`[Federal Register Volume 90, Number 13 (Wednesday, January 22, 2025)]
[Rules and Regulations]
[Pages 7880-7940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31177]



[[Page 7879]]

Vol. 90

Wednesday,

No. 13

January 22, 2025

Part III





Commodity Futures Trading Commission





-----------------------------------------------------------------------





17 CFR Parts 1, 22, 30, et al.





Regulations To Address Margin Adequacy and To Account for the Treatment 
of Separate Accounts by Futures Commission Merchants; Final Rule

  Federal Register / Vol. 90, No. 13 / Wednesday, January 22, 2025 / 
Rules and Regulations  

[[Page 7880]]


-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 22, 30, and 39

RIN 3038-AF21


Regulations To Address Margin Adequacy and To Account for the 
Treatment of Separate Accounts by Futures Commission Merchants

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is amending its regulations, adopted under the Commodity Exchange Act 
(CEA), to require a futures commission merchant (FCM) to ensure a 
customer does not withdraw funds from its account with the FCM if the 
balance in the account after the withdrawal would be insufficient to 
meet the customer's initial margin requirements; and relatedly, to 
permit an FCM, subject to certain requirements, to treat the separate 
accounts of a single customer as accounts of separate entities for 
purposes of certain Commission regulations.

DATES: 
    Effective date: This rule is effective March 24, 2025.
    Compliance dates: The compliance date for FCMs that are clearing 
members of a derivatives clearing organization (DCO) as of the date of 
publication of this rule in the Federal Register shall be July 21, 
2025. The compliance date for all other FCMs shall be January 22, 2026.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel, 
202-418-5092, [email protected]; Daniel O'Connell, Special Counsel, 
202-418-5583, [email protected], Division of Clearing and Risk; Thomas 
Smith, Deputy Director, 202-418-5495, [email protected]; Liliya 
Bozhanova, Associate Director, 202-418-6232, [email protected]; 
Jennifer Bauer, Special Counsel, 202-418-5472, [email protected], Market 
Participants Division; Jasmine Lee, Special Counsel, 202-418-5226, 
[email protected], Division of Market Oversight, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 
20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. The Commission's Customer Funds Protection Regulations
    B. The Divisions' No-Action Position
    C. The Commission's First Proposal
    D. The Commission's Second Proposal
II. Regulations
    A. Amendments to Regulation Sec.  1.3
    B. Amendments to Regulation Sec.  1.17
    C. Amendments to Regulations Sec. Sec.  1.20, 1.32, 22.2, and 
30.7
    D. Regulation Sec.  1.44(a)
    E. Regulation Sec.  1.44(b)
    F. Regulation Sec.  1.44(c)
    G. Regulation Sec.  1.44(d)
    H. Regulation Sec.  1.44(e)
    I. Regulation Sec.  1.44(f)
    J. Regulation Sec.  1.44(g)
    K. Regulation Sec.  1.44(h)
    L. Appendix A to Part 1
    M. Amendments to Regulation Sec.  1.58
    N. Amendments to Regulation Sec.  1.73
    O. Amendments to Regulation Sec.  30.2
    P. Amendments to Regulation Sec.  39.13
III. Cost Benefit Considerations
    A. Introduction
    B. Consideration of the Costs and Benefits of the Commission's 
Action
    C. Costs and Benefits of the Commission's Action as Compared to 
Alternatives
    D. Section 15(a) Factors
IV. Related Matters
    A. Antitrust Considerations
    B. Regulatory Flexibility Act
    C. Paperwork Reduction Act
    D. Congressional Review Act

I. Background

A. The Commission's Customer Funds Protection Regulations

    Protection of market participants from misuses of customer assets 
and avoidance of systemic risk are two of the fundamental purposes of 
the CEA.\1\ The Commission has promulgated regulations designed to 
protect customer assets, including regulations designed to ensure that 
FCMs appropriately margin customer accounts and are not induced to 
cover one customer's margin shortfall with another customer's funds. 
The Commission has also promulgated regulations designed to diminish 
the risk that a customer default in its obligations to an FCM that is a 
clearing member of a DCO (clearing FCM) results in the clearing FCM in 
turn defaulting on its obligations to a DCO, which could adversely 
affect the stability of the broader financial system.
---------------------------------------------------------------------------

    \1\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    Section 4d(a)(2) of the CEA and regulation Sec.  1.20(a) require an 
FCM to separately account for, and segregate from its own funds, all 
money, securities, and property it has received to margin, guarantee, 
or secure the trades or contracts of its commodity customers.\2\ 
Additionally, section 4d(a)(2) of the CEA and regulation Sec.  1.22(a) 
prohibit an FCM from using the money, securities, or property of one 
customer to margin or settle the trades or contracts of another 
customer.\3\ This requirement is designed to prevent an FCM from 
treating customers disparately and to mitigate the risk that the FCM 
will not maintain sufficient funds in segregation to pay all customer 
claims if the FCM becomes insolvent.\4\ Section 4d(a)(2) of the CEA and 
regulations Sec. Sec.  1.20 and 1.22 effectively require an FCM to add 
its own funds into segregation in an amount equal to the sum of all 
customer undermargined amounts, including customer account deficits, to 
prevent the FCM from being induced to use one customer's funds to 
margin or carry another customer's trades or contracts.\5\
---------------------------------------------------------------------------

    \2\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20(a).
    \3\ 7 U.S.C. 6d(a)(2); 17 CFR 1.22(a).
    \4\ Prohibition of Guarantees Against Loss, 46 FR 11668, 11669 
(Feb. 10, 1981).
    \5\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20; 17 CFR 1.22; Prohibition of 
Guarantees Against Loss, 46 FR at 11669.
---------------------------------------------------------------------------

    Section 5b of the CEA,\6\ as amended by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010,\7\ sets forth eighteen core 
principles with which DCOs must comply to register and maintain 
registration as DCOs with the Commission. In 2011, the Commission 
adopted regulations for DCOs to implement Core Principle D, which 
concerns risk management.\8\ These regulations include a number of 
provisions that require a DCO to in turn require that its clearing 
members take certain steps to support their own risk management to 
mitigate the risk that such clearing members pose to the DCO.
---------------------------------------------------------------------------

    \6\ 7 U.S.C. 7a-1.
    \7\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \8\ Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D); 
Derivatives Clearing Organization General Provisions and Core 
Principles, 76 FR 69334, 69335 (Nov. 8, 2011).
---------------------------------------------------------------------------

    One such regulation, Sec.  39.13(g)(8)(iii), provides that a DCO 
shall require a clearing member to ensure that a customer does not 
withdraw funds from its account with the clearing member unless the net 
liquidating value plus the margin deposits remaining in the customer's 
account after the withdrawal would be sufficient to meet the customer 
initial margin requirements with respect to all products and swap 
portfolios held in the customer's account that are cleared by the 
DCO.\9\ Regulation Sec.  39.13(g)(8)(iii) thus establishes a ``Margin 
Adequacy Requirement'' designed to mitigate the risk that a clearing 
FCM fails to hold customer funds sufficient to cover the required 
initial margin for the customer's cleared positions.\10\ In light

[[Page 7881]]

of the use of omnibus margin accounts, in which the funds of multiple 
customers are held together, this safeguard is necessary to avoid the 
misuse of customer funds by mitigating the likelihood that the clearing 
FCM will effectively cover one customer's margin shortfall using 
another customer's funds.\11\
---------------------------------------------------------------------------

    \9\ 17 CFR 39.13(g)(8)(iii).
    \10\ For purposes of this final rule, the Commission uses the 
term ``Margin Adequacy Requirement'' to refer to this requirement, 
which applies indirectly to clearing FCMs via the operation of DCO 
rules, and the analogous requirement set forth in regulation Sec.  
1.44(b) which will apply directly to all FCMs.
    \11\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    In adopting the Margin Adequacy Requirement of regulation Sec.  
39.13(g)(8)(iii), the Commission stated \12\ that the regulation was 
consistent with the definition of ``Margin Funds Available for 
Disbursement'' in the Margins Handbook \13\ prepared by the Joint Audit 
Committee (JAC), a representative committee of U.S. futures exchanges 
and the National Futures Association (NFA).\14\ The Commission noted 
that although designated self-regulatory organizations (DSROs) reviewed 
FCMs to determine whether they appropriately prohibited their customers 
from withdrawing funds from their futures accounts, it was unclear to 
what extent that requirement applied to cleared swap accounts when such 
swaps were executed on a designated contract market (DCM) that 
participated in the JAC.\15\ The Commission also noted that clearing 
members that cleared only swaps that were executed on a swap execution 
facility were not subject to the requirements of the JAC Margins 
Handbook or review by a DSRO.\16\
---------------------------------------------------------------------------

    \12\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69379.
    \13\ Joint Audit Committee Margins Handbook, available at http://www.jacfutures.com/jac/MarginHandBookWord.aspx.
    \14\ JAC, JAC Members, available at http://www.jacfutures.com/jac/Members.aspx. Self-regulatory organizations, such as commodity 
exchanges and registered futures associations (e.g., NFA), enforce 
minimum financial and reporting requirements, among other 
responsibilities, for their members. See regulation Sec.  1.3, 17 
CFR 1.3. Pursuant to regulation Sec.  1.52(d), when an FCM is a 
member of more than one self-regulatory organization, the self-
regulatory organizations may decide among themselves which of them 
will assume primary responsibility for these regulatory duties and, 
upon approval of such a plan by the Commission, the self-regulatory 
organization assuming such primary responsibility will be appointed 
the designated self-regulatory organization for the FCM. 17 CFR 
1.52(d).
    \15\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69379.
    \16\ Id.
---------------------------------------------------------------------------

    Thus, although regulation Sec.  39.13(g)(8)(iii) was also designed 
to apply these risk mitigation and customer protection standards to 
futures and swap positions carried in customer accounts by clearing 
FCMs, Commission regulations do not apply a Margin Adequacy Requirement 
to non-clearing FCMs. Furthermore, regulation Sec.  39.13(g)(8)(iii) 
does not require DCOs to apply a Margin Adequacy Requirement to the 
positions carried by a clearing FCM that are not cleared at a 
registered DCO (e.g., most foreign futures and foreign option 
positions).\17\
---------------------------------------------------------------------------

    \17\ The term ``foreign futures'' means any contract for the 
purchase or sale of any commodity for future delivery made, or to be 
made, on or subject to the rules of any foreign board of trade. 
Regulation Sec.  30.1(a), 17 CFR 30.1(a). The term ``foreign 
option'' means any transaction or agreement which is or is held out 
to be of the character of, or is commonly known to the trade as, an 
``option,'' ``privilege,'' ``indemnity,'' ``bid,'' ``offer,'' 
``put,'' ``call,'' ``advance guaranty'' or ``decline guaranty,'' 
made or to be made on or subject to the rules of any foreign board 
of trade. 17 CFR 30.1(b).
---------------------------------------------------------------------------

B. The Divisions' No-Action Position

    On July 10, 2019, the Division of Swap Dealer and Intermediary 
Oversight (DSIO) (now Market Participants Division (MPD)) and the 
Division of Clearing and Risk (DCR) (collectively, the Divisions) 
published CFTC Letter No. 19-17, which, among other things, provides 
staff guidance with respect to the processing of margin withdrawals 
under regulation Sec.  39.13(g)(8)(iii) and announced a conditional and 
time-limited no-action position for certain such withdrawals.\18\ The 
advisory followed discussions with, and written representations from, 
the Asset Management Group of the Securities Industry and Financial 
Markets Association (SIFMA-AMG), the Chicago Mercantile Exchange (CME), 
the Futures Industry Association (FIA), the JAC, and several FCMs, 
regarding practices among FCMs and their customers related to the 
handling of separate accounts of the same customer.\19\
---------------------------------------------------------------------------

    \18\ CFTC Letter No. 19-17, July 10, 2019, available at https://www.cftc.gov/csl/19-17/download as extended by CFTC Letter No. 20-
28, Sept. 15, 2020, available at https://www.cftc.gov/csl/20-28/download; CFTC Letter No. 21-29, Dec. 21, 2021, available at https://www.cftc.gov/csl/21-29/download; CFTC Letter No. 22-11, Sept. 15, 
2022, available at https://www.cftc.gov/csl/22-11/download; CFTC 
Letter No. 23-13, Sept. 11, 2023, available at https://www.cftc.gov/csl/23-13/download; and CFTC Letter No. 24-07, June 24, 2024, 
available at https://www.cftc.gov/csl/24-07/download.
    \19\ See, e.g., SIFMA-AMG letter dated June 7, 2019 to Brian A. 
Bussey and Matthew B. Kulkin (SIFMA-AMG Letter); CME letter dated 
June 14, 2019 to Brian A. Bussey and Matthew B. Kulkin (CME Letter); 
and FIA letter dated June 26, 2019 to Brian A. Bussey and Matthew B. 
Kulkin (First FIA Letter).
---------------------------------------------------------------------------

    CFTC Letter No. 19-17 used the term ``beneficial owner'' 
synonymously with the term ``customer,'' as ``beneficial owner'' was, 
in this context, commonly used to refer to the customer that is 
financially responsible for an account. Additionally, as discussed 
further below, in the customer relationship context, FCMs often deal 
directly with a commodity trading advisor acting as an agent of the 
customer rather than with the customer itself. For the avoidance of 
confusion (e.g., with regard to the terms ``owner'' or ``ownership,'' 
as those terms are used in Forms 40 and 102,\20\ or parts 17-20,\21\ or 
with regard to the term ``beneficial owner,'' as that term may be used 
by other agencies), this final rule uses only the term ``customer,'' 
except where directly quoting or paraphrasing a source that uses the 
term ``beneficial owner.''
---------------------------------------------------------------------------

    \20\ See CFTC, CFTC Form 40, Statement of a Reporting Trader, 
available at https://www.cftc.gov/sites/default/files/idc/groups/public/@forms/documents/file/cftcform40.pdf; see also CFTC, 
Ownership & Control Reporting, available at https://www.cftc.gov/Forms/OCR/index.htm (discussing Ownership and Control Reporting 
under Form 102).
    \21\ See 17 CFR parts 17 (covering reports by reporting markets, 
FCMs, clearing members, and foreign brokers), 18 (reports by 
traders), 19 (reports by persons holding reportable positions in 
excess of position limits and by merchants and dealers in cotton), 
and 20 (large trader reporting for physical commodity swaps).
---------------------------------------------------------------------------

    The written representations preceding the issuance of CFTC Letter 
No. 19-17 included letters filed separately by SIFMA-AMG, CME, and FIA 
(collectively, the ``Industry Letters''). Citing regulation Sec.  
39.13(g)(8)(iii)'s requirements related to the withdrawal of customer 
initial margin, and JAC Regulatory Alert #19-02 reminding FCMs of those 
requirements,\22\ SIFMA-AMG and FIA explained that provisions in 
certain FCM customer agreements provide that certain accounts carried 
by the FCM that have the same customer are treated as accounts for 
different legal entities (i.e., ``separate accounts'').\23\
---------------------------------------------------------------------------

    \22\ JAC, Regulatory Alert #19-02, May 14, 2019, available at 
http://www.jacfutures.com/jac/jacupdates/2019/jac1902.pdf.
    \23\ SIFMA-AMG Letter; First FIA Letter.
---------------------------------------------------------------------------

    As FIA explained, there are a variety of reasons why a customer may 
want separate treatment for its accounts under such an agreement.\24\ 
For instance, an institutional customer, such as an investment or 
pension fund, may allocate assets to investment managers \25\ under 
investment management agreements that require each investment manager 
to invest a specified portion of the customer's assets under management 
in accordance with an agreed trading strategy, independent of the 
trading that may be undertaken for the customer by the same or other 
investment manager(s) acting on behalf of other accounts of the

[[Page 7882]]

customer.\26\ Under such a circumstances, an investment manager, in 
order to implement its trading strategy effectively, may want assurance 
that the portion of funds it has been allocated to manage is entirely 
available to the investment manager, and will not be affected by the 
activities of other investment managers who manage other portions of 
the customer's assets and maintain separate accounts at the same FCM.
---------------------------------------------------------------------------

    \24\ First FIA Letter.
    \25\ The Industry Letters sometimes used the terms ``investment 
manager'' and ``asset manager'' interchangeably.
    \26\ Id.
---------------------------------------------------------------------------

    Additionally, as FIA explained, a commercial enterprise may 
establish separate agreements to leverage specific broker expertise on 
products or to diversify risk management strategies.\27\ In such cases, 
each separate account may be subject to a separate customer agreement, 
which the FCM in many cases negotiates directly with the customer's 
agent, which is often an investment manager.\28\
---------------------------------------------------------------------------

    \27\ Id.
    \28\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG and FIA asserted that, subject to appropriate FCM 
internal controls and procedures, separate accounts should be treated 
as separate legal entities for purposes of regulation Sec.  
39.13(g)(8)(iii); i.e., separate accounts should not be combined when 
determining an account's margin funds available for disbursement.\29\ 
SIFMA-AMG and FIA maintained that such separate account treatment 
should not be expected to expose an FCM to any greater regulatory or 
financial risk, and asserted that an FCM's internal controls and 
procedures could be designed to assure that the FCM does not undertake 
any additional risk as to the separate account.\30\ The Industry 
Letters included a number of examples of such controls and 
procedures.\31\
---------------------------------------------------------------------------

    \29\ SIFMA-AMG Letter; First FIA Letter.
    \30\ SIFMA-AMG Letter; First FIA Letter.
    \31\ SIFMA-AMG Letter; First FIA Letter; CME Letter.
---------------------------------------------------------------------------

    In its letter, SIFMA-AMG suggested that it would be possible to 
allow for separate account treatment without undermining the risk 
mitigation and customer protection goals of regulation Sec.  
39.13(g)(8)(iii).\32\ SIFMA-AMG recognized that there may be some 
instances, such as a customer default, in which separate account 
margining would no longer be prudent.\33\ SIFMA-AMG stated that an FCM 
could agree to first satisfy any amounts owed from agreed assets 
related to a separate account, and continue to release funds until the 
FCM provided the separate account with a notice of an event of default 
under the applicable clearing account agreement, and determined that it 
is no longer prudent to continue to separately margin the customer's 
accounts, provided that such actions are consistent with the FCM's 
written internal controls and procedures.\34\ SIFMA-AMG further stated 
that, in such instance, the FCM would retain the ability to ultimately 
look to funds in other accounts of the customer, including accounts 
under different control, and the right to call the customer for 
funds.\35\ CME similarly asserted that disbursements on a separate 
account basis should not be permitted in certain circumstances, such as 
financial distress, that fall outside the ``ordinary course of 
business.'' \36\ Although CME asserted that the plain language of 
regulation Sec.  39.13(g)(8)(iii) unambiguously forbids disbursements 
on a separate account basis, CME noted that it would be amenable to the 
Commission amending the regulation to permit such disbursements, 
subject to certain such risk-mitigating conditions.\37\
---------------------------------------------------------------------------

    \32\ SIFMA-AMG Letter.
    \33\ Id.
    \34\ Id.
    \35\ Id.
    \36\ CME Letter.
    \37\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG and FIA requested that DCR confirm that it would not 
recommend that the Commission initiate an enforcement action against a 
DCO that permits its clearing FCMs to treat certain separate accounts 
of a customer as accounts of separate entities for purposes of 
regulation Sec.  39.13(g)(8)(iii),\38\ and confirm that a clearing FCM 
may release excess funds from a separate customer account 
notwithstanding an outstanding margin call in another account of the 
same customer.\39\
---------------------------------------------------------------------------

    \38\ FIA specifically noted that such a no-action position could 
be conditioned on the FCM maintaining certain internal controls and 
procedures. First FIA Letter.
    \39\ SIFMA-AMG Letter; First FIA Letter; see also CME Letter.
---------------------------------------------------------------------------

    In CFTC Letter No. 19-17, DCR stated that, in the context of 
separate accounts, the risk management goals of regulation Sec.  
39.13(g)(8)(iii) may effectively be addressed if a clearing FCM 
carrying a customer with separate accounts meets certain conditions, 
which were derived from the Industry Letters and specified in CFTC 
Letter No. 19-17.\40\ DCR stated that it would not recommend that the 
Commission take enforcement action against a DCO if the DCO permits its 
clearing FCMs to treat certain separate accounts as accounts of 
separate entities for purposes of regulation Sec.  39.13(g)(8)(iii) 
subject to these conditions.\41\ The no-action position extended until 
June 30, 2021, in order to provide staff with time to recommend, and 
the Commission with time to consider, a rulemaking to implement on a 
permanent basis requirements related to separate account treatment.\42\ 
CFTC Letter No. 20-28, published on September 15, 2020, extended the 
no-action position until December 31, 2021 due to challenges presented 
by the COVID-19 pandemic.\43\ CFTC Letter No. 20-28 stated that if the 
process to consider codifying the no-action position provided for by 
CFTC Letter No. 19-17 was not completed by that date, the Divisions 
would consider further extending the no-action position.\44\ The 
Divisions have continued to extend the no-action position in CFTC 
Letter No. 19-17 as they have worked toward a final rule. The no-action 
position currently expires on the earlier of June 30, 2025 or the 
effective date of this final rule.\45\
---------------------------------------------------------------------------

    \40\ CFTC Letter No. 19-17.
    \41\ Id.
    \42\ Id.
    \43\ CFTC Letter No. 20-28.
    \44\ Id.
    \45\ CFTC Letter No. 24-07.
---------------------------------------------------------------------------

C. The Commission's First Proposal

    On April 14, 2023, the Commission published in the Federal Register 
a notice of proposed rulemaking designed to codify the no-action 
position in CFTC Letter No. 19-17 (First Proposal).\46\ The First 
Proposal proposed to amend regulation Sec.  39.13 to allow a DCO to 
permit a clearing FCM to treat the separate accounts of customers as 
accounts of separate entities for purposes of regulation Sec.  
39.13(g)(8)(iii), if such clearing member's written internal controls 
and procedures permitted it to do so, and the DCO required its clearing 
members to comply with risk-mitigating requirements based on the 
conditions in CFTC Letter No. 19-17.
---------------------------------------------------------------------------

    \46\ Derivatives Clearing Organization Risk Management 
Regulations to Account for the Treatment of Separate Accounts by 
Futures Commission Merchants, 88 FR 22934 (Apr. 14, 2023) (First 
Proposal).
---------------------------------------------------------------------------

    The requirements for separate account treatment in the First 
Proposal were substantially similar to the conditions in CFTC Letter 
No. 19-17. However, certain such proposed requirements reflected 
modification of the no-action conditions on which they were based, 
including additional reporting requirements for clearing FCMs required 
to cease disbursements on a separate account basis, an explicit process 
for clearing FCMs to resume disbursements on a separate account basis, 
and

[[Page 7883]]

provisions designed to further clarify the requirement that separate 
accounts be on a one business day margin call.
    The Commission originally proposed to codify the no-action position 
in CFTC Letter No. 19-17 in part 39 to hew closely to the operation of 
the no-action position itself. Under the First Proposal, DCOs would be 
able to permit clearing FCMs to engage in separate account treatment, 
provided such clearing FCMs complied with certain requirements, which 
DCOs would be required to monitor and enforce through their rules.
    The comment period for the First Proposal was extended once at the 
request of a commenter and closed on June 30, 2023.\47\ The Commission 
received comments from twelve commenters.\48\ Although commenters 
generally supported codifying the no-action position in CFTC Letter No. 
19-17, six commenters \49\ contended that the Commission should codify 
the no-action position in its part 1 FCM regulations (where it would 
apply directly to all FCMs) rather than in its part 39 DCO regulations 
(where it would apply only to clearing FCMs, through the 
instrumentality of DCO rules). Other commenters did not opine on 
whether the proposed codification should be in part 1 versus part 39.
---------------------------------------------------------------------------

    \47\ Derivatives Clearing Organization Risk Management 
Regulations to Account for the Treatment of Separate Accounts by 
Futures Commission Merchants, 88 FR 39205 (June 15, 2023).
    \48\ The American Council of Life Insurers, CME, FIA, 
Intercontinental Exchange, Inc., the JAC, MFA (formerly Managed 
Funds Association), NFA, SIFMA-AMG, Symphony Communications 
Services, LLC, and three individuals.
    \49\ CME, FIA, Intercontinental Exchange, Inc., the JAC, NFA, 
and SIFMA-AMG.
---------------------------------------------------------------------------

D. The Commission's Second Proposal

    On February 20, 2024, the Commission voted to approve withdrawal of 
the First Proposal and publish a notice of proposed rulemaking to 
codify a Margin Adequacy Requirement similar to that of regulation 
Sec.  39.13(g)(8)(iii), along with the no-action position in CFTC 
Letter No. 19-17, in part 1 of its regulations, whereby it would be 
applicable to all FCMs (Second Proposal).\50\ In the Second Proposal, 
the Commission discussed and addressed comments received in response to 
the First Proposal, including the comments that informed the 
Commission's decision to withdraw the First Proposal and instead 
propose to codify the no-action position of CFTC Letter No. 19-17 in 
part 1.
---------------------------------------------------------------------------

    \50\ Regulations to Address Margin Adequacy and To Account for 
the Treatment of Separate Accounts by Futures Commission Merchants, 
89 FR 15312 (Mar. 1, 2024) (Second Proposal). The Second Proposal 
also contained supporting amendments in parts 1, 22, 30, and 39.
---------------------------------------------------------------------------

    The notice of proposed rulemaking and withdrawal were published in 
the Federal Register on March 1, 2024. The Commission is finalizing the 
Second Proposal, with modifications responding to the comments 
received. The bulk of the final rule will be contained in new 
regulation Sec.  1.44. However, as explained below, the Commission is 
also finalizing supporting amendments in regulations Sec. Sec.  1.3, 
1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 39.13 to facilitate 
implementation of regulation Sec.  1.44. The Commission is additionally 
finalizing amendments to address inadvertent inconsistencies in 
existing regulations.\51\
---------------------------------------------------------------------------

    \51\ These are changes to regulation Sec.  1.3 (to clarify that 
Saturday is not a business day); regulation Sec.  1.17(b) (to 
reorganize the wording of the definition of the term ``business 
day'' for capital purposes to be consistent with the wording in the 
amendments to regulation Sec.  1.3, to clarify that the definition 
of the term ``risk margin'' includes both customer and noncustomer 
accounts, and to change the term ``FCM'' to read ``futures 
commission merchant''); regulations Sec. Sec.  1.20(i), 30.7(f)(2), 
and 22.2(f) (to revise the regulatory description of the calculation 
of the total amount of funds that an FCM must hold in segregation 
for futures customers, Cleared Swaps Customers, and 30.7 customers, 
respectively, to align such description with the Commission's 
financial forms and the instructions to such forms, reorganizing 
regulations Sec.  22.2(f)); regulation Sec.  1.58(a) and (b) (to 
clarify that gross margining requirements for omnibus accounts 
carried for one FCM at another FCM apply to Cleared Swaps as well as 
to futures and options on futures); and Sec.  30.2(b) (to clarify 
that, in the context of the exclusion for applying certain 
regulations to persons and transactions subject to the requirements 
of part 30, existing regulations Sec. Sec.  1.41, 1.42, and 1.43 
(which were added in the 2021 part 190 bankruptcy rulemaking) are 
not excluded). These changes are discussed in greater detail in the 
relevant sections below.
---------------------------------------------------------------------------

    Regulation Sec.  1.44 is comprised of eight subsections. Regulation 
Sec.  1.44(a) defines key terms solely for purposes of regulation Sec.  
1.44. Regulation Sec.  1.44(b) incorporates, for all FCMs, and for all 
accounts,\52\ the same Margin Adequacy Requirement that DCOs are 
obligated in regulation Sec.  39.13(g)(8)(iii) to require their 
clearing FCMs to apply. Regulation Sec.  1.44(c) makes clear that an 
FCM can provide disbursements on a separate account basis only during 
the ``ordinary course of business,'' a term that is defined in proposed 
regulation Sec.  1.44(a). Regulation Sec.  1.44(d) explains how FCMs 
may elect to engage in separate account treatment for one or more 
customers. Regulation Sec.  1.44(e) enumerates the events that are 
inconsistent with the ordinary course of business for purposes of 
regulation Sec.  1.44 and contains requirements for FCMs related to 
cessation of disbursements on a separate account basis upon the 
occurrence of such events, and resumption of separate account 
disbursements upon the cure of such events. Regulation Sec.  1.44(f) 
contains the requirement that each separate account be on a ``one 
business day margin call'' and sets out provisions designed to 
establish how a one business day margin call is to be made and met for 
purposes of regulation Sec.  1.44. Regulation Sec.  1.44(g) sets forth 
capital, risk management, and segregation calculation requirements for 
FCMs with respect to accounts for which the FCM has elected separate 
treatment. Lastly, regulation Sec.  1.44(h) articulates information and 
disclosure requirements for FCMs that engage in separate account 
treatment.
---------------------------------------------------------------------------

    \52\ Regulation Sec.  1.44(a) defines ``account'' to include 
futures accounts and Cleared Swaps Customer Accounts, both of which 
terms are defined in regulation Sec.  1.3, and 30.7 accounts. A 30.7 
account means any account maintained by an FCM for or on behalf of 
30.7 customers to hold money, securities, or other property to 
margin, guarantee, or secure foreign futures or foreign options. 17 
CFR 30.1(g).
---------------------------------------------------------------------------

II. Regulations

    Section 8a(5) of the CEA \53\ authorizes the Commission ``to make 
and promulgate such rules and regulations as, in the judgment of the 
Commission, are reasonably necessary to effectuate any of the 
provisions or to accomplish any of the purposes of'' the CEA. The 
Commission is promulgating these rules pursuant to section 8a(5) as 
reasonably necessary to effectuate sections 4d(a)(2) and 4d(f)(2) of 
the CEA,\54\ providing for the segregation and protection of, 
respectively, futures customer funds and Cleared Swaps Customer 
Collateral, and section 4(b)(2)(A) of the CEA,\55\ providing for the 
safeguarding of customers' funds in connection with foreign futures and 
foreign option transactions. The Commission is also promulgating these 
rules as reasonably necessary to effectuate section 4f(b) of the CEA, 
which requires an FCM to meet minimum financial requirements prescribed 
by the Commission as necessary to ensure that the FCM meets its 
obligations.\56\ Moreover, the Commission is promulgating these rules 
as reasonably necessary to accomplish the purposes of the CEA as set 
forth in section 3(b); \57\ specifically, ``the avoidance of systemic 
risk'' and ``protect[ing] all market participants from . . . misuses of 
customer assets.''
---------------------------------------------------------------------------

    \53\ 7 U.S.C. 12a(5).
    \54\ 7 U.S.C. 6d(a)(2) and (f)(2).
    \55\ 7 U.S.C. 6(b)(2)(A).
    \56\ 7 U.S.C. 6f(b).
    \57\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    Accordingly, the Commission believes that the amendments adopted 
herein relating to the Margin Adequacy

[[Page 7884]]

Requirement, and the modification of this requirement to permit, 
subject to certain further conditions, separate account treatment in 
connection with the withdrawal of customer initial margin, support the 
customer funds protection and risk management provisions and purposes 
of the CEA. As further described below, the Commission also believes 
that preventing the undermargining of customer accounts and mitigating 
the risk of a clearing member default, or the default of a non-clearing 
FCM, and the potential for systemic risk in either scenario, is 
effectively addressed by the standards set forth in this final rule.
    All FCMs are currently subject to a detailed set of requirements 
designed to provide effective protection for customer funds. These 
include, for futures accounts, regulations Sec. Sec.  1.20 (requiring 
segregation of customer funds), 1.22 (requiring, inter alia, residual 
interest to cover undermargined amounts), and 1.23 (requiring FCMs to 
maintain residual interest in segregated accounts up to a targeted 
amount that they determine based on specified considerations), as well 
as similar regulatory obligations with respect to Cleared Swaps 
Customer Accounts (respectively, regulations Sec. Sec.  22.2(d) and (f) 
and 22.17), and 30.7 accounts (regulation Sec.  30.7).
    Regulation Sec.  39.13(g)(8)(iii) provides, through the Margin 
Adequacy Requirement, an additional layer of protection for customer 
funds, but only with respect to FCMs that are clearing members of DCOs. 
Prior to this final rule, there was no analogous Margin Adequacy 
Requirement applicable to FCMs that are not clearing members of DCOs. 
As discussed above, regulation Sec.  39.13(g)(8)(iii) is designed to 
mitigate the risk that a clearing member fails to hold, from a 
customer, funds sufficient to cover the required initial margin for the 
customer's cleared positions and, in light of the use of omnibus margin 
accounts, avoid the misuse of customer funds by reducing the likelihood 
that the clearing member will cover one customer's margin shortfall 
using another customer's funds.\58\ Accordingly, regulation Sec.  
39.13(g)(8)(iii) provides risk mitigation benefits for DCOs, clearing 
FCMs, and customers. The effect of the staff no-action position in CFTC 
Letter No. 19-17 is to allow DCOs to permit clearing FCMs to engage in 
separate account treatment for purposes of that provision, but subject 
to conditions designed to maintain the provision's risk mitigating 
effects.
---------------------------------------------------------------------------

    \58\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    By establishing requirements for separate account treatment for all 
FCMs through the addition of a similar Margin Adequacy Requirement to 
part 1, the Commission seeks to replicate the regulatory structure 
presented by the interaction of regulation Sec.  39.13(g)(8)(iii) and 
the no-action position of CFTC Letter No. 19-17 for all FCMs, and 
further the customer fund protection and risk mitigation purposes of 
the CEA \59\ by implementing measures designed to further ensure that 
all FCMs, whether clearing or non-clearing, do not create or exacerbate 
an undermargining scenario.
---------------------------------------------------------------------------

    \59\ Section 3(b) of the CEA, 7 U.S.C. 5(b) (It is the purpose 
of the CEA to ensure the financial integrity of all transactions 
subject to this Act and the avoidance of systemic risk and to 
protect all market participants from misuses of customer assets'').
---------------------------------------------------------------------------

    The requirements for separate account treatment established herein 
are designed to (i) ensure that FCMs carry out separate account 
treatment in a consistent and documented manner; (ii) monitor customer 
accounts on a separate and combined basis; (iii) identify and act upon 
instances of financial or operational distress that necessitate a 
cessation of disbursements on a separate account basis; (iv) provide 
appropriate disclosures to customers \60\ regarding separate account 
treatment; and (v) apprise their DSROs when they apply separate account 
treatment or when an event has occurred that would necessitate 
cessation of disbursements on a separate account basis.\61\
---------------------------------------------------------------------------

    \60\ In this final rule, references to a ``customer'' are to a 
direct customer of the FCM in question. Thus, where non-clearing FCM 
N clears through clearing FCM C, a customer (including a separate 
account customer) of N is not considered a customer of C.
    \61\ For the avoidance of doubt, the final rule permits an FCM 
to decide to engage in separate account treatment for a set of 
customers. It neither requires an FCM to engage in such treatment 
nor requires a customer of an FCM that decides to engage in separate 
account treatment for certain customers to choose to have its 
accounts with such FCM treated as separate accounts of separate 
entities. Thus, separate account treatment should involve an 
affirmative decision by both the FCM and the customer.
---------------------------------------------------------------------------

    The amendments are designed to extend the customer protection and 
risk management benefits of regulation Sec.  39.13(g)(8)(iii) to all 
FCMs and all of their customer accounts, and to provide an alternative 
means of achieving those risk management goals if the FCM elects to 
permit customers to maintain separate accounts.\62\ Additionally, as 
discussed further below in the cost benefit considerations, because a 
number of clearing FCMs have already implemented the conditions set 
forth in CFTC Letter No. 19-17, some FCMs will have already 
implemented, in significant part, the requirements established herein.
---------------------------------------------------------------------------

    \62\ As a result, regulation Sec.  1.44 prohibits the 
application of portfolio margining or cross-margining treatment 
between separate accounts of the same customer, but would not 
prohibit the application of such treatments within a particular 
separate account of a customer.
---------------------------------------------------------------------------

    The Commission received comment letters in response to the Second 
Proposal from the JAC, FIA, SIFMA-AMG, CME, Intercontinental Exchange, 
Inc. (ICE), the Options Clearing Corporation (OCC), and MFA (formerly 
Managed Funds Association). Commenters supported the Commission's 
proposal to codify the no-action position of CFTC Letter No. 19-17 and 
the Commission's proposed approach to base that codification in part 1. 
Certain commenters commented on the substantive requirements proposed, 
as well as how the proposed requirements may interact with one another 
and with other Commission regulations, and suggested modifications to 
the Second Proposal. The Commission addresses these comments in the 
discussion below. Additionally, the Commission posed specific questions 
for comment in the Second Proposal. Although in three instances 
commenters responded explicitly to these questions,\63\ FIA noted that 
it considers its comment letter responsive to Questions 1-4, 6, and 7 
in its discussion of proposed amendments to regulation Sec.  1.17 and 
proposed regulation Sec.  1.44(d), (f), and (h), including proposed 
requirements for the disclosure of information in the Disclosure 
Document required by regulation Sec.  1.55(i).\64\
---------------------------------------------------------------------------

    \63\ FIA (Question 4), the JAC (Question 5) and CME (Question 
8).
    \64\ FIA Comment Letter.
---------------------------------------------------------------------------

    Questions 1 and 2 concerned the Second Proposal generally. In 
Question 1, the Commission requested comment regarding whether, in 
light of changes made in the Second Proposal relative to the First 
Proposal, the Commission should consider any requirements for separate 
account treatment additional to those contained in regulation Sec.  
1.44 as proposed or modify or remove any of the proposed requirements. 
In Question 2, the Commission requested comment regarding whether the 
interaction between regulation Sec.  1.44(g)-(h) as proposed and other 
regulations under parts 1, 22, and 30 affected by the proposed 
requirements (e.g., regulations Sec. Sec.  1.17, 1.20, 1.22, 1.23, 
1.32, 1.55, 1.58, 1.73, 22.2, 30.2, and 30.7) was sufficiently clear. 
No commenters responded explicitly to these questions, although, as 
indicated above, certain comments addressed the thematic issues these 
questions raise.

