 

this section. For purposes of this 

section, a security will be considered 

‘‘readily marketable’’ if it is traded on a 

‘‘ready market’’ as defined in Rule 

15c3–1(c)(11)(i) of the Securities and 

Exchange Commission (17 CFR 

240.15c3–1(c)(11)(i)). 

(3) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization the daily 

Statement of Secured Amounts and 

Funds Held in Separate Accounts for 


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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 67961 

30.7 Customers pursuant to Commission 

Regulation 30.7 required by paragraph 

(l)(1) of this section by noon the 

following business day. 

(4) Each futures commission merchant 

shall file the Statement of Secured 

Amounts and Funds Held in Separate 

Accounts for 30.7 Customers pursuant 

to Commission Regulation 30.7 required 

by paragraph (l)(1) of this section in an 

electronic format using a form of user 

authentication assigned in accordance 

with procedures established or 

approved by the Commission. 

(5) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization a report listing 

of the names of all banks, trust 

companies, futures commission 

merchants, derivatives clearing 

organizations, foreign brokers, foreign 

clearing organizations, or any other 

depository or custodian holding 30.7 

Customer Funds as of the fifteenth day 

of the month, or the first business day 

thereafter, and the last business day of 

each month. This report must include: 

(i) The name and location of each 

depository holding 30.7 Customer 

Funds; 

(ii) The total amount of 30.7 Customer 

Funds held by each depository listed in 

paragraph (l)(5) of this section; and 

(iii) The total amount of cash and 

investments that each depository listed 

in paragraph (l)(5) of this section holds 

for the futures commission merchant. 

The futures commission merchant must 

report the following investments: 

(A) Obligations of the United States 

and obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities); 

(B) General obligations of any State or 

of any political subdivision of a State 

(municipal securities); 

(C) General obligation issued by any 

enterprise sponsored by the United 

States (government sponsored enterprise 

securities); 

(D) Certificates of deposit issued by a 

bank; 

(E) Commercial paper fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; 

(F) Corporate notes or bonds fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; and 

(G) Interests in money market mutual 

funds. 

(6) Each futures commission merchant 

must report the total amount of 

customer owned securities held by the 

futures commission merchant as 30.7 

Customer Funds and must list the 

names and locations of the depositories 

holding customer owned securities. 

(7) Each futures commission merchant 

must report the total amount of 30.7 

Customer Funds that have been used to 

purchase securities under agreements to 

resell the securities (reverse repurchase 

transactions). 

(8) Each futures commission merchant 

must report which, if any, of the 

depositories holding 30.7 Customer 

Funds under paragraph (l)(5) of this 

section are affiliated with the futures 

commission merchant. 

(9) Each futures commission merchant 

shall file the detailed list of depositories 

required by paragraph (l)(5) of this 

section by 11:59 p.m. the next business 

day in an electronic format using a form 

of user authentication assigned in 

accordance with procedures established 

or approved by the Commission. 

(10) Each futures commission 

merchant shall retain its daily secured 

amount computation, the Statement of 

Secured Amounts and Funds Held in 

Separate Accounts for 30.7 Customers 

pursuant to Commission Regulation 

30.7 required by paragraph (l)(1) of this 

section, and the detailed list of 

depositories required by paragraph (l)(5) 

of this section, together with all 

supporting documentation, in 

accordance with the requirements of 

§ 1.31 of this part. 

27. Add Appendix E and Appendix F 

to part 30 to read as follows: 

Appendix E to Part 30— 

Acknowledgment Letter for CFTC 

Regulation 30.7 Customer Secured 

Account 

[Date] 

[Name and Address of Depository] 

We refer to the Secured Amount 

Account(s) which [Name of Futures 

Commission Merchant] (‘‘we’’ or ‘‘our’’) have 

opened or will open with [Name of 

Depository] (‘‘you’’ or ‘‘your’’) entitled: 

[Name of Futures Commission Merchant] 

[if applicable, add ‘‘FCM Customer Omnibus 

Account’’] CFTC Regulation 30.7 Customer 

Secured Account [If applicable, include any 

abbreviated name of the Account(s) as 

reflected in the Depository’s electronic 

systems (provided any such abbreviated 

name must reflect that the Account(s) is a 

CFTC regulated customer secured account)] 

Account Number(s): 

(collectively, the ‘‘Account(s)’’). 

