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[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]
[Proposed Rules]
[Pages 68148-68151]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26978]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AE22

Residual Interest Deadline for Futures Commission Merchants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to revise the Residual Interest Deadline in 
Commission Rule 1.22. The amendment would remove the December 31, 2018 
termination date for the phased-in compliance schedule for futures 
commission merchants (``FCMs'') and provide assurance that the Residual 
Interest Deadline would only be revised through a separate Commission 
rulemaking.

DATES: Comments must be received on or before January 13, 2015.

ADDRESSES: You may submit comments, identified by RIN 3038-AE22, 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 Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail, above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one of these methods.
    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 may be 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 
Sec.  145.9 of the Commission's regulations.\1\
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    \1\ Commission 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.
_____________________________________-

    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

[[Page 68149]]

applicable laws, and may be accessible under the Freedom of Information 
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Act.

FOR FURTHER INFORMATION CONTACT:
    Division of Swap Dealer and Intermediary Oversight: Thomas Smith, 
Deputy Director, 202-418-5495, tsmith@cftc.gov; Jennifer Bauer, Special 
Counsel, 202-418-5472, jbauer@cftc.gov; Joshua Beale, Attorney-Advisor, 
202-418-5446, jbeale@cftc.gov, Three Lafayette Centre, 1155 21st Street 
NW., Washington, DC 20581.
    Division of Clearing and Risk: M. Laura Astrada, Associate Chief 
Counsel, 202-418-7622, lastrada@cftc.gov, or Kirsten V. K. Robbins, 
Special Counsel, 202-418-5313, krobbins@cftc.gov, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
    Office of the Chief Economist: Stephen Kane, Research Economist, 
skane@cftc.gov, 202-418-5911, Three Lafayette Centre, 1155 21st Street 
NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On October 30, 2013, the Commission amended Regulation 1.22 to 
enhance the safety of funds deposited by customers with FCMs as margin 
for futures transactions.\2\ The amendments require an FCM to maintain 
its own capital (hereinafter referred to as the FCM's ``Residual 
Interest'') in customer segregated accounts in an amount equal to or 
greater than its customers' aggregate undermargined amounts.\3\
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    \2\ Enhancing Protections Afforded Customers and Customer Funds 
Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, Final Rule, 78 FR 68506 (Nov. 14, 2013) (amending 17 
CFR Parts 1, 3, 22, 30 and 140).
    \3\ See 17 CFR 1.22(c)(3)(i). As defined in Regulation 
1.22(c)(1), a customer's account is ``undermargined,'' when the 
value of the customer funds for a customer's account is less than 
the total amount of collateral required by derivatives clearing 
organizations for that account's contracts. See 78 FR 68513, n.30.
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    If an FCM is required to increase its Residual Interest as a result 
of customer undermargined accounts, the FCM must deposit additional 
funds into the customer segregated accounts by the specified Residual 
Interest Deadline.\4\ The Commission established a phased-in compliance 
schedule for Regulation 1.22 with an initial Residual Interest Deadline 
of 6:00 p.m. Eastern Time on the date of the settlement referenced in 
Regulation 1.22(c)(2)(i) (the ``Settlement Date''), beginning November 
14, 2014.\5\
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    \4\ See 17 CFR 1.22(c)(3)(i). The term ``Residual Interest 
Deadline'' is defined in Regulation 1.22(c)(5).
    \5\ See 17 CFR 1.22(c)(5)(ii)(A); see 78 FR 68578.
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    In addition, the Commission directed staff to publish for public 
comment a report (the ``Report'') addressing, to the extent information 
is practically available, the practicability (for both FCMs and 
customers) of moving the Residual Interest Deadline from 6:00 p.m. 
Eastern Time on the Settlement Date, to the time of settlement or to 
some other time of day.\6\ The Report is also to address whether and on 
what schedule it would be feasible to move the Residual Interest 
Deadline, and the costs and benefits of such potential requirements.\7\ 
The Commission further directed staff to solicit public comment and 
conduct a public roundtable regarding specific issues to be covered by 
the Report.\8\ The Report is to be completed by May 16, 2016.\9\
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    \6\ See 17 CFR 1.22(c)(5)(iii)(A).
    \7\ Id.
    \8\ Id.
    \9\ Id.
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    Within nine months after the publication of the Report, the 
Commission may, by Order, terminate the phase-in period, or determine 
that it is necessary or appropriate in the public interest to propose 
through a separate rulemaking a different Residual Interest 
Deadline.\10\ Finally, absent Commission action, the phased-in 
compliance period for the Residual Interest Deadline will terminate on 
December 31, 2018, and the Residual Interest Deadline will change to 
the time of settlement on the Settlement Date.\11\
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    \10\ See 17 CFR 1.22(c)(5)(iii)(B).
    \11\ See 17 CFR 1.22(c)(5)(iii)(C).
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II. Discussion