[[Page 7885]]

A. Amendments to Regulation Sec.  1.3

    The definitions contained in regulation Sec.  1.3 are key to 
understanding and interpreting the Commission's regulations, including 
part 1 FCM regulations. The Commission believes the provisions of 
regulation Sec.  1.44 require an amendment to regulation Sec.  1.3.
    The Commission proposed to amend the definition of ``business day'' 
in regulation Sec.  1.3. Prior to this final rule, regulation Sec.  1.3 
provided, in relevant part, that ``business day'' meant any day other 
than a Sunday or holiday. The term ``business day'' is intended to 
encompass days on which banks and custodians are open in the United 
States to facilitate payment of margin. For the avoidance of doubt, 
``holiday'' in this context refers to holidays in the United States. 
The Commission proposed to modify the definition of ``business day'' in 
regulation Sec.  1.3 to confirm that the term encompasses any day other 
than a Saturday, Sunday, or holiday.
    The Commission notes that, in actual practice, Saturdays are 
generally not treated as business days in the markets,\65\ by market 
participants, or for regulatory purposes.\66\ The Commission proposed 
to amend the definition of ``business day'' in regulation Sec.  1.3 to 
conform to that reality. In connection with the proposed amendments to 
regulation Sec.  1.3, in Question 3 of the Second Proposal, the 
Commission requested comment regarding whether its proposal to revise 
the definition of ``business day'' in regulation Sec.  1.3 would result 
in any adverse consequences for any market participants. The Commission 
did not receive any comments with respect to the proposed amendment to 
the definition of ``business day'' in regulation Sec.  1.3 or 
explicitly in response to Question 3. Accordingly, the Commission is 
adopting the amendment to the definition of ``business day'' in 
regulation Sec.  1.3 as proposed.
---------------------------------------------------------------------------

    \65\ It is true that some markets are moving toward 24/7 
operation. The Commission will continue to monitor these 
developments, and consider further rulemaking in this area as 
appropriate. Nonetheless, a definition of business days that 
includes Saturday, but not Sunday, does not reflect present or 
plausible future reality.
    \66\ For instance, Saturdays are treated as non-business days 
for purposes of swaps reporting under parts 43 and 45 of the 
Commission's regulations, 17 CFR 43.1; 17 CFR 45.2, execution of 
confirmations by swap dealers, 17 CFR 23.501(c)(5)(ii), and under 
the Commission's part 39 DCO regulations, 17 CFR 39.2 (defining an 
intraday business day period). See also, e.g., CFTC, Guidebook for 
Part 17.00: Reports by Reporting Markets, Futures Commission 
Merchants, Clearing Members, and Foreign Brokers, at 18, May 30, 
2023 (noting that for purposes of part 17.00 reports, ``reporting 
entities may elect to not consider Saturdays to be a business day, 
as Saturday is not commonly known as such'').
---------------------------------------------------------------------------

B. Amendments to Regulation Sec.  1.17

    Regulation Sec.  1.17 establishes minimum financial requirements 
for FCMs. Regulation Sec.  1.17(a)(1)(i) provides that each person 
registered as an FCM must maintain adjusted net capital equal to, or in 
excess of, the greatest of: (1) $1 million (or $20 million if the FCM 
is also registered as a swap dealer); (2) eight percent of the total 
``risk margin'' required on the positions in customer and noncustomer 
accounts \67\ carried by the FCM; (3) the amount of adjusted net 
capital required by NFA as a registered futures association; or (4) for 
an FCM registered as a securities broker or dealer with the Securities 
and Exchange Commission (SEC), the amount of net capital required by 
SEC rule Sec.  15c3-1.\68\ For purposes of regulation Sec.  
1.17(a)(1)(i), the term ``risk margin'' is defined by paragraph (b)(8) 
of that regulation to generally mean the level of maintenance margin or 
performance bond required for customer and noncustomer positions 
established by the applicable exchanges or clearing organizations.
---------------------------------------------------------------------------

    \67\ The term ``noncustomer account'' generally means the 
accounts of affiliates of an FCM or employees of an FCM. See 17 CFR 
1.17(b)(4).
    \68\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    The Commission proposed several amendments to regulation Sec.  1.17 
to reflect the regulatory capital treatment of separate accounts that 
would result from the implementation of proposed regulation Sec.  1.44, 
including the requirements contained in regulation Sec.  1.44(g)(3), 
discussed below. As a general matter, the proposed amendments to 
regulation Sec.  1.17 were designed to ensure that FCMs manage risk 
with respect to separate accounts consistently, and cannot revert to 
calculating minimum financial requirements on a combined account basis 
where such calculations would tend to reflect less risk and reduced 
financial requirements for a customer than if each of the customer's 
separate accounts were treated as an account of a distinct customer 
without regard to the same customer's other separate accounts.
    Consistent with that intent, the Commission proposed to expand the 
list of modifiers to the definition of the term ``risk margin'' for an 
account by adding proposed paragraph (b)(8)(v) to regulation Sec.  
1.17, providing that if an FCM carries separate accounts for separate 
account customers pursuant to regulation Sec.  1.44, then the FCM shall 
calculate the risk margin pursuant to regulation Sec.  
1.17(a)(1)(i)(B)(1) as if each separate account is owned by a separate 
entity.
    The Commission notes that, under the amendments as proposed, risk 
margin would be calculated on an individual basis for each separate 
account. Calculating risk margin separately for each separate account 
would eliminate the potential for portfolio margining offsets based on 
positions between separate accounts of the same separate account 
customer,\69\ which would either increase, or leave unchanged, the 
total risk margin requirement, and thus the minimum adjusted net 
capital requirement, for an FCM providing separate account 
treatment.\70\ The proposed addition of paragraph (b)(8)(v) to 
regulation Sec.  1.17 was intended to further clarify that, pursuant to 
the Commission's FCM capital rule, an FCM that elects to permit 
separate account treatment must compute the risk margin amount for 
separate accounts as if each account is an account of a separate 
entity.
---------------------------------------------------------------------------

    \69\ As noted in regulation Sec.  39.13(g)(4), a DCO may allow 
reductions in initial margin requirements for related positions if 
the price risks with respect to such positions are significantly and 
reliably correlated. This includes cases where (A) The products on 
which the positions are based are complements of, or substitutes 
for, each other. An example might be long versus short positions in 
oil and natural gas, both of which may be used for generating 
energy. However, portfolio margining is applicable only to accounts 
for the same customer. See regulation Sec.  39.13(g)(8)(i) 
(requiring collection of initial margin on a gross basis for each 
clearing member's customer accounts). So, if a customer has, in a 
single account, both long oil positions and short natural gas 
positions, then the customer may benefit from a reduction in initial 
margin requirements for the two risk-offsetting positions. However, 
if those positions are in different separate accounts of the 
customer under this this final rule, then the positions would not 
lead to an initial margin reduction as the positions would not be 
margined on a combined or portfolio basis.
    \70\ As noted above, per regulation Sec.  1.17(a)(1)(i), the 
adjusted net capital requirement for an FCM is the greatest of 
several calculations, one of which is eight percent of the total 
risk margin requirement as defined in regulation Sec.  1.17(b)(8). 
Thus, a calculation that would increase, or leave unchanged, the 
risk margin requirement would correspondingly increase, or leave 
unchanged, the adjusted net capital requirement.
---------------------------------------------------------------------------

    In proposing to amend the definition of the term ``risk margin'' in 
regulation Sec.  1.17(b)(8) to reflect separate accounts, the 
Commission noted that such amendment, and the resulting potential 
increase in an FCM's minimum adjusted net capital requirement under 
regulation Sec.  1.17(a)(1)(i), would also affect other regulations 
that impose obligations on FCMs based on their level of adjusted net 
capital.\71\ The Commission also

[[Page 7886]]

noted that the proposed amendments to the minimum capital requirements 
would affect an FCM's obligation to provide certain notices to the 
Commission and to the FCM's DSRO under regulation Sec.  1.12.\72\
---------------------------------------------------------------------------

    \71\ For example, regulation Sec.  1.17(h) conditions an FCM's 
ability to repay or prepay subordinated debt obligations on the FCM 
maintaining an amount of adjusted net capital that, after taking 
into effect the amount of the subordinated debt payment and other 
subordinate debt payments maturing within a set time period, exceeds 
the FCM's minimum adjusted net capital requirement by 120 percent to 
125 percent, as specified in the applicable provision of regulation 
Sec.  1.17(h). See, e.g., 17 CFR 1.17(h)(2)(vii) which generally 
provides, subject to certain conditions, that an FCM may not make a 
prepayment on an outstanding subordinated debt obligation if such 
payment would result in the FCM maintaining less than 120 percent of 
its minimum adjusted net capital requirement.
    \72\ See, e.g., 17 CFR 1.12(a), which requires an FCM to provide 
notice to the Commission and the FCM's DSRO if the FCM's adjusted 
net capital at any time is less than the minimum required by 
regulation Sec.  1.17.
---------------------------------------------------------------------------

    The Commission additionally proposed to amend regulation Sec.  1.58 
to provide that, where a clearing FCM carries an omnibus customer 
account for a non-clearing FCM, and the non-clearing FCM applies 
separate account treatment, then such non-clearing FCM must calculate 
initial and maintenance margin for purposes of regulation Sec.  1.58(a) 
separately for each separate account. These proposed amendments to 
regulation Sec.  1.58 are discussed further below.
    Second, the Commission proposed to amend regulation Sec.  
1.17(c)(2), which defines ``current assets'' that an FCM may recognize 
and include in computing its net capital. Regulation Sec.  1.17(c)(2) 
currently defines ``current assets'' to include cash and other assets 
or resources commonly identified as those that are reasonably expected 
to be realized in cash or sold during the next 12 months. However, 
regulation Sec.  1.17(c)(2)(i) provides that an FCM must exclude from 
current assets any unsecured receivables resulting from futures, 
Cleared Swaps, or 30.7 accounts that liquidate to a deficit or contain 
a debit ledger balance only, provided, however, that the FCM may 
include a deficit or debit ledger balance in current assets until the 
close of business on the business day following the date on which the 
deficit or debit ledger balance originated (provided, in turn, that the 
account had timely satisfied the previous day's deficits or debit 
ledger balances).
    The Commission proposed to amend regulation Sec.  1.17(c)(2)(i) to 
provide explicitly that if an FCM carries separate accounts for 
separate account customers pursuant to proposed regulation Sec.  1.44, 
then the FCM must treat each separate account as an account of a 
separate entity for the calculation of net capital, with certain 
limitations if deficits or debit ledger balances were not satisfied 
across the separate accounts of one separate account customer in 
accordance with the one business day requirements. As proposed, amended 
regulation Sec.  1.17(c)(2)(i) would provide that the FCM must exclude 
each unsecured separate account that liquidates to a deficit or 
contains a debit ledger balance only from current assets in its 
calculation of net capital, provided, however, that if the separate 
account is subject to a call for margin by the FCM, it may be included 
in current assets until the close of business on the business day 
following the date on which the deficit or debit ledger balance 
originated, provided that the separate account timely satisfied a 
previous day's deficit or debit ledger balance in its entirety. As 
proposed, amended regulation Sec.  1.17(c)(2)(i) further provides that, 
if the separate account does not satisfy a previous day's deficit or 
debit ledger balance in its entirety, then the deficit or debit ledger 
balance for the separate account, and any other deficits or debit 
ledger balances of the separate account customer in other separate 
accounts carried by the FCM, shall not be included in current assets 
until all such calls are satisfied in their entirety. The Commission's 
proposed amendments were intended to provide the same capital treatment 
to separate accounts as is currently provided customer accounts that 
liquidate to deficits or contain debit ledger balances, and to be 
consistent with corresponding conditions to the no-action position in 
CFTC Letter No. 19-17.\73\
---------------------------------------------------------------------------

    \73\ CFTC Letter No. 19-17. The letter provides that an ``FCM 
shall record each separate account independently in the FCM's books 
and records, i.e., the FCM shall record separate accounts as a 
receivable (debit/deficit) or payable with no offsets between the 
other separate accounts of the same customer.'' Id. (Condition 6). 
The letter also provides that ``the receivable from a separate 
account shall only be considered secured (a current/allowable asset) 
based on the assets of that separate account, not on the assets held 
in another separate account of the same customer.'' Id. (Condition 
7).
---------------------------------------------------------------------------

    Third, the Commission proposed to amend regulation Sec.  
1.17(c)(4), which defines the term ``liabilities'' for purposes of an 
FCM calculating its net capital. Regulation Sec.  1.17(c)(4) generally 
defines the term ``liabilities'' to mean the total money liabilities of 
an FCM arising in connection with any transaction whatsoever, including 
economic obligations of an FCM that are recognized and measured in 
conformity with generally accepted accounting principles. Regulation 
Sec.  1.17(c)(4) also provides that for purposes of computing net 
capital, an FCM may exclude from its liabilities funds held in 
segregation for futures customers, Cleared Swaps Customers, and 30.7 
customers, provided that such segregated funds are also excluded from 
the FCM's current assets in computing the firm's net capital.
    The Commission proposed to amend regulation Sec.  1.17(c)(4)(ii) to 
explicitly provide that an FCM that carries the separate accounts of 
separate account customers pursuant to proposed regulation Sec.  1.44 
must compute the amount of money, securities, and property due to a 
separate account customer as if each separate account of the separate 
account customer is a distinct customer. The Commission further 
proposed to amend regulation Sec.  1.17(c)(4)(ii) to provide that an 
FCM, in computing its net capital, may exclude funds held in 
segregation for separate account customers from the FCM's liabilities, 
provided that funds held in segregation for separate account customers 
are also excluded from the FCM's current assets. The purpose of the 
proposed amendment is to ensure that an FCM, in computing its net 
capital, reflects separate accounts in a consistent manner in 
determining its total current assets and liabilities.
    Fourth, the Commission proposed to amend regulation Sec.  
1.17(c)(5), which defines the term ``adjusted net capital.'' Regulation 
Sec.  1.17(c)(5)(viii) provides, in relevant part, that adjusted net 
capital means net capital minus, among other items detailed in 
regulation Sec.  1.17(c)(5), the amount of funds required in each 
customer 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 
the account's positions. FCMs are allowed to apply (that is, to reduce 
the amount of this deduction from capital by) ``calls for margin or 
other required deposits which are outstanding no more than one business 
day.'' \74\ However, once a customer fails to meet a margin call within 
one business day, the FCM loses that one business day period for 
receiving any of that customer's future margin calls, until the point 
in time at which the customer is no longer undermargined.\75\
---------------------------------------------------------------------------

    \74\ 17 CFR 1.17(c)(5)(viii).
    \75\ Thus, if, due to activity on Monday, Customer A is 
undermargined by $150, and the FCM calls Customer A for that margin 
on Tuesday, then the FCM does not need to deduct that $150 from its 
net capital in computing its adjusted net capital, so long as the 
margin call is met by the close of business on Wednesday. Moreover, 
if Customer A, due to activity on Tuesday, is undermargined by an 
additional $100, and the FCM calls for that additional $100 on 
Wednesday, then the FCM does not need to deduct that additional $100 
on Wednesday. If Customer A meets the $150 call by close of business 
Wednesday, and the $100 call by close of business on Thursday, then 
no deduction need be taken for either the $150 or the $100 margin 
calls. However, if Customer A fails to meet Tuesday's $150 call by 
close of business on Wednesday, then the FCM must deduct both the 
$150 from Tuesday and the $100 from Wednesday (thus a total of 
$250), as well as any future undermargined amounts until Customer A 
cures its entire undermargined amount. Again, once a customer fails 
to meet a margin call within one business day, the FCM loses the one 
business day period for that customer to meet any of its future 
margin calls, until the point in time at which the customer is no 
longer undermargined.

---------------------------------------------------------------------------

[[Page 7887]]

    The Commission proposed to amend regulation Sec.  1.17(c)(5)(viii) 
to provide that an FCM that carries separate accounts for a separate 
account customer pursuant to proposed regulation Sec.  1.44 must 
compute the amount of funds required to meet maintenance margin 
requirements for each separate account as if the account was owned by a 
distinct customer. However, if a margin call for any separate account 
of a separate account customer is outstanding for more than one 
business day, then (consistent with the treatment of multiple margin 
calls for a single customer described in the previous paragraph), no 
margin call for that separate account customer will benefit from the 
one business day period until the point in time at which all margin 
calls for the separate accounts of that separate account customer have 
been met in full.
    As discussed further below in the context of proposed regulation 
Sec.  1.44(f), the concepts of margin calls that are outstanding no 
more than one business day (for purposes of Sec.  1.17(c)(5)(viii)) and 
meeting a one business day margin call (for purposes of Sec.  1.44(f)) 
are separate and distinct. It is possible that a separate account 
customer may meet the test for the first, but not the second, or may 
meet the test for the second, but not the first.
    The proposed amendments to regulation Sec.  1.17 also include 
certain technical changes designed to improve clarity and promote 
consistency with other Commission regulations.\76\
---------------------------------------------------------------------------

    \76\ E.g., changes to punctuation and substitution of ``level of 
maintenance margin or performance bond required for the customer and 
noncustomer positions'' for ``level of maintenance margin or 
performance bond required for the customer or noncustomer 
positions'' with respect to the meaning of risk margin for an 
account. See, e.g., regulation Sec.  1.17(b)(8). The Commission is 
further replacing the term ``FCM'' in regulation Sec.  1.17(b)(8) 
with ``futures commission merchant.'' The Commission is also 
reorganizing paragraph Sec.  1.17(c)(5)(viii) into sub-paragraphs 
(A), (B), (C), and (D) to enhance clarity. The Commission is also 
reorganizing the wording of the definition of the term ``business 
day'' in regulation Sec.  1.17(b)(6) to read ``any day other than a 
Saturday, Sunday, or holiday'' rather than ``any day other than a 
Sunday, Saturday, or holiday.'' This change would align the wording 
in this provision with the wording of the term ``business day'' in 
regulation Sec.  1.3.
---------------------------------------------------------------------------

    Commenters did not object to the Commission's proposed addition of 
paragraph (b)(8)(v) to regulation Sec.  1.17, the Commission's proposed 
amendments to regulation Sec.  1.17(c)(4)(ii), or the technical 
amendments that the Commission proposed to regulation Sec.  1.17. FIA 
welcomed the Commission's proposal to amend regulation Sec.  1.17 to 
require FCMs that carry separate accounts to calculate the risk margin 
component of the FCM's regulatory capital requirement as if the 
separate accounts are owned by separate entities.\77\ The JAC did not 
object to the proposed amendments to regulation Sec.  1.17(c)(2)(i), 
but contended that the amendments would introduce a change from the 
current requirements related to the treatment of separate account 
debits and deficits in CFTC Letter No. 19-17 by requiring FCMs to look 
across all separate accounts of a separate account customer when 
determining one day debits or deficits to be considered current assets 
for net capital, rather than making that determination solely on the 
basis of each of the separate account customer's separate accounts 
individually.\78\ The JAC noted that FCMs may require time to update 
their regulatory systems and records to comply with the amendments as 
proposed.\79\
---------------------------------------------------------------------------

    \77\ FIA Comment Letter.
    \78\ JAC Comment Letter.
    \79\ Id.
---------------------------------------------------------------------------

    The JAC also recommended that the Commission clarify how an FCM 
should consider whether a separate account timely satisfied the 
previous day's debit or deficits in its entirety, noting that, if 
margin calls are only considered satisfied when receipts are settled 
for purposes of proposed regulation Sec.  1.17(c)(2)(i), then margin 
calls met in non-USD in one separate account may affect the current or 
noncurrent classification of a debit or deficits in all separate 
accounts of a separate account customer.\80\ As discussed further 
below, JAC guidance provides that FCMs, subject to certain conditions, 
may apply margin equity credit to an account for certain pending non-
USD transactions. The JAC noted that, depending on how margin calls are 
considered satisfied, the proposed amendments may require FCMs 
permitting separate account treatment to consider additional capital 
needs.\81\
---------------------------------------------------------------------------

    \80\ Id.
    \81\ Id.
---------------------------------------------------------------------------

    With respect to the proposed amendments to regulation Sec.  
1.17(c)(5)(viii), the JAC agreed that proposed regulation Sec.  
1.17(c)(5)(viii)(A) (requiring that if one margin call is noncurrent, 
then all margin calls are noncurrent), is consistent with how, pursuant 
to the JAC's guidance, FCMs currently calculate noncurrent margin calls 
and account for noncurrent margin calls for purposes of determining 
capital charges. The JAC did not take a position with respect to the 
proposed amendments to regulation Sec.  1.17(c)(5)(viii)(B), but urged 
the Commission (if adopting the amendments as proposed) to highlight in 
its final rulemaking that the amendments would require that, if a 
margin call for any separate account of a separate account customer is 
outstanding for more than one business day, then the calculation of 
current calls used in computing the separate account's undermargined 
capital charge must account for the age of all margin calls in all 
separate accounts of the separate account customer. The JAC noted that 
the resulting look-across to all margin calls in all separate accounts 
of a separate account customer could result in significant capital 
charges for FCMs even where each separate account is meeting its calls 
on a one business day basis as required by proposed regulation Sec.  
1.44(f), due to the additional time for compliance with the one 
business day margin requirement provided for holidays and foreign 
currency wires as proposed in accordance with the practices followed 
under CFTC Letter No. 19-17.\82\
---------------------------------------------------------------------------

    \82\ Id.
---------------------------------------------------------------------------

    Additionally, as the JAC noted in its comments with respect to the 
proposed amendments to regulation Sec.  1.17(c)(2)(i), JAC Regulatory 
Alert #14-06 provides that, when calculating the undermargined capital 
charge and consistent with the treatment for residual interest, an FCM 
may consider pending non-USD deposits, ACH payments, and checks as 
received, subject to certain conditions.\83\ The JAC requested that the 
Commission confirm

[[Page 7888]]

that pending non-USD deposits would be permitted to be considered as 
received in computing the undermargined capital charge for all 
customers under proposed regulation Sec.  1.17(c)(5)(viii)(A) and 
(B).\84\
---------------------------------------------------------------------------

    \83\ Id. Specifically, JAC Alert #14-06 provides that, at an 
FCM's discretion, it may consider a non-USD deposit as pending in a 
customer's account and included in the account's margin equity if 
``(i) the FCM assesses that it is prudent to do so based on the 
account's past history of satisfying margin calls and the 
operational and credit risk profile of the account owner, (ii) the 
account is on a 1-day wire transfer basis (i.e., the wire is 
initiated on Day 2), (iii) the FCM has a sufficient basis that the 
wire was actually initiated, (iv) the FCM continues to age the 
pending non-U.S. Dollar receipts and retains the ability to 
recognize a failed deposit immediately upon occurrence, and (v) the 
FCM treats unsettled non-U.S. Dollar disbursements from the account 
in the same manner.'' JAC Regulatory Alert #14-06, Nov. 4, 2014, 
available at http://www.jacfutures.com/jac/jacupdates/2014/jac1406.pdf.
    \84\ JAC Comment Letter.
---------------------------------------------------------------------------

    The JAC also noted that, as the Commission has not proposed to 
modify regulation Sec.  1.17(c)(5)(ix), requiring undermargined capital 
charges for noncustomer and omnibus accounts, the JAC will assume that 
FCMs will still be able to apply treatment for pending deposits as set 
forth in JAC Regulatory Alert #14-06 to noncustomers and omnibus 
accounts, unless the Commission amends the provision or confirms 
otherwise.\85\
---------------------------------------------------------------------------

    \85\ Id.
---------------------------------------------------------------------------

    Additionally, the JAC requested that the Commission confirm that 
for purposes of the undermargined capital charge for a customer account 
under regulation Sec.  1.17(c)(5), maintenance margin requirements 
include the risk component only, and non-cash collateral should be 
valued at market value less applicable haircuts, including for separate 
account customers.\86\ The JAC stated that performing such margin 
calculations differently in order to comply with different regulatory 
reporting requirements may prove burdensome for FCMs that permit 
separate account treatment.\87\
---------------------------------------------------------------------------

    \86\ Id.
    \87\ Id.
---------------------------------------------------------------------------

    FIA contended that the proposed amendments to regulation Sec.  
1.17(c)(2)(i) and regulation Sec.  1.17(c)(5)(viii) are inconsistent 
with the principle of separate account margining and how clearing FCMs 
have understood the conditions of CFTC Letter No. 19-17.\88\ FIA argued 
that, for purposes of calculating both current assets under regulation 
Sec.  1.17(c)(2)(i) and charges against net capital for undermargined 
accounts under regulation Sec.  1.17(c)(5)(viii), the Second Proposal 
would effectively require FCMs to suspend the ordinary course of 
business for purposes of both calculations in the event that any 
separate account fails to satisfy its previous day's deficit or debit 
ledger balance in its entirety within one business day (for purposes of 
the calculation of current assets) or within the close of business at 
the end of the second business day following the call (for purposes of 
the undermargined capital charge).\89\ FIA noted that, on the basis of 
the conditions of the no-action position in CFTC Letter No. 19-17,\90\ 
FCMs calculate current assets and undermargined capital charges for 
each separate account as if each such account were owned by a separate 
entity, and do not look across to other separate accounts of the same 
customer for purposes of either calculation, unless the FCM is 
suspending the ordinary course of business for any such account.\91\
---------------------------------------------------------------------------

    \88\ FIA Comment Letter.
    \89\ Id.
    \90\ Specifically, requirements that FCMs electing separate 
account treatment (i) record each separate account independently in 
the FCM's books and records, including by recording each separate 
account as a receivable (debit/deficit) or payable with no offsets 
between the other separate accounts of the same customer; and (ii) 
reflect the receivable from a separate account as secured (as a 
current/allowable asset) based on the assets of that separate 
account rather than on the assets held in another separate account 
of the same customer.
    \91\ FIA Comment Letter.
---------------------------------------------------------------------------

    FIA asserted that these proposed revisions to regulation Sec.  1.17 
would be costly for FCMs, which would be required to rebuild 
operational and reporting systems, and to rewrite underlying 
programming code, to perform the necessary look-across of all of the 
separately margined accounts for the same separate account customer 
whenever the separate account customer fails to timely satisfy the 
previous day's deficit/debit ledger balance in its entirety for the 
current asset calculation, or fails to settle a margin call by the end 
of the day after the call for the undermargined capital charge 
calculation.\92\
---------------------------------------------------------------------------

    \92\ Id.
---------------------------------------------------------------------------

    FIA also argued that these proposed revisions to regulation Sec.  
1.17 would be punitive for FCMs, because they would impose capital 
costs on FCMs without regard to any related financial or operational 
risk. FIA included in its comment letter an example illustrating how an 
FCM could be required to take a significant capital charge due to a 
failure to meet a margin call timely in one separate account, even if 
the separate account customer's other separate accounts, managed by 
other investment managers, have margin calls that have not yet aged to 
a point that the FCM would be required to take a capital charge under 
existing regulation Sec.  1.17.\93\ FIA noted that a recent survey of 
its members showed that, although the percentage of required margin for 
separate accounts to total customer margin requirements varied from 
less than one percent to over 20%, members uniformly reported material 
potential capital implications measured by amount of margin required 
for a single beneficial owner across its separate accounts.\94\
---------------------------------------------------------------------------

    \93\ Id.
    \94\ Id.
---------------------------------------------------------------------------

    FIA recommended that the Commission modify its proposed amendments 
to regulation Sec.  1.17 to require a look-across of all of a separate 
account customer's separate accounts only where the ordinary course of 
business has been suspended for the separate account customer.\95\ FIA 
further recommended that such look-across be made subject to the 
requirements defining the Commission's proposed one business day margin 
call requirement in proposed regulation Sec.  1.44(f) so that FCMs can 
continue taking the benefit of current assets and avoiding charges 
against capital while client settlement in non-USD for separate 
accounts is pending.\96\
---------------------------------------------------------------------------

    \95\ Id.
    \96\ Id.
---------------------------------------------------------------------------

    Like the JAC, FIA discussed the application of margin equity credit 
to accounts for pending non-USD margin deposits under JAC guidance.\97\ 
FIA noted this practice appears to be in tension with the Commission's 
proposed amendments to regulation Sec.  1.17 and urged the Commission 
to clarify that the Second Proposal was not adopted with the intention 
of prohibiting such current treatment of pending non-USD transfers for 
purposes of computing undermargined capital charges.\98\
---------------------------------------------------------------------------

    \97\ Id.
    \98\ Id.
---------------------------------------------------------------------------

    In proposing to codify the no-action position of CFTC Letter No. 
19-17 in part 1 of its regulations, the Commission considered the way 
in which it would need to modify existing provisions of part 1 to 
facilitate separate account treatment for FCMs. With respect to the 
calculation of current assets as set forth in regulation Sec.  
1.17(c)(2)(i) and the undermargined capital charge as set forth in 
regulation Sec.  1.17(c)(5)(viii), the Commission proposed a more 
conservative approach to risk management that would trigger inclusion 
of debits or deficits (with respect to proposed regulation Sec.  
1.17(c)(2)(i)) or outstanding margin calls (with respect to proposed 
regulation Sec.  1.17(c)(5)(viii)) across a separate account customer's 
separate accounts when a margin call made of such separate account 
customer for purposes of either regulation is not satisfied timely. 
Although CFTC Letter No. 19-17, which applied directly to DCOs, did not 
speak explicitly to how FCMs should treat separate accounts for 
purposes of these regulations, its provisions call for DCOs to require 
FCMs to subject accounts receiving separate treatment to heightened 
scrutiny and enhanced risk management practices, particularly with 
respect to timely receipt of margin.