You acknowledge and agree that we have 

opened or will open the above-referenced 

Account(s) for the purpose of depositing, as 

applicable, money, securities and other 

property (collectively ‘‘Funds’’) for or on 

behalf of our customers who are entering into 

foreign futures and/or foreign options 

transactions (as such terms are defined in 

U.S. Commodity Futures Trading 

Commission (‘‘CFTC’’) Regulation 30.1, as 

amended). The Funds deposited in the 

Account(s) or accruing to the credit of the 

Accounts will be kept separate and apart and 

separately accounted for on your books from 

our own funds and all other accounts 

maintained by us in accordance with the 

provisions of the Commodity Exchange Act, 

as amended (the ‘‘Act’’), and Part 30 of the 

CFTC’s regulations, as amended, and may not 

be commingled with our own funds in any 

proprietary account we maintain with you 

and the Funds must otherwise be treated in 

accordance with the provisions of the Act 

and CFTC Regulations. 

Furthermore, you acknowledge and agree 

that such Funds may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, nor may they be 

used by us to secure credit from you. You 

further acknowledge and agree that the 

Funds in the Account(s) shall not be subject 

to any right of offset or lien for or on account 

of any indebtedness, obligations or liabilities 

we may now or in the future have owing to 

you, and that you understand the nature of 

the Funds held or hereafter deposited in the 

Account(s) and that you will treat and 

maintain such Funds in accordance with the 

provisions of the Act and CFTC regulations. 

This prohibition does not affect your right to 

recover funds advanced in the form of cash 

transfers you make in lieu of liquidating noncash assets held in the Account(s) for 

purposes of variation settlement or posting 

initial (original) margin. 

In addition, you agree that the Account(s) 

may be examined at any reasonable time by 

an appropriate officer, agent or employee of 

the CFTC or a self-regulatory organization, 

and this letter constitutes the authorization 

and direction of the undersigned to permit 

any such examination or audit to take place. 

You agree to respond promptly and directly 

to requests for confirmation of account 

balances and other account information from 

an appropriate officer, agent, or employee of 

the CFTC or a self-regulatory organization of 

which we are a member, without further 

notice to or consent from the futures 

commission merchant. You also agree that, 

immediately upon instruction by the director 

of the Division of Swap Dealer and 

Intermediary Oversight of the CFTC or the 

director of the Division of Clearing and Risk 

of the CFTC, or any successor divisions, or 

such directors’ designees, or any appropriate 

official of a self-regulatory organization of 

which we are a member, you will provide 

any and all information regarding or related 

to the Funds or the Accounts as shall be 

specified in such instruction and as directed 

in such instruction. You further agree that 

you will provide the CFTC and our 

designated self-regulatory organization with 

the necessary software, a user log-in, and 

password that will allow the CFTC and our 

designated self-regulatory organization to 

have read-only access to the accounts listed 

above on your Web site on a 24-hour a day 

basis. This letter further constitutes the 

consent and authorization of the undersigned 

for you to respond immediately to requests 

from appropriate officers, agents, or 

employees of the CFTC or a self-regulatory 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
67962 Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules 

organization for information and/or 

confirmation of current and historical 

account balances of the Account(s). 

You acknowledge and agree that you meet 

the requirements detailed for depositories in 

CFTC Regulation 30.7, as amended. You 

further acknowledge and agree that the 

Funds in the Account(s) shall be released 

immediately, subject to the requirements of 

US or non-U.S. law as applicable, upon 

proper notice and instruction from an 

appropriate officer or employee of us or from 

the director of the Division of Clearing and 

Risk of the CFTC, the director of the Division 

of Swap Dealer and Intermediary Oversight, 

or any successor divisions, or such directors’ 

designees. We will not hold you responsible 

for acting pursuant to any instruction from 

the CFTC upon which you have relied after 

having taken reasonable measures to assure 

that such instruction was provided to you by 

the director of the Division of Clearing and 

Risk or the director of the Division of Swap 

Dealer and Intermediary Oversight of the 

CFTC, or any successor divisions, or such 

directors’ designees. 