    As noted above, absent Commission action, the phase-in of the 
compliance period for the Residual Interest Deadline will automatically 
terminate on December 31, 2018, and change to the time of settlement on 
the Settlement Date. The Commission is proposing to revise Regulation 
1.22 to remove the December 31, 2018 automatic termination of the 
phase-in compliance period. The proposal would instead provide that the 
Residual Interest Deadline would remain at 6:00 p.m. Eastern Time, 
unless the Commission takes further action via publication of a new 
rule.
    The Commission is proposing to amend Regulation 1.22 in order to 
provide the Commission with a greater degree of flexibility to assess 
the issues and all relevant data associated with revising the Residual 
Interest Deadline. In this regard, the proposal would afford the 
Commission the opportunity to fully and carefully consider the views 
expressed during the public roundtable, the views and issues raised 
during the solicitation of public comments, and the results of the 
staff's Report, regarding the practicability and costs and benefits of 
revising the Residual Interest Deadline without the constraints of an 
established regulatory deadline for Commission action. The Commission 
is also proposing to revise Regulation 1.22 to make clear that any 
subsequent revision to the Residual Interest Deadline may only be 
effected through a separate rulemaking.
    The Commission notes that this proposal does not alter the 
requirement in Regulation 1.22(c)(3)(i) that, commencing November 14, 
2014, all FCMs maintain the requisite Residual Interest in customer 
accounts by no later than 6:00 p.m. Eastern Time on the Settlement 
Date.
    The Commission invites comments on all aspects of the proposed 
amendments to the phase-in compliance period, including the costs and 
benefits of this proposed change. For example, does the automatic 
termination of the phase-in compliance period serve any useful 
purposes, such as focusing attention on the Report, that the Commission 
should consider? At this time, are there indications that issues 
regarding the practicability and costs and benefits of revising the 
Residual Interest Deadline will require significant time to consider, 
such that the automatic termination of the phase-in compliance period 
would hamper consideration of those issues? What are the particular 
concerns, if any, suggesting that the automatic termination of the 
phase-in compliance period is inappropriate in the specific context of 
Regulation 1.22?

III. Cost-Benefit Considerations

    Section 15(a) of the Commodity Exchange Act (``CEA'') requires the 
Commission to consider the costs and benefits of its actions before 
promulgating a regulation under the CEA or issuing certain orders.\12\ 
Section 15(a) further specifies that the costs and benefits shall be 
evaluated in light of 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) factors.
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    \12\ 7 U.S.C. 19(a).
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    The proposed rule and the status quo baseline with which the costs 
and benefits are compared are similar. The baseline for this costs and 
benefits consideration is the status quo, in which

[[Page 68150]]

the 6:00 p.m. Eastern Time on the Settlement Date would apply until the 
Commission takes further action or, in the absence of further action, 
December 31, 2018. Inasmuch as the proposed rule would not change the 
settlement date, but would eliminate the December 31, 2018 deadline 
requiring FCMs to maintain sufficient Residual Interest in its customer 
accounts by the time of settlement on the Settlement Date, the 
Commission believes that there is not likely to be any material 
difference between this proposed rulemaking and the status quo baseline 
in terms of the first four section 15(a) factors.
    With respect to the fifth section 15(a) factor, ``other public 
interest considerations,'' the Commission has considered that the 
presence of an automatic termination of the phase-in compliance period 
in the regulation may have beneficial effects. For example, the 
automatic termination of the phase-in compliance period may focus 
attention on the results of the Report and provide a timeline for the 
Commission's consideration of issues about the Residual Interest 
requirement. On the other hand, the Commission has considered that time 
will be required to consider the Report and related roundtable and 
public comments, prior to any change in the Residual Interest Deadline. 
As it does not have relevant data to quantify a monetary value of the 
public interest considerations likely to be implicated by the proposed 
elimination of the December 31, 2018 deadline, the Commission has 
considered them qualitatively in reaching its preliminary decision to 
propose the elimination of the regulatory deadline. The Commission 
invites comment on the cost and benefit implications of all of the 
public interest considerations that are relevant to its proposal, as 
well as on the other section 15(a) factors.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \13\ 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.\14\ The proposed regulations would affect 
FCMs. 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.\15\ 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.\16\ 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.
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    \13\ 5 U.S.C. 601 et seq.
    \14\ 47 FR 18618 (Apr. 30, 1982).
    \15\ Id. at 18619.
    \16\ Id.
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    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 amends requirements that contain a 
collection of information for which the Commission has previously 
received a control number from OMB. The title for this collection of 
information is ``Regulations and Forms Pertaining to Financial 
Integrity of the MarketPlace, OMB control number 3038-0024''. This 
collection of information is not expected to be impacted by the rule 
amendment proposed herein, as the calculations which are already 
reflected in the burden estimate are not expected to change, but the 
phase-in period for assessing compliance relative to such calculations 
is solely proposed to be altered. The PRA burden hours associated with 
this collection of information are therefore not expected to be 
increased or reduced as a result of the amendment proposed.
    Accordingly, for purposes of the PRA, these proposed rule 
amendments, if promulgated in final form, would not impose any new 
reporting or recordkeeping requirements. The Commission invites public 
comment on the accuracy of its estimate that no additional information 
collection requirements or changes to existing collection requirements 
would result from the rules proposed herein.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

    For the reasons discussed in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as set forth 
below:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).