[[Page 7889]]

    The Commission has considered the JAC's and FIA's assertions that 
the proposed amendments to regulation Sec.  1.17(c)(2)(i) and 
regulation Sec.  1.17(c)(5)(viii) would represent a deviation from how 
FCMs have generally understood and applied the conditions of CFTC 
Letter No. 19-17. The Commission further acknowledges that a separate 
account customer's untimely payment of margin with respect to a 
separate account for purposes of regulation Sec.  1.17(c)(2)(i) or 
regulation Sec.  1.17(c)(5)(viii) does not necessarily indicate that 
the separate account customer is out of the ordinary course of 
business, as set forth in proposed regulation Sec.  1.44(a), with 
respect to that separate account or any other separate account of such 
customer. It follows that a separate account for which payment of 
margin is untimely for purposes of regulation Sec.  1.17(c)(2)(i) or 
regulation Sec.  1.17(c)(5)(viii) may not be indicative of financial or 
operational distress in the same manner as would untimely payment of 
margin for purposes of regulation Sec.  1.44. Unlike regulations Sec.  
1.17(c)(2)(i) and Sec.  1.17(c)(5)(iii), which require an FCM to 
reserve capital when the aggregate of a customer's accounts are, 
respectively, in debit/deficit or undermargined beyond a defined period 
of time to protect the FCM against potential losses or price exposure 
if the liquidation of the customer's positions is required, regulation 
Sec.  1.44 is designed to build in allowances to account for delays 
resulting from differences in time zones as well as international 
banking conventions in establishing requirements for meeting a one 
business day margin call. The Commission accordingly appreciates, and 
finds persuasive, FIA's comments to the effect that the proposed look-
across of separate accounts of a separate account customer who does not 
timely meet a margin call for purposes of regulation Sec.  
1.17(c)(2)(i) or Sec.  1.17(c)(5)(viii) may prove costly to implement 
and operationally disruptive to deploy. The Commission also appreciates 
the JAC's comments regarding the potential implementation and 
compliance burden that the proposed requirements would pose for FCMs.
    Accordingly, the Commission is adopting the amendments to 
regulation Sec.  1.17 as proposed, but with two modifications. First, 
the Commission is removing language from the proposed amendments to 
regulation Sec.  1.17(c)(2)(i) that would have provided that, if a 
separate account does not meet a previous day's margin call for a 
deficit or debit balance, the FCM shall exclude all separate accounts 
of that separate account customer carried by the FCM that have a 
deficit or debit ledger balance from current assets under regulation 
Sec.  1.17(c)(2)(i). Second, the Commission is modifying the language 
of proposed regulation Sec.  1.17(c)(5)(viii)(B) to provide that, if a 
call for margin or other required deposits for any separate account of 
a particular separate account customer is outstanding for more than one 
business day, then all outstanding margin calls for that separate 
account shall be treated as if the margin calls are outstanding for 
more than one business day, and shall be deducted from net capital 
until all such calls have been met in full. In this manner, where a 
separate account customer's separate account does not meet a previous 
day's margin call for a deficit or debit balance under regulation Sec.  
1.17(c)(2)(i), or has a margin call or other required deposits 
outstanding for more than one business day under regulation Sec.  
1.17(c)(5)(viii), then the FCM shall treat the separate account on a 
standalone basis in determining current assets or the undermargined 
capital charge, and need not look across to debits or deficits, or 
outstanding margin calls, in the separate account customer's other 
separate accounts.
    As previously discussed, the Commission believes that separate 
account treatment results in a conservative capital treatment due to 
the impact of removing portfolio margining across separate accounts, 
including in the calculation of the required capital based on risk 
margin separately for each separate account. Even during a period 
outside the ordinary course of business when disbursements on a 
separate account basis are suspended, the Commission believes that net 
capital treatment may in most instances continue to be more 
conservative by maintaining separate treatment of separate accounts for 
net capital calculation purposes. In consideration of the comments 
received regarding the operational difficulties which FCMs may face 
from being required to consolidate the treatment of separate accounts 
for net capital calculations and the likely conservative effect of 
maintaining separate treatment, the Commission is adopting the final 
rules as modified, and further clarifies that even during a period of a 
suspension of disbursements on a separate account basis, an FCM must 
continue separate treatment for net capital calculations. However, 
should an FCM itself cease treating the separate accounts separately, 
such as by initiating any cross-default remedies across the separate 
accounts of a separate account customer (thus indicating the FCM is 
exercising legal remedies to collapse separate accounts for the purpose 
of collection against the separate account customer), then continued 
separate net capital treatment by the FCM of such accounts would no 
longer be appropriate, as an FCM's exercise of cross-default remedies 
that combine separate accounts would be inconsistent with an FCM's 
continued election of separate account treatment.
    The Commission additionally considered the JAC's and FIA's comments 
with respect to the treatment of pending non-USD transfers. As the JAC 
and FIA noted, JAC Regulatory Alerts #14-03 and #14-06 permit FCMs to 
apply margin equity credit to an account for pending non-USD transfers 
for certain purposes and subject to certain conditions. As the JAC 
noted, the guidance provided by JAC Regulatory Alert #14-03 and #14-06 
provides that, due to the inherent delays in the settlement of certain 
foreign currency transfers, in determining a customer's or 
noncustomer's margin status (under JAC Regulatory Alert #14-03) or 
residual interest requirement (under JAC Regulatory Alert #14-06), an 
FCM may, at its discretion, consider unsettled non-USD transactions as 
pending in a customer's or noncustomer's account and include in the 
account's margin equity if: (i) the FCM assesses that it is prudent to 
do so based on the account's past history of satisfying margin calls 
and the operational and credit risk profile of the account owner; (ii) 
the account is on a one-day wire transfer basis (i.e., the wire is 
initiated on the day the margin call is issued); (iii) the FCM has a 
sufficient basis to believe that the wire was actually initiated; (iv) 
the FCM continues to age the pending non-USD receipts and retains the 
ability to recognize a failed deposit immediately upon occurrence; and 
(v) the FCM treats unsettled non-USD disbursements from the account in 
the same manner.\99\ Although the Commission did not discuss treatment 
of pending non-USD transfers in the First Proposal, in the Second 
Proposal, or in CFTC Letter No. 19-17, as discussed below, commenters 
raised questions related to the treatment of pending non-USD transfers 
in several

[[Page 7890]]

contexts, which the Commission has focused on in developing this final 
rule.
---------------------------------------------------------------------------

    \99\ See JAC, JAC Regulatory Alert #14-03, May 21, 2014, 
available at http://www.jacfutures.com/jac/jacupdates/2014/jac1403.pdf; JAC, JAC Regulatory Alert #14-06, Nov. 4, 2014, 
available at http://www.jacfutures.com/jac/jacupdates/2014/jac1406.pdf.
---------------------------------------------------------------------------

    In the Second Proposal, the Commission noted that it sought to 
enact a narrow codification, with respect to all FCMs, of the no-action 
conditions of CFTC Letter No. 19-17.\100\ In particular, the Commission 
does not seek to disrupt current, established margining practices at 
FCMs, except where explicitly stated in this final rule. In considering 
the JAC's and FIA's comments with respect to the treatment of pending 
non-USD transfers, the Commission considers, in light of this 
objective, that currently, and for the past ten years, subject to JAC 
guidance, a number of FCMs have treated as received certain pending 
non-USD transfers (i.e., those that are consistent with that guidance) 
for certain purposes.
---------------------------------------------------------------------------

    \100\ Second Proposal, 89 FR at 15317.
---------------------------------------------------------------------------

    As the third condition, the FCM must also have a sufficient basis 
to believe that the transfer was actually initiated for immediate 
settlement (including, as the Commission understands, that the transfer 
was actually initiated on the required one-day basis). The Commission 
notes that, as each condition for the treatment of pending non-USD 
transfers is a separate condition, the Commission expects that in order 
to meet this third condition, an FCM would rely on evidence beyond the 
factors identified in the first condition (i.e., the account's past 
history of satisfying margin calls and the operational and credit risk 
profile of the account owner). Further to this point, the requirement 
that the FCM have a sufficient basis to believe that the transfer was 
actually initiated indicates that an FCM would be expected to identify 
a sufficient, factual basis to support its conclusion that a specific 
transfer was initiated for immediate settlement consistent with the 
banking practices relative to the jurisdiction from which the transfer 
originated. The Commission expects that such sufficient factual support 
would include at minimum an affirmative, written representation from 
the customer that the specific transfer had actually been 
initiated.\101\ The fourth condition requires the FCM to continue aging 
pending non-USD receipts and have the ability to recognize a deposit 
failure immediately when it occurs, both of which are critical to 
complying with the requirements of regulation Sec.  1.17 (among other 
Commission regulations) that require an FCM to be able to accurately 
age outstanding margin calls. In particular, a transfer that does not 
arrive by the day it is expected (consistent with banking practices 
relative to the jurisdiction from which the transfer originated) should 
be considered to have failed. The fifth condition requires consistent 
treatment of pending non-USD transfers in an account: to the extent an 
FCM treats pending non-USD deposits as received for certain purposes, 
it must similarly treat pending non-USD disbursements as disbursed.
---------------------------------------------------------------------------

    \101\ The Commission notes that a pattern wherein funds are not 
timely received despite such representations would undermine the 
satisfaction of the first condition; i.e., the account's past 
history of satisfying margin calls.
---------------------------------------------------------------------------

    The Commission has considered the history of FCMs' treatment of 
pending non-USD transfers under the JAC guidance. Among other 
information, the Commission has considered, with respect to separate 
accounts under the terms of the no-action position, the criteria 
applied to such treatment under the JAC guidance, the potential risks 
and benefits of such treatment for FCMs and customers, and the 
Commission's objectives in codifying the no-action position of CFTC 
Letter No. 19-17. The Commission confirms that it does not intend for 
the final rule to preclude FCMs from considering pending non-USD 
transfers as received for purposes of computing the undermargined 
capital charge pursuant to regulation Sec.  1.17(c)(5), consistent with 
the JAC guidance as described above.\102\ In doing so, however, the 
Commission notes that it expects that DSROs will diligently monitor 
their FCMs to ensure compliance with the criteria for such treatment, 
and will take appropriate supervisory steps where they find failures to 
comply with such criteria, with particular focus on the requirement 
that an FCM have a sufficient basis to believe that a non-USD transfer 
classified as pending was in fact initiated, and the requirement that 
an FCM treat pending non-USD disbursements in a manner consistent with 
its treatment of pending non-USD receipts.
---------------------------------------------------------------------------

    \102\ The Commission additionally confirms that the final rule 
is not intended to preclude FCMs from treating as received pending 
non-USD transfers, subject to the same five conditions listed in JAC 
Regulatory Alerts #14-03 and #14-06 discussed above, for purposes of 
calculating undermargined capital charges for noncustomer and 
omnibus accounts under regulation Sec.  1.17(c)(5)(ix). As the JAC 
noted in its comment letter, the Commission did not propose to amend 
this provision.
---------------------------------------------------------------------------

    Lastly, to respond to the JAC's request for clarification on the 
subject, the Commission confirms that, for purposes of the 
undermargined capital charge for a customer account under regulation 
Sec.  1.17(c)(5), maintenance margin requirements include the risk 
component only. The Commission further confirms that in computing the 
value of the margin deposits of an account, including accounts of 
separate account customers, non-cash collateral should be valued at 
market value less applicable haircuts.

C. Amendments to Regulations Sec. Sec.  1.20, 1.32, 22.2, and 30.7

    As previously stated, protecting market participants from misuses 
of customer assets is one of the fundamental purposes of the CEA.\103\ 
Regulations Sec. Sec.  1.32, 22.2(g), and 30.7(l) are designed in part 
to further this purpose by requiring each FCM carrying accounts for 
futures customers, Cleared Swaps Customers, or 30.7 customers, 
respectively, to perform a daily computation of, and to prepare a daily 
record demonstrating compliance with, the FCM's obligation to hold a 
sufficient amount of funds in designated customer segregated accounts 
to meet the aggregate credit balances of all of the FCM's futures 
customers, Cleared Swaps Customers, and 30.7 customers.\104\ An FCM is 
required to prepare the daily segregation calculations reflecting 
customer account balances as of the close of business each day, and to 
submit the applicable segregation statements electronically to the 
Commission and to the FCM's DSRO by noon the next business day.
---------------------------------------------------------------------------

    \103\ Section 3(b) of the CEA, 7 U.S.C. 5(b); see also, e.g., 
CEA section 4d(a)(2), 7 U.S.C. 6d(a)(2); CEA section 4d(f)(2), 7 
U.S.C. 6d(f)(2); CEA section 4b(2)(A), 7 U.S.C. 6b(2)(A).
    \104\ Each FCM that carries accounts for futures customers, 
Cleared Swaps Customers, and 30.7 customers is required to prepare 
daily statements demonstrating compliance with the applicable 
segregation requirements. For futures customers, the FCM must 
prepare a daily Statement of Segregation Requirements and Funds in 
Segregation for Customers Trading on U.S. Commodity Exchanges (17 
CFR 1.32(a)) (``Futures Segregation Statement''); for Cleared Swaps 
Customers, the FCM must prepare a daily Statement of Cleared Swaps 
Customer Segregation Requirements and Funds in Cleared Swaps 
Customer Accounts under section 4d(f) of the CEA (17 CFR 22.2(g)(1)-
(4)) (``Cleared Swaps Segregation Statement''); and for 30.7 
customers, the FCM must prepare a daily Statement of Secured Amounts 
and Funds Held in Separate Accounts for 30.7 Customers pursuant to 
regulation 30.7 (17 CFR 30.7(l)(1)). The statements listed above are 
part of the Commission's Form 1-FR-FCM, which contains the financial 
reporting templates required to be filed by FCMs.
---------------------------------------------------------------------------

    The Commission proposed to amend regulations Sec. Sec.  1.32, 22.2, 
and 30.7 to provide that an FCM that permits separate accounts pursuant 
to regulation Sec.  1.44 must perform its daily segregation 
calculations, and prepare its daily segregation statements, by treating 
the accounts of separate account customers as accounts of separate 
entities. The amendments add new paragraph (l) to regulation Sec.  
1.32, new paragraph (g)(11) to regulation Sec.  22.2, and new paragraph

[[Page 7891]]

(l)(11) to regulation Sec.  30.7. The purpose of the amendments is to 
establish the manner in which these existing segregation and reporting 
obligations apply to FCMs that permit separate accounts pursuant to 
regulation Sec.  1.44. Regulations Sec. Sec.  1.32, 22.2, and 30.7 
require an FCM to prepare one daily segregation computation, and submit 
one segregation schedule, for the funds of its futures customers, 
Cleared Swaps Customers, and 30.7 customers, respectively. The 
amendments to regulations Sec. Sec.  1.32, 22.2(g), and 30.7(l) provide 
that an FCM that permits separate accounts, in preparing such 
computation and segregation schedule, is required to record each 
separate account as if it were an account of a separate entity, and 
include all separate accounts with other futures accounts, Cleared 
Swaps Customer Accounts, and 30.7 accounts, as applicable, carried by 
the FCM that are not separate accounts.
    In addition, the amendments provide that an FCM, in computing its 
segregation obligations, may offset a net deficit in a particular 
separate account customer's separate account against the current value, 
net of specified haircuts, of any readily marketable securities held by 
the FCM for the separate account customer, provided that the readily 
marketable securities are held as margin collateral for the specific 
separate account that is in deficit. Readily marketable securities held 
for other separate accounts of the separate account customer may not be 
used to offset the separate account that is in deficit.\105\ The 
amendments to regulations Sec. Sec.  1.32, 22.2(g), and 30.7(l) with 
respect to the offsetting of a net deficit in a customer's account by 
the value of readily marketable securities, less applicable haircuts, 
held in the customer's account are consistent with how an FCM currently 
offsets a net deficit in a customer's account that is margined by 
securities. In addition, the amendments are consistent with the 
separate account conditions to the no-action position in CFTC Letter 
No. 19-17.\106\
---------------------------------------------------------------------------

    \105\ I.e., if separate account customer S has separate accounts 
A and B, then readily marketable securities held for separate 
account A could not be used to offset a deficit in separate account 
B, and vice versa.
    \106\ See CFTC Letter No. 19-17 (providing, among other 
conditions for separate account treatment, that ``[e]ach receivable 
from a separate account shall be `grossed up' on the applicable 
segregation, secured or cleared swaps customer statement; thus, an 
FCM shall use its own funds to cover the debit/deficit of each 
separate account.'').
---------------------------------------------------------------------------

    The Commission also proposed to amend regulation Sec.  22.2(f) to 
revise the regulatory description of the stated calculation of the 
total amount of funds that an FCM is required to hold in segregation 
for Cleared Swaps Customers. The amendment: (i) corrects an error 
included in the drafting of the description of the calculation when the 
regulation was originally adopted in 2012; and (ii) aligns the 
regulatory text describing the segregation calculation set forth in 
regulation Sec.  22.2(f) with the calculation performed on the Cleared 
Swaps Segregation Statement that is submitted to the Commission each 
day by FCMs with Cleared Swaps Customers pursuant to regulation Sec.  
22.2(g). The amendment applies across FCMs with Cleared Swaps 
Customers, whether or not such FCMs maintain separate accounts.
    The segregation calculation required by regulation Sec.  22.2(f) is 
intended to ensure that an FCM holds, at all times, a sufficient amount 
of funds in segregation to cover its total financial obligation to all 
Cleared Swaps Customers. Compliance with the segregation requirements 
helps ensure that an FCM is not using the funds of one Cleared Swaps 
Customer to cover a deficit in the Cleared Swaps Customer Account of 
another Cleared Swaps Customer, and further helps ensure that an FCM 
holds sufficient funds in segregation to transfer the Cleared Swaps 
Customer Accounts, including the Cleared Swaps and the Cleared Swaps 
Customer Collateral, to a transferee FCM if the transferor FCM becomes 
insolvent.
    To achieve the regulatory objective noted above, regulation Sec.  
22.2(f)(2) currently requires an FCM to calculate its minimum 
segregation requirement as the sum of the net liquidating equities of 
each Cleared Swaps Customer Account with a positive account balance 
carried by the FCM. The net liquidating equity of a Cleared Swaps 
Customer Account is explicitly calculated as the sum of the market 
value of any funds held in the Cleared Swaps Customer Account of a 
Cleared Swaps Customer (including readily marketable securities), as 
adjusted positively or negatively by, among other things, any 
unrealized gains or losses on open Cleared Swaps positions, the value 
of open long option positions and short option positions, fees charged 
to the account, and authorized withdrawals. To the extent that the 
calculation results in a net liquidating equity that is positive, the 
Cleared Swaps Customer Account has a credit balance.\107\ To the extent 
that the calculation results in a net liquidating equity that is 
negative, the Cleared Swaps Customer Account has a debit balance.\108\ 
Regulation Sec.  22.2(f)(4) provides that an FCM must hold, at all 
times, a sufficient amount of funds in segregation to meet the total 
net liquidating equities of all Cleared Swaps Customer Accounts with 
credit balances, and further provides that the FCM may not offset this 
total by any Cleared Swaps Customer Accounts with debit balances.
---------------------------------------------------------------------------

    \107\ 17 CFR 22.2(f)(3).
    \108\ Id.
---------------------------------------------------------------------------

    With respect to Cleared Swaps Customer Accounts with debit 
balances, regulation Sec.  22.2(f)(5) further requires the FCM to 
include in the total funds required to be held in segregation all debit 
balances to the extent secured by readily marketable securities held 
for the particular Cleared Swaps Customers that have debit balances. 
The required addition of debit balance accounts in regulation Sec.  
22.2(f)(5) was intended to be consistent with the long-standing Futures 
Segregation Statement contained in the Form 1-FR-FCM and the Form 1-FR-
FCM Instructions Manual.\109\ An error, however, was made in drafting 
the description of the details of the segregation calculation in 
current regulation Sec.  22.2(f)(5). Specifically, as noted above, 
regulation Sec.  22.2(f)(5) requires an FCM to include in the total 
segregation requirement any Cleared Swaps Customer Accounts with debit 
balances that are secured by readily marketable securities. However, 
the full value of the readily marketable collateral is part of the 
calculation of the net liquidating equity of the account. Therefore, a 
Cleared Swaps Customer Account with a debit balance would never have 
additional readily marketable securities available to offset a debit 
balance.\110\
---------------------------------------------------------------------------

    \109\ In adopting the final regulation Sec.  22.2(f), the 
Commission stated that proposed regulation Sec.  22.2(f) set forth 
an explicit calculation for the amount of Cleared Swaps Customer 
Collateral that an FCM must maintain in segregation that did not 
materially differ from the calculation of the amount of funds an FCM 
is required to hold in segregation under the Form 1-FR-FCM for 
futures customers. The Commission adopted final regulation Sec.  
22.2(f) as proposed. Protection of Cleared Swaps Customer Contracts 
and Collateral; Conforming Amendments to the Commodity Broker 
Bankruptcy Provisions; Final Rule, 77 FR 6336, at 6352-6353 (Feb. 7, 
2012).
    \110\ For example, if a Cleared Swaps Customer Account was 
comprised of cash of $300, securities of $200, and an unrealized 
loss on open Cleared Swaps of $600, the account would have a net 
equity debit balance of $100 under regulation Sec.  22.2(f). There 
are no additional securities that the FCM may use to secure the $100 
debit balance and, therefore, the FCM is required to increase its 
segregation requirement by $100 to ensure that there are sufficient 
funds in segregation to cover the FCM's obligation to all Cleared 
Swaps Customers with a credit balance.
---------------------------------------------------------------------------

    The segregation calculation required under regulation Sec.  1.32 
for futures accounts, and the Commission's Form 1-FR-FCM and related 
Form 1-FR-

[[Page 7892]]

FCM Instructions Manual, differs from the description as currently 
written in regulation Sec.  22.2(f)(4) and (5) with respect to the 
offsetting of debit balances by readily marketable securities. 
Specifically, an FCM is required to calculate the net equity of each 
futures customer excluding the value of any noncash collateral held in 
the account.\111\ If the calculation results in a debit balance, the 
FCM is permitted to offset the debit balance by the fair market value 
of any readily marketable securities (after application of applicable 
securities haircuts set forth in the regulation).\112\
---------------------------------------------------------------------------

    \111\ The Form 1-FR-FCM Instructions Manual provides that a 
customer account is in deficit when the combination of the account's 
cash ledger balance, unrealized gain or loss on open futures 
contracts, and the value of open option contracts liquidates to an 
amount less than zero. The manual explicitly provides that ``[a]ny 
securities used to margin the account are not included in 
determining a customer's deficit.'' 1-FR-FCM Instructions Manual, p. 
10-2. Accordingly, an FCM would exclude the value of any readily 
marketable securities from the calculation of the customer's account 
balance. The 1-FR-FCM Instructions Manual is available on the 
Commission's website at: www.cftc.gov/sites/default/files/idc/groups/public/@iointermediaries/documents/file/1fr-fcminstructions.pdf.
    \112\ 17 CFR 1.32(b). Applying the calculation in regulation 
Sec.  1.32 to Cleared Swaps, if a Cleared Swaps Customer Account was 
comprised of cash of $300, securities of $200, and an unrealized 
loss on open Cleared Swaps of $600, the account would have a net 
equity debit balance of $300, as the value of the securities is not 
included in the calculation ($300 cash less $600 in unrealized 
losses, results in a $300 debit balance). The FCM may offset the 
$300 debit balance by $170, which represents the value of the 
readily marketable securities held in the account as collateral 
($200 fair market value of the securities, less a $30 haircut). The 
FCM is then required to include $130 in its segregation requirement, 
which represents the amount of the unsecured debit balance remaining 
in the customer's account (i.e., $300 debit balance, less $170 value 
of the securities after haircuts).
---------------------------------------------------------------------------

    As noted above, the amendments to regulation Sec.  22.2(f)(4) and 
(5) are intended to correct the description of the segregation 
calculation and to make it consistent with: (i) how FCMs calculate 
their total Cleared Swaps segregation obligations under regulation 
Sec.  22.2(g), (ii) how FCMs report their total segregation 
requirements on the Cleared Swaps Segregation Statement, and (iii) the 
segregation calculation requirements for futures accounts under 
regulation Sec.  1.32. Thus, the amendments are not expected to have 
any effect on FCMs and their current practices.
    In addition, the Commission proposed to amend regulations 
Sec. Sec.  1.20(i) and 30.7(f), which require an FCM carrying futures 
accounts and 30.7 accounts, respectively, to calculate its total 
segregation requirements in a manner that is consistent with current 
regulation Sec.  22.2(f). As with the amendment to regulation Sec.  
22.2(f), the amendments to regulations Sec. Sec.  1.20(i) and 30.7(f) 
apply across FCMs that maintain futures customer accounts or 30.7 
customer accounts, respectively, whether or not such FCMs maintain 
separate accounts. The Commission adopted current regulations 
Sec. Sec.  1.20(i) and 30.7(f) in 2013. The final regulations, however, 
did not include the provision set forth in regulation Sec.  22.2(f)(5) 
requiring an FCM to include any secured debit balances in its 
segregation requirement. This omission was unintentional, as the 
Commission expressed its intent to ``mirror'' the requirements of 
regulation Sec.  22.2(f) in regulation Sec.  1.20(i) (and effectively 
regulation Sec.  30.7(f)).\113\
---------------------------------------------------------------------------

    \113\ Enhancing Protections Afforded Customers and Customer 
Funds Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506, 68543 (Nov. 14, 2013) (discussing the 
Commission's intent to adopt regulation Sec.  1.20(i) consistent 
with the corresponding requirements in regulation Sec.  22.2(f)); 
id. at 68576 (discussing the Commission's intent for the daily 
segregation calculation for 30.7 accounts to be consistent with the 
requirements for the daily segregation calculations for futures 
customer funds in regulation Sec.  1.32).
---------------------------------------------------------------------------

    To address the omission, the Commission proposed to amend 
regulations Sec. Sec.  1.20(i) and 30.7(f) to reflect the requirement 
that an FCM include any unsecured customer debit balances, calculated 
consistent with the amendments to regulation Sec.  22.2(f)(4) and (5) 
that are discussed above, in the calculation of its futures and foreign 
futures and foreign options segregation requirement. The amendments to 
regulations Sec. Sec.  1.20(i) and 30.7(f) accurately describe and 
reflect the existing segregation calculations for futures, foreign 
futures, and Cleared Swaps as originally intended. The amendments to 
regulations Sec. Sec.  1.20(i) and 30.7(f) are not expected to have any 
impact on FCMs as the firms currently calculate their segregation 
requirements by including customer unsecured debit balances.
    The Commission did not receive any comments with respect to the 
proposed amendments to regulations Sec. Sec.  1.20, 1.32, 22.2, and 
30.7. Accordingly, the Commission is adopting the amendments to 
regulations Sec. Sec.  1.20, 1.32, 22.2, and 30.7 as proposed.\114\
---------------------------------------------------------------------------

    \114\ The Commission is making technical changes in the final 
amendments with respect to regulations Sec. Sec.  1.20(i)(5)(ii), 
1.32(b), 22.2(f)(5)(ii), and 30.7(f)(2)(v)(B) to correct the 
citation to the SEC regulation defining ``ready market'' (Sec.  
240.15c3-1(c)(11) rather than Sec.  241.15c3-1(c)(11)).
---------------------------------------------------------------------------

D. Regulation Sec.  1.44(a)

    The Commission structured proposed regulation Sec.  1.44 so that 
FCMs would be required to avoid returning margin to customers when 
doing so would create or exacerbate a margin deficiency in the 
customer's account; however, the proposed regulation then would allow 
FCMs to provide for separate account treatment within the Commission's 
broader regulatory framework for FCMs. As such, regulation Sec.  1.44, 
as proposed, contains certain terms that are designed to operate in a 
specific manner with respect to regulation Sec.  1.44, but that do not 
apply, or do not apply in the same way, with respect to other of the 
Commission's FCM regulations. The Commission therefore proposed to add 
new regulation Sec.  1.44(a) to define certain terms only for purposes 
of regulation Sec.  1.44. The Commission believes that regulation Sec.  
1.44(a) is reasonably necessary to accomplishing the goals of 
protecting customer funds and mitigating systemic risk because it 
defines key terms in requirements that FCMs will need to apply to 
ensure margin adequacy, and in requirements that FCMs will need to 
apply when treating customer accounts separately for purposes of margin 
adequacy.
    The Commission proposed to define ``account'' for purposes of 
proposed regulation Sec.  1.44 as meaning a futures account, a Cleared 
Swaps Customer Account (both of which are defined in regulation Sec.  
1.3, which definitions apply broadly to all CFTC regulations), or a 
Sec.  30.7 account (as defined in regulation Sec.  30.1 \115\). The 
Commission proposed this definition to implement the proposed Margin 
Adequacy Requirement, including in the context of separate account 
treatment, with respect to accounts of all three types for all FCMs, 
consistent with comments received in response to the First Proposal.
---------------------------------------------------------------------------

    \115\ 17 CFR 30.1.
---------------------------------------------------------------------------

    ICE's comment letter indirectly addressed the definition of 
``account'' in proposed regulation Sec.  1.44(a). ICE voiced support 
for the Commission's proposal to permit FCMs to provide separate 
account treatment for customers with regulation 30.7 accounts for 
futures and options transactions traded on exchanges outside the United 
States, but stated it does not believe it is necessary for the 
Commission to distinguish regulation 30.7 accounts from futures and 
Cleared Swap Customer accounts in connection with separate account 
treatment.\116\ ICE also noted that there are references in proposed 
regulation Sec.  1.44 to DCMs that should also include foreign 
exchanges

[[Page 7893]]

in connection with regulation 30.7 accounts.\117\
---------------------------------------------------------------------------

    \116\ ICE Comment Letter.
    \117\ Including proposed regulation Sec.  1.44(b)(2) and (f)(7). 
Id.
---------------------------------------------------------------------------

    The Commission proposed to codify the Second Proposal principally 
in part 1 (as opposed to in part 39) in light of comments received in 
response to the First Proposal. This is designed to ensure that the 
Margin Adequacy Requirement and requirements for separate account 
treatment will apply directly to all FCMs and all FCM customers, 
including futures customers, Cleared Swaps Customers, and 30.7 account 
customers. The Commission is distinguishing these accounts in 
regulation Sec.  1.44 to ensure that the regulation encompasses each 
class of FCM customer.
    The Commission agrees that certain references to DCMs that are 
included in regulation Sec.  1.44 should be clarified to include 
explicitly foreign exchanges in connection with 30.7 accounts, as 
separate account customers may have foreign futures and foreign options 
positions traded on such exchanges. Accordingly, as noted further below 
in connection with regulation Sec.  1.44(b)(2) and 1.44(f)(7), in 
adopting these provisions, the Commission is modifying them to refer to 
``any designated contract market or other board of trade,'' in order to 
encompass such foreign exchanges. The Commission did not receive any 
other comments related to the definition of ``account'' in proposed 
regulation Sec.  1.44(a) and is adopting that definition as proposed.
    The Commission also proposed in proposed regulation Sec.  1.44(a) 
to further define ``business day'' as having the same meaning as set 
forth in regulation Sec.  1.3, but with the clarification that 
``holiday'' refers to Federal holidays as established by 5 U.S.C. 6103. 
The Commission also proposed in proposed regulation Sec.  1.44(a) to 
define ``holiday'' as meaning Federal holidays as established by 5 
U.S.C. 6103.
    In Question 4 of the Second Proposal, the Commission sought 
commenters' views on how the proposed definition of ``business day'' 
should address days when securities and other markets are closed. 
(E.g., whether the Commission should address in the definition days 
when such other markets are open or create an exception for days when 
such markets are closed on a prescheduled basis.) The Commission sought 
information on potential liquidity challenges or other risks that could 
result from such an exception, as well as information on how FCMs and 
customers currently address days when securities and other markets are 
closed.
    In its comment letter, FIA noted that neither the proposed 
definitions of ``business day'' nor ``holiday'' in proposed regulation 
Sec.  1.44(a) address days on which banks are open but futures and 
securities markets are closed.\118\ FIA stated that, on such days, 
transfers of non-cash collateral cannot settle, and separate account 
customers settling initial margin calls with such collateral will, 
under the proposed regulation, be deemed to have failed to meet a 
margin call.\119\ In FIA's view, a separate account customer should not 
be deemed to have failed to settle a margin call because securities 
markets are closed.\120\ FIA suggested the Commission revise the 
definition of ``holiday'' in proposed regulation Sec.  1.44(a) to 
provide that holidays include ``any business day that is not a 
securities settlement day in the United States.'' \121\ No other 
commenters responded specifically to this question.
---------------------------------------------------------------------------

    \118\ FIA Comment Letter.
    \119\ Id.
    \120\ Id.
    \121\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges that, on days on which banks are open 
but futures and securities markets are closed, customers, including 
separate account customers, may be unable to use non-cash collateral to 
aid in their meeting margin calls. However, FCMs and customers may 
arrange for a variety of methods to settle margin calls, including bank 
transfers. The Commission believes that, given the availability of such 
funding mechanisms on days when banks are open but securities and other 
markets are closed, introducing an exception that would allow for 
additional delays in the payment of margin on such days may introduce 
unnecessary additional risk of undermargining.
    The Commission did not receive any other comments related to the 
definitions of ``business day'' or ``holiday'' in proposed regulation 
Sec.  1.44(a) and is adopting those definitions as proposed.
    Relatedly, the Commission proposed to define ``one business day 
margin call'' as a margin call that is issued and met in accordance 
with the requirements of proposed regulation Sec.  1.44(f). The 
Commission did not receive any comments with respect to this proposed 
definition, but the Commission received comments related to the 
substantive requirements defining a one business day margin call in 
proposed regulation Sec.  1.44(f). The Commission addresses those 
comments below in connection with that provision. The Commission is 
adopting the definition of ``one business day margin call'' in 
regulation Sec.  1.44(a) as proposed.
    Under regulation Sec.  1.44, an FCM may provide disbursements on a 
separate account basis only when it, and its customer, are operating 
within the ``ordinary course of business,'' as that term is defined in 
the proposed regulation. The Commission proposed to define ``ordinary 
course of business'' as meaning the standard day-to-day operation of 
the FCM's business relationship with its separate account customer, a 
condition where there are no unusual circumstances that might indicate 
either a materially increased level of risk that the separate account 
customer may fail promptly to perform its financial obligations to the 
FCM, or a decrease in the FCM's financial resilience. The Commission 
proposed regulation Sec.  1.44(e) to set forth the circumstances that 
would be inconsistent with the ordinary course of business, and the 
occurrence of which would require a cessation of disbursements on a 
separate account basis.
    SIFMA-AMG contended that the definition of ``ordinary course of 
business'' in proposed regulation Sec.  1.44(a) poses certain 
regulatory compliance challenges.\122\ Specifically, SIFMA-AMG asserted 
that the proposed definition does not sufficiently clarify the meaning 
of ``standard day-to-day operation.'' \123\ SIFMA-AMG argued that FCMs 
and DCOs would be required to continuously monitor for a series of 
events, some of which would not appear to rise to the level of 
significance to suggest that they are not within the ordinary course of 
business, such as the failure of a customer to make a single margin 
payment.\124\ SIFMA-AMG urged the Commission to better define 
``ordinary course of business'' and consider an approach that presumes 
operation in the ordinary course of business, with clearly delineated 
events such as default or bankruptcy as the only instances that would 
be considered outside the ordinary course of business.\125\
---------------------------------------------------------------------------

    \122\ SIFMA-AMG Comment Letter.
    \123\ Id.
    \124\ Id.
    \125\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG further contended that the Commission's proposed 
definition of ``ordinary course of business'' fails to recognize that 
FCMs must, under Commission regulations, manage risk effectively, and 
that FCMs also have