In the event we become subject to either a 

voluntary or involuntary petition for relief 

under the U.S. Bankruptcy Code, we 

acknowledge that you will have no obligation 

to release the Funds held in the Account(s), 

except upon instruction of the Trustee in 

Bankruptcy or pursuant to the Order of the 

respective U.S. Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of set off against or lien on 

assets other than assets maintained in the 

Account(s), nor to impose such charges 

against us or any proprietary account 

maintained by us with you. Further, it is 

understood that amounts represented by 

checks, drafts or other items shall not be 

considered to be part of the Account(s) until 

finally collected. Accordingly, checks, drafts 

and other items credited to the Account(s) 

and subsequently dishonored or otherwise 

returned to you, or reversed, for any reason 

and any claims relating thereto, including but 

not limited to claims of alteration or forgery, 

may be charged back to the Account(s), and 

we shall be responsible to you as a general 

endorser of all such items whether or not 

actually so endorsed. 

You may conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that you have no notice of or actual 

knowledge of, or could not reasonably know 

of, a violation of the Act or other provision 

of law by us; and you shall not in any 

manner not expressly agreed to herein be 

responsible for ensuring compliance by us 

with the provisions of the Act and CFTC 

regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 

governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

such action or omission to act, to us or to any 

other person, firm, association or corporation 

even if thereafter any such order, decree, 

judgment or levy shall be reversed, modified, 

set aside or vacated. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns, including for the 

avoidance of doubt, regardless of the change 

in name of any party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter, to the extent 

that such prior agreement is inconsistent 

with the terms hereof. In the event of any 

conflict between this letter agreement and 

any other agreement between the parties in 

connection with the Account(s), this letter 

agreement shall govern with respect to 

matters specific to the Act and the CFTC’s 

regulations, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning the enclosed 

copy of this letter. You further acknowledge 

and agree to provide a copy of this fully 

executed letter directly to the CFTC (via 

electronic mail to 

acknowledgmentletters@cftc.gov) and our 

designated self-regulatory organization. 

[Name of Futures Commission Merchant] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Depository] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 

DATE: 

Appendix F to Part 30: 

CFTC Regulation 30.7—Acknowledgment 

Letter for CFTC Regulation 30.7 Customer 

Secured Money Market Mutual Fund 

Account [All of this was not proposed] 

[Date] 

[Name and Address of Money Market 

Mutual Fund] 

We propose to invest funds held by [Name 

of Futures Commission Merchant or 

Derivatives Clearing Organization] (‘‘we’’ or 

‘‘our’’) on behalf of our customers in shares 

of [Name of Money Market Mutual Fund] 

(‘‘you’’ or ‘‘your’’) under account(s) entitled 

(or shares issued to): 

[Name of Futures Commission Merchant or 

Derivatives Clearing Organization] [if 

applicable, add ‘‘FCM Customer Omnibus 

Account’’] CFTC Regulation 30.7 Customer 

Secured Money Market Mutual Fund 

Account 

[If applicable, include any abbreviated 

name of the Account(s) as reflected in the 

Depository’s electronic systems (provided 

any such abbreviated name must reflect that 

the Account(s) is a CFTC regulated customer 

segregated account)] 

Account Number(s): [ ] 

(collectively, the ‘‘Account(s)’’). 

You acknowledge and agree that we are 

holding these funds, including any shares 

issued and amounts accruing in connection 

therewith (collectively, the ‘‘Shares’’), for the 

benefit of our customers who are entering 

into foreign futures and/or foreign options 

transactions (as such terms are defined in 

U.S. Commodity Futures Trading 

Commission (‘‘CFTC’’) Regulation 30.1, as 

amended); that the Shares held by you, 

hereafter deposited in the Account(s) or 

accruing to the credit of the Accounts, will 

be kept separate and apart and separately 

accounted for on your books from our own 

funds and from any other funds or accounts 

held by us in accordance with the provisions 

of the Commodity Exchange Act, as amended 

(the ‘‘Act’’), and Part 30 of the CFTC’s 

regulations, as amended; and that the Shares 

must otherwise be treated in accordance with 

the provisions of the Act and CFTC 

regulations. 