0
2. In Sec.  1.22, revise paragraphs (c)(5)(iii)(B) and (C) to read as 
follows:

Sec.  1.22  Use of futures customer funds restricted.

* * * * *
    (c) * * *
    (5) * * *
    (iii) * * *
    (B) Nine months after publication of the report required by 
paragraph (c)(5)(iii)(A) of this section, the Commission may (but shall 
not be required to) do either of the following:
    (1) Terminate the phase-in period through rulemaking, in which case 
the phase-in period shall end as of a date established by a final rule 
published in the Federal Register, which date shall be no less than one 
year after the date such rule is published; or
    (2) Determine that it is necessary or appropriate in the public 
interest to propose through rulemaking a different Residual Interest 
Deadline. In that event, the Commission shall establish, if necessary, 
a phase-in schedule in the final rule published in the Federal 
Register.
    (C) If the phase-in schedule has not been terminated or revised 
pursuant to paragraph (c)(5)(iii)(B) of this section, then the Residual 
Interest Deadline shall remain 6:00 p.m. Eastern Time on the date of 
the settlement referenced in paragraph (c)(2)(i) or, as appropriate, 
(c)(4) of this section until such time that the Commission takes 
further action through rulemaking.

    Issued in Washington, DC, on November 3, 2014, by the 
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

[[Page 68151]]

Appendices to Residual Interest Deadline for Futures Commission 
Merchants--Commission Voting Summary and Chairman's Statement Appendix 
1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Wetjen, Bowen, 
and Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Chairman Timothy G. Massad

    I support the Staff's recommendation. One of my priorities has 
been to fine-tune our rules to make sure they work as intended and 
do not impose undue burdens or unintended consequences, particularly 
for the nonfinancial commercial businesses that use these markets to 
hedge commercial risks. The proposed amendment is consistent with 
that goal. It is designed to help ensure that the funds deposited by 
customers with Futures Commission Merchants, or FCMs, remain safe. 
It is not a major change, but it is significant in making sure that 
manufacturers, farmers, ranchers, and other companies that rely on 
the derivatives markets to hedge routine business risks can continue 
to use them efficiently and effectively.
    The rule prohibits an FCM from using customer funds of one 
customer for the benefit of another customer. Last fall, the 
Commission amended Regulation 1.22 to further enhance the safety of 
such funds by making sure that customer accounts have sufficient 
margin. On any day when a customer is required to post additional 
margin but has not yet done so, the FCM must maintain its own 
capital--often referred to as the FCM's ``Residual Interest''--in 
customer segregated accounts to make up the difference. The 
amendments provided that the FCM must deposit the additional funds 
by a specified deadline. Specifically, the amendments said that as 
of November 14, 2014, the deadline would be 6:00 p.m. Eastern Time 
on the settlement date. The deadline for the FCMs to post their 
capital affects the deadline for customers to increase their own 
funds.
    The amendments passed last fall also provide that the Commission 
will conduct a study, and solicit public comment--including by way 
of a public roundtable--concerning the practicability, for both FCMs 
and their customers, of moving that deadline from 6:00 p.m. to the 
morning daily clearing settlement cycle or the time of settlement, 
which I will refer to as 9:00 a.m. for convenience. The amendments 
said the Commission would decide, within nine months after 
publication of the report, whether to move the deadline to 9:00 a.m. 
Finally, the amendments said that if the Commission failed to take 
any action, the deadline would automatically move to 9:00 a.m. as of 
December 31, 2018.
    Today, we are making a minor, but important, change. We are 
proposing to eliminate the provision that says the deadline will 
automatically move to 9:00 a.m. as of December 31, 2018. The 
deadline will still move to 6:00 p.m. as of November 14 of this 
year, and we will still conduct a study of the practicability of 
making the deadline earlier. An earlier residual interest deadline 
better protects customers from one another, in line with the 
statute, but we want to make sure we move deliberately so that the 
model works best for customers in light of all of their interests, 
since the deadline will affect how much margin customers have to 
post and when. Today's proposal will make sure that customers have 
an opportunity to not only review the study but give us input when 
we consider whether to accelerate the deadline.

[FR Doc. 2014-26978 Filed 11-13-14; 8:45 am]
BILLING CODE 6351-01-P
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