[[Page 7894]]

commercial incentives to do so.\126\ SIFMA-AMG argued the proposed 
definition of ``ordinary course of business'' is inconsistent with an 
FCM's obligations, noting that an FCM's obligations under its Risk 
Management Program (RMP) are intentionally fluid and are designed to 
allow FCMs to tailor their RMP to the specific activities of the FCM 
and its customers.\127\
---------------------------------------------------------------------------

    \126\ Id.
    \127\ Id.
---------------------------------------------------------------------------

    In adopting regulation Sec.  1.44(a), the Commission has determined 
to modify the definition of ``ordinary course of business'' in 
consideration of SIFMA-AMG's comment. As an initial matter, the 
Commission notes that under regulation Sec.  1.44 as proposed, events 
inconsistent with the ordinary course of business are generally those 
that the Commission would expect an FCM to become aware of through its 
existing compliance function and procedures (e.g., with respect to 
cessation of disbursements on a separate account basis for a separate 
account customer, a failure to deposit margin timely; the occurrence 
and declaration by the FCM of an event of default as defined in the 
account documentation executed between the FCM and the separate account 
customer; a good faith determination by the FCM's chief compliance 
officer (CCO), one of its senior risk managers, or other senior 
manager, following such FCM's own internal escalation procedures, that 
the separate account customer is in financial distress; or the 
insolvency or bankruptcy of the separate account customer or a parent 
company of the customer; or, with respect to cessation of disbursements 
on a separate account basis for any of an FCM's customers, a 
determination in good faith by an FCM's CCO, senior risk managers, or 
other senior management, that the FCM itself is under financial or 
other distress; or the insolvency or bankruptcy of the FCM or a parent 
company of the FCM) and notifications or directives from third parties.
    The Commission notes that the list of events inconsistent with the 
ordinary course of business proposed as part of regulation Sec.  
1.44(e) is substantially the same as the list of events discussed in 
CFTC Letter No. 19-17, which has been relied on by DCOs (and by 
extension their clearing FCMs) successfully since 2019. As SIFMA-AMG 
noted in its comment letter, FCMs have some discretion in managing risk 
with respect to their (and their customers') activities, and FCMs 
appear to have done so effectively under the conditions of CFTC Letter 
No.19-17 for over five years. The Commission expects FCMs will under 
regulation Sec.  1.44 similarly exercise risk management discretion to 
identify when certain non-ordinary course of business events have 
occurred.\128\
---------------------------------------------------------------------------

    \128\ See, e.g., new regulation Sec.  1.44(e)(1)(iii) (``A good 
faith determination by the futures commission merchant's chief 
compliance officer, one of its senior risk managers, or other senior 
manager, following such futures commission merchant's own internal 
escalation procedures, that the separate account customer is in 
financial distress, or there is significant and bona fide risk that 
the separate account customer will be unable promptly to perform its 
financial obligations to the futures commission merchant, whether 
due to operational reasons or otherwise.'').
---------------------------------------------------------------------------

    Additionally, the Commission notes that although failure to make a 
single margin payment may not in itself represent a departure from the 
ordinary course of business (hence the Commission's proposal, 
consistent with the no-action conditions of CFTC Letter No. 19-17, to 
include an exception to non-ordinary course of business conditions for 
failure to pay margin due to certain unusual administrative errors or 
operational constraints), as a general matter, ensuring timely payment 
of margin is critical to the Commission's goal of providing for 
separate account treatment in a manner that ensures the safety of 
customer funds and effective risk mitigation.
    Although the Commission believes default or bankruptcy of an FCM or 
customer are not the only events that could represent a departure from 
the ordinary course of business with respect to separate account 
margining, the Commission agrees that the standard for what constitutes 
the ordinary course of business can be more clearly defined.
    Under the proposal, although the occurrence of any of the events 
described in regulation Sec.  1.44(e) would be inconsistent with the 
``ordinary course of business,'' it was also possible that some other, 
unspecified, events might also be inconsistent with the ``ordinary 
course of business.'' Accordingly, the Commission has modified 
regulation Sec.  1.44(a) to close the set of such events by providing 
that the ``ordinary course of business'' means the operation of the 
FCM's business relationship with its separate account customer absent 
the occurrence of one or more of the events specified in regulation 
Sec.  1.44(e). In such manner, the ordinary course of business 
continues, provided none of the events delineated in regulation Sec.  
1.44(e) have occurred.
    The Commission proposed to define ``separate account'' as meaning 
any one of multiple accounts of the same separate account customer that 
are carried by the same FCM. The Commission did not receive any 
comments with respect to this proposed definition and is adopting it as 
proposed.
    The Commission proposed to define ``separate account customer'' as 
meaning a customer for which the FCM has elected to engage in separate 
account treatment. The Commission also did not receive any comments 
with respect to this proposed definition and is adopting it as 
proposed.
    Lastly, the Commission proposed to define ``undermargined amount'' 
for an account as meaning the amount, if any, by which the customer 
margin requirements with respect to all products held in that account, 
exceed the net liquidating value plus the margin deposits currently 
remaining in that account.\129\ The proposed definition noted that 
``[f]or purposes of this definition, `margin requirements' shall mean 
the level of maintenance margin or performance bond (including, as 
appropriate, the equity component or premium for long or short option 
positions) required for the positions in the account by the applicable 
exchanges or clearing organizations.'' \130\ This clarification (which 
was drawn from the definition of risk margin in regulation Sec.  
1.17(b)(8)) is in recognition of the difference between exchange (or 
clearing organization) requirements for ``initial margin'' and 
``maintenance margin.'' However, here, unlike risk margin, the 
Commission included the equity component or premium for long or short 
option positions, as those are part of the total required level of 
margin. ``Initial margin'' is the amount of margin (otherwise known as 
``performance bond'' \131\ in this context) required to establish a 
position. Some (though not all) contract markets and clearing houses 
establish ``maintenance margin'' requirements that are less than the 
corresponding initial margin

[[Page 7895]]

requirement. Where, due to adverse market movements, the amount of 
margin on deposit is less than the initial margin requirement, but 
greater than or equal to maintenance margin, the FCM is not required to 
(though it may) call additional margin from the customer. Once the 
amount of margin on deposit is less than the maintenance margin 
required, the FCM must call the customer for enough margin to meet the 
initial margin level.
---------------------------------------------------------------------------

    \129\ The definition of ``undermargined amount'' in regulation 
Sec.  1.44(a) is different from, and simpler than, the definitions 
of ``undermargined amount'' for the purpose of residual interest 
calculations in regulations Sec. Sec.  1.22(c)(1), 22.2(f)(6)(i), 
and 30.7(f)(1)(ii). The calculations in the latter cases are 
required to take into account information at the close of business 
on day T-1 that will be used to calculate a residual interest 
requirement on day T, as well as payments that may be received on 
day T, and the elimination of double counting of debit balances.
    \130\ The definition of ``undermargined amount'' in regulation 
Sec.  1.44(a) further provides that, with respect to positions for 
which maintenance margin is not specified, ``margin requirements'' 
shall refer to the initial margin required for such positions.
    \131\ ``Performance bond'' secures the performance by a customer 
to meet its variation margin payment obligations to its FCM (or the 
performance of variation margin payment obligations of an FCM to the 
clearinghouse, or to an intermediary upstream FCM).
---------------------------------------------------------------------------

    The Commission used the term ``undermargined amount'' in connection 
with proposed regulation Sec.  1.44(f) in defining the requirements for 
making and meeting a one business day margin call, as well as in 
proposed regulation Sec.  1.44(g) in setting legally segregated, 
operationally commingled (LSOC) compliance calculations for separate 
accounts.
    In its comment letter, the JAC contended that the Commission's 
proposed definition of ``undermargined amount'' in proposed regulation 
Sec.  1.44(a) is inconsistent with industry practice and methodologies 
for calculating the undermargined amount provided in the JAC Margins 
Handbook.\132\ Specifically, proposed regulation Sec.  1.44(a) defines 
``undermargined amount'' for an account as, ``the amount, if any, by 
which the customer margin requirements with respect to all products 
held in that account exceeds the net liquidating value plus the margin 
deposits currently remaining in that account.'' Further, proposed 
regulation Sec.  1.44(a) provides that, for purposes of such 
definition, ``margin requirements'' means the ``level of maintenance 
margin or performance bond (including, as appropriate, the equity 
component or premium for long or short options positions) required for 
the positions in the account by the applicable exchanges or clearing 
organizations.''
---------------------------------------------------------------------------

    \132\ JAC Comment Letter.
---------------------------------------------------------------------------

    As the JAC explained, its Margins Handbook recognizes two methods 
for determining the undermargined amount: the Net Liquidating Value 
Method \133\ and the Total Equity Method.
---------------------------------------------------------------------------

    \133\ Also referred to as the ``Risk Method'' or ``Pure SPAN 
Method.''
---------------------------------------------------------------------------

    For purposes of the Net Liquidating Value Method, the JAC Margins 
Handbook defines the undermargined amount as: ``The amount by which 
margin equity is less than the maintenance margin requirement.'' \134\ 
The JAC noted that, for purposes of this method, its Margins Handbook 
defines margin equity as ``an account's net liquidating equity plus the 
collateral value of acceptable margin deposits'' \135\ and defines the 
maintenance margin requirement as: ``The minimum amount of margin 
equity required to be maintained in an account.'' \136\
---------------------------------------------------------------------------

    \134\ JAC Comment Letter (citing JAC Margins Handbook, Chapter 
1, Definition of ``Undermargined Amount'').
    \135\ Id. (citing JAC Margins Handbook, Chapter 1, Definition of 
``Margin Equity'').
    \136\ Id. (citing JAC Margins Handbook, Chapter 1, Definition of 
``Maintenance Margin Requirement (MMR)''). The definition further 
notes that the maintenance margin requirement is the actual risk 
margin calculated by the SPAN[supreg] margin system. Id.
---------------------------------------------------------------------------

    Under the alternative Total Equity Method, the undermargined amount 
is the amount by which total equity plus the collateral value of 
acceptable margin deposits is less than the risk maintenance margin 
requirement adjusted for the option value.\137\
---------------------------------------------------------------------------

    \137\ Id. (citing JAC Margins Handbook, Chapter 4, ``Margins 
Calls''). The JAC noted that net long option value reduces the risk 
margin requirement while net short option value increases it.
---------------------------------------------------------------------------

    The JAC argued that, as proposed, the definition of ``undermargined 
amount'' in proposed regulation Sec.  1.44(a) would require that, for 
all customer accounts (not just the separate accounts of separate 
account customers), an FCM include the equity component of long and 
short options in both the margin equity and the margin 
requirement.\138\ However, the JAC asserted, under the JAC Margins 
Handbook, exchange rules, and industry practice, the equity component 
of long and short options is included only in either the margin equity 
(under the Net Liquidating Value Method) or margin requirement (under 
the Total Equity Method).\139\ The JAC further asserted that currently, 
option premium is already included in margin equity and is not a 
component of the margin requirement.\140\
---------------------------------------------------------------------------

    \138\ Id.
    \139\ Id.
    \140\ Id.
---------------------------------------------------------------------------

    The JAC noted that, depending on the composition of an account, the 
Second Proposal's definition of ``undermargined amount'' may result in 
different undermargined amounts than the Net Liquidating Value Method 
or Total Equity Method as those methods are applied today. The JAC 
requested the Commission provide the specific calculation for inclusion 
of the equity component of premium for long or short options positions 
and provide further clarification as to the rationale for the apparent 
proposed change in methodology.
    FIA similarly commented that, although the proposed definition of 
``undermargined amount'' in proposed regulation Sec.  1.44(a) appeared 
to derive from the JAC Margins Handbook definition of the same term, 
the definition as proposed may give the impression that the Commission 
intends to codify a preference for the Net Liquidating Value Method to 
the exclusion of the Total Equity Method alternative in the JAC Margins 
Handbook. FIA recommended that the Commission amend the proposed 
definition of ``undermargined amount'' in proposed regulation Sec.  
1.44(a) to provide that ``undermargined amount'' for an account means 
the account's margin deficiency, if any, computed in accordance with 
applicable guidance of the JAC promulgated under regulation Sec.  
1.52(d).
    The Commission's proposed definition of ``undermargined amount'' is 
based not on the Net Liquidating Value/Risk/Pure SPAN Method as set 
forth in the JAC Margins Handbook but rather on the Margin Adequacy 
Requirement in regulation Sec.  39.13(g)(8)(iii), which provides that a 
DCO shall require its clearing members to ensure their customers do not 
withdraw funds from their accounts with such clearing members unless 
the net liquidating value plus the margin deposits remaining in a 
customer's account after such withdrawal are sufficient to meet the 
customer initial margin requirements with respect to all products and 
swap portfolios held in such customer's account which are cleared by 
the DCO. In that respect, it is not intended to evince a requirement to 
determine the undermargined amount of an account specifically using the 
Net Liquidating Value Method to the exclusion of the Total Equity 
Method as set forth in the JAC Margins Handbook. In proposing the 
definition of ``undermargined amount,'' the Commission sought to make 
clear that an FCM's determination of the undermargined amount for a 
separate account should account for the equity component or premium for 
long or short options positions in computing the required level of 
margin for an account. However, the Commission's intent was not to 
change FCMs' current practice with respect to the way in which they 
determine the undermargined amount for an account.
    In its comment letter, the JAC noted that FCMs determine the 
undermargined amount using either the Net Liquidating Value method or 
the alternative Total Equity method set forth in the JAC Margins 
Handbook, both of which incorporate the equity component for long or 
short option positions (the former as part of margin equity and the 
latter as part of margin requirements), and that margin

[[Page 7896]]

premium is already included as part of margin equity under either 
method.
    Having considered the JAC's and FIA's comments, relevant provisions 
of the JAC Margins Handbook, and the Commission's objectives in 
defining ``undermargined amount,'' the Commission is persuaded that 
utilizing either the Net Liquidating Value method or the alternative 
Total Equity method to determine an account's undermargined amount 
generally will produce an identical result (with the exception, as the 
JAC notes, of certain instances involving long options positions, in 
which the Total Equity method will produce a greater margin deficiency, 
resulting in a greater margin requirement, which would further serve to 
mitigate risk).
    Accordingly, in adopting the definition of ``undermargined amount'' 
in regulation Sec.  1.44(a), the Commission is removing the proposed 
language stating that, for purposes of the definition of 
``undermargined amount,'' the term ``margin requirements'' shall 
``include[ ], as appropriate, the equity component or premium for long 
or short option positions,'' based on the Commission's understanding, 
in light of comments received, that under current practice, the equity 
component is included as a matter of course in margin equity or margin 
requirements, and the option premium is factored into margin 
equity.\141\ The Commission believes the resulting definition is 
consistent with the Net Liquidating Value method for determining an 
undermargined amount, as set forth in the JAC's Margins Handbook. 
Notwithstanding that definition, the Commission also believes an FCM's 
use of the Total Equity method, as set forth in the JAC's Margins 
Handbook, would also be consistent with that definition.
---------------------------------------------------------------------------

    \141\ The Commission is also making a technical (grammatical) 
change to the definition of ``undermargined amount'' in regulation 
Sec.  1.44(a) to change ``by which the customer margin requirements 
. . . exceeds the net liquidating value . . .'' to ``by which the 
customer margin requirements . . . exceed the net liquidating value 
. . . .''
---------------------------------------------------------------------------

    In Question 5 of the Second Proposal, the Commission invited 
commenters to provide feedback with respect to whether the definition 
of ``undermargined amount'' should apply haircuts to the value of 
customer collateral held by an FCM and, if so, whether the amount of 
such haircuts should be based on SEC rule 240.15c3-1 and Commission 
regulation Sec.  1.17(c)(5)(ii), or on some other basis. A haircut is a 
reduction in the allowable value of an asset to account for market 
risk. In its comment letter, the JAC stated that non-cash collateral on 
deposit in a customer's account should be valued at market value less 
applicable SEC and CFTC haircuts for determining the margin value of 
collateral. No other commenters responded specifically to this 
question. The Commission has determined, in adopting the definition of 
``undermargined amount'' in regulation Sec.  1.44(a), to include in 
that definition a requirement that collateral haircuts based on Rule 
15c3-1 of the Securities and Exchange Commission (17 CFR 240.15c3-1) 
and regulation Sec.  1.17(c)(5) be applied to the value of the margin 
deposits held by an FCM to reflect potential market risk associated 
with the value of the collateral if and when such collateral was 
liquidated.
    Accordingly, the Commission is adopting regulation Sec.  1.44(a) as 
proposed, subject to the modifications discussed above with respect to 
the definitions of ``ordinary course of business'' and ``undermargined 
amount.''

E. Proposed Regulation Sec.  1.44(b)

    The Commission proposed regulation Sec.  1.44(b) to require all 
FCMs, whether clearing or non-clearing, to comply with the same Margin 
Adequacy Requirement that DCOs are required to apply to their clearing 
FCMs pursuant to regulation Sec.  39.13(g)(8)(iii). As proposed, 
regulation Sec.  1.44(b) provides that an FCM shall ensure that a 
customer does not withdraw funds from its accounts with such FCM unless 
the net liquidating value (calculated as of the close of business on 
the previous business day) plus the margin deposits remaining in the 
customer's account after such withdrawal are sufficient to meet the 
customer initial margin requirements with respect to all products held 
in such customer's account, except as provided in proposed regulation 
Sec.  1.44(c), which allows an FCM to permit disbursements on a 
separate account basis under ordinary course of business 
conditions.\142\
---------------------------------------------------------------------------

    \142\ Consistent with the existing Margins Handbook, the Margin 
Adequacy Requirement is based on initial margin requirements rather 
than any lower maintenance margin requirement. See JAC Margins 
Handbook at 10-1 (``Margin Funds Available for Disbursement = Net 
Liquidating Value + Margin Deposits - Initial Margin Requirement > 
0''); see also supra n. 13 and accompanying text.
---------------------------------------------------------------------------

    In proposing regulation Sec.  1.44(b), the Commission sought to 
articulate a standard for the calculation of margin adequacy that is 
consistent with the Commission's requirements for calculation of 
undermargined amounts for purposes of an FCM's residual interest 
calculations.\143\ Regulations Sec. Sec.  1.22(c)(2), 22.2(f)(6)(ii), 
and 30.7(f)(ii)(B) require each FCM to compute such undermargined 
amounts based on the information available to the FCM as of the close 
of each business day for futures customer accounts, Cleared Swaps 
Customer Accounts, and 30.7 accounts, respectively.
---------------------------------------------------------------------------

    \143\ Id.
---------------------------------------------------------------------------

    In order to address circumstances in which the previous day (for 
purposes of regulation Sec.  1.44(b)(1)'s margin adequacy calculation 
requirements), excluding Saturdays and Sundays, is a holiday (as 
defined in regulation Sec.  1.44(a)) on which markets, but not banks, 
may be open, proposed regulation Sec.  1.44(b)(2) further provides 
that, in such circumstances, the margin adequacy calculation shall 
instead be made using the net liquidating value of an account as of the 
close of business on such holiday where (i) any DCM on which the FCM 
trades is open for trading; and (ii) an account of any of the FCM's 
customers includes positions traded on such a market.\144\
---------------------------------------------------------------------------

    \144\ Proposed regulation Sec.  1.44(b)(2), and proposed 
regulation Sec.  1.44(f)(7), discussed below, are consistent with 
JAC Regulatory Alert #22-02, which provides that an FCM must issue 
margin calls to customers on holidays where futures markets are open 
and U.S. banks are closed. The margin calls are calculated based on 
information as of the close of the previous business day (i.e., the 
business day prior to the holiday) and the FCM does not count the 
holiday for purposes of aging the margin call. JAC Regulatory Alert 
#22-01, Mar. 30, 2022, available at www.jacfutures.com.
---------------------------------------------------------------------------

    The Commission notes that proposed regulation Sec.  1.44(b)'s 
requirements related to the timing of the margin adequacy calculation 
required by the same section are intended to represent a minimum 
standard. The proposed requirements are not intended to prevent an FCM 
from exercising its judgment in connection with good risk management 
practice to prevent the disbursement of customer funds based on 
intervening intraday market movements resulting in losses to a customer 
account between the calculation benchmark set forth in proposed 
regulation Sec.  1.44(b) and the time at which a customer requests to 
withdraw funds. Ensuring that customers do not withdraw funds from 
their accounts at FCMs if such withdrawal would create or exacerbate an 
initial margin shortfall is reasonably necessary from a risk management 
perspective to reduce the likelihood and magnitude of the risk that the 
FCM must cover losses due to a default by the customer on obligations 
that exceed the margin held by the FCM. Similarly, because customer 
funds are held by an FCM in omnibus accounts, this

[[Page 7897]]

prohibition will reduce the likelihood and magnitude of the risk that 
the FCM will effectively use the margin of other customers to ``margin 
or guarantee the trades or contracts, or to secure or extend the credit 
of'' a customer that was permitted to withdraw margin in a manner that 
created or exacerbated an undermargined condition,\145\ whether the 
duty to prevent such withdrawals falls on DCOs acting on their clearing 
member FCMs (per regulation Sec.  39.13(g)(8)(iii)), or directly on 
FCMs.
---------------------------------------------------------------------------

    \145\ See CEA Sec.  4d(a)(2), 7 U.S.C. 6d(a)(2) (Providing that 
an FCM may not use the money or property of one customer ``to margin 
or guarantee the trades or contracts, or to secure or extend the 
credit, of any customer or person other than the one for whom the 
same are held.'').
---------------------------------------------------------------------------

    Because regulation Sec.  39.13(g)(8)(iii) applies only to DCOs 
(which in turn can only apply regulation Sec.  39.13(g)(8)(iii)'s 
Margin Adequacy Requirement to their clearing member FCMs), and given 
the strong trend of the comments in favor of addressing these issues in 
a manner that is uniform across all types of FCMs directly in part 1 
rather than indirectly through part 39, the Commission continues to 
view it as reasonably necessary to extend the requirement to prevent 
such undermargining scenarios to all FCMs.
    Accordingly, it is the Commission's judgment that regulation Sec.  
1.44(b), which will apply a Margin Adequacy Requirement similar to that 
of regulation Sec.  39.13(g)(8)(iii) directly to FCMs, both clearing 
and non-clearing, is reasonably necessary to protect customer funds and 
mitigate systemic risk, thus effectuating CEA section 4d(a)(2), 
4d(f)(2), and 4(b)(2)(A) \146\ and accomplishing the purposes of 
``avoidance of systemic risk'' and ``protecting all market participants 
from . . . misuses of customer assets.'' \147\
---------------------------------------------------------------------------

    \146\ 7 U.S.C. 6d(a)(2), 6d(f)(2), and 6(b)(2)(A).
    \147\ CEA Sec.  3(b), 7 U.S.C. 5(b). See, as discussed above, 
section 8a(5) of the CEA, 7 U.S.C. 12a(5), authorizing the 
Commission to make and promulgate such rules and regulation as in 
the Commission's judgment are reasonably necessary to effectuate any 
of the provisions, or to accomplish any of the purposes, of the CEA.
---------------------------------------------------------------------------

    The JAC discussed proposed regulation Sec.  1.44(b) in several 
respects in its comment letter. First, the JAC asserted that proposed 
regulation Sec.  1.44(b)(1) is unclear; specifically, because it is 
unclear how the Commission is defining customer initial margin 
requirements in light of its definition of the term ``margin 
requirements,'' within the proposed definition of the term 
``undermargined amount'' in proposed regulation Sec.  1.44(a), as 
including ``the equity component or premium for long or short option 
positions.'' \148\ As the JAC noted, proposed regulation Sec.  
1.44(b)(1) would affect all customers, not just customers whose 
accounts receive separate account treatment.\149\
---------------------------------------------------------------------------

    \148\ JAC Comment Letter. The JAC reiterated additional points 
in support of this contention that the Commission discusses above in 
connection with the definition of ``undermargined amount'' in 
regulation Sec.  1.44(a).
    \149\ Id.
---------------------------------------------------------------------------

    As discussed above in connection with regulation Sec.  1.44(a), the 
Commission is adopting its proposed definition of ``undermargined 
amount'' with modifications to remove language that the JAC identified 
as inconsistent with exchange rules and industry practice, and the 
Commission views an FCM's use of either of the Net Liquidating Value or 
alternative Total Equity method set forth in the JAC Margins Handbook 
as consistent with the Commission's objective in defining an account's 
undermargined amount for purposes of regulation Sec.  1.44.
    Second, the JAC contended that proposed regulation Sec.  1.44(b) 
may impact the way some FCMs settle with customers on a daily 
basis.\150\ Specifically, the JAC asserted, many FCMs initiate multiple 
cash and/or collateral transactions within the same customer account on 
the same business day in order to settle each individual currency 
within the account, or may call initial margin separately from 
variation margin within a single customer account, whether or not such 
account is receiving separate account treatment.\151\ The JAC noted 
this may result in a withdrawal of margin funds by a single customer 
account or within a separate account when, in the aggregate, including 
required margin on all positions and total margin equity, the account 
was undermargined as of the close of business on the prior business 
day.\152\ The JAC asserted this is a generally accepted practice, 
provided certain controls are in place and adequate records are 
maintained to demonstrate margin calls are issued, aged, and fully 
initiated for immediate settlement to support any outgoing 
disbursements.\153\ The JAC requested that the Commission confirm 
whether such margin procedures will continue to be permissible for 
separate and non-separate accounts, particularly with respect to the 
funds available for disbursement to a customer.\154\
---------------------------------------------------------------------------

    \150\ Id.
    \151\ Id.
    \152\ Id.
    \153\ Id.
    \154\ Id.
---------------------------------------------------------------------------

    Relatedly, the JAC sought clarification regarding whether the 
Second Proposal requires each separate account to settle a single 
undermargined amount pursuant to proposed regulation Sec.  1.44(f) or 
disburse a single excess margin amount pursuant to proposed regulation 
Sec.  1.44(b), taking into account the aggregate of all positions and 
currencies within the separate account.\155\ The JAC indicated that, to 
the extent the proposed regulations would require a change in current 
practice with respect to settlement of margin payments on a currency-
by-currency basis within a customer account (whether or not the account 
is receiving separate treatment), then FCMs may be required to update 
their regulatory records, risk programs, margin calculations, and 
reporting for customer accounts.\156\
---------------------------------------------------------------------------

    \155\ Id. The JAC provided the following example: a customer's 
separate account has an overall undermargined amount at the close of 
business on Monday of $2,000 USD (comprised of an undermargined 
amount in GBP currency with a USD equivalent value of $6,000 and 
funds in excess of its margin requirements in USD currency of 
$4,000). The JAC requested the Commission clarify whether, although 
the separate account was undermargined overall for Monday's close of 
business, the FCM could allow the separate account customer to 
withdraw on Tuesday the excess margin funds denominated in USD of 
$4,000 while also issuing a margin call on Tuesday for the GBP 
undermargined amount (for the USD equivalent value of $6,000), and 
remain in compliance with proposed regulation Sec.  1.44(b) and, if 
so, (i) whether there are certain requirements and controls that the 
FCM must have in place; and (ii) how the different settlement 
timeframes of the currencies would impact such permissibility, 
including in cases where a specific currency cannot be initiated for 
immediate settlement (e.g., if in the JAC's example, Tuesday is a 
banking holiday in the UK, but not in the U.S.). Id.
    \156\ Id.
---------------------------------------------------------------------------

    In response to the JAC's comment, the Commission confirms that each 
separate account would not be required to settle a single undermargined 
amount or disburse a single excess margin amount pursuant to regulation 
Sec.  1.44 as adopted herein. Rather, each receipt or disbursement 
would add to or subtract from the available balance in a customer's 
account, calculated using a single reference currency. As stated above, 
regulation Sec.  1.44(b) as proposed would require an FCM to ensure 
that a customer does not withdraw funds from its accounts with the FCM 
unless the net liquidating value (calculated as of the close of 
business on the previous business day) plus the margin deposits 
remaining in the customer's account after the withdrawal are sufficient 
to meet the customer initial margin requirements with respect to all 
products held in the customer's account, except as provided for 
pursuant to regulation Sec.  1.44(c), which sets forth the fundamental 
requirements for separate account treatment.

[[Page 7898]]

    The Commission notes that, for purposes of regulation Sec.  
1.44(b), the net liquidating value is calculated based on the market 
value of the positions in the customer's account. In proposing 
regulation Sec.  1.44(b), the Commission noted that real-time 
calculation of margin adequacy with respect to a potential withdrawal 
may prove impracticable.\157\ In doing so, the Commission refers to the 
fact that it may be impracticable for an FCM to calculate the market 
value of the positions in a customer's account on a real-time basis.
---------------------------------------------------------------------------

    \157\ Second Proposal, 89 FR at 15324.
---------------------------------------------------------------------------

    However, the Commission does not believe it would be impracticable 
for an FCM to account for payments received or disbursements made since 
the close of business on the previous business day. Indeed, regulation 
Sec.  1.22(c)(3)(ii) provides that an FCM may reduce the amount of 
residual interest required to be maintained under regulation Sec.  
1.22(c)(3)(i) to account for payments received from or on behalf of 
undermargined futures customers (less the sum of any disbursements made 
to or on behalf of such customers) between the close of business on the 
previous business day and the Residual Interest Deadline.\158\ 
Regulations Sec. Sec.  22.2(f)(6)(iii)(B) and 30.7(f)(ii)(C)(2) permit 
this practice as to the accounts of Cleared Swaps Customers and 30.7 
customers, respectively.\159\
---------------------------------------------------------------------------

    \158\ 17 CFR 1.22(c)(3)(ii).
    \159\ 17 CFR 22.2(f)(6)(iii)(B); 17 CFR 30.7(f)(ii)(C)(2). See 
also, e.g., JAC Comment Letter (discussing multi-settlement 
margining procedures as well as treatment of pending non-USD 
transfers for purposes of determining a customer's residual interest 
requirement).
---------------------------------------------------------------------------

    Similarly, in calculating margin adequacy under regulation Sec.  
1.44(b), an FCM should consider payments received from or on behalf of 
customers, including the separate accounts of separate account 
customers, less the sum of any disbursements made to or on behalf of 
such customers, between the close of business on the previous business 
day and the time at which the FCM considers a disbursement to a 
customer. In calculating the current balance in a customer's account, 
an FCM may use either the currency exchange rates at the close of 
business on the previous day, or at some later time. The FCM should be 
consistent in both the sources of exchange rates that it uses and in 
choosing the time as of which it will reference such exchange rates in 
calculating the current balance in the customer's account. Moreover, in 
doing so, the FCM must act consistently with regulation Sec.  
1.49(e).\160\ Additionally, as discussed below, the Commission notes 
that the final rule is not intended to preclude FCMs from, consistent 
with JAC guidance, considering as received for purposes of regulation 
Sec.  1.44(b)'s Margin Adequacy Requirement pending receipts 
denominated in non-USD (and non-CAD, in light of regulation Sec.  
1.44(f)(1)-(3)'s provisions for the timing of margin payments to meet a 
one business day margin call standard) currencies.\161\ The Commission 
expects that an FCM will, consistent with JAC guidance, also treat 
pending non-USD (and non-CAD) disbursements in the same manner (i.e., 
as disbursed).
---------------------------------------------------------------------------

    \160\ 17 CFR 1.49(e).
    \161\ See the Commission's discussion of the JAC's guidance with 
respect to pending non-USD transfers above in its discussion of 
amendments to regulation Sec.  1.17.
---------------------------------------------------------------------------

    Third, the JAC noted that although the Margin Adequacy Requirement 
in proposed regulation Sec.  1.44(b) discusses determination of funds 
available for withdrawal from customer accounts, the Commission in the 
Second Proposal proposed only to establish a requirement to collect 
margin from separate account customers (in proposed regulation Sec.  
1.44(f)(1)) and did not propose a broader requirement for FCMs to 
collect margin, analogous to the collection requirement in regulation 
Sec.  39.13(g)(8)(ii), and applicable to all accounts carried by 
clearing and non-clearing FCMs.\162\ The JAC further noted that, in the 
absence of such a requirement, the requirements applicable to margin 
collection are limited to requirements under exchange rules whereas 
requirements applicable to disbursements to customers will be defined 
by Commission regulations (unless the exchange or clearing organization 
imposes a more stringent requirement).\163\
---------------------------------------------------------------------------

    \162\ Id. Regulation Sec.  39.13(g)(8)(ii) provides, among other 
things, that a DCO shall require its clearing members to collect 
customer initial margin at a level that is not less than 100 percent 
of the DCO's clearing initial margin requirements with respect to 
each product and portfolio and commensurate with the risk presented 
by each customer account. 17 CFR 39.13(g)(8)(ii).
    \163\ JAC Comment Letter.
---------------------------------------------------------------------------

    As discussed above, commenters to the First Proposal, including the 
JAC, asked that the Commission codify requirements for the treatment of 
separate accounts in its regulations that would apply to all FCMs. In 
the Second Proposal, the Commission proposed to do just that. The 
Commission discussed in the Second Proposal its intent to promulgate a 
narrow codification, applied directly to FCMs, of the requirements for 
margin disbursement set forth in regulation Sec.  39.13(g)(8)(iii), 
subject to requirements based on the conditional no-action position in 
CFTC Letter No. 19-17, including requirements for separate account 
treatment that closely mirror the conditions in the no-action 
position.\164\ The no-action position in CFTC Letter No. 19-17 and the 
First Proposal concerned requirements for separate account treatment 
for purposes of regulation Sec.  39.13(g)(8)(iii) regarding 
disbursements of margin, and did not discuss requirements for 
collection of margin outside of the separate account context. 
Accordingly, the Commission considers the imposition of a requirement 
for collection of margin analogous to regulation Sec.  39.13(g)(8)(ii) 
to be out of scope for purposes of this rulemaking, although the 
Commission may consider further amendments to its regulations in the 
future to incorporate a separate margin collection requirement. As the 
JAC's comment notes, margin collection requirements are currently set 
by exchanges (as well as DCOs with respect to cleared transactions).
---------------------------------------------------------------------------

    \164\ See Second Proposal, 89 FR at 15317.
---------------------------------------------------------------------------

    The JAC also recommended that the Commission revise the Margin 
Adequacy Requirement in proposed regulation Sec.  1.44(b) (and/or the 
definition of ``account'' proposed in proposed regulation Sec.  
1.44(a)) to ``include accounts of noncustomers who pose risk to the FCM 
if such noncustomers are permitted to withdraw margin funds that would 
create or exacerbate an undermargined situation, or not be required to 
deposit and maintain sufficient margin to cover the risk of their 
positions.'' \165\
---------------------------------------------------------------------------