Furthermore, you acknowledge and agree 

that such Shares may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, nor may they be 

used by us to secure credit from you. You 

further acknowledge and agree that the 

Shares in the Account(s) shall not be subject 

to any right of offset or lien for or on account 

of any indebtedness, obligations or liabilities 

we may now or in the future have owing to 

you. 

In addition, you agree that the Account(s) 

may be examined at any reasonable time by 

an appropriate officer, agent or employee of 

the CFTC or a self-regulatory organization, 

and this letter constitutes the authorization 

and direction of the undersigned to permit 

any such examination or audit to take place. 

You agree to respond promptly and directly 

to requests for confirmation of account 

balances and other account information from 

an appropriate officer, agent, or employee of 

the CFTC or a self-regulatory organization of 

which we are a member, without further 

notice to or consent from the futures 

commission merchant. You also agree that, 

immediately upon instruction by the director 

of the Division of Swap Dealer and 

Intermediary Oversight of the CFTC or the 

director of the Division of Clearing and Risk 

of the CFTC, or any successor divisions, or 

such directors’ designees, or any appropriate 

official of a self-regulatory organization of 

which we are a member, you will provide 

any and all information regarding or related 

to the Funds or the Accounts as shall be 

specified in such instruction and as directed 

in such instruction. You further agree that 

you will provide the CFTC and our 

designated self-regulatory organization with 

the necessary software, a user log-in, and 

password that will allow the CFTC and our 

designated self-regulatory organization to 

have read-only access to the accounts listed 

above on your Web site on a 24-hour a day 

basis. This letter further constitutes the 

consent and authorization of the undersigned 

for you to respond immediately to requests 

from appropriate officers, agents, or 

employees of the CFTC or a self-regulatory 

organization for information and/or 

confirmation of current and historical 

account balances of the Account(s). 


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You acknowledge and agree that the Shares 

in the Account(s) shall be released 

immediately, subject to the requirements of 

U.S. or non-U.S. law as applicable, upon 

proper notice and instruction from an 

appropriate officer or employee of us or from 

the director of the Division of Clearing and 

Risk or the director of the Division of Swap 

Dealers and Intermediary Oversight of the 

CFTC, or any successor divisions, or such 

directors’ designees. We will not hold you 

responsible for acting pursuant to any 

instruction from the CFTC upon which you 

have relied after having taken reasonable 

measures to assure that such instruction was 

provided to you by the director of the 

Division of Clearing and Risk of the CFTC, 

or any successor division, or such director’s 

designee. You further acknowledge that you 

will provide to the CFTC a copy of this fully 

executed acknowledgment (via electronic 

mail to acknowledgmentletters@cftc.gov). 

In the event we become subject to either a 

voluntary or involuntary petition for relief 

under the U.S. Bankruptcy Code, we 

acknowledge that you will have no obligation 

to release the Shares held in the Account(s), 

except upon instruction of the Trustee in 

Bankruptcy or pursuant to the Order of the 

respective U.S. Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of set off against or lien on 

assets other than assets maintained in the 

Account(s), nor to impose such charges 

against us or any proprietary account 

maintained by us with you. Further, it is 

understood that amounts represented by 

checks, drafts or other items shall not be 

considered to be part of the Account(s) until 

finally collected. Accordingly, checks, drafts 

and other items credited to the Account(s) 

and subsequently dishonored or otherwise 

returned to you, or reversed, for any reason 

and any claims relating thereto, including but 

not limited to claims of alteration or forgery, 

may be charged back to the Account(s), and 

we shall be responsible to you as a general 

endorser of all such items whether or not 

actually so endorsed. 

You may conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that you have no notice of or actual 

knowledge of, or could not reasonably know 

of, a violation of the Act or other provision 

of law by us; and you shall not in any 

manner not expressly agreed to herein be 

responsible for ensuring compliance by us 

with the provisions of the Act and CFTC 

regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 

governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

such action or omission to act, to us or to any 

other person, firm, association or corporation 

even if thereafter any such order, decree, 

judgment or levy shall be reversed, modified, 

set aside or vacated. 

We are permitted to invest our Commodity 

Customers’ funds in money market mutual 

funds pursuant to CFTC Regulation 1.25. 

That rule sets forth the following conditions, 

among others, with respect to any investment 

in a money market mutual fund: 

(1) The net asset value of the fund must be 

computed by 9:00 a.m. of the business day 

following each business day and be made 

available to us by that time; 

(2) The fund must be legally obligated to 

redeem an interest in the fund and make 

payment in satisfaction thereof by the close 

of the business day following the day on 

which we make a redemption request except 

as otherwise specified in CFTC Regulation 

1.25(c)(5)(ii); and 

(3) The agreement under which we invest 

our Commodity Customers’ funds must not 

contain any provision that would prevent us 

from pledging or transferring fund shares. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns, including for the 

avoidance of doubt, regardless of the change 

in name of any party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter, to the extent 

that such prior agreement is inconsistent 

with the terms hereof. In the event of any 

conflict between this letter agreement and 

any other agreement between the parties in 

connection with the Account(s), this letter 

agreement shall govern with respect to 

matters specific to Section 4d of the Act and 

the CFTC’s regulations, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning the enclosed 

copy of this letter. You further acknowledge 

and agree to provide a copy of this fully 

executed letter directly to the CFTC and our 

designated self-regulatory organization. 

[Name of Futures Commission Merchant or 

Derivatives Clearing Organization] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Money Market Mutual Fund] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 

DATE: 

PART 140—ORGANIZATION, 

FUNCTIONS, AND PROCEDURES OF 

THE COMMISSION 

28. The authority citation for part 140 

continues to read as follows: 

Authority: 7 U.S.C. 2 and 12a. 

29. In § 140.91, redesignate paragraph 

(a)(8) as paragraph (a)(12) and paragraph 

(a)(7) as paragraph (a)(8), add new 

paragraphs (a)(7), (a)(9), (a)(10), and 

(a)(11), and revise paragraph (b) to read 

as follows: 

§ 140.91 Delegation of authority to the 

Director of the Division of Clearing and Risk 

and to the Director of the Division of Swap 

Dealer and Intermediary Oversight. 

(a) * * * 

(7) All functions reserved to the 

Commission in § 1.20 of this chapter. 

* * * * * 

(9) All functions reserved to the 

Commission in § 1.26 of this chapter. 

(10) All functions reserved to the 

Commission in § 1.52 of this chapter. 

(11) All functions reserved to the 

Commission in § 30.7 of this chapter. 

* * * * * 

(b) The Director of the Division of 

Clearing and Risk and the Director of 

the Division of Swap Dealer and 

Intermediary Oversight may submit any 

matter which has been delegated to him 

or her under paragraph (a) of this 

section to the Commission for its 

consideration. 

* * * * * 

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BILLING CODE C 

Issued in Washington, DC, on October 23, 

2012 by the Commission. 

Stacy Yochum, 

Counsel. 

Appendices to Enhancing Protections 

Afforded Customers and Customer 

Funds Held by Futures Commission 

Merchants and Derivatives Clearing 

Organizations—Commission Voting 

Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2— Statement of Chairman 

Gary Gensler 

I support the proposed rules to enhance the 

protections afforded customers that 

participate in the futures and swaps markets, 

including the protection of customer funds 

held by futures commission merchants 

(FCMs) and derivatives clearing 

organizations. 

The CFTC’s mission is to ensure the 

integrity of the futures and swaps markets. 

As part of this, we must do everything within 

our authorities and resources to strengthen 

oversight programs and the protection of 

customers and their funds. And that’s the 

goal of this proposal. It’s about ensuring 

customers have confidence that the funds 

they post as margin or collateral are fully 

segregated and protected. 

CFTC Commissioners and staff have 

reached out broadly on ways to enhance 

customer protections. We hosted two 

roundtables this year on issues ranging from 

the segregation of customer funds to 

examining the CFTC’s oversight of selfregulatory organizations (SROs). 

In July, the CFTC approved a National 

Futures Association (NFA) proposal that 

stemmed from a coordinated effort by the 

CFTC, the SROs, other financial regulators, 

and market participants, including from the 

CFTC’s roundtable earlier this year. 

This customer protection proposal 

incorporates these NFA rules into the 

Commission’s regulations so that the CFTC 


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can directly enforce these important rules. 