    \165\ The JAC noted the Commission could then consider allowing 
separate account treatment for such noncustomers under the 
provisions of proposed regulation Sec.  1.44(c)-(h).
---------------------------------------------------------------------------

    The Commission appreciates the JAC's recommendation to consider 
revising the Margin Adequacy Requirement to apply to the accounts of 
noncustomers, which the Commission generally understands to encompass 
accounts of certain affiliates and affiliated individuals of an FCM. 
The Commission notes that the Margin Adequacy Requirement of regulation 
Sec.  39.13(g)(8)(iii) does not apply with respect to withdrawals by 
noncustomers, and neither CFTC Letter No. 19-17 nor the Commission's 
proposals to codify the no-action position in that letter contemplated 
the application of a Margin Adequacy Requirement, or requirements for 
separate account treatment, with respect to noncustomers. The 
Commission considers application of the Margin Adequacy Requirement in 
proposed regulation Sec.  1.44(b) to noncustomers to

[[Page 7899]]

be outside the scope of this rulemaking, but will consider whether to 
provide additional risk management requirements applicable to 
noncustomers in the future.\166\
---------------------------------------------------------------------------

    \166\ There are currently requirements relating to risk 
assessment recordkeeping for FCMs with respect to affiliated persons 
in regulations Sec. Sec.  1.14 and 1.15.
---------------------------------------------------------------------------

    Lastly, as the Commission discusses above in connection with 
amendments to regulation Sec.  1.17, the Commission received a number 
of comments requesting that the Commission confirm whether FCMs may 
consider as received pending non-USD transfers for purposes of certain 
regulations, consistent with JAC guidance and current industry 
practice. Although the Commission did not receive any such comments 
specifically with respect to proposed regulation Sec.  1.44(b), for the 
avoidance of doubt, the Commission confirms that the final rule is not 
intended to preclude FCMs from considering as received pending non-USD 
transfers, consistent with JAC guidance, when considering a 
disbursement under regulation Sec.  1.44(b). However, in light of 
regulation Sec.  1.44(f)(1)-(3), under which payment of margin in 
Canadian dollars (CAD) is required to be settled pursuant to the timing 
requirements for payment of margin in USD for purposes of meeting a one 
business day margin call standard, the Commission expects that, when 
considering pending non-USD transfers for purposes of regulation Sec.  
1.44(b)'s Margin Adequacy Requirement, FCMs will treat pending CAD 
transfers on the same basis as pending USD transfers (i.e., they will 
not be treated as received or as disbursed). Additionally, a non-USD 
transfer that ultimately is not received on a one business day basis, 
as set forth in regulation Sec.  1.44(f), would be considered a failed 
deposit and could no longer be considered pending, even if this was due 
to administrative error or operational constraint. Thereafter, that 
transfer would only be considered as received upon actual receipt.
    Having considered comments received in response to proposed 
regulation Sec.  1.44(b), the Commission is adopting regulation Sec.  
1.44(b) as proposed, subject to modifications to regulation Sec.  
1.44(b)(2), discussed above in connection with regulation Sec.  
1.44(a), to address foreign exchanges related to regulation Sec.  30.7 
accounts.\167\
---------------------------------------------------------------------------

    \167\ Specifically, as adopted, regulation Sec.  1.44(b)(2) 
provides, ``For purposes of [regulation Sec.  1.44(b)(1)] . . . 
where the previous day (excluding Saturdays and Sundays) is a 
holiday . . . where any designated contract market or other board of 
trade on which the futures commission merchant trades is open for 
trading, and where an account of any of the futures commission 
merchant's customers includes positions traded on such a market, the 
net liquidating value for such an account should . . . be calculated 
as of the close of business on such holiday.''
---------------------------------------------------------------------------

F. Regulation Sec.  1.44(c)

    The Commission proposed regulation Sec.  1.44(c) to establish the 
fundamental requirements for separate account treatment. As a general 
matter, these requirements are substantially the same as in CFTC Letter 
No. 19-17, and in the First Proposal, except that the FCM may choose to 
engage in separate account treatment without a requirement that a DCO 
specifically authorize such treatment. As proposed, regulation Sec.  
1.44(c) provides that an FCM may, only during the ordinary course of 
business, as that term is defined in regulation Sec.  1.44, treat the 
separate accounts of a separate account customer as accounts of 
separate entities for purposes of regulation Sec.  1.44(b),\168\ if 
such FCM elects to do so as specified in regulation Sec.  1.44(d). 
Regulation Sec.  1.44(c) further provides that an FCM that has made 
such an election shall comply with the risk-mitigating requirements set 
forth in proposed regulation Sec.  1.44 and maintain written internal 
controls and procedures designed to ensure such compliance.
---------------------------------------------------------------------------

    \168\ As noted above, proposed regulation Sec.  1.44(b) is 
intended to serve as an analog to regulation Sec.  39.13(g)(8)(iii) 
for FCMs.
---------------------------------------------------------------------------

    The Commission believes that permitting FCMs to treat the separate 
accounts of separate account customers as accounts of separate entities 
for purposes of regulation Sec.  1.44(b), subject to the risk-
mitigating requirements set forth in regulation Sec.  1.44, 
accomplishes the CEA's purposes of promoting responsible innovation as 
well as effective customer fund protection and risk mitigation.\169\ 
Compliance with those requirements can best be achieved if the FCM 
maintains written internal controls and procedures designed to ensure 
such compliance.
---------------------------------------------------------------------------

    \169\ See CEA Sec. Sec.  3(b), 8a(5); see also, CEA section 
4d(a)(2), 7 U.S.C. 6d(a)(2); CEA section 4d(f)(2), 7 U.S.C. 
6d(f)(2); CEA section 4b(2)(A), 7 U.S.C. 6b(2)(A); CEA section 
4f(b), 7 U.S.C. 6f(b).
---------------------------------------------------------------------------

    In its comment letter, ICE stated that it does not object to the 
specific requirements that would be imposed under proposed regulation 
Sec.  1.44(c) where an FCM elects separate account treatment with 
respect to a customer.\170\
---------------------------------------------------------------------------

    \170\ ICE Comment Letter.
---------------------------------------------------------------------------

    The Commission did not receive any other comments specific to 
proposed regulation Sec.  1.44(c). Accordingly, the Commission is 
adopting regulation Sec.  1.44(c) as proposed.

G. Regulation Sec.  1.44(d)

    The Commission proposed regulation Sec.  1.44(d) to provide that an 
FCM may elect to treat the separate accounts of a customer as accounts 
of separate entities for purposes of proposed regulation Sec.  1.44(b). 
As proposed, regulation Sec.  1.44(d)(1) provides that, to elect to 
treat the separate accounts of a customer as accounts of separate 
entities for purposes of regulation Sec.  1.44(b), the FCM shall 
include the customer on a list of separate account customers maintained 
in its books and records, and that such list shall include both the 
identity of each separate account customer and the identity of each 
separate account of such customer. The FCM would also be required to 
keep this list current. Furthermore, as proposed, regulation Sec.  
1.44(d)(2) provides that, when an FCM first chooses to include a 
customer on a list of separate account customers, the FCM is required 
to provide, within one business day, notification of the election to 
allow separate account treatment for customers in accordance with the 
process specified in regulation Sec.  1.12(n)(3).\171\ For the 
avoidance of doubt, the notification of such election would remain a 
one-time notification made the first time the FCM begins providing 
separate account notification for any customer. Successive 
notifications would not be required for each additional customer for 
which the FCM provides separate account treatment. Furthermore, the FCM 
would need only provide notification of the election and would not be 
required to include the identity of the separate account customer. The 
Commission believes that regulation Sec.  1.44(d) is reasonably 
necessary to protect customer funds and mitigate systemic risk because 
it is designed to enable DSROs to effectively monitor and regulate FCMs 
that engage in separate account treatment, and to provide that FCMs 
will have the records necessary to understand which accounts receive 
separate account treatment for purposes of monitoring compliance with 
the proposed regulation.
---------------------------------------------------------------------------

    \171\ See 17 CFR 1.12(n)(3).
---------------------------------------------------------------------------

    In its comment letter, the JAC stated that a complete and accurate 
listing of separate accounts is critical to ensure that the 
Commission's risk mitigating requirements can be effectively carried 
out by an FCM, monitored by self-regulatory organizations (SROs) and 
the Commission for compliance with such requirements, and monitored by 
DCOs for customer gross margin reporting under proposed regulation 
Sec.  39.13(g)(8)(i), and to assist DCOs and/or bankruptcy trustees in 
porting accounts in the event of an FCM's

[[Page 7900]]

insolvency.\172\ The JAC asserted that, currently, when such listing 
has been requested, certain FCMs offering separate account treatment 
under the no-action position of CFTC Letter No. 19-17 include all of 
the FCM's accounts or potential accounts on such listing rather than 
only those accounts ``currently subject to separate account treatment 
(i.e., beneficial owners that maintain more than one account at the FCM 
which are being treated separately).'' \173\ The JAC recommended that 
the Commission require only accounts currently receiving separate 
account treatment to be included on such listing to ensure proper focus 
and attention to the additional risks posed by separate account 
treatment, effective monitoring of reporting of separate accounts, and 
proper and efficient porting of separate accounts.\174\ The JAC also 
recommended that the Commission require separate accounts to be clearly 
identified as such in the FCM's books and records, including on the 
separate account customer's statements to assist in ensuring a current, 
accurate, and complete listing of accounts receiving separate 
treatment.\175\
---------------------------------------------------------------------------

    \172\ JAC Comment Letter.
    \173\ Id.
    \174\ Id.
    \175\ Id.
---------------------------------------------------------------------------

    The Commission notes that the recordkeeping requirement in 
regulation Sec.  1.44(d)(1), described above, is substantially similar 
to the corresponding condition in CFTC Letter No. 19-17 that an FCM 
maintain a list of all separate accounts receiving separate account 
treatment, indicating the beneficial owner and account numbers of such 
accounts. For the avoidance of doubt, the Commission also believes that 
the recordkeeping requirement in regulation Sec.  1.44(d)(1) as 
proposed is consistent with the JAC's comment. It requires an FCM that 
elects to treat separate accounts of a customer as accounts of separate 
entities for purposes of regulation Sec.  1.44(b) to: (i) include the 
customer on a list of separate account customers maintained in its 
books and records; (ii) include on the list the identity of each 
separate account customer; (iii) include on the list the identity of 
each separate account of such customer; and (iv) keep the list current.
    The definition of ``separate account customer'' in regulation Sec.  
1.44(a) is ``a customer for which the [FCM] has made the election set 
forth in [regulation Sec.  1.44(d)].'' The FCM would thus be required 
to subject the customers on that list, as separate account customers, 
to the requirements of regulation Sec.  1.44 for separate account 
treatment, including regulation Sec.  1.44's one business day margin 
call standard.
    In its comment letter, ICE opined that it would be appropriate for 
the Commission under proposed regulation Sec.  1.44(d) to require an 
FCM to provide notice to DCOs of which it is a clearing member of 
accounts that are subject to separate account treatment, so that the 
DCO can comply with its obligations with respect to the margining of 
such accounts under regulation Sec.  39.13(g).\176\
---------------------------------------------------------------------------

    \176\ ICE Comment Letter.
---------------------------------------------------------------------------

    The Commission designed the Second Proposal to codify the terms of 
the no-action position in CFTC Letter No. 19-17 in a manner directly 
applicable to FCMs and not through the instrumentation of DCO rules. 
The Commission notes that under the conditions of CFTC Letter No. 19-
17, an FCM shall, on a one-time basis, provide notification to its DSRO 
if it will apply separate account treatment a provided for in the no-
action position to any separate accounts. No such notification to a DCO 
was a condition of the no-action position and, because the Commission 
is modifying part 1 to apply a Margin Adequacy Requirement and 
requirements for separate account treatment directly to FCMs, the 
Commission views a requirement, imposed by the Commission, for an FCM 
to provide to a DCO of which it is a clearing member the one-time 
notification of commencement of separate account treatment as outside 
the scope of this rulemaking. The Commission further notes that a DCO 
has the discretion to put in place additional rules regarding 
information its clearing members must provide, and could choose to 
independently promulgate a requirement under DCO rules to provide 
notification to such DCO the first time an FCM begins separate account 
treatment for a customer.\177\ Regulation Sec.  39.13(g)(8)(iii), as 
amended by this final rulemaking, requires a DCO to have rules 
requiring that its clearing members do not withdraw funds from their 
accounts in a manner that would lead to or exacerbate an undermargining 
scenario, except as provided for in regulation Sec.  1.44, and DCOs 
have discretion in how they choose to monitor for and enforce that 
requirement.
---------------------------------------------------------------------------

    \177\ See, e.g., ICE Clear Credit Rule 406(f) (``Each 
Participant shall provide such reports to ICE Clear Credit with 
respect to Non-Participant Parties and their related Client Related 
Positions and Non-Participant Collateral . . . upon request of ICE 
Clear Credit and upon such other basis, if any, as is provided in 
the ICE Clear Credit Procedures.'').
---------------------------------------------------------------------------

    FIA requested that the Commission clarify that any clearing FCM 
that has already provided the notice required by proposed regulation 
Sec.  1.44(d)(2) to its DSRO in compliance with the conditions of CFTC 
Letter No. 19-17 shall be deemed to have complied with the requirement 
of proposed regulation Sec.  1.44(d)(2) that an FCM provide 
notification to its DSRO of the first time the FCM includes a customer 
on its list of separate account customers.\178\
---------------------------------------------------------------------------

    \178\ FIA Comment Letter.
---------------------------------------------------------------------------

    As discussed above, in addition to requiring an FCM to maintain a 
list of all separate accounts (indicating the beneficial owner and 
account numbers) receiving separate account treatment, CFTC Letter No. 
19-17 requires as a condition to separate account treatment that an FCM 
shall, on a one-time basis, provide notification to its DSRO if it will 
apply separate account treatment to any separate accounts. As proposed, 
regulation Sec.  1.44(d)(2) adds to this requirement that such 
notification shall be provided in accordance with the following 
conditions: (i) the first time that the FCM includes a customer on the 
list of separate account customers; (ii) within one business day; (iii) 
to the Commission (in addition to the DSRO); and (iv) in accordance 
with the process specified in regulation Sec.  1.12(n)(3). With respect 
to the one-time notification that the FCM is required to provide to its 
DSRO, the Commission recognizes that the requirements of regulation 
Sec.  1.44(d)(2) are, in the main, substantially the same as those in 
the corresponding condition of CFTC Letter No. 19-17. Notwithstanding 
the timing and manner requirements of regulation Sec.  1.44(d)(2) as 
proposed, recognizing that FCMs have successfully applied separate 
account treatment under the conditions of CFTC Letter No. 19-17 for 
over five years, the Commission confirms that a clearing FCM that has 
already provided to its DSRO the one-time notification of commencement 
of separate account treatment pursuant to the no-action conditions of 
CFTC Letter No. 19-17 shall be deemed to have complied with the 
analogous requirement of regulation Sec.  1.44(d)(2).
    Having considered comments received with respect to proposed 
regulation Sec.  1.44(d), the Commission is adopting regulation Sec.  
1.44(d) as proposed.

H. Regulation Sec.  1.44(e)

    As proposed, regulation Sec.  1.44(e) enumerates events that would 
be inconsistent with the ordinary course of business, as that term is 
defined in regulation Sec.  1.44(a), and sets forth

[[Page 7901]]

requirements related to the cessation and resumption of permitting 
disbursements on a separate account basis upon, respectively, the 
occurrence and cure of certain non-ordinary course of business events. 
Each of these events would raise important concerns about the financial 
resiliency of the FCM or one or more of its separate account 
customers.\179\ As discussed above with respect to regulation Sec.  
1.44(a), the list of events in regulation Sec.  1.44(e) will be the 
exclusive set of events that are inconsistent with the ordinary course 
of business for purposes of regulation Sec.  1.44.
---------------------------------------------------------------------------

    \179\ For example, while the bankruptcy of an FCM or a separate 
account customer would have direct effects, the bankruptcy of an 
FCM's or separate account customer's parent company would also 
portend financial challenges for, respectively, the FCM or separate 
account customer (e.g., if the parent company decided to liquidate 
its subsidiaries in bankruptcy). Experience in the bankruptcies of, 
e.g., Refco and Lehman, demonstrates that when one member of an 
affiliate financial company structure files for bankruptcy, other 
affiliates soon follow.
---------------------------------------------------------------------------

    These events are divided into two categories: (i) events that 
concern the separate accounts of a particular separate account 
customer, the occurrence of any one of which would require the FCM to 
cease permitting disbursements on a separate account basis with respect 
to all accounts of that customer; and (ii) events that concern the 
financial status of the FCM itself, and the occurrence of any one of 
which would require the FCM to cease permitting disbursements on a 
separate account basis with respect to all of its separate account 
customers.
    Significantly, while a separate account customer is outside the 
ordinary course of business as defined in regulation Sec.  1.44(a), 
only the privilege of permitting disbursements on a separate account 
basis, pursuant to regulation Sec.  1.44(c), is terminated (or 
suspended). So long as a customer remains a separate account customer, 
whether or not within the ordinary course of business, then the FCM is 
required to comply with the requirements of regulation Sec.  1.44, 
including with respect to the relevant provisions addressed in 
regulations Sec. Sec.  1.17, 1.20, 1.22, 1.23, 1.32, 1.55, 1.58, 1.73, 
22.2, 30.7, and 39.13(g)(8)(i) regarding that customer and all of that 
customer's separate accounts. Similarly, if it is the FCM that is 
outside the ordinary course of business, it is only the privilege of 
permitting disbursements on a separate account basis with respect to 
any of the FCM's separate account customers and their separate accounts 
that is terminated (or suspended). The FCM continues to be required to 
comply with the requirements in regulation Sec.  1.44, including with 
respect to the relevant provisions described above, with respect to its 
separate account customers and their separate accounts. Thus, for the 
avoidance of doubt, a separate account customer that is outside the 
ordinary course of business is still a separate account customer.
    The first category of events is as follows:
     (1)(i) The separate account customer, including any 
separate account of such customer, fails to deposit initial margin or 
maintain maintenance margin or make payment of variation margin or 
option premium as specified in proposed regulation Sec.  1.44(f).\180\
---------------------------------------------------------------------------

    \180\ I.e., the one business day margin call requirement.
---------------------------------------------------------------------------

     (ii) The occurrence and declaration by the FCM of an event 
of default as defined in the account documentation executed between the 
FCM and the separate account customer.
     (iii) A good faith determination by the FCM's CCO, one of 
its senior risk managers, or other senior manager, following such FCM's 
own internal escalation procedures, that the separate account customer 
is in financial distress, or there is significant and bona fide risk 
that the separate account customer will be unable promptly to perform 
its financial obligations to the FCM, whether due to operational 
reasons or otherwise.
     (iv) The insolvency or bankruptcy of the separate account 
customer or a parent company of such customer.
     (v) The FCM receives notification that a board of trade, a 
DCO, an SRO as defined in regulation Sec.  1.3 or section 3(a)(26) of 
the Securities Exchange Act of 1934, the Commission, or another 
regulator \181\ with jurisdiction over the separate account customer, 
has initiated an action \182\ with respect to such customer based on an 
allegation that the customer is in financial distress.
---------------------------------------------------------------------------

    \181\ E.g., the SEC or a foreign regulator.
    \182\ In this context, the term ``initiate an action'' is 
intended to include the filing of a complaint or a petition to take 
action against an entity, or an analogous process. The initiation or 
conduct of an investigation would not be sufficient to constitute 
``initiating an action'' in this context.
---------------------------------------------------------------------------

     (vi) The FCM is directed to cease permitting disbursements 
on a separate account basis, with respect to the separate account 
customer, by a board of trade, a DCO, an SRO, the Commission, or 
another regulator with jurisdiction over the FCM, pursuant to, as 
applicable, board of trade, DCO, or SRO rules, government regulations, 
or law.
    The second set of events is as follows:
     (2)(i) The FCM is notified by a board of trade, a DCO, an 
SRO, the Commission, or another regulator with jurisdiction over the 
FCM, that the board of trade, the DCO, the SRO, the Commission, or 
other regulator, as applicable, believes the FCM is in financial or 
other distress.
     (ii) The FCM is under financial or other distress as 
determined in good faith by its CCO, senior risk managers, or other 
senior management.
     (iii) The insolvency or bankruptcy of the FCM or a parent 
company of the FCM.
    As proposed, regulation Sec.  1.44(e)(3) provides that the FCM must 
provide notice to its DSRO and to the Commission of the occurrence of 
any of the events terminating (or suspending) disbursements on a 
separate account basis for one or more separate account customers. The 
notice must be provided to the DSRO and the Commission in accordance 
with the process specified in regulation Sec.  1.12(n)(3). The notice 
also must identify the event and, if applicable, the customer. The FCM 
is required to provide such notice promptly in writing no later than 
the next business day following the date on which the FCM identifies or 
has been informed that the relevant event has occurred. The 
notification required upon exiting the ordinary course of business is 
intended to ensure that the Commission and DSROs will be apprised of 
the occurrence of non-ordinary course of business events, so that they 
may actively communicate with and monitor an FCM with respect to the 
resolution of such events (e.g., where an FCM attempts to establish 
that its customer has reentered ordinary course of business 
conditions).
    Regulation Sec.  1.44(e)(4), as proposed, provides an avenue for an 
FCM that has experienced a non-ordinary course of business event with 
respect to itself or a customer to return to the ordinary course of 
business and resume disbursements on a separate account basis for 
itself or its customers, as may be the case. Regulation Sec.  
1.44(e)(4) provides that an FCM that has ceased permitting 
disbursements on a separate account basis to a separate account 
customer due to the occurrence of a non-ordinary course of business 
event, with respect to that specific separate account customer, or with 
respect to all such customers, may resume permitting disbursements to 
such customer(s) on a separate account basis if such FCM reasonably 
believes, based on new information, that those circumstances triggering 
the event have been cured, and such FCM documents in writing the 
factual basis and rationale for its

[[Page 7902]]

conclusion. However, regulation Sec.  1.44(e)(4) also provides that, if 
the circumstances triggering cessation of such treatment were an action 
or direction by a board of trade, a DCO, an SRO, the Commission, or 
another regulator with jurisdiction over the separate account customer 
or the FCM, then cure of those circumstances would require the 
withdrawal or other appropriate termination of such action or direction 
by that entity.
    That permitting disbursements on a separate account basis should be 
discontinued (or at least suspended) under certain circumstances is 
reflected in CME's recommendation, preceding issuance of CFTC Letter 
No. 19-17, that disbursements on a separate account basis be permitted 
only during the ordinary course of business. As CME explained, FCMs 
should maintain the flexibility to determine that either the customer 
or the FCM itself is in distress and ``pause'' disbursements until the 
customer's other account can demonstrably meet the call to deposit 
funds.\183\ Similarly, as CME noted, an FCM should not be purposely 
releasing funds to a customer when the customer's overall account is in 
deficit, as doing so may create a shortfall in segregated, secured, or 
Cleared Swaps Accounts in the event the FCM becomes insolvent.\184\
---------------------------------------------------------------------------

    \183\ CME Letter.
    \184\ Id.
---------------------------------------------------------------------------

    However, the Commission acknowledges that in some instances, an FCM 
or customer may exit a state of financial, operational, or other 
distress, such that resumption of separate account disbursements would 
be appropriate. By explicitly providing FCMs with an avenue to resume 
disbursements on a separate account basis consistent with the 
resumption of the ordinary course of business, the Commission seeks to 
ensure that a temporary departure from the ordinary course of business, 
once remedied, does not continue to preclude an FCM from applying (and 
a customer from having applied to its accounts) separate account 
treatment, and to incentivize transparency between FCMs and their DSROs 
and Commission staff with respect to conditions at the FCMs or 
customers that could indicate operational or financial distress and, 
more generally, the risk management program at the FCM.
    Regulation Sec.  1.44(e) is designed to ensure that disbursements 
are permitted on a separate account basis only during the routine 
operation of the FCM's business relationship with its customer. Certain 
events signaling financial or operational distress of the FCM or 
customer are inconsistent with the normal operation of the business 
relationship between the FCM and its customer. The Commission believes 
that, when such events occur, and throughout the duration of their 
occurrence, suspending FCMs' ability to provide disbursements on a 
separate account basis with respect to the Margin Adequacy Requirement 
is reasonably necessary to protect customer funds and mitigate systemic 
risk, and to effectuate section 4d of the CEA.
    The JAC, noting the passage of time since the Divisions issued CFTC 
Letter No. 19-17, requested that the Commission provide examples of 
non-enumerated events that would constitute operating outside the 
ordinary course of business, so that FCMs and their customers can 
better understand the circumstances in which disbursements on a 
separate account basis are not permitted.
    In the Second Proposal, the Commission proposed to define the 
``ordinary course of business'' as the ``standard day-to-day operation 
of the futures commission merchant's business relationship with its 
separate account customer,'' based on the similar definition in CFTC 
Letter No. 19-17 (``standard day to day operation of the FCM's business 
relationship with its customer''). Although in both CFTC Letter No. 19-
17 and proposed regulation Sec.  1.44(e) the Commission set forth 
events that it would consider inconsistent with the ordinary course of 
business, the Commission acknowledges that the Second Proposal's 
proposed definition of ``ordinary course of business'' in conjunction 
with the list of events inconsistent with the ordinary course of 
business in proposed regulation Sec.  1.44(e) may have resulted in 
confusion regarding the scope of events that the Commission will 
consider inconsistent with the ordinary course of business for purposes 
of regulation Sec.  1.44(a).
    As discussed above in connection with SIFMA-AMG's comment related 
to the definition of ``ordinary course of business'' in regulation 
Sec.  1.44(a), the Commission is modifying the proposed definition of 
``ordinary course of business'' in regulation Sec.  1.44(a) to make 
clear that regulation Sec.  1.44(e) contains the complete list of 
events that, for purposes of regulation Sec.  1.44, would cause a 
separate account customer or an FCM providing separate account 
treatment to fall outside the ordinary course of business, such that 
the FCM would need to cease providing disbursements on a separate 
account basis for one or more customers. Therefore, only the events 
specifically enumerated in regulation Sec.  1.44(e) would place a 
separate account customer or an FCM providing separate account 
treatment outside the ordinary course of business, as defined in 
regulation Sec.  1.44(a).
    ICE, in its comment letter, stated that it did not object to the 
list of events that would be inconsistent with the ordinary course of 
business in proposed regulation Sec.  1.44(e).
    The Commission did not receive any other comments directly related 
to proposed regulation Sec.  1.44(e).\185\ Accordingly, the Commission 
is adopting regulation Sec.  1.44(e) as proposed.\186\
---------------------------------------------------------------------------

    \185\ Comments with respect to the Commission's proposed 
definition of ``ordinary course of business,'' set forth in 
regulation Sec.  1.44(a), are addressed above in connection with 
that section.
    \186\ As a matter of internal consistency and clarity, because 
proposed regulation Sec.  1.44(e)(4) concerns the resumption of 
disbursements on a separate account basis following a cessation of 
such treatment due to non-ordinary course of business conditions, 
the Commission is making a change in final regulation Sec.  
1.44(e)(4), to substitute ``disbursements on a separate account 
basis'' for ``separate account treatment,'' in providing, ``If the 
circumstances triggering cessation of disbursements on a separate 
account basis were an action or direction by one of the entities 
described in paragraphs (e)(1)(v) or (vi), or paragraph (e)(2)(i), 
of this section, then the cure of those circumstances would require 
the withdrawal or other appropriate termination of such action or 
direction by that entity.''
---------------------------------------------------------------------------

I. Regulation Sec.  1.44(f)

    The Commission proposed regulation Sec.  1.44(f) to require that 
each separate account must be on a one business day margin call, 
subject to certain requirements designed to further define what 
constitutes a one business day margin call. Providing for a one 
business day margin call, as defined in this regulation Sec.  1.44(f), 
ensures that margin shortfalls are timely corrected, and that a 
customer's inability to meet a margin call is timely identified. 
However, in certain circumstances, it may be impracticable for payments 
to be received on a same-day basis due to the mechanics of 
international payment systems (e.g., time zones and schedules of 
correspondent banks). In promulgating requirements to define timely 
payment of margin for purposes of the standard set forth in proposed 
regulation Sec.  1.44(f), the Commission seeks to establish 
requirements that reflect industry best practices among FCMs and 
customers.\187\ The

[[Page 7903]]

Commission believes that regulation Sec.  1.44(f) is reasonably 
necessary to protect customer funds and mitigate systemic risk, and to 
effectuate CEA section 4d, because it is designed to limit the time in 
which accounts receiving separate treatment may be undermargined, and 
to do so in a manner that takes into consideration the way in which 
that period may be affected by factors such as time zones, 
international banking conventions, and (to an appropriate extent) 
holidays.
---------------------------------------------------------------------------

    \187\ An analysis by FIA indicated that, for the FCMs studied, 
on average more than 90% of margin deficits were collected by the 
close of business on the day following the market movements creating 
such deficits. For a majority of the FCMs studied, 95% of margin 
deficits were collected by that time. See Letter from Barbara 
Wierzinski, General Counsel, FIA, to Melissa Jurgens, Secretary, 
CFTC, Costs of the Proposed Residual Interest Requirement Compared 
to the FIA Alternative, at 3, available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59283&SearchText=FIA.
---------------------------------------------------------------------------

    Specifically, the Commission understands that, although margin 
calls made in the morning in the U.S. Eastern Time Zone (ET) are 
typically capable of being met on a same-day basis when margin is paid 
in United States dollars (USD) and CAD, the operation of time zones and 
banking conventions in other jurisdictions may necessitate additional 
time when margin is paid in other currencies. For example, the 
Commission understands, based on discussions with market participants, 
that margin paid in Japanese yen (JPY) and certain other currencies is 
typically received two business days after a margin call is issued, and 
margin paid in British pounds (GBP), euros (EUR), and certain other 
non-USD/CAD/JPY currencies is typically received one business day after 
a margin call is issued.
    In connection with proposed regulation Sec.  1.44(f), the 
Commission requested comment (as Question 6) regarding whether, in 
light of changes made in the Second Proposal relative to the First 
Proposal, the regulatory framework set forth in proposed regulation 
Sec.  1.44(f) appropriately balances practicability and burden with 
risk management, as well as: (i) if not, what alternative approach 
should be taken; and (ii) how such an alternative approach would better 
balance practicability and burden with risk management. As part of this 
request, the Commission requested comment on whether the standard of 
timeliness for a one business day margin call set forth in proposed 
regulation Sec.  1.44(f) presented practicability challenges and, if 
so, what those challenges would be, and how the proposed standard of 
timeliness could be improved. The Commission considers the comments 
received in response to the margin payment timing requirements set 
forth in proposed regulation Sec.  1.44(f)(1)-(3), and other provisions 
of proposed regulation Sec.  1.44(f) that modify those requirements in 
certain circumstances, to be generally responsive to this question. The 
Commission discusses these comments below.
    As proposed, regulation Sec.  1.44(f)(1) provides that, except as 
explicitly provided in regulation Sec.  1.44(f), if, as a result of 
market movements or position changes on the previous business day, a 
separate account is undermargined (i.e., the undermargined amount for 
the account is greater than zero), then the FCM shall issue a margin 
call for that separate account for at least the amount necessary for 
the separate account to meet the initial margin required by the 
applicable exchanges or clearing organizations (including, as 
appropriate, the equity component or premium for long or short option 
positions) for the positions in the separate account.\188\ Such call 
must be met by the applicable separate account customer no later than 
the close of the Fedwire Funds Service on the same business day, 
consistent with the industry standard for when 90-95% of margin 
deficits are cured.\189\
---------------------------------------------------------------------------

    \188\ The undermargined amount is based on maintenance margin, 
which may be lower than initial margin. However, if an account falls 
below the maintenance margin level, the amount of the margin call is 
generally required to be the amount necessary to bring the account 
back to the (potentially higher) initial margin level.
    \189\ The Fedwire Funds Service is an electronic funds transfer 
service commonly used for settlement and clearing arrangements. The 
service currently closes at 7:00 p.m. ET. For purposes of the 
Fedwire Funds Service, Federal Reserve Banks observe as holidays all 
Saturdays, all Sundays, and the holidays listed on the Federal 
Reserve Banks' Holiday Schedules. See The Federal Reserve, 
Fedwire[supreg] Funds Service and National Settlement Service 
Operating Hours and FedPayments[supreg] Manager Hours of 
Availability, available at https://www.frbservices.org/resources/financial-services/wires/operating-hours.html. Because the Fedwire 
Funds Service hours of operations may be subject to change, the 
Commission has determined to tie the timeframe to fulfill the one 
business day margin call requirements of proposed regulation Sec.  
1.44(f) to the Fedwire Funds Service's closing rather than an 
absolute time.
---------------------------------------------------------------------------

    In light of challenges to same-day settlement posed by margining in 
certain currencies, as described above, and in recognition of the 
particular banking conventions around payments in other currencies, the 
Commission proposed regulation Sec.  1.44(f)(2) to provide that payment 
of margin in certain currencies listed in proposed Appendix A to part 1 
shall be considered in compliance with the requirements of regulation 
Sec.  1.44(f) provided they are received by the applicable FCM no later 
than the end of the second business day after the day on which the 
margin call is issued.
    The Commission also proposed regulation Sec.  1.44(f)(3), which 
provides that payment of margin in fiat currencies other than USD, CAD, 
or the currencies listed in proposed Appendix A to part 1 shall be 
considered in compliance with the requirements of regulation Sec.  
1.44(f) if received by the applicable FCM no later than the end of the 
business day after the business day on which the margin call was 
issued.
    In the Commission's view, a ``one business day margin call'' should 
be defined beyond the term itself, in light of the effect of time zones 
and international banking conventions that may cause a customer to be 
unable to meet a call for margin in certain currencies on the day the 
margin call is issued. Although FCMs may ensure that margin calls are 
generally met within one business day, for purposes of separate account 
treatment, the Commission wishes to ensure that such margin calls are 
(subject to specified exceptions) always met on a one business day 
basis. The Commission also notes that, with respect to the calculation 
of balances in customers' accounts and the undermargined amount which 
the FCM must include in its residual interest and LSOC compliance 
calculations, such figures would be calculated on a separate account 
basis, as discussed herein.\190\
---------------------------------------------------------------------------

    \190\ See, e.g., JAC, Regulatory Alert, #18-02, at 2, June 6, 
2018 (discussing undermargined accounts), regulation Sec.  
1.44(g)(5).
---------------------------------------------------------------------------