Under this proposal, FCMs would be 

required to: 

• Hold sufficient funds in Part 30 secured 

accounts (funds held for U.S. foreign futures 

and options customers trading on foreign 

contract markets) to meet their total 

obligations to customers trading on foreign 

markets computed under the net liquidating 

equity method. FCMs would no longer be 

allowed to use the alternative method, which 

had allowed them to hold a lower amount of 

funds representing the margin on their 

foreign futures; 

• Maintain written policies and 

procedures governing the maintenance of 

excess funds in customer segregated and Part 

30 secured accounts. Withdrawals of 25 

percent or more would necessitate preapproval in writing by senior management 

and must be reported to the designated SRO 

and the CFTC; and 

• Make additional reports available to the 

SRO and the CFTC, including daily 

computations of segregated and Part 30 

secured amounts. 

Beyond the NFA rules, additional reforms 

in this proposal benefited from the CFTC’s 

broad outreach and consultation with the 

SROs and market participants, as well as 

substantial feedback from CFTC 

Commissioners. They include: 

• First, bringing the regulators’ view of 

customer accounts into the 21st century by 

giving the SROs and the CFTC direct 

electronic access to FCMs’ bank and 

custodial accounts for customer funds, 

without asking the FCMs’ permission. 

Further, acknowledgement letters and 

confirmation letters must come directly to 

regulators from banks and custodians. 

• Second, increasing disclosures to 

customers regarding the risks associated with 

futures trading and using FCMs to invest 

their funds. Futures customers, if they wish, 

should have access to information about how 

their assets are held, similar to that which is 

available to mutual fund and securities 

customers. FCMs would be required to 

provide current and potential customers with 

specific information about the FCM’s risks. 

• Third, enhancing controls at FCMs 

regarding how customer accounts are 

handled, including policies and procedures 

on supervision and risk management of 

customer funds. 

• Fourth, setting standards for the SROs’ 

examinations and the annual certified 

financial statement audits, including raising 

minimum standards for independent public 

accountants who audit FCMs. 

• Fifth, requiring FCMs to ensure they 

back up segregated customer accounts with 

funds to cover potential margin deficits. 

• Sixth, implementing a more effective 

early warning system for the Commission 

and the SROs that alerts them to certain 

problems, including a) when an FCM’s funds 

are insufficient to meet the targeted residual 

interest in customer accounts b) when there 

is a material adverse impact to the FCM’s 

creditworthiness and c) when there is a 

material change to the FCM’s clearing or 

financial arrangements. 

• And seventh, instituting a liquidity 

requirement for FCMs, in addition to the 

existing capital requirement, to better detect 

FCMs that have become distressed and may 

put customer funds at risk. 

Prior to this proposal, the Commission 

already made some important improvements 

to protections for customer funds. They 

include: 

• The completed amendments to rule 1.25 

regarding the investment of funds that bring 

customers back to protections they had prior 

to exemptions the Commission granted 

between 2000 and 2005. Importantly, this 

prevents use of customer funds for in-house 

lending through repurchase agreements; 

• Clearinghouses will have to collect 

margin on a gross basis and FCMs will no 

longer be able to offset one customer’s 

collateral against another and then send only 

the net to the clearinghouse; 

• The so-called ‘‘LSOC rule’’ (legal 

segregation with operational comingling) for 

swaps ensures customer money is protected 

individually all the way to the clearinghouse; 

and 

• The Commission included customer 

protection enhancements in the final rule for 

designated contract markets. These 

provisions codify into rules staff guidance on 

minimum requirements for SROs regarding 

their financial surveillance of FCMs. 

It is crucial that the CFTC, working with 

SROs and market participants, continues its 

efforts to enhance protections for the funds 

of both futures and swaps customers. We 

look forward to reviewing the public input 

on this proposal. 

Appendix 3—Statement of 

Commissioner Jill E. Sommers 

Today the Commission has proposed a new 

set of rules to, among other things, increase 

customer protections and disclosures, 

strengthen risk management programs, and 

enhance auditing and examination 

procedures for futures commission 

merchants (FCMs). In light of the recent 

events surrounding MF Global and Peregrine, 

I am, of course, supportive of such steps to 

the extent that they lead to greater customer 

protection and increased customer awareness 

of the risks associated with their futures and 

swaps accounts. 