    The Commission received several comments with respect to the margin 
payment timing framework for separate accounts set forth in proposed 
regulation Sec.  1.44(f)(1)-(3).
    As discussed above in connection with regulation Sec.  1.44(a), the 
JAC contended that the Commission's proposed definition of the term 
``undermargined amount'' would be inconsistent with existing industry 
practice and the guidance for calculating a margin call in the JAC 
Margins Handbook. As with respect to other provisions of proposed 
regulation Sec.  1.44 that use or otherwise rely on the term 
``undermargined amount,'' the JAC contended that the margin call 
required under proposed regulation Sec.  1.44(f)(1) would be similarly 
inconsistent with industry practice and JAC guidance.\191\ In doing so, 
the JAC reiterated its comment that the Second Proposal's definition of 
``undermargined amount'' would require FCMs to compute margin calls for 
separate accounts as required under proposed regulation Sec.  
1.44(f)(1) whereas FCMs would be required to

[[Page 7904]]

compute margin calls differently for non-separate account 
customers.\192\
---------------------------------------------------------------------------

    \191\ JAC Comment Letter. The JAC stated that, currently, FCMs 
calculate a margin call using the following formula: Initial Margin 
Requirement--Margin Equity--Outstanding Margins Calls = [a positive 
balance represents the amount of margin call to be issued]. Id.
    \192\ Id.
---------------------------------------------------------------------------

    As discussed above in connection with regulation Sec.  1.44(a), the 
Commission is modifying the definition of ``undermargined amount'' to 
remove the language that the Commission believes created the identified 
inconsistency and confirm that the Commission considers either of the 
Net Liquidating Value or Total Equity methods set forth in the JAC 
Margins Handbook to be consistent with the definition of 
``undermargined amount'' that the Commission is adopting.
    SIFMA-AMG urged the Commission to rescind the one business day 
margin call standard set forth in proposed regulation Sec.  1.44(f)(1)-
(3).\193\ SIFMA-AMG contended that the Second Proposal does not 
adequately appreciate the differences in operational workflows and risk 
management processes currently in place and how they may differ 
depending on markets, products, clients, custodians, and fund 
structures.\194\ Specifically, SIFMA-AMG disagreed with the 
Commission's proposal to require same-day margin calls to be met 
regardless of the time the FCM issues them.\195\ SIFMA-AMG noted that, 
for example, a 3:00 p.m. margin call would be required to be met on a 
same-day basis under proposed regulation Sec.  1.44(f)(1), which would 
not happen in the normal course of business.\196\ According to SIFMA-
AMG, depending on how late in the day an FCM issued the margin call, 
managers may not be capable of meeting the call on a same-day basis, 
due in part to the time needed for managers, as fiduciaries, to 
validate the margin calls and instruct payments from the separate 
account clients' custodians globally, who may impose earlier cutoff 
times to meet same-day margin transfers or be subject to different time 
zones and business days.\197\ Instead, SIFMA-AMG argued, the 
Commission's timing requirements for meeting margin calls should take 
into account the agreed call time in documents between FCMs and 
customers.\198\ In SIFMA-AMG's view, the Commission's proposal 
represents a prescriptive framework around timing and deadlines for 
meeting margin calls that would eliminate the operational flexibility 
originally provided in CFTC Letter No. 19-17, and a one business day 
margin call should be deemed met so long as it is issued by the cutoff 
time agreed between the FCM and its customer.\199\
---------------------------------------------------------------------------

    \193\ SIFMA-AMG Comment Letter.
    \194\ Id.
    \195\ Id.
    \196\ Id.
    \197\ Id.
    \198\ Id.
    \199\ Id.
---------------------------------------------------------------------------

    ICE, in its comment letter, noted it did not object to the proposed 
one business day margin call standard as it would apply to FCMs.\200\
---------------------------------------------------------------------------

    \200\ ICE Comment Letter.
---------------------------------------------------------------------------

    The Commission proposed regulation Sec.  1.44(f), particularly the 
margin payment timing framework set forth in regulation Sec.  
1.44(f)(1)-(3), to more clearly define the concept of a ``one business 
day margin call,'' as that term is used in CFTC Letter No. 19-17. CFTC 
Letter No. 19-17 provided, among other conditions for separate account 
treatment, that: (i) each separate account must be on a one business 
day margin call; (ii) situations of administrative error or operational 
constraints which prevent the call from being met within a one-day 
period will not be considered a violation of such condition; and (iii) 
in no case can customers and FCMs contractually arrange for longer than 
a one business day period for a margin call to be met. The Commission 
notes that the no-action conditions of CFTC Letter No. 19-17 would thus 
appear to unambiguously provide that a margin call in a separate 
account must be met within one business day, but do not explicitly 
address certain practical challenges in applying such a standard, such 
as how an FCM shall make, and a customer shall meet, a call for margin 
paid in a currency that an FCM may be unable to practicably receive on 
the same (or in some cases next) business day. Although SIFMA-AMG 
appears to interpret this silence as promoting operational flexibility, 
the Commission believes it may confuse FCMs as to their obligations 
with respect to the margining of separate accounts, and may result in 
interpretations that are inconsistent with the Commission's customer 
funds protection and risk management goals in providing for the 
separate treatment of accounts.
    Furthermore, although regulation Sec.  1.44(f)(1)-(3) require a 
margin call to be met on a one business day basis, as set forth in 
regulation Sec.  1.44(f)(1)-(3), regardless of the time the call is 
issued, the Commission did not prescribe a time by which a margin call 
must be issued, recognizing that there may be legitimate operational 
reasons as to why an FCM may need to issue margin calls to different 
separate account customers at different times. The margin call 
contemplated by regulation Sec.  1.44(f)(1)-(3) is based on market 
movements or changes in positions on the previous business day, not as 
of the day of the call itself.\201\ The Commission proposed this 
standard to provide a clear cutoff time for the determination of a 
margin call, and to allow a margin call to be reasonably made and met 
on a one-day basis, based on the Commission's understanding that margin 
calls to address market movements or changes in positions on a given 
day are typically issued early on the next business day. For the 
avoidance of doubt, FCMs and customers may agree on the time the margin 
call required by regulations Sec.  1.44(f) should be made. If the call 
is not made timely due to administrative error or operational 
constraint as set forth in regulation Sec.  1.44(f)(5), discussed 
below, then such failure would not be deemed a violation of regulation 
Sec.  1.44's one business day margin call standard. However, to 
require, as SIFMA-AMG suggests, only that a margin call be met if 
issued by the cutoff time agreed between the FCM and its customer, 
would be to effectively allow FCMs and customers to interpret the one 
business day period on a customer-by-customer basis. This would be 
contrary to the Commission's goal of providing clear standards around 
the timely payment of margin to prevent separate accounts from becoming 
undermargined, which is at the core of the Commission's risk-mitigation 
goals.
---------------------------------------------------------------------------

    \201\ For the avoidance of doubt, an FCM may also, in its 
discretion, issue a call for margin based on same-day market 
movements or changes in positions. The FCM could, consistent with 
regulation Sec.  1.44(f)(1), make that call due either same-day or 
next-day. For example, under regulation Sec.  1.44(f)(1), the FCM 
would be required to make and collect, on Tuesday, a call for margin 
based on market movements and changes of positions on Monday. If the 
FCM determines to issue an additional margin call on Tuesday based 
on market movements (or changes in positions, or volatility, or 
other factors) on Tuesday, Sec.  1.44(f)(1) would require that that 
call be collected no later than close of Fedwire on Wednesday. 
However, the FCM could, in its discretion (in what would likely be 
an unusual case) make that supplemental call also due on Tuesday (or 
some earlier point in time on Wednesday). If that additional margin 
call does not cover the margin required for all of Tuesday's market 
movements and changes in positions, then the FCM would be required 
to issue (and collect) a margin call for the difference on 
Wednesday.
---------------------------------------------------------------------------

    Accordingly, the Commission is adopting regulation Sec.  
1.44(f)(1)-(3) as proposed.
    The occurrence of a foreign holiday during which banks are closed 
may also create difficulties in the payment of margin in a fiat 
currency other than USD. Therefore, the Commission proposed regulation 
Sec.  1.44(f)(4), which, as proposed, states that the relevant deadline 
for payment of margin in fiat currencies other than USD may be extended 
by up to one additional business day and still be considered in 
compliance with the requirements of

[[Page 7905]]

proposed regulation Sec.  1.44(f) if payment is delayed due to a 
banking holiday in the jurisdiction of issue of the currency. In 
effect, as proposed, regulation Sec.  1.44(f)(4) provides one 
additional business day for each nonconsecutive holiday in the 
jurisdiction of issue of the currency in which margin is to be paid. As 
proposed, regulation Sec.  1.44(f)(4) also provides that, for payments 
of margin in EUR specifically, either the separate account customer or 
the investment manager managing the separate account may designate one 
country within the Eurozone with which they have the most significant 
contacts for purposes of meeting margin calls in that separate account, 
the banking holidays of which shall be referred to for such 
purpose.\202\
---------------------------------------------------------------------------

    \202\ With respect to margin payments in EUR, proposed 
regulation Sec.  1.44(f)(4) was intended to prevent customers or 
asset managers from leveraging banking holidays in a multiplicity of 
jurisdictions, to circumvent requirements to pay margin timely.
---------------------------------------------------------------------------

    The Commission designed regulation Sec.  1.44(f)(4) to provide FCMs 
with a level of discretion in how they manage risk by allowing an FCM 
to permit limited delays in margin payments due to non-U.S. banking 
conventions. Regulation Sec.  1.44(f)(4) would not, however, require an 
FCM to extend the deadline for payments of margin. In this manner, the 
Commission sought to allow FCMs to exercise risk management judgment in 
balancing, within limits, the risk management challenges caused by 
extending the time before a margin call is met with the burdens 
involved in requiring the client or asset manager to prefund potential 
margin calls in advance of the holiday or to arrange to pay margin more 
promptly in USD or another currency not affected by the holiday. The 
Commission expected that FCM risk management decisions, including the 
use of any extension permitted under regulation Sec.  1.44(f)(4), will 
be made in consideration of relevant risk management factors; e.g., a 
client's risk profile and market conditions, evaluated at the time the 
risk management decisions are made.\203\
---------------------------------------------------------------------------

    \203\ This expectation is consistent with the statement of the 
directors of DCR and DSIO in issuing CFTC Letter No. 19-17. CFTC, 
Statement by the Directors of the Division of Clearing and Risk and 
the Division of Swap Dealer and Intermediary Oversight Concerning 
the Treatment of Separate Accounts of the Same Beneficial Owner, 
Sept. 13, 2019, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/dcrdsiodirectorstatement091319 (``We fully expect 
that DCOs and FCMs and their customers will agree that FCMs must 
retain, at all times, the discretion to determine that the facts and 
circumstances of a particular shortfall are extraordinary and 
therefore necessitate accelerating the timeline and relying on the 
FCM's protocol for liquidation or for accessing funds in the other 
accounts of the beneficial owner held at the FCM.''). See also CFTC 
Letter No. 20-28 (stating the same).
---------------------------------------------------------------------------

    In the Second Proposal, with respect to proposed regulation Sec.  
1.44(f)(4), the Commission requested comment (as Question 7) regarding 
whether commenters believe it will be impracticable to comply with 
proposed regulation Sec.  1.44(f)(4), as that section pertains to 
payment of margin in EUR, including examples of operational or other 
challenges that would result in such impracticability. To the extent 
commenters have such practicability concerns, the Commission requested 
comment regarding how, in the alternative, the Commission should seek 
to achieve its goal of preventing evasion of the one business day 
margin call standard, in light of differing banking holidays within the 
national jurisdictions that comprise the Eurozone. The Commission 
considers the comments received in response to proposed regulation 
Sec.  1.44(f)(4) to be responsive to this question.
    With respect to proposed regulation Sec.  1.44(f)'s provisions 
regarding payment of margin in connection with Eurozone holidays, FIA 
stated it does not believe motives of leveraging banking holidays in a 
multiplicity of jurisdictions to circumvent margin payment timing 
requirements are practicable or can be fairly ascribed to the 
institutional asset owners and money managers whom, according to FIA, 
comprise the predominant part of the group of customers who rely on 
separate account margining.\204\ FIA contended that proposed regulation 
Sec.  1.44(f)(4) would be unworkable, asserting that all investment 
managers and many separate account customers maintain custodial 
arrangements in multiple Eurozone jurisdictions and will be affected by 
local public holidays, which vary widely across the Eurozone.\205\
---------------------------------------------------------------------------

    \204\ FIA Comment Letter.
    \205\ Id.
---------------------------------------------------------------------------

    FIA noted, for example, that where a European state pension fund 
contracts with two unaffiliated institutional money managers based in 
France (i.e., two separate accounts of the same customer), and 
custodies funds for one mandate with a bank in France and for the other 
with a bank in Germany, and both managers designate France as their 
jurisdiction of most significant contacts, an asset manager whose 
custodian is in Germany will have no way of settling a EUR call 
received from an FCM on October 3, which is German Unity Day, a 
national holiday; and, under regulation Sec.  1.44(f)(4), as proposed, 
the FCM is prohibited from extending the benefit of a one business day 
extension to the separate account.\206\ FIA noted that asset owners 
typically hardwire separate investment mandates to separate custodial 
arrangements, and do not expect to be involved in settling margin calls 
arising in connection with those separate mandates.\207\ Therefore, FIA 
argued, in this example, the German custodian would not be able to pass 
the margin call to the French custodian or directly onto the pension 
fund.\208\
---------------------------------------------------------------------------

    \206\ Id.
    \207\ Id.
    \208\ Id.
---------------------------------------------------------------------------

    Furthermore, FIA asserted, FCMs would incur operational risk in 
having to track the Eurozone holiday preferences of hundreds or 
thousands of separate accounts, and FCMs will need to deploy new margin 
day counting systems and protocols, including new coding for automated 
systems.\209\ FIA further contended that, where such systems are 
automated, the workflows imposed under the proposed regulation would 
likely result in the need for more manual handling, which increases the 
risk of operational error.\210\ FIA recommended that the Commission 
revise proposed regulation Sec.  1.44(f)(4) to specify that, with 
respect to payments in EUR, the banking holidays of any jurisdiction 
within the Eurozone with which either the separate account customer or 
the investment manager managing the separate account has significant 
contacts shall be referred to for purposes of receiving the benefit of 
a one business day extension of an EUR-denominated margin call in 
consideration of non-U.S. local banking holidays.\211\
---------------------------------------------------------------------------

    \209\ Id.
    \210\ Id.
    \211\ Id.
---------------------------------------------------------------------------

    Additionally, with respect to proposed regulation Sec.  
1.44(f)(4)'s provision for one additional business day to meet a margin 
call in non-USD fiat currency to account for non-U.S. banking holidays, 
FIA noted that a growing number of FCM institutional clients, managers, 
and custodians are based in jurisdictions where there may be 
consecutive holidays.\212\ In FIA's view, limiting the extension 
available to such clients to a single business day forces the FCM to 
choose between suspending disbursements on a separate account basis 
simply due to holidays in the client's jurisdiction and exercising its 
discretion not to suspend disbursements on a separate account basis in 
the absence of any other reason to do so, thereby risking disciplinary 
action by the Commission or the FCM's

[[Page 7906]]

DSRO.\213\ FIA urged the Commission to revise proposed regulation Sec.  
1.44(f)(4) to provide that the deadline for payment of margin in non-
USD fiat currencies may be extended to the next business day following 
any banking holiday in the jurisdiction of issue of the currency and 
still be considered in compliance with the requirements of regulation 
Sec.  1.44(f) if payment is delayed due to such banking holiday.\214\
---------------------------------------------------------------------------

    \212\ Id.
    \213\ Id.
    \214\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG asserted it would be impractical for FCMs to comply with 
proposed regulation Sec.  1.44(f), and further asserted that there does 
not appear to be data or analysis to support the Commission's 
position.\215\ SIFMA-AMG contended that, although the Commission 
considers technical margin deficit scenarios from global business that 
regularly navigate U.S. and non-U.S. bank holidays, it does not 
consider that firms may plan for expected events, such as Golden Week 
in Japan,\216\ by pre-funding accounts.\217\ According to SIFMA-AMG, 
under the Commission's proposal, such an approach would be unmanageable 
and unsustainable and would impose a regulatory burden without a 
corresponding public policy benefit.\218\
---------------------------------------------------------------------------

    \215\ SIFMA-AMG Comment Letter.
    \216\ A period from April 29 to May 5 containing multiple public 
holidays.
    \217\ SIFMA-AMG Comment Letter.
    \218\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG argued that requiring clients posting cash margin in EUR 
to choose a country in the Eurozone and follow its holiday schedule 
would, in the event different managers for the same client choose 
different Eurozone countries, require the overhaul of agreements and 
burden FCMs with additional monitoring responsibilities.\219\ SIFMA-AMG 
recommended that the Commission provide greater flexibility to allow 
for better risk management, asserting that, by avoiding having to 
navigate the bank holidays of two different countries, a clearing 
member can appropriately manage its risk based on its business and 
customers.\220\
---------------------------------------------------------------------------

    \219\ Id.
    \220\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG stated that the base currency, custodian, and overall 
global nature of investing complicate efforts to pre-fund ahead of 
known holidays.\221\ SIFMA-AMG noted that, typically, margin payments 
are made in the base currency of a fund, or the client and the FCM 
effectuate single currency margining and the asset manager then 
repatriates foreign currency balances.\222\ SIFMA-AMG asserted that 
this process has been successfully implemented and that the Commission 
should not attempt to establish or require particular methods of 
achieving these goals.\223\
---------------------------------------------------------------------------

    \221\ Id.
    \222\ Id.
    \223\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG stated that, when a global holiday approaches, firms are 
asked by FCMs to prefund anticipated, expected initial and/or variation 
margin, resulting in overcollateralization.\224\ SIFMA-AMG asserted 
that prefunding margin is more operationally risky, particularly when 
scaled across multiple jurisdictions and with a global client base, 
because: (i) overcollateralization places excess risk at the FCM; (ii) 
it is impractical to attempt to estimate what other market moves will 
be in order to proactively overcollateralize and post margin; (iii) 
different custodians have different cutoff times, which may not be met 
ahead of a holiday; and (iv) prefunding leads to an inefficient process 
of having to be credited back payments as opposed to paying what is 
owed on a daily basis.\225\ SIFMA-AMG asserted that with large, 
separate accounts, there is always margin on hand to meet volatile 
market movements, and requiring prefunding as a precaution may be 
unnecessary because of a firm's ability to pay cash when needed.\226\ 
SIFMA-AMG also contended that the Commission's belief that firms might 
use holidays to gain a benefit with respect to required margin is 
misguided and impractical.\227\
---------------------------------------------------------------------------

    \224\ Id.
    \225\ Id.
    \226\ Id.
    \227\ Id.
---------------------------------------------------------------------------

    Additionally, SIFMA-AMG stated the Commission's Second Proposal 
does not consider the product and foreign currency associated with a 
particular trade, noting that a client may always be behind on margin 
due to the client's or fund's location, the client custodian, the 
product traded, and the clearinghouse.\228\ SIFMA-AMG stated the 
Commission's regulations should consider all parties involved in a 
transaction, such as the FCM, asset manager, clearinghouse, product, 
and foreign currency associated with a particular trade.\229\
---------------------------------------------------------------------------

    \228\ Id.
    \229\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG requested that, to the extent the Commission is 
considering the deadline for payment of margin in non-USD fiat 
currencies may be extended by up to one additional business day and 
still be considered in compliance with proposed regulation Sec.  
1.44(f) if payment is delayed due to a banking holiday in the 
jurisdiction of issue of the currency, the Commission confirm that 
initiating a transfer on the same day would suffice to meet the 
requirement.\230\
---------------------------------------------------------------------------

    \230\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG contended FCMs should have discretion to consider a 
deposit as pending in a customer's account, consistent with JAC 
Regulatory Alert #14-03.\231\ Specifically, SIFMA-AMG argued, if the 
FCM has a sufficient basis to believe the wire was actually initiated, 
and based on its experience with the customer and its normal course of 
business and consistent with its risk management program, then the FCM 
should have discretion to treat the margin as received and credited to 
a customer's margin equity.\232\ Otherwise, SIFMA-AMG stated, the 
Commission should consider same-day initiation of a transfer as an 
alternative to a grace or cure period to demonstrate compliance with 
proposed regulation Sec.  1.44(f).\233\ SIFMA-AMG stated that utilizing 
the time of initiation would effectively build into the regulation 
notice that payment was not received, the cure for which would be 
confirmation that the payment was initiated.\234\
---------------------------------------------------------------------------

    \231\ Id.
    \232\ Id.
    \233\ Id.
    \234\ Id.
---------------------------------------------------------------------------

    In MFA's comment letter, MFA opined that the manner in which the 
Second Proposal defined ``business day'' provided appropriate 
extensions of time for circumstances in which U.S. markets are open, 
but the day is a holiday in a non-U.S. jurisdiction.\235\
---------------------------------------------------------------------------

    \235\ MFA Comment Letter.
---------------------------------------------------------------------------

    The Commission is adopting regulation Sec.  1.44(f)(4) with 
modifications in light of comments received.
    Specifically, final regulation Sec.  1.44(f)(4) provides, in its 
first sentence, ``The relevant deadline for payment of margin in fiat 
currencies other than U.S. Dollars may be extended to the next business 
day following any banking holiday in the jurisdiction of issue of the 
currency, and still be considered in compliance with the requirements 
of this paragraph (f) if payment is delayed due to such banking 
holiday.'' Accordingly, final regulation Sec.  1.44(f)(4) provides an 
extension to meet margin calls in non-USD fiat currency during 
consecutive holidays.
    Furthermore, in final regulation Sec.  1.44(f)(4), the Commission 
eliminates the proposed provision regarding payments in EUR that a 
would have

[[Page 7907]]

required the identification of the jurisdiction within the Eurozone 
with which either the separate account customer or the relevant asset 
manager has the most significant contacts; the banking holidays of 
which would be referred to for purposes of receiving a one-day 
extension for EUR-denominated payments.
    The Commission views the one business day margin call standard set 
forth in regulation Sec.  1.44(f) as a fundamental measure for 
mitigating the risk to an FCM and its omnibus customer accounts for 
futures, Cleared Swaps, or foreign futures and foreign options, as it 
limits the time in which a customer's separate account may be 
undermargined. However, noting that, in codifying the no-action 
position of CFTC Letter No. 19-17, the Commission does not seek to 
disrupt established margining practices, the Commission has considered, 
and finds persuasive, comments submitted by FIA and SIFMA-AMG with 
respect to the anticipated challenges associated with implementing 
regulation Sec.  1.44(f)(4) as proposed, including the expected 
difficulties associated with implementing and administering new 
operational systems and renegotiating customer agreements. The 
Commission also finds persuasive information submitted by commenters 
regarding steps FCMs take currently to ensure customer accounts will 
not be undermargined during non-U.S. banking holidays, including 
instances in which there are consecutive non-U.S. banking holidays. 
Furthermore, both FIA and SIFMA-AMG disputed that firms leverage 
banking holidays (or that they practicably could) to gain a benefit 
with respect to required margin, and the Commission did not receive any 
comments indicating that such leveraging occurs, or that it is a 
substantial risk.
    In CFTC Letter No. 19-17, staff stated that a failure to deposit, 
maintain, or pay margin or option premium due to administrative errors 
or operational constraints would not constitute a failure to timely 
deposit or maintain initial or variation margin that would place a 
customer out of the ordinary course of business. This provision was 
intended to prevent a clearing FCM from being excluded from relying on 
the no-action position as a result of one-off exceptions, such as mis-
entered data, a flawed software update, or an unusual and unexpected 
information technology outage (e.g., an unanticipated outage of the 
Fedwire Funds Service).
    The Commission proposed regulation Sec.  1.44(f)(5), which, as 
proposed, provides that a failure with respect to a specific separate 
account to deposit, maintain, or pay margin or option premium that was 
called pursuant to regulation Sec.  1.44(f)(1), due to unusual 
administrative error or operational constraints that a separate account 
customer or investment manager acting diligently and in good faith 
could not have reasonably foreseen, does not constitute a failure to 
comply with the requirements of regulation Sec.  1.44(f). As proposed, 
regulation Sec.  1.44(f)(4) also provides that, for such purposes, an 
FCM's determination that the failure to deposit, maintain, or pay 
margin or option premium is due to such administrative error or 
operational constraints must be based on the FCM's reasonable belief in 
light of information known to the FCM at the time the FCM learns of the 
relevant administrative error or operational constraint.
    FIA contended that proposed regulation Sec.  1.44(f)(5) results in 
a proposal that is unnecessarily complex, disruptive of existing market 
practice, and an inappropriate and unjustified departure from the 
conditions of CFTC Letter No. 19-17.\236\ FIA further contended that 
the proposed rule is overly prescriptive and inflexible, and would 
increase systemic risk in margin settlement rather than mitigate 
it.\237\ FIA argued that proposed regulation Sec.  1.44(f)(5) would 
effectively require FCMs to suspend the ordinary course of business for 
events that are not extraordinary or unusual at all, but are intrinsic 
to the complexity and multiplicity of the components of the global 
payment settlement system that FCMs and their customers rely on.\238\
---------------------------------------------------------------------------

    \236\ FIA Comment Letter.
    \237\ Id.
    \238\ Id.
---------------------------------------------------------------------------

    Specifically, FIA contended that, by reformulating CFTC Letter No. 
19-17's standard for situations of administrative error or operational 
constraints to require that such situations be ``unusual,'' and by 
requiring FCMs to, in effect, document each determination of failure to 
settle based on administrative error or operational constraints in 
light of whether the separate account customer or investment manager 
acting diligently and in good faith could have reasonably foreseen the 
error or constraints giving rise to the settlement failure, the 
Commission has made such standard unworkable.\239\ FIA asserted that, 
when a separate account fails to settle within the applicable 
timeframe, FCMs will have to make and document a complicated and 
potentially highly speculative assessment of the facts under a legal 
standard that is subjective and vague.\240\ FIA noted that this would 
subject FCMs to the risk of being second-guessed by DSRO 
examiners.\241\
---------------------------------------------------------------------------

    \239\ Id.
    \240\ Id.
    \241\ Id.
---------------------------------------------------------------------------

    Additionally, FIA noted, FCMs have invested significantly in 
renovating operational and compliance systems in order to implement the 
conditions of CFTC Letter No. 19-17.\242\ FIA argued that proposed 
regulation Sec.  1.44(f)(5) will require material levels of new 
investment in compliance, risk management, and operations time and 
resources for no discernable risk management benefit.\243\ FIA 
recommended the Commission strike the requirement that an 
administrative error or operational constraint be ``unusual,'' and the 
requirement that the error or constraint be one that a separate account 
customer or investment manager acting diligently and in good faith 
could not have reasonably foreseen.\244\
---------------------------------------------------------------------------

    \242\ Id.
    \243\ Id.
    \244\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG similarly contended that proposed regulation Sec.  
1.44(f)(5) would establish a standard that is subjective and ambiguous 
and does not appropriately balance practicability and burden with risk 
management.\245\ SIFMA-AMG opined that the Commission's proposal does 
not make sufficiently clear the meaning of ``unusual,'' asserting that 
the meaning of the term can be analyzed in any number of different 
contexts and that the proposed regulation would therefore be difficult 
to implement without factors or a determinative standard.\246\ SIFMA-
AMG stated that it believes the level of prescriptiveness of proposed 
regulation Sec.  1.44(f)(5) is inconsistent with the Commission's 
principles-based approach with respect to FCM regulation.\247\
---------------------------------------------------------------------------

    \245\ SIFMA-AMG Comment Letter.
    \246\ Id.
    \247\ Id.
---------------------------------------------------------------------------

    MFA similarly argued that the Commission should effectively revert 
proposed regulation Sec.  1.44(f)(5) to the original language of the 
corresponding condition in CFTC Letter No. 19-17 regarding instances 
when administrative error or operational constraints do not result in a 
non-ordinary course of business event.\248\ MFA, like FIA and SIFMA-
AMG, asserted that FCMs and their customers have already developed 
procedures and controls to implement the conditions of CFTC Letter No. 
19-17.\249\ MFA noted the Commission

[[Page 7908]]

historically has applied a more principles-based approach with respect 
to margin regulation to recognize differences in FCMs and other market 
participants, and contended that this practice has avoided the 
interpretative challenges that would be created by the prescriptive 
nature of proposed regulation Sec.  1.44(f)(5).\250\
---------------------------------------------------------------------------

    \248\ MFA Comment Letter.
    \249\ Id.
    \250\ Id.
---------------------------------------------------------------------------

    MFA opined that the Second Proposal revises the conditions of CFTC 
Letter No. 19-17 to narrow them significantly and render them all but 
unusable. Specifically, MFA contended that the term ``unusual'' is 
subjective, and that, with the benefit of hindsight, any administrative 
error or operational constraint could be argued to have been reasonably 
foreseen.\251\ MFA further questioned how an FCM is to make a 
determination that a failure to pay margin is due to administrative 
error or operational constraint, who is required to approve such 
determination, and whether it is expected that an FCM would be 
obligated to escalate a proposed recommendation that an error or 
constraint is unusual through its corporate governance 
infrastructure.\252\ MFA argued that regulation Sec.  1.44(f)(5), as 
proposed, would add unnecessary delay, complexity, and administrative 
burden to an FCM, creating a disincentive for the FCM to develop and 
present a record to support a determination that a failure to timely 
pay margin was due to unusual administrative error or operational 
constraints.\253\ MFA further argued that the burden imposed by 
regulation Sec.  1.44(f)(5) as proposed would incentivize FCMs to 
simply declare that an event was outside the ordinary course of 
business and seek to eliminate separate account margining for the 
client.\254\ With respect the requirement that an FCM's determination 
of unusual administrative error or operational constraint be based on 
its ``reasonable belief,'' MFA questioned whether an FCM is expected to 
review the entire customer relationship to determine the frequency of 
administrative errors or operational constraints before it has the 
necessary information to form the basis of a determination.
---------------------------------------------------------------------------

    \251\ Id.
    \252\ Id.
    \253\ Id.
    \254\ Id.
---------------------------------------------------------------------------

    MFA expressed concern that proposed regulation Sec.  1.44(f)(5) 
would impede an FCM from exercising reasonable risk management 
practices and would require the FCM to undergo a complex and time-
consuming analysis before determining whether to provide some form of 
grace period to the underlying customer.\255\
---------------------------------------------------------------------------

    \255\ Id.
---------------------------------------------------------------------------

    The Commission proposed regulation Sec.  1.44(f)(5) to provide that 
a single missed margin payment would not result in an FCM being 
required to suspend disbursements on a separate account basis for a 
customer, where the missed payment is the result of an unexpected, 
unusual administrative error or operational constraint. As proposed, 
regulation Sec.  1.44(f)(5) reflects the Commission's belief that 
providing such an exception for any administrative error or operational 
constraint could result in an FCM maintaining separate account 
disbursements for a separate account customer that fails to make timely 
margin payments on a frequent basis or because of known or avoidable 
issues. At the same time, the Commission believes that limiting such 
exceptions to specific events, or requiring that the FCM's 
determination of administrative error or operational constraint be 
based on a prescriptive set of criteria, could in fact increase the 
risk that a single ``foot-fault'' (i.e., an unusual and inadvertent 
failure), not explicitly addressed by Commission regulations, that 
results in a missed margin payment, would result in suspension of 
disbursements on a separate account basis, and may ultimately make 
separate account treatment unworkable for FCMs and their customers.
    The Commission recognizes that there could be a wide variety of 
situations that may constitute administrative error or operational 
constraints for purposes of regulation Sec.  1.44(f)(5), and, as 
discussed further below, that, at the time an FCM learns of such 
administrative error or operational constraint, a well-run FCM, may be 
required to act expeditiously based on limited information concerning 
such events, and in a manner consistent with its own risk management 
processes and procedures. The Commission accordingly is not prescribing 
the form or manner in which an FCM must document determinations of 
administrative error or operational constraints, much less that such 
determination be made following an exhaustive analysis. For the same 
reason, the Commission is not prescribing specific procedures or lines 
of escalation an FCM must implement in order to make a determination of 
administrative error or operational constraint in compliance with 
regulation Sec.  1.44(f)(5).
    Moreover, a client's or asset manager's arrangements for paying 
margin are not necessarily static. Where an administrative error or 
operational constraint prevents the prompt payment of margin, the FCM 
may be able to work with the client or asset manager so that steps are 
taken to mitigate the likelihood of, or prevent, the recurrence of, the 
circumstances that led to that result.
    As discussed above, FIA, SIFMA-AMG, and MFA variously commented 
that proposed regulation Sec.  1.44(f)(5) uses subjective and ambiguous 
terms; in particular, the requirement that an administrative error or 
operational constraint be ``unusual.'' The corresponding condition in 
CFTC Letter No. 19-17, provides an exception to the one business day 
margin call condition for margin payments that are untimely due to 
administrative error or operational constraint, but does not contain an 
express limiting principle with respect to the nature of the 
administrative errors or operational constraints that would be within 
its scope.
    The Commission agrees with commenters that the ``unusual'' standard 
could be read to be subjective and ambiguous, and does not 
appropriately balance practicability and burden with risk management. 
As such, the Commission is declining to retain in final regulation 
Sec.  1.44(f)(5) the proposed requirement that an administrative error 
or operational constraint be unusual. The Commission is also persuaded 
by commenters' assertions that the requirement that the relevant 
unusual administrative error or operational constraint be one that a 
``separate account customer or asset manager acting diligently and in 
good faith could not have reasonably foreseen'' may prove unworkable 
and may ultimately introduce unnecessary delay and complexity to an 
FCM's determination of the occurrence of an unusual administrative 
error or operational constraint.
    Accordingly, in adopting regulation Sec.  1.44(f)(5), the 
Commission is eliminating the requirement that an administrative error 
or operational constraint be ``unusual'' or one ``that a separate 
account customer or asset manager acting diligently and in good faith 
could not have reasonably foreseen.'' The Commission is otherwise 
adopting regulation Sec.  1.44(f)(5) as proposed, with a change for 
internal consistency.\256\
---------------------------------------------------------------------------

    \256\ As proposed, regulation Sec.  1.44(f)(5) provides, in 
part, that, ``A failure with respect to a specific separate account 
to deposit, maintain, or pay margin or option premium that was 
called pursuant to paragraph (f)(1) of this section, due to unusual 
administrative error or operational constraints . . . does not 
constitute a failure to comply with the requirements of this 
paragraph (f).'' As discussed above, this provision is intended to 
implement in regulation Sec.  1.44 the no-action condition providing 
that ``[e]ach such separate account must be on a one business day 
margin call'' and that ``[s]ituations of administrative error or 
operational constraints which prevent the call from being met within 
a one-day period will not be considered a violation of [the] 
condition.'' CFTC Letter No. 19-17. Regulation Sec.  1.44(f) 
requires separate accounts to be on a one business day margin call, 
a concept which the provisions of regulation Sec.  1.44(f) further 
define. While regulation Sec.  1.44(f)(1) provides a base 
requirement to issue a margin call which must be met on a one-day 
basis, other components of regulation Sec.  1.44(f) address how a 
one business day margin call must be made and met in the context of 
international banking conventions as well as holidays. For internal 
consistency, the avoidance of confusion, and to ensure that the 
exception provided in regulation Sec.  1.44(f)(5) applies in respect 
of such other provisions informing the meaning of a one business day 
margin call, in final regulation Sec.  1.44(f)(5), the Commission is 
adjusting the reference to regulation Sec.  (f)(1) to instead 
reference regulation Sec.  1.44(f) generally.

---------------------------------------------------------------------------

[[Page 7909]]

    Although not directly related to proposed regulation Sec.  
1.44(f)(5), ICE suggested that the Commission revise regulation Sec.  
1.56, which prohibits an FCM from representing that it will not call 
for or collect margin, to make conforming changes to facilitate 
separate account treatment.\257\ ICE asserted that it is concerned that 
failing to do so may not allow FCMs to fully take advantage of 
regulation Sec.  1.44, or may create uncertainty with respect to the 
application of regulation Sec.  1.56 for a customer with separate 
accounts.\258\
---------------------------------------------------------------------------

    \257\ ICE Comment Letter.
    \258\ Id.
---------------------------------------------------------------------------

    The Commission appreciates ICE's comment. The Commission noted in 
the Second Proposal that it seeks in this rulemaking only to directly 
apply the Margin Adequacy Requirement encompassed by regulation Sec.  
39.13(g)(8)(iii) to all FCMs and to enact a narrow codification of the 
no-action position in CFTC Letter No. 19-17 as applicable to all FCMs, 
and that it considers amendments to regulation Sec.  1.56 as outside 
the scope of this rulemaking. The Commission believes regulation Sec.  
1.56's prohibition of guarantees against loss with respect to ``any 
commodity interest in any account carried by [an FCM]'' (emphasis 
added) is sufficiently clear that such provision would apply to the 
separate accounts of a separate account customer. As staff made clear 
in CFTC Letters Nos. 19-17 and 20-28, separate account treatment is 
consistent with regulation Sec.  1.56 so long as the FCM retains, at 
all times, the discretion to access funds in the other separate 
accounts of the beneficial owner held at the FCM.\259\
---------------------------------------------------------------------------

    \259\ See, e.g., CFTC Letter No. 20-28.
---------------------------------------------------------------------------

    The Commission additionally notes that the requirement that an FCM 
provide separate account customers with a disclosure that under part 
190 of the Commission's regulations that all separate accounts of a 
separate account customer will be combined in the event of an FCM 
bankruptcy, an original condition of the no-action position proposed as 
regulation Sec.  1.44(h)(3), was included as a no-action condition due 
to the fact that it would not possible to limit the losses in one 
separate account from affecting another separate account of the 
separate account customer in a default scenario.
    The Commission proposed regulation Sec.  1.44(f)(6) to make clear 
that it is establishing a maximum period in which a margin call must be 
met for purposes of regulation Sec.  1.44, rather than establishing a 
minimum time an FCM must allow. As proposed, regulation Sec.  
1.44(f)(6) provides that an FCM would not be in compliance with the 
requirements of proposed regulation Sec.  1.44(f) if it contractually 
agrees to provide separate account customers with periods of time to 
meet margin calls that extend beyond the time periods specified in 
proposed regulation Sec.  1.44(f)(1)-(5),\260\ or engages in practices 
that are designed to circumvent proposed regulation Sec.  1.44(f). As 
proposed, regulation Sec.  1.44(f) would not preclude an FCM from 
having customer agreements that provide for more stringent margining 
requirements or applying more stringent margining requirements in 
appropriate circumstances. The statement that these ``requirements 
apply solely for purposes of this paragraph (f)'' means that such 
requirements are not intended to apply to any other provision; e.g., 
they are not intended to define when an account is undermargined for 
purposes of regulation Sec.  1.17. Conversely, the Commission did not 
propose to prohibit contractual arrangements inconsistent with proposed 
regulation Sec.  1.44(f). However, the FCM would not be permitted to 
engage in separate account treatment under such arrangements.
---------------------------------------------------------------------------

    \260\ For example, if an FCM and a customer contract for a grace 
or cure period that would operate to make margin due and payable 
later than the deadlines described herein, including a case where 
the FCM would not have the discretion to liquidate the customer's 
positions and/or collateral where margin is not paid by such time, 
such an agreement would be inconsistent with the requirements 
pursuant to which such FCM may engage in separate account treatment.
---------------------------------------------------------------------------

    SIFMA-AMG urged the Commission to consider permitting FCMs to 
continue having discretion to agree on a limited grace period, based on 
their own credit assessment and consistent with their risk management 
programs.\261\ SIFMA-AMG contended that such grace periods are 
consistent with the objectives of ensuring the timely correction of 
margin shortfalls or timely identification of a customer's inability to 
meet a margin call.\262\
---------------------------------------------------------------------------

    \261\ SIFMA-AMG Comment Letter.
    \262\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG asserted that contractual grace periods can manifest in 
scenarios other than separate account treatment, depending on a fund's 
structure.\263\ For example, SIFMA-AMG noted, in instances where 
subadvisors are hired for a specific fund and the investment firm is 
managing the same fund with potentially the same FCM, removing the 
grace period would mean that a single ``foot fault'' with respect to a 
single asset manager can cause the FCM to revert to margining on a 
gross basis, which would disrupt the ability of certain SIFMA-AMG 
members to get excess margin back and could cause a lack of awareness 
of a client's overall margin requirements.\264\ SIFMA-AMG further 
asserted that this would incentivize customers to change FCMs and would 
result in less transparency and opportunity for existing FCMs to cover 
themselves if a client defaults.\265\
---------------------------------------------------------------------------

    \263\ Id.
    \264\ Id.
    \265\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG contended that an FCM's inability to rely on the return 
of excess margin due to ``foot faults'' at other managers could cause 
further downstream failures and inadvertent consequences.\266\ For 
example, SIFMA-AMG noted, excess margin is normally expected to be 
returned based on data generated early in the morning, and managers may 
anticipate that excess margin will be available to make additional 
investments or execute new transactions, or to be used to cover other 
margin or payment obligations due.\267\ However, SIFMA-AMG stated, if 
later in the day, the excess margin unexpectedly is not returned due to 
a ``foot fault'' at a separate manager, which such manager cannot 
validate or challenge, there may not be time to either unwind the new 
trades or investments, or to meet the other margin or payment demands, 
which could lead to defaults on these and other obligations and 
potentially trigger other cross-defaults.
---------------------------------------------------------------------------

    \266\ Id.
    \267\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG also asserted that certain sub-advised funds or separate 
account clients are not able to hold cash as a buffer against this 
scenario due to cash limits, which, in light of the proposed 
regulation, would incentivize managers to move sub-advised funds or 
separate account clients to FCMs where there is no overlap across such 
sub-

[[Page 7910]]

advised funds or separate account clients. SIFMA-AMG contended that 
this would result in less transparency and fewer assets available to 
each FCM, potentially impairing FCMs' credit risk management, and 
running counter to risk management goals where separate account 
treatment results in an FCM holding more margin than it otherwise 
would. Asserting that there may be occasions when additional time is 
warranted to allow a customer to address delays in the payment of 
margin that are not caused by administrative errors or operational 
constraints, SIFMA-AMG recommended that the Commission reconsider its 
position regarding grace periods.\268\
---------------------------------------------------------------------------

    \268\ Id.
---------------------------------------------------------------------------

    The Commission views grace periods as inconsistent with the risk 
management goals of separate account treatment, although the Commission 
reiterates that regulation Sec.  1.44, as proposed, does not prohibit 
the use of grace periods with respect to the accounts of non-separate 
account customers. The Margin Adequacy Requirement set forth in 
regulation Sec.  1.44(b) provides that an FCM shall not allow a 
customer to withdraw funds from its accounts if such withdrawal would 
create or exacerbate an undermargining scenario in the customer's 
account. Regulation Sec.  1.44(c)'s provision for an election for 
separate account treatment for purposes of the Margin Adequacy 
Requirement is premised on an FCM's ability to comply with risk 
management requirements designed to ensure, in part, that margin for 
separate accounts is paid timely, such that a separate account 
customer's individual separate accounts do not become undermargined. 
The Commission's one business day margin call standard is intended to 
limit the window in which a customer's separate account may be 
undermargined, thus limiting the risk to the FCM, and the FCM's omnibus 
customer account for futures, Cleared Swaps, or foreign futures or 
foreign options.
    The Commission notes that while a single ``foot fault'' with 
respect to a single manager theoretically could result in an FCM being 
required to suspend disbursements on a separate account basis, the 
error would not lead to that result if the FCM determines it 
constitutes an administrative error or operational constraints as set 
forth in regulation Sec.  1.44(f)(5). Additionally, the Commission 
notes that, in light of the unpredictability of markets, it would 
appear that an asset manager that puts its account in a position where 
a failure to receive margin would result in an actual default would be 
placing its customer at substantial risk.
    As noted above, as proposed, regulation Sec.  1.44(f)(6) provides 
that an FCM would not be in compliance with the requirements of 
proposed regulation Sec.  1.44(f) if it contractually agrees to provide 
separate account customers with periods of time to meet margin calls 
that extend beyond the time periods specified in proposed regulation 
Sec.  1.44(f)(1)-(5), or engages in practices that are designed to 
circumvent proposed regulation Sec.  1.44(f). While the JAC did not 
directly discuss proposed regulation Sec.  1.44(f)(6) in its comment 
letter, the JAC noted that if an FCM and customer contract to arrange 
for margins calls to be met in longer than one business day, then the 
FCM is not making a bona fide attempt to collect margin within one 
business day after the occurrence of the event giving rise to the 
margin deficiency.\269\
---------------------------------------------------------------------------

    \269\ JAC Comment Letter.
---------------------------------------------------------------------------

    The Commission reiterates that regulation Sec.  1.44 is designed to 
operate without prejudice to the rules or guidance of a DSRO, and that 
a DSRO may promulgate and maintain rules and guidance with respect to 
the treatment of customer accounts, including separate accounts, that 
are more stringent than the regulations promulgated herein.
    Although FIA in its comment letter did not directly discuss 
proposed regulation Sec.  1.44(f)(6), FIA noted that, for the past 
three years, examiners from CME's Financial and Regulatory Surveillance 
Department have taken the position in financial and operational audits 
of FCM clearing members for which CME serves as DSRO that any 
contractual grace or cure period overlying a customer's failure to 
satisfy a margin call (which is not qualified by reference to 
administrative or operational reasons for failure) is a violation of 
CME Rule 930.K.1, requiring clearing members to maintain full 
discretion to determine when and under what circumstances positions in 
any account shall be liquidated.\270\ FIA stated that it believes clear 
guidance is needed with respect to permissibility of grace periods, and 
requested the Commission communicate to CME and the JAC that they 
should make their position with respect to the permissibility of grace 
periods under CME rules known publicly through a market regulatory 
notice so that all clearing member FCMs, buy-side managers, and asset 
owners will receive the same message at the same time.\271\ This issue 
would appear to have been addressed subsequent to FIA's comment.\272\
---------------------------------------------------------------------------

    \270\ FIA Comment Letter.
    \271\ Id.
    \272\ Id. Following the close of the comment period, on October 
15, 2024, CME published a bulletin reminding clearing members of 
their responsibility to comply with CME Rule 930.K.1 and Chicago 
Board of Trade, New York Mercantile Exchange, and COMEX Rule 930.K 
(collectively, Rule 930.K). CME Group, Memorandum, Financial and 
Regulatory Bulletin #24-02 re: Rule 930.K.--Liquidation of Accounts, 
Oct. 15, 2024, available at https://www.cmegroup.com/notices/clearing/2024/10/frb-24-02.html. The bulletin notes that recent 
disciplinary actions for violation of this rule highlight that 
clearing members may need to review and update their account 
agreements, and further notes that where a disciplinary committee 
has found one clearing member's conduct to be a violation of 
exchange rules, the public posting of the disciplinary action 
provides notice to all clearing members and market participants that 
such conduct is a rule violation. Id. CME further stated that, aside 
from reasonable, one-day administrative or operational exceptions, 
contractual language providing a period of time (i.e., a grace or 
cure period) after a missed performance bond call before the 
clearing member could take action (including liquidation of 
positions) would violate Rule 930.K. Id.
---------------------------------------------------------------------------

    With respect to FIA's comment, the Commission believes that DSROs, 
in overseeing FCMs, should make clear the manner in which they will 
apply their rules, and should not apply such rules in a disparate 
manner to the entities for which they serve as DSRO.
    Accordingly, the Commission is adopting regulation Sec.  1.44(f)(6) 
as proposed, with a change for internal consistency.\273\
---------------------------------------------------------------------------

    \273\ As proposed, regulation Sec.  1.44(f)(6) provides, ``A 
futures commission merchant would not be in compliance with the 
requirements of this paragraph (f) if it contractually agrees to 
provide separate account customers with periods of time to meet 
margin calls that extend beyond the time periods specified in 
paragraph (f)(1) through (5) of this section, or engages in 
practices that are designed to circumvent this paragraph (f).'' This 
provision is intended to implement in regulation Sec.  1.44 the no-
action condition (part of the one business day margin call 
condition) that, ``In no case can customers and FCMs contractually 
arrange for longer than a one business day period for a margin call 
to be met.'' CFTC Letter No. 19-17. As a matter of internal 
consistency (with respect to the final clause of regulation Sec.  
1.44(f)(6)), consistency with the corresponding no-action condition, 
and to ensure that the time periods specified in the regulation 
encompass banking holidays for which regulation Sec.  1.44(f)(7) 
provides an exception to the timing requirements of regulation Sec.  
1.44(f)(1), the Commission is adopting final regulation Sec.  
1.44(f)(6) with a modification to reference paragraph (f) generally 
in the first instance.
---------------------------------------------------------------------------

    The Commission proposed regulation Sec.  1.44(f)(7) to provide an 
exception to regulation Sec.  1.44(f)(1) with respect to certain 
holidays (currently, Columbus Day and Veterans Day) on which some DCMs 
may be open for trading, but on which banks are closed (and, therefore, 
payment of margin may be difficult or impracticable). As proposed, 
regulation Sec.  1.44(f)(7) only applies to an FCM if that FCM 
intermediates trades on such a DCM, and to a separate account if that

[[Page 7911]]

separate account includes positions traded on such a DCM.
    Paragraph (i) deals with margin calls based on undermargined 
amounts in a separate account resulting from market movements on the 
business day before the holiday. Such calls may be made on the holiday 
but would be due by the close of Fedwire on the next business day after 
the holiday.\274\
---------------------------------------------------------------------------

    \274\ Additional days due to other provisions of proposed 
regulation Sec.  1.44(f) would also be applicable.
---------------------------------------------------------------------------

    Paragraph (ii) deals with margin calls based on undermargined 
amounts resulting from market movements on the holiday. If, as a result 
of such market movements, a separate account is undermargined by an 
amount greater than the amount it was undermargined due to market 
movements or position changes on the business day before the holiday, 
the FCM shall issue a margin call for the separate account for at least 
the incremental undermargined amount, which must be met by the 
applicable separate account customer no later than the close of the 
Fedwire Funds Service on the next business day after the holiday.\275\
---------------------------------------------------------------------------

    \275\ To illustrate the operation of regulation Sec.  
1.44(f)(7)(i)-(ii) as proposed, using Veterans Day (November 11) as 
an example, and assuming that no relevant day falls on a weekend, 
if, as a result of market movements on November 10, a separate 
account is undermargined by $100, the FCM would issue a margin call 
of at least $100 and, payment of that $100 would be due by the close 
of Fedwire on November 12. If that separate account were to be 
undermargined by a total of $160 as a result of market movements on 
November 11, the FCM would issue a margin call for at least the 
incremental amount ($160-$100 = $60) on November 12, and that 
incremental $60 would also be due by the close of Fedwire on 
November 12. If, instead, the separate account gained $60 on 
November 11, the original margin call for $100 (issued on November 
11) would still need to be met by the close of Fedwire on November 
12. By contrast, if the separate account were not undermargined as a 
result of market movements on November 10, but then became 
undermargined by $60 as a result of market movements on November 11, 
the FCM would issue a margin call in the amount of at least $60 on 
November 12, and payment would be due by the close of Fedwire on 
November 12.
---------------------------------------------------------------------------

    Although ICE, in its comment letter, stated that it did not object 
to the Commission's proposed standard for a one business day margin 
call as it applies to FCMs,\276\ ICE recommended that the Commission 
modify regulation Sec.  1.44(f)(7), as proposed, to extend to DCOs that 
are open for clearing on a U.S. holiday to account for Cleared Swaps 
that may not be traded on a DCM and for which margin requirements are 
set by the DCO.\277\
---------------------------------------------------------------------------

    \276\ ICE Comment Letter.
    \277\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges that the same rationale for providing 
the exception in proposed regulation Sec.  1.44(f)(7) with respect to 
an FCM trading uncleared swaps on a DCM applies equally in respect of 
an FCM with swaps cleared at a DCO: on days when DCOs are open, but 
banks are closed, and margin requirements are set by the DCO, it may be 
difficult or impracticable for FCMs to pay margin.
    Accordingly, the Commission is adopting regulation Sec.  1.44(f)(7) 
with the modification that its terms shall apply in the case of a 
holiday where any DCM or other board of trade on which the FCM trades 
is open for trading, or any DCO that clears the Cleared Swaps of such 
FCM's Cleared Swaps Customers is open for clearing such swaps, and 
where a separate account of any of the FCM's separate account customers 
includes positions traded on such market or cleared at such a DCO. 
Additionally, as discussed above in connection with regulation Sec.  
1.44(a), final regulation Sec.  1.44(f)(7) will also refer to ``any 
designated contract market or other board of trade,'' to explicitly 
encompass foreign exchanges in connection with 30.7 accounts.
    Lastly, the Commission proposed regulation Sec.  1.44(f)(8) to set 
forth a procedure to adjust the scope of currencies in proposed 
Appendix A to part 1. In proposing regulation Sec.  1.44(f)(8), the 
Commission sought to ensure a more flexible process whereby members of 
the public, or the Commission itself, may initiate a process to expand 
or narrow proposed Appendix A to part 1 as may be required from time to 
time, subject to public notice and comment. Regulation Sec.  
1.44(f)(8), as proposed, provides that any person may submit to the 
Commission any currency that such person proposes to add to or remove 
from proposed Appendix A to part 1.
    The submission must include a statement that margin payments in the 
relevant currency cannot, in the case of a proposed addition, or can, 
in the case of a proposed removal, practicably be received by the FCM 
issuing a margin call no later than the end of the first business day 
after the day on which the margin call is issued. The submitter would 
be required to support such assertion with documentation or other 
relevant supporting information, as well as any additional information 
that the Commission requests.\278\ The Commission would be required to 
review the submission and determine whether to propose to add the 
relevant currency to, or remove it from, proposed Appendix A to part 1. 
The Commission would also be required to issue such determination 
through notice-and-comment rulemaking, with a comment period of no less 
than thirty days. Proposed regulation Sec.  1.44(f)(8) also provides 
that the Commission may propose to issue such a determination of its 
own accord, without prompting by a submission from a member of the 
public. As with a public submission, a Commission determination on its 
own accord would be subject to notice and comment rulemaking, with a 
public comment period of no less than thirty days.
---------------------------------------------------------------------------

    \278\ Submitters may request confidential treatment for parts of 
its submission in accordance with regulation Sec.  145.9(d).
---------------------------------------------------------------------------

    The Commission did not receive any comments with respect to 
proposed regulation Sec.  1.44(f)(8). Accordingly, the Commission is 
adopting regulation Sec.  1.44(f)(8) as proposed.

J. Regulation Sec.  1.44(g)

    As proposed, regulation Sec.  1.44(g) contains requirements related 
to calculations for capital, risk management, and segregation of 
customer funds. These provisions are substantially similar to the 
corresponding no-action conditions in CFTC Letter No. 19-17, except 
that they have been reorganized and subjected to minor changes to 
account for their proposed inclusion in part 1 of the Commission's 
regulations as well as the proposed introduction of new defined terms. 
Regulation Sec.  1.44(g) is intended to ensure that an FCM treats 
separate accounts in a consistent manner for purposes of risk 
management. Many of its provisions are intended to ensure that an FCM 
treats each separate account as a distinct account from all other 
accounts of a separate account customer for purposes of the FCM 
computing its regulatory capital and segregation of customer funds.
    The Industry Letters preceding the issuance of CFTC Letter No. 19-
17 provided examples of controls an FCM could apply to mitigate the 
risk of permitting disbursements on a separate account basis, and 
discussed restrictions used in customer agreements providing for the 
application of separate account treatment designed to ensure that a 
customer's separate accounts are in fact treated separately on a 
consistent basis in the FCM's management of risk. For instance, as FIA 
noted in its June 26, 2019 letter, customer agreements that provide for 
separate account treatment generally require that a separate account be 
margined separately from any other account maintained for the customer 
with the FCM, and assets held in one separate account should not 
ordinarily be used to offset, or (absent default) meet, any obligations 
of another separate account, including obligations

[[Page 7912]]

that it or another asset manager may have incurred on behalf of a 
different account of the same customer.\279\ In that letter, preceding 
issuance of CFTC Letter No. 19-17, FIA observed that these restrictions 
serve to assure the customer, or the asset manager responsible for a 
particular account, that the account will not be subject to 
unanticipated interference that may exacerbate stress on a customer's 
aggregate exposure to the FCM.\280\ Additionally, FIA noted that where 
an FCM treats separate accounts as separate customers for risk 
management purposes, the FCM may manage risk more conservatively 
against the customer under the assumption that the customer has fewer 
assets than it may in fact have.\281\
---------------------------------------------------------------------------

    \279\ First FIA Letter.
    \280\ Id.
    \281\ Id.
---------------------------------------------------------------------------

    These controls, and conditions for the consistent treatment of 
separate accounts in an FCM's books and records for purposes of risk 
management, constitute a key part of the no-action conditions of CFTC 
Letter No. 19-17. The Commission considers such requirements as 
reasonably necessary with respect to this final rule to ensure that 
FCMs do not manage the risk posed by the separate accounts of certain 
separate account customers, or the risk posed by certain such separate 
accounts of such customers, in a disparate manner. Such disparate 
treatment could reduce the risk-mitigating effects of such requirements 
with respect to certain separate account customers and their separate 
accounts, and could impair the ability of an FCM's DSRO or the 
Commission to ascertain the extent to which certain customers' accounts 
are in fact being treated separately. Thus, these requirements are 
reasonably necessary to effectuate section 4d of the CEA.
    Accordingly, as proposed, regulation Sec.  1.44(g) would apply to 
all FCMs certain conditions in CFTC Letter No. 19-17 designed to 
provide for consistent treatment of separate accounts. As proposed, 
regulation Sec.  1.44(g) requires a separate account of a customer to 
be treated separately from other separate accounts of the same customer 
for purposes of certain existing computational and recordkeeping 
requirements, which would otherwise be met by treating accounts of the 
same customer on a combined basis. Because accounts subject to 
regulation Sec.  1.44 would be risk-managed on a separate basis, the 
Commission believes it is appropriate for the regulation to provide 
that FCMs apply these risk-mitigating computational and recordkeeping 
requirements on a separate account basis. The effect of the 
requirements in these paragraphs is to augment the FCM's existing 
obligations under various provisions of regulation Sec.  1.17.
    As proposed, regulation Sec.  1.44(g)(1) provides that an FCM's 
internal risk management policies and procedures shall provide for 
stress testing as set forth in regulation Sec.  1.73, and credit limits 
for separate account customers. Regulation Sec.  1.44(g)(1) further 
provides that such stress testing must be performed, and the credit 
limits must be applied, both on an individual separate account and on a 
combined account basis. By conducting stress testing on both an 
individual separate account and on a combined account basis, an FCM can 
determine the potential for significant loss in the event of extreme 
market conditions, and the ability of traders and FCMs to absorb those 
losses, with respect to each individual separate account of a customer, 
as well as with respect to all of the customer's separate accounts. 
Additionally, by applying credit limits on both an individual separate 
account basis (to address issues that may be specific to the particular 
strategy governing the separate account) and on a combined account 
basis (to address issues that may be applicable to the customer's 
overall portfolio at the FCM), an FCM can better manage the financial 
risks they incur as a result of carrying positions both for a 
customer's separate account and for all of the customer's accounts. By 
better managing the financial risks posed by customers and 
understanding the extent of customers' risk exposures, FCMs can better 
mitigate the risk that customers do not maintain sufficient funds to 
meet applicable initial and maintenance margin requirements. Such FCMs 
can also anticipate and mitigate the risk of the occurrence of certain 
of the events detailed in regulation Sec.  1.44(e).
    Regulation Sec.  1.44(g)(2), as proposed, provides that an FCM 
shall calculate the margin requirement for each separate account of a 
separate account customer independently from such margin requirement 
for all other separate accounts of the same customer with no offsets or 
spreads recognized across the separate accounts. An FCM would be 
required to treat each separate account of a customer independently 
from all other separate accounts of the same customer for purposes of 
computing capital charges for undermargined customer accounts in 
determining its adjusted net capital under regulation Sec.  1.17.
    Regulation Sec.  1.44(g)(3), as proposed, provides that an FCM 
shall, in computing its adjusted net capital for purposes of regulation 
Sec.  1.17, record each separate account of a separate account customer 
in the books and records of the FCM as a distinct account of a 
customer, including recording each separate account with a net debit 
balance or a deficit as a receivable from the separate account 
customer, with no offsets between the other separate accounts of the 
same separate account customer.
    Regulations Sec. Sec.  1.20, 22.2, and 30.7 currently require an 
FCM to maintain a sufficient amount of customer funds in segregated 
accounts to meet its total obligations to all futures customers, 
Cleared Swaps Customers, and 30.7 customers, respectively.\282\ In 
order to ensure that the FCM holds sufficient funds in segregation to 
satisfy the aggregate account balances of all customers with positive 
net liquidating balances, the FCM is prohibited from netting the 
account balances of customers with deficit or debit ledger balances 
against the account balances of customers with credit balances.\283\ 
Each FCM is also required to prepare and submit to the Commission, and 
to FCM's DSRO, a daily statement demonstrating compliance with its 
segregation obligations.\284\
---------------------------------------------------------------------------

    \282\ 17 CFR 1.20(a), 22.2(f)(2), and 30.7(a).
    \283\ 17 CFR 1.20(i)(4), 22.2(f)(4), and 30.7(f)(2)(iv) for 
futures customer accounts, Cleared Swaps Customer Accounts, and 30.7 
accounts, respectively.
    \284\ See 17 CFR 1.32(d), 22.2(g)(3), and 30.7(l)(3).
---------------------------------------------------------------------------

    Regulation Sec.  1.44(g)(4), as proposed, provides that an FCM 
shall, in calculating the amount of its own funds it is required to 
maintain in segregated accounts to cover deficits or debit ledger 
balances pursuant to regulations Sec. Sec.  1.20(i), 22.2(f), or 
30.7(f)(2) in any futures customer accounts, Cleared Swaps Customer 
Accounts, or 30.7 accounts, respectively, include any deficits or debit 
ledger balances of any separate account as if the accounts are accounts 
of separate entities. The purpose of regulation Sec.  1.44(g)(4) is to 
ensure that an FCM that elects to permit separate account customers 
treats separate accounts as if the accounts are accounts of separate 
entities for purposes of computing the amount of funds the FCM is 
required to hold in segregation for futures customers, Cleared Swaps 
Customers, and 30.7 customers. Specifically, regulation Sec.  1.44(g) 
would provide that an FCM may not offset a deficit or debit ledger 
balance in the separate account of a separate account customer by any 
credit balance in any other separate accounts of the same separate 
account customer carried by the FCM. Regulation Sec.  1.44(g)

[[Page 7913]]

would impose the same obligations on separate accounts that are 
currently imposed by regulations Sec. Sec.  1.20, 22.2, and 30.7 on 
customer accounts that are not separate accounts. Regulation Sec.  
1.44(g) is also consistent with CFTC Letter No. 19-17.\285\
---------------------------------------------------------------------------

    \285\ CFTC Letter No. 19-17 provides that an ``FCM shall use its 
own funds to cover the debit/deficit of each separate account.'' 
CFTC Letter No. 19-17.
---------------------------------------------------------------------------

    Regulations Sec. Sec.  1.22, 22.2, and 30.7 currently prohibit an 
FCM from using, or permitting the use of, the funds of one futures 
customer, Cleared Swaps Customer, or 30.7 customer, respectively, to 
purchase, margin, or settle the positions of, or to secure or extend 
the credit of, any person other than such customer.\286\ To ensure 
compliance with this prohibition, each FCM is required to compute, as 
of the close of the previous business day, the total undermargined 
amount of its customers' accounts and to maintain a sufficient amount 
of the FCMs' own funds (i.e., residual interest) in the applicable 
customer segregated accounts to cover the undermargined amounts.\287\
---------------------------------------------------------------------------

    \286\ 17 CFR 1.22(a), 22.2(d), and 30.7(f)(1)(i).
    \287\ An FCM is required to maintain a sufficient amount of its 
own funds in segregation to cover the FCM's customers' undermargined 
amounts by the residual interest deadline. The residual interest 
deadline for futures customers and 30.7 customers is 6:00 p.m. 
Eastern Time on the next business day. 17 CFR 1.22(c) & 30.7(f). The 
residual interest deadline for Cleared Swaps Customers is the time 
of settlement on the next business day of the applicable swaps 
clearing organization. 17 CFR 22.2(f)(6).
---------------------------------------------------------------------------

    The Commission proposed regulation Sec.  1.44(g)(5) to provide 
that, for purposes of its residual interest and LSOC compliance 
calculations, as applicable under regulations Sec. Sec.  1.22(c), 
22.2(f)(6), and 30.7(f)(1)(ii), the FCM shall treat the separate 
accounts of a separate account customer as if the accounts were 
accounts of separate entities and include the undermargined amount of 
each separate account, and cover such deficiency with its own funds. 
The amendments would result in an FCM treating each separate account in 
a manner comparable with the treatment currently provided to customer 
accounts that are not separate accounts and are consistent with CFTC 
Letter No. 19-17.\288\
---------------------------------------------------------------------------

    \288\ CFTC Letter No. 19-17 provides that an ``FCM shall include 
the margin deficiency of each separate account, and cover with its 
own funds as applicable, for purposes of its [r]esidual [i]nterest 
and LSOC compliance calculations.'' CFTC Letter No. 19-17 (Condition 
10).
---------------------------------------------------------------------------

    Regulation Sec.  1.11 requires an FCM that accepts customer funds 
to margin futures, Cleared Swaps, or foreign futures and foreign 
options to implement a risk management program designed to monitor and 
manage the risks associated with the activities of the FCM.\289\ The 
risk management program is required to address, among other risks, 
segregation risk, and further requires an FCM to establish a targeted 
amount of its own funds, or residual interest, that the firm will hold 
in segregated accounts for futures customers, Cleared Swaps Customers, 
and 30.7 customers to reasonably ensure that the FCM remains in 
compliance with its obligation to hold, at all times, a sufficient 
level of funds in segregation to cover its full obligation to its 
customers.\290\ Regulation Sec.  1.23(c) further requires an FCM to 
establish a targeted residual interest amount that is held in 
segregation to reasonably ensure that the FCM remains in compliance, at 
all times, with its customer funds segregation requirements.\291\
---------------------------------------------------------------------------

    \289\ 17 CFR 1.11(c).
    \290\ 17 CFR 1.11(e)(3)(i)(D).
    \291\ 17 CFR 1.23(c).
---------------------------------------------------------------------------

    The Commission proposed regulation Sec.  1.44(g)(6) to provide 
that, in determining its residual interest target for purposes of 
regulations Sec. Sec.  1.11(e)(3)(i)(D) and 1.23(c), the FCM must treat 
separate accounts of separate account customers as accounts of separate 
entities. In this regard, an FCM is required to consider the potential 
impact to segregated funds and to the FCM's targeted residual interest 
resulting from one or more separate accounts of a separate account 
customer that are undermargined, or that contain deficits or debit 
ledger balances, without taking into consideration the funds in excess 
of the margin requirements maintained in other separate accounts of the 
separate account customer.
    Currently, Commission regulations require an FCM to maintain its 
own capital, or residual interest, in customer segregated accounts in 
an amount equal to or greater than its customers' aggregate 
undermargined accounts.\292\ Additionally, each day, an FCM is required 
to perform a segregated calculation to verify its compliance with 
segregation requirements. The FCM must file a daily electronic report 
showing its segregation calculation with its DSRO, and the DSRO must be 
provided with electronic access to the FCM's bank accounts to verify 
that the segregated funds reported are in fact maintained. The FCM must 
also assure its DSRO that when it meets a margin call for customer 
positions, it never uses value provided by one customer to meet another 
customer's obligation.\293\ These requirements are intended to prevent 
FCMs from being induced to cover one customer's margin shortfall with 
another customer's excess margin and allow DSROs to verify that FCMs 
are not in fact doing so. Regulation Sec.  1.44(g)(6) is designed to 
ensure that margin deficiencies are calculated accurately for accounts 
receiving separate treatment, and that such deficiencies are covered 
consistent with existing Commission regulations. Regulation Sec.  
1.44(g)(6) is also consistent with the conditions to the no-action 
position in CFTC Letter No. 19-17.\294\
---------------------------------------------------------------------------

    \292\ See, e.g., 17 CFR 1.22(c)(3); 17 CFR 22.2(f)(6)(iii)(A).
    \293\ See, e.g., 17 CFR 22.2(g).
    \294\ CFTC Letter No. 19-17 provides that the ``FCM shall factor 
into its residual interest target customer receivables as computed 
on a separate account basis.'' CFTC Letter No. 19-17 (Condition 9).
---------------------------------------------------------------------------

    Citing proposed regulation Sec.  1.44(g)(5)'s requirement that an 
FCM, for purposes of its residual interest and LSOC compliance 
calculations, must ``treat the separate accounts of a separate account 
customer as if the accounts were accounts of separate entities and 
include the undermargined amount of each separate account, and cover 
such undermargined amount with its own funds,'' the JAC reiterated its 
comment that the definition of ``undermargined amount'' in proposed 
regulation Sec.  1.44(a) defines the undermargined amount differently 
than how the term is currently defined in the JAC Margins Handbook and 
has been applied for purposes of an FCM's compliance with regulations 
Sec. Sec.  1.22(c), 22.2(f)(6), and 30.7(f)(1)(ii).\295\ The JAC stated 
that, given this discrepancy, for non-separate account customers, the 
undermargined amount to be included in the residual interest 
requirements and LSOC compliance calculations may be different than 
that for separate account customers under proposed regulation Sec.  
1.44(g)(5), and this change would require FCMs that permit separate 
account treatment to bifurcate the manner in which they calculate their 
requirements and update their regulatory reporting records.\296\
---------------------------------------------------------------------------

    \295\ JAC Comment Letter. The JAC noted that, pursuant to JAC 
Regulatory Alert #14-06, the undermargined amount or margin 
deficiencies should be calculated for the residual interest 
requirement as: Risk Maintenance Margin Requirement-Credit Net 
Liquidating Value-Margin Collateral in Excess of Amounts to Secure 
Debit/Deficits = Undermargined Amount (if amount < zero, then the 
amount is zero.) The JAC also noted JAC Regulatory Alert #12-03 
defines a similar calculation for the margin deficiencies to be 
included in the LSOC compliance calculation in accordance with 
regulation Sec.  22.2(f). Id.
    \296\ Id.
---------------------------------------------------------------------------

    As discussed above in connection with regulation Sec.  1.44(a), the 
Commission is adopting its proposed definition of ``undermargined 
amount''

[[Page 7914]]

with modifications to remove language that the JAC identified as 
inconsistent with exchange rules and industry practice, and the 
Commission views an FCM's use of either of the Net Liquidating Value or 
alternative Total Equity method set forth in the JAC Margins Handbook 
as consistent with the Commission's objective in defining an account's 
undermargined amount for purposes of regulation Sec.  1.44.
    Additionally, recalling its comment with respect to pending 
receipts, the JAC noted it was unclear whether pending non-USD receipts 
could be considered as received under proposed regulation Sec.  
1.44(g)(5) based on the definition of ``undermargined amount'' in 
proposed regulation Sec.  1.44(a).\297\
---------------------------------------------------------------------------

    \297\ Id.
---------------------------------------------------------------------------

    Consistent with its discussion of the JAC's and FIA's comments with 
respect to treatment of pending non-USD transfers in connection with 
amendments to regulation Sec.  1.17, the Commission confirms that the 
final rule would not preclude an FCM from treating as received pending 
non-USD transfers, consistent with the conditions in the JAC guidance 
discussed above, for purposes of complying with regulation Sec.  
1.44(g)(5).
    ICE noted that it generally supports the risk management 
requirements for separate accounts set forth in proposed regulation 
Sec.  1.44(g).
    The Commission did not receive any other comments regarding 
proposed regulation Sec.  1.44(g). Accordingly, the Commission is 
adopting regulation Sec.  1.44(g) as proposed.

K. Regulation Sec.  1.44(h)

    As proposed, regulation Sec.  1.44(h) contains requirements related 
to information and disclosures. As with the provisions in regulation 
Sec.  1.44(g), these provisions are substantially similar to their 
corresponding no-action conditions in CFTC Letter No. 19-17, except 
that they have been reorganized and subject to minor changes to account 
for their proposed inclusion in part 1 as well as the proposed 
introduction of new defined terms. The Commission believes that 
regulation Sec.  1.44(h) is reasonably necessary to protect customer 
funds and mitigate systemic risk, and to effectuate section 4d of the 
CEA, because it establishes requirements designed to ensure that FCMs 
applying separate account treatment have the customer information 
necessary to apply such treatment consistent with the risk mitigating 
requirements of regulation Sec.  1.44 and, with respect to FCMs that 
choose to apply separate account treatment, it establishes requirements 
designed to inform customers of certain potential risks associated with 
such treatment.
    As proposed, regulation Sec.  1.44(h)(1) provides that an FCM shall 
obtain from each separate account customer or, as applicable, the 
manager of a separate account, information sufficient for the FCM to: 
(i) assess the value of the assets dedicated to such separate account; 
and (ii) identify the direct or indirect parent company of the separate 
account customer, as applicable, if such customer has a direct or 
indirect parent company.\298\ Regulation Sec.  1.44(h)(1) is intended 
to ensure that FCMs have visibility with respect to customers' 
financial resources appropriate to ensure that a customer's separate 
account is adequately margined in light of those resources, and to 
identify when a customer's financial circumstances would necessitate 
the cessation of disbursements on a separate account basis. Regulation 
Sec.  1.44(h)(1)(i) contemplates that, in certain instances, an asset 
manager may manage one or more accounts under power of attorney on a 
customer's behalf. In such cases, an FCM may obtain the requisite 
financial information from the asset manager. Regulation Sec.  
1.44(h)(1)(ii) is intended to ensure that FCMs have sufficient 
information to identify the direct or indirect parent company of a 
customer so that they may identify when a parent company of a customer 
has become insolvent, for purposes of proposed regulation Sec.  
1.44(e)(1)(iv).
---------------------------------------------------------------------------

    \298\ The Commission understands that, in certain cases, such as 
when a customer is a fund, the customer may not have a parent 
company. In such cases, the requirement to obtain information 
sufficient to identify the direct or indirect parent company would 
not apply.
---------------------------------------------------------------------------

    The Commission did not receive any comments with respect to 
proposed regulation Sec.  1.44(h)(1), and accordingly is adopting that 
provision as proposed.
    As proposed, regulation Sec.  1.44(h)(2) provides that, where a 
separate account customer has appointed a third-party as the primary 
contact to the FCM, the FCM must obtain and maintain current contact 
information of an authorized representative at the customer and take 
reasonable steps to verify that such contact information is and remains 
accurate, and that the person is in fact an authorized representative 
of the customer. In many cases, an asset manager acts under a power of 
attorney on behalf of a customer, and the FCM has little direct contact 
with the customer. Regulation Sec.  1.44(h)(2) is designed to ensure 
that FCMs have a reliable means of contacting separate account 
customers directly if the asset manager fails to ensure prompt payment 
on behalf of the customer.
    The Commission did not receive any comments with respect to 
proposed regulation Sec.  1.44(h)(2), and accordingly is adopting that 
provision as proposed.\299\
---------------------------------------------------------------------------

    \299\ The Commission is making a technical change to final 
regulation Sec.  1.44(h)(2), to substitute ``representative of the 
customer'' for ``representative at the customer,'' in recognition of 
the fact that a customer may be a natural person.
---------------------------------------------------------------------------

    Regulation Sec.  1.44 will not affect the Commission's bankruptcy 
rules under part 190 of its regulations or any rights of a customer or 
FCM in bankruptcy thereunder. In the event that an FCM electing 
separate account treatment experiences a bankruptcy, the accounts of a 
customer in each account class will be consolidated, and accounts of 
the same customer treated separately for purposes of regulation Sec.  
1.44 will not be treated separately in bankruptcy. To make this 
limitation clear to customers and FCMs, the Commission proposed 
regulation Sec.  1.44(h)(3), which provides that an FCM must provide 
each separate account customer with a disclosure that, pursuant to part 
190 of the Commission's regulations, all separate accounts of the 
customer in each account class will be combined in the event of the 
FCM's bankruptcy. As proposed, regulation Sec.  1.44(h)(3) provides 
that the disclosure statement must be delivered directly to the 
customer via electronic means, in writing or in such other manner as 
the FCM customarily delivers disclosures pursuant to applicable 
Commission regulations, and as permissible under the FCM's customer 
documentation. Furthermore, the FCM must maintain documentation 
demonstrating that the disclosure statement required by regulation 
Sec.  1.44(h)(3) was delivered directly to the customer. The FCM must 
also include the disclosure statement required by regulation Sec.  
1.44(h)(3) on its website or within its Disclosure Document required by 
regulation Sec.  1.55(i).
    The Bankruptcy Reform Act of 1978 \300\ enacted subchapter IV of 
chapter 7 of the Bankruptcy Code, title 11 of the U.S. Code, to add 
certain provisions designed to afford enhanced protections to commodity 
customer property and protect markets from the reversal of certain 
transfers of money or other property, in recognition of the complexity 
of the commodity business.\301\ The Commission enacted part 190 of its 
regulations,\302\ to

[[Page 7915]]

implement subchapter IV. Under part 190, all separate accounts of a 
customer in an account class will be combined in the event of an FCM's 
bankruptcy.\303\ The Commission proposed regulation Sec.  1.44(h)(3) so 
that customers receive full and fair disclosure as to the treatment of 
their accounts in an FCM bankruptcy.
---------------------------------------------------------------------------

    \300\ Public Law 95-598, 92 Stat. 2549.
    \301\ Bankruptcy, 46 FR 57535, 57535-36 (Nov. 24, 1981).
    \302\ 17 CFR part 190.
    \303\ 17 CFR 190.08(b)(2)(i) and (xii) (``Aggregate the credit 
and debit equity balances of all accounts of the same class held by 
a customer in the same capacity . . . . Except as otherwise provided 
in this paragraph (b)(2), all accounts that are . . . deemed to be 
held by [a person] in its individual capacity shall be deemed to be 
held in the same capacity . . . . Except as otherwise provided in 
this section, an account maintained with a debtor by an agent or 
nominee for a principal or a beneficial owner shall be deemed to be 
an account held in the individual capacity of such principal or 
beneficial owner.'').
---------------------------------------------------------------------------

    In its comment letter, FIA requested that the Commission clarify 
that any FCM that has already provided the disclosure specified in 
proposed regulation Sec.  1.44(h)(3) pursuant to the identical 
requirement of CFTC Letter No. 19-17 shall be deemed to have complied 
with regulation Sec.  1.44(h)(3).\304\
---------------------------------------------------------------------------

    \304\ FIA Comment Letter.
---------------------------------------------------------------------------

    The Commission is adopting regulation Sec.  1.44(h)(3) as proposed. 
However, the Commission recognizes that regulation Sec.  1.44(h)(3) is 
virtually identical to a corresponding condition in CFTC Letter No. 19-
17,\305\ and that, under the terms of the no-action letter, as applied 
by DCOs, FCMs permitting separate account treatment are required to 
comply with the condition. Accordingly, the Commission confirms that, 
to the extent an FCM has already provided the disclosure required by 
regulation Sec.  1.44(h)(3) to its separate account customers 
consistent with the no-action position in CFTC Letter No. 19-17, and 
continues to provide such disclosure to new separate account customers, 
then such FCM would be in compliance with the disclosure provision 
requirement of regulation Sec.  1.44(h)(3).
---------------------------------------------------------------------------

    \305\ Cf. CFTC Letter No. 19-17 (``The FCM shall provide each 
beneficial owner using separate accounts with a disclosure that 
under CFTC Part 190 rules all separate accounts of the beneficial 
owner will be combined in the event of an FCM bankruptcy. The 
disclosure statement required by this paragraph will be delivered 
separately to the beneficial owner via electronic means in writing 
or in such other manner as the FCM customarily delivers disclosures 
pursuant to applicable CFTC regulations and as permissible under the 
FCM's customer documentation. The FCM must maintain evidence that 
such disclosure was delivered directly to the beneficial owner. The 
FCM shall also include the disclosure on its website or within its 
disclosure document required by Regulation 1.55(i).'').
---------------------------------------------------------------------------

    As proposed, regulation Sec.  1.44(h)(4) provides that an FCM that 
has made an election pursuant to regulation Sec.  1.44(d) shall 
disclose in the Disclosure Document required by regulation Sec.  
1.55(i) that it permits the separate treatment of accounts for the same 
customer under the requirements of proposed regulation Sec.  1.44 and 
that, in the event that separate account treatment for some customers 
were to contribute to a loss that exceeds the FCM's ability to cover, 
that loss may affect the segregated funds of all of the FCM's customers 
in one or more account classes. Regulation Sec.  1.55 was adopted to 
``advise new customers of the substantial risk of loss inherent in 
trading commodity futures.'' \306\ The Commission amended regulation 
Sec.  1.55 in 2013 to, among other things, add new paragraph (i) 
requiring FCMs to disclose to customers ``all information about the 
[FCM], including its business, operations, risk profile, and 
affiliates, that would be material to the customer's decision to 
entrust . . . funds to and otherwise do business with the [FCM] and 
that is otherwise necessary for full and fair disclosure.'' \307\ Such 
disclosures include material information regarding specific topics 
identified in regulation Sec.  1.55(k), which include ``[a] basic 
overview of customer funds segregation,'' as well as ``current risk 
practices, controls, and procedures.'' \308\ These disclosures are 
designed to ``enable customers to make informed judgments regarding the 
appropriateness of selecting an FCM'' and to enhance the diligence that 
a customer can conduct prior to opening an account and on an ongoing 
basis.\309\
---------------------------------------------------------------------------

    \306\ Adoption of Customer Protection Rules, 43 FR 31886, 31888 
(July 24, 1978).
    \307\ 17 CFR 1.55(i).
    \308\ 17 CFR 1.55(k)(8) & (11).
    \309\ Enhancing Protections Afforded Customers and Customer 
Funds Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506, 68564 (Nov. 14, 2013).
---------------------------------------------------------------------------

    The Commission believes that the application of separate account 
treatment for some customers of an FCM, is ``material to the . . . 
decision to entrust . . . funds to and otherwise do business with the 
[FCM]'' with respect to the customers of such FCM generally because, in 
the event that separate account treatment for some customers were to 
contribute to a loss that exceeds the FCM's ability to cover, that loss 
might affect the segregated funds of all of the FCM's customers in one 
or more account classes.\310\ Accordingly, the Commission proposed 
regulation Sec.  1.44(h)(4) to ensure that customers are apprised of a 
matter that is relevant to the FCM's risk management policies.
---------------------------------------------------------------------------

    \310\ See 17 CFR 1.55(i).
---------------------------------------------------------------------------

    In its comment letter, FIA contended that the Commission's proposed 
firm-specific disclosure for regulation Sec.  1.55(i) under proposed 
regulation Sec.  1.44(h)(4) is confusing and misleading.\311\ As 
proposed, regulation Sec.  1.44(h)(4) provides that the disclosure 
statement must apprise the customer that if separate account treatment 
for some customers were to contribute to a loss that exceeds the FCM's 
ability to cover, that loss may affect the segregated funds of all of 
the FCM's customers in one or more account classes. FIA argued that 
such language is confusing because it fails to specify how separate 
account treatment for some customers might contribute to a loss that 
exceeds the FCM's ability to cover.\312\ FIA noted any customer's 
activity in any account could contribute to a loss, and FIA asserted 
that such fellow-customer risk is already addressed in existing firm-
specific disclosure.\313\ FIA asserted that it is unclear how separate 
account margining increases such risk, noting that, if anything, 
separate account treatment generally mitigates credit risk to the 
underlying asset owner, ensuring, in most cases, that the FCM holds 
more collateral against the owner's consolidated portfolio of positions 
than it would if it was net margining the portfolio as a single 
account.\314\
---------------------------------------------------------------------------

    \311\ FIA Comment Letter.
    \312\ Id.
    \313\ Id.
    \314\ Id.
---------------------------------------------------------------------------

    The Commission notes that, although separate account margining may 
reduce risk in the sense that, generally, an FCM will hold more 
collateral with respect to the portfolio of a separate account 
customer, separate account margining is not risk-free. In adopting a 
Margin Adequacy Requirement applicable to all FCMs similar to that 
presently in regulation 39.13(g)(8)(iii), the Commission implements a 
regulation designed to guard against the possibility that an FCM will 
permit a withdrawal of customer funds that will lead to the customer's 
account becoming undermargined. Regulation Sec.  1.44 operates to 
permit the customer's separate accounts to be treated as accounts of 
separate legal entities for purposes of the Margin Adequacy 
Requirement, provided the FCM complies with specified requirements for 
the treatment of separate accounts. Those requirements (including those 
that would result in the FCM holding a greater amount of margin than it 
would if it did not engage in separate account treatment) are designed 
to mitigate the potential risk posed by the treatment of one customer's 
separate account as the account of a separate legal entity without 
reference to other separate

[[Page 7916]]

accounts of the same separate account customer.
    Although the Commission believes FCMs have successfully complied 
with the no-action conditions of CFTC Letter No. 19-17, where ensuring 
margin adequacy is critical to protecting customer funds and mitigating 
risk to an FCM and the broader financial system, FCMs that engage in 
separate account treatment comply with margin adequacy in a materially 
different manner than FCMs that do not engage in separate account 
treatment, and are subject to additional requirements. The failure to 
comply with such requirements could contribute to a loss that the FCM 
is unable to cover. In light of considerations of protection of 
customer funds, and the purpose of regulation Sec.  1.55(i) to provide 
to customers ``all information . . . that would be material to the 
customer's decision to entrust such funds to and otherwise do business 
with'' the FCM, the Commission believes it is appropriate for FCMs to 
apprise customers, whether separate account customers or otherwise, of 
such risk of loss resulting from the FCM's separate treatment of 
accounts.
    Additionally, as proposed, regulation Sec.  1.44(h)(4)(i) provides 
that an FCM that applies separate account treatment pursuant to 
proposed regulation Sec.  1.44 must apply such treatment in a 
consistent manner over time, and that if the election pursuant to 
proposed regulation Sec.  1.44(d) for a separate account customer is 
revoked, such election may not be reinstated during the 30 days 
following such revocation. The Commission proposed this 30-day period 
to prevent the possibility that, as discussed below, an FCM could 
toggle its separate account treatment election for purposes other than 
serving customers' bona fide commercial purposes.
    Proposed regulation Sec.  1.44(h)(4)(i) is intended to ensure that 
FCMs employ separate account treatment in a way that is consistent with 
the customer protection and FCM risk management provisions of the CEA 
and Commission regulations. The Commission recognizes that, although 
bona fide business or risk management purposes may at times warrant 
application or cessation of separate account treatment, FCMs should not 
apply or cease separate account treatment for reasons, or in a manner, 
that would contravene the customer protection and risk mitigation 
purposes of the CEA and Commission regulations. For instance, an FCM 
should not switch back and forth between separate and combined 
treatment for customer accounts to achieve preferable margining 
outcomes or offset margin shortfalls in particular accounts. The period 
of 30 days was chosen to balance this goal with a recognition that, 
after a sufficient period, the relevant circumstances for a particular 
customer may change for reasons other than strategic switching. The 
Commission recognizes that there are a wide variety of circumstances 
that may indicate inconsistent application of separate account 
treatment.
    With respect to the 30-day toll on reinstatement of separate 
account disbursements in proposed regulation Sec.  1.44(h)(4)(i), FIA 
asserted that it is not aware that any FCM has ever ``toggled'' 
separate account treatment for any customer, and further asserted the 
tolling period could have negative unintended consequences for 
customers and overall market liquidity.\315\ FIA noted that separate 
account margining is crucial for many institutional asset managers to 
efficiently deploy their investment strategies across multiple 
accounts, and if an FCM is forced to suspend separate account treatment 
due to an event outside the ordinary course of business, the 30-day 
minimum waiting period could significantly disrupt the trading and risk 
management of affected customers even after the underlying issue is 
resolved.\316\ FIA urged the Commission to adopt a more targeted, risk-
based approach that defers to FCMs' judgment.\317\ FIA asserted that 
the only reasons an FCM is likely to have to suspend separate account 
treatment against the wishes of its customer are those detailed in the 
risk scenarios in proposed regulation Sec.  1.44(e), and the timeframe 
within which separate account treatment should be restored in the wake 
of any such event should be left to the FCM's risk management 
discretion.\318\
---------------------------------------------------------------------------

    \315\ FIA Comment Letter.
    \316\ Id.
    \317\ Id.
    \318\ Id.
---------------------------------------------------------------------------

    SIFMA-AMG similarly commented that its members are not aware of 
instances in which an FCM might ``toggle'' separate account treatment, 
noting that, in addition to significant regulatory obligations intended 
to protect customers, including stringent risk management provisions, 
FCMs who try to ``game'' a system to maintain separate account status 
would lose the trust necessary to maintain these competitive, 
longstanding commercial relationships.\319\ SIFMA-AMG also asserted 
that, operationally, its members would not permit or give contract 
authority for an FCM to switch back and forth between separate and 
combined treatment for customer accounts in order to achieve more 
preferable margining outcomes or offset margin shortfalls in particular 
accounts.\320\ According to SIFMA-AMG, this would be highly unusual and 
would be a significant deviation from industry practice.\321\ 
Additionally, SIFMA-AMG asserted that it did not find the rationale for 
a tolling period of 30 days to be persuasive, and does not believe 
there is any reason why such period should be considered appropriate or 
sufficient.\322\ SIFMA-AMG expressed concern that such revocation could 
cause harm to its business activities, in turn harming SIFMA-AMG 
members' customers and their investments.\323\ SIFMA-AMG also expressed 
concern that the tolling period could have a compounding effect on 
markets and liquidity as well as risk management of FCMs and asset 
managers, and should be removed or modified to be more flexible.\324\
---------------------------------------------------------------------------

    \319\ SIFMA-AMG Comment Letter.
    \320\ Id.
    \321\ Id.
    \322\ Id.
    \323\ Id.
    \324\ Id.
---------------------------------------------------------------------------

    For the avoidance of doubt, the Commission confirms that the 
proposed 30-day toll on the reinstatement of separate account treatment 
was not intended to apply in instances in which the occurrence of 
events outside the ordinary course of business, as enumerated in 
regulation Sec.  1.44(e), have caused an FCM to terminate or suspend 
disbursements on a separate account basis for a separate account 
customer.
    An event that is outside the ordinary course of business would mean 
that the customer would, at least for a time, not be able to obtain 
disbursements on a separate account basis, pursuant to regulation Sec.  
1.44(c). During that time, the FCM would still be subject to the 
requirements attendant upon separate account treatment of a customer's 
account, including, e.g., those under regulations Sec. Sec.  1.44(f) 
through (h), 1.58(c), and 1.73(c). It is only where the election 
pursuant to regulation Sec.  1.44(d) for a particular customer's 
account is affirmatively revoked that those requirements would cease to 
be applicable, and it is only in that case that the 30-day toll period 
would apply.
    By contrast, if an FCM must cease providing disbursements to a 
customer on a separate account basis because the customer's account is 
no longer in the ``ordinary course of business,'' the FCM may permit a 
resumption of disbursements on a separate account basis for the 
separate account customer as soon as the requirements of regulation 
Sec.  1.44(e)(4), regarding the

[[Page 7917]]

cure of non-ordinary course of business conditions and resumption of 
separate account treatment, are met.
    As discussed above, FIA and SIFMA-AMG stated in their comments that 
they are not aware that any FCM has ever attempted to selectively use 
separate account treatment to obtain an illegitimate economic 
advantage. The Commission does not assume that establishes that there 
is no possibility of separate account treatment being used in such 
manner, and further submits that, if such strategic use of separate 
account treatment is uncommon, then a toll on resumption of separate 
account treatment following a revocation of an election for separate 
account treatment should not represent a significant burden for FCMs or 
customers. At the same time, the Commission is not aware of any such 
instances of ``strategic switching'' occurring under the no-action 
position, nor has any commenter discussed such issue as a significant 
risk.
    Accordingly, in adopting regulation Sec.  1.44(h)(4), including 
regulation Sec.  1.44(h)(4)(i), the Commission is eliminating the 
proposed 30-day tolling period for an FCM to reinstate an election for 
separate account treatment. The Commission is also adopting regulation 
Sec.  1.44(h)(4) with a technical change.\325\
---------------------------------------------------------------------------

    \325\ The Commission is making a technical change in final 
regulation Sec.  1.44(h)(4) to substitute the phrase ``pursuant to 
the requirements'' for ``under the terms and conditions'' (``A 
futures commission merchant that has made an election pursuant to 
paragraph (d) of this section shall disclose in the Disclosure 
Document required under paragraph 1.55(i) of this part that it 
permits the separate treatment of accounts for the same customer 
pursuant to the requirements of this Sec.  1.44 . . . .'').
---------------------------------------------------------------------------

L. Appendix A to Part 1

    The Commission proposed Appendix A to part 1 to set forth those 
currencies for which payment of margin shall be considered in 
compliance with the one business day margin call requirements of 
regulation Sec.  1.44(f) if received no later than the end of the 
second business day after the day on which the margin call is 
issued.\326\
---------------------------------------------------------------------------

    \326\ As discussed above, the procedures for adding currencies 
to or removing currencies from Appendix A to part 1 will be set 
forth in regulation Sec.  1.44(f)(8).
---------------------------------------------------------------------------

    The Commission understands that the list of currencies it included 
in proposed Appendix A to part 1 is consistent with current industry 
settlement conventions, based on the Commission staff's informational 
discussions with industry professionals knowledgeable regarding such 
conventions. The Commission proposed that the initial currencies under 
proposed Appendix A to part 1 should be Australian dollar (AUD), 
Chinese renminbi (CNY), Hong Kong dollar (HKD), Hungarian forint (HUF), 
Israeli new shekel (ILS), Japanese yen (JPY), New Zealand dollar (NZD), 
Singapore dollar (SGD), Turkish lira (TRY), and South African rand 
(ZAR).
    The Commission did not receive any comments with respect to 
proposed Appendix A to part 1. Accordingly, the Commission is adopting 
Appendix A to part 1 as proposed.

M. Amendments to Regulation Sec.  1.58

    Regulation Sec.  1.58(a) currently provides that each FCM that 
carries a commodity futures or commodity option position for another 
FCM or a foreign broker on an omnibus basis must collect, and each FCM 
and foreign broker whose account is so carried, must deposit initial 
and maintenance margin on positions reportable under regulation Sec.  
17.04 \327\ at a level of at least that established for customer 
accounts by the rules of the relevant contract market. Regulation Sec.  
1.58(a) is designed to ensure that where a clearing FCM (i.e., a 
carrying FCM) carries a customer omnibus account for a non-clearing FCM 
(i.e., a depositing FCM), the risk posed by the customers of the 
depositing FCM continues to be appropriately mitigated through 
margining of those positions (i.e., calculation of initial and 
maintenance margins) on a gross basis at the depositing FCM. This is 
analogous to the margining of positions of a clearing FCM on a gross 
basis at the DCO.\328\
---------------------------------------------------------------------------

    \327\ 17 CFR 17.04.
    \328\ See regulation Sec.  39.13(g)(8)(i).
---------------------------------------------------------------------------

    In proposing regulation Sec.  1.58(a) in 1981, the ``Commission 
view[ed] with great concern the fact that [a significant] amount of 
customer funds [was] being held by firms [i.e., non-clearing FCMs] 
that, in comparison to clearing FCMs, generally have less capital and 
are less equipped to handle the volatility of the commodity markets, a 
concern which was highlighted by the . . . bankruptcies [of three FCMs] 
which occurred during the last half of 1980.'' \329\ In light of the 
segregation requirements at the time--which did not yet apply to 
foreign futures and foreign options, and also did not apply to cleared 
swaps (a category that did not then exist)--these requirements were 
designed only to apply to futures and options. The requirement was 
therefore tied to position reporting under regulation Sec.  17.04, a 
reporting requirement that is limited to futures and options.
---------------------------------------------------------------------------

    \329\ See Gross Margining of Omnibus Accounts, 46 FR 62864 (Dec. 
29, 1981).
---------------------------------------------------------------------------

    By 2011, industry practice had developed such that ``[u]nder 
current industry practice, omnibus accounts report gross positions to 
their clearing members and clearing members collect margins on a gross 
basis for positions held in omnibus accounts.'' \330\ The Commission 
thus required DCOs to require that clearing members post margin to DCOs 
on a gross basis for both domestic futures and cleared swaps.\331\ The 
Commission stated, as its rationale, that it continues to believe, as 
stated in the notice of proposed rulemaking, that gross margining of 
customer accounts will: (a) More appropriately address the risks posed 
to a DCO by its clearing members' customers than net margining; (b) 
will increase the financial resources available to a DCO in the event 
of a customer default; and (c) with respect to cleared swaps, will 
support the requirement in Sec.  39.13(g)(2)(iii) that a DCO must 
margin each swap portfolio at a minimum 99 percent confidence 
level.\332\
---------------------------------------------------------------------------

    \330\ See Derivatives Clearing Organization General Provisions 
and Core Principles, 76 FR 69334, 69375 (Nov. 8, 2011).
    \331\ See id., regulation Sec.  39.13(g)(8)(i).
    \332\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR 69375-69376.
---------------------------------------------------------------------------

    The Commission also noted that, ``under certain circumstances gross 
margining may also increase the portability of customer positions in an 
FCM insolvency. That is, a gross margining requirement would increase 
the likelihood that there will be sufficient collateral on deposit in 
support of a customer position to enable the DCO to transfer it to a 
solvent FCM.'' \333\
---------------------------------------------------------------------------

    \333\ Id. at 69376 n. 133 (citing CPSS-IOSCO Consultative Report 
[on the Principles for Financial Market Infrastructures], Principle 
14: Segregation and Portability, Explanatory Notes 3.14.6 and 
3.14.8, at 67-68).
---------------------------------------------------------------------------

    At the time, with its focus on implementing rules for DCOs, the 
Commission did not amend regulation Sec.  1.58 explicitly to require 
gross margining for Cleared Swaps in omnibus accounts cleared by a non-
clearing FCM through a clearing FCM. However, reviewing the matter 
presently, the Commission is of the view that the reasons for requiring 
clearing FCMs to post margin at a DCO on a gross basis apply, mutatis 
mutandis, to support requiring gross margining for omnibus customer 
accounts of non-clearing FCMs for

[[Page 7918]]

Cleared Swaps in addition to domestic futures.\334\
---------------------------------------------------------------------------

    \334\ By contrast, the Commission has imposed limits on holding 
the foreign futures or foreign options secured amount outside the 
United States. See regulation Sec.  30.7(c) (limiting such amounts 
to 120% ``of the total amount of funds necessary to meet margin and 
prefunding margin requirements'' that are ``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 options 
positions.'') Requiring an FCM to send a larger amount of 30.7 funds 
upstream to a foreign broker or foreign clearing organization would 
run counter to the regulation's goal of limiting such amounts. 
Accordingly, the Commission did not propose to require gross 
margining with respect to 30.7 accounts.
---------------------------------------------------------------------------

    Accordingly, in the Second Proposal, the Commission proposed to 
amend regulations Sec.  1.58(a) and (b). The Commission proposed to 
amend regulation Sec.  1.58(a), addressing gross collection of margin 
generally, to require that ``[e]ach futures commission merchant which 
carries a futures, options, or Cleared Swaps position for another 
futures commission merchant or for a foreign broker on an omnibus basis 
must collect, and each futures commission merchant and foreign broker 
for which an omnibus account is being carried must deposit, initial and 
maintenance margin on each position so carried'' at a level no less 
than that established for customer accounts by the rules of the 
applicable contract market or other board of trade'' (or, if the board 
of trade does not specify any such margin level, the level specified by 
the relevant clearing organization), i.e., on a gross margin basis. The 
Commission proposed to amend regulation Sec.  1.58(b), addressing 
entitlement to spread or hedge margin treatment, to require that if an 
FCM that ``carries a futures, options, or Cleared Swaps position for 
another futures commission merchant or for a foreign broker on an 
omnibus basis allows a position to be margined as a spread position or 
as a hedged position in accordance with the rules of the applicable 
contract market, the carrying futures commission merchant must obtain 
and retain a written representation from the futures commission 
merchant or from the foreign broker for which the omnibus account is 
being carried that each such position is entitled to be so margined.''
    Under regulation Sec.  1.58 as proposed to be amended, clearing FCM 
initial and maintenance margin requirements for separate accounts of 
the same customer are to be calculated on a gross basis as the margin 
for accounts of distinct customers.\335\ The Commission believes it is 
important to continuity of risk management that the same approach also 
be applied in the case of a non-clearing (depositing) FCM whose 
accounts are carried by a clearing (carrying) FCM, with respect to the 
amount that depositing FCM is required to deposit, and that the 
carrying FCM is required to collect.\336\ The Commission therefore 
proposed to amend regulation Sec.  1.58 to add new paragraph (c) 
providing that, where an FCM has established an omnibus account that is 
carried by another FCM, and the depositing FCM has elected to treat the 
separate accounts of a customer as accounts of separate entities for 
purposes of regulation Sec.  1.44, then the depositing FCM must 
calculate initial and maintenance margin for purposes of regulation 
Sec.  1.58(a) separately for each separate account.\337\
---------------------------------------------------------------------------

    \335\ See proposed regulation Sec.  1.44(g)(2).
    \336\ As a result, each customer with accounts subject to 
separate account treatment should be subject to the same or greater 
margin requirements as such customer would be subject to if its 
separate accounts were margined on a combined account basis.
    \337\ If non-clearing FCM N has customers P and Q, and Q is a 
separate account customer with separate accounts R, S, and T, then N 
would calculate, on a gross basis, the margin requirements for 
accounts P, R, S, and T, consistent with proposed regulation Sec.  
1.58(c). That gross margin requirement, across those four accounts, 
will be the amount that, consistent with regulation Sec.  1.58(a), N 
must deposit and N's clearing FCM, C, must collect.
---------------------------------------------------------------------------

    In its comment letter, the JAC discussed the Commission's proposal 
to amend regulation Sec.  1.58(a) and (b) to extend the gross margin 
requirements of domestic futures and options accounts to Cleared Swaps 
accounts while specifically declining to require gross margining for 
omnibus accounts of secured 30.7 futures and options positions held by 
FCMs.\338\ The JAC noted that, although proposed regulation Sec.  
1.58(a) allows an FCM carrying a secured 30.7 omnibus account to margin 
that account on a net basis, the FCM would be able to margin the 
account on a net basis even if the DCO, a non-U.S. clearinghouse, or 
broker carrying an omnibus account were to collect margin on a gross 
basis from the FCM.\339\ Thus, the FCM would be collecting less margin 
than they are paying to the DCO, the non-U.S. clearinghouse, or the 
carrying broker. The JAC recommended that the Commission consider 