As always, I am sensitive to the fact that 

some regulation, while well intended, may 

not further its stated goals or may be so 

burdensome that the benefits do not justify 

the costs. I encourage members of the public 

to comment, both to support the aspects of 

this proposed rule that take appropriate steps 

towards achieving the Commission’s 

objectives and to highlight the areas of the 

proposal that they believe may be 

unnecessary or that could be accomplished 

through more efficient means. In particular, 

I welcome comment on the Commission’s 

proposal requiring an FCM to maintain 

residual interest in segregated accounts in an 

amount that exceeds the sum of all futures 

customers’ margin deficits. Additionally, it 

would be helpful to hear from self-regulatory 

organizations (SROs) regarding whether 

reviews by an examinations expert would 

assist the SROs in the application of their 

respective supervisory programs. 

I am hopeful that, with the help of 

thoughtful recommendations from market 

participants, the Commission will finalize an 

effective and streamlined rule improving 

protections for futures and swaps customers. 

Appendix 4—Statement of 

Commissioner Scott O’Malia 

In response to the Peregrine and MF Global 

failures, the Commission has proposed a new 

set of rules to enhance the level of protection 

afforded customers of the futures markets. In 

particular, the proposal calls for FCMs to 

maintain adequate capital in their customer 

accounts to ensure customers are not bearing 

the credit risk of their fellow customers, 

implement controls around the risks specific 

to a particular FCM’s business, increase the 

level of disclosures provided to customers, 

and create an independent segregation 

account balance verification system. While 

these measures are a good start, I believe that 

it is essential to focus on a comprehensive 

technological solution that goes beyond what 

the Commission has proposed in this release. 

Technology can be a cost effective oversight 

tool for both customers and the Commission 

to enhance transparency and improve risk 

management. Improving our capacity to 

monitor money flows can serve as a 

significant deterrent against fraudulent 

behavior. 

I encourage industry participants to voice 

their opinion as to how the proposals put 

forth today can be improved upon. 

Specifically, what technological solutions 

can be employed to facilitate the 

dissemination of information about FCMs to 

their customers so that they may ‘‘know their 

FCM’’? How can firms implement the new 

capital requirements in the most cost 

effective manner? What is the best method 

for an FCM to monitor its level of risk? I look 

forward to hearing from market participants 

on the most effective ways to implement the 

customer protection rules proposed by the 

Commission today. 

I would also like to highlight one of today’s 

proposals that will require additional 

development in order to fulfill the goal of 

customer protection. Today’s proposal calls 

for the creation of an electronic balance 

confirmation process that would allow the 

Commission and Self-Regulatory 

Organizations (‘‘SROs’’) to independently 

check the balance of each segregated account 

held on behalf of customers. While this can 

be used to aid in the surveillance of account 

balances, the Commission proposal only 

works on an individual basis and requires 

significant human involvement to log in and 

monitor individual accounts. What the 

industry needs is a fully automated system 

that allows the Commission and SROs to 

download the account balances for each 

segregated account held for a customer and 

compare that balance to the figures on record 

at each FCM. In response to the Peregrine 

and MF Global failures, industry participants 

discussed the implementation of such a 

system in July of this year during the 

Commission’s Technology Advisory 

Committee (TAC) meeting. During the 

meeting, the TAC members present were 

virtually unanimous in their belief that an 

automated customer fund verification system 

was needed. Certain TAC members also made 

presentations discussing the technological 


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hurdles that must be overcome in order to 

put such a system in place. 

On October 30th we will have another TAC 

meeting during which SROs will update us 

on the status of this system’s implementation 

and their estimates for when it will be fully 

operational. Only when this system is up and 

running can customers of the futures 

industry feel secure that their investments 

are in safe hands and properly monitored by 

both the Commission and SROs. This is an 

issue of utmost importance and requires 

collaboration on the part of the Commission, 

SROs and each and every Commission 

registrant. The end result of this process will 

provide customers with the assurance they 

need to continue investing in the derivatives 

markets. 

I hope market participants will provide 

thoughtful recommendations to improve 

customer protections and deploy technology 

that is cost-effective to create and maintain. 

I also encourage market participants to 

provide specific data that the Commission 

can use to develop a robust cost benefit 

analysis. 

[FR Doc. 2012–26435 Filed 11–13–12; 8:45 am] 

BILLING CODE P 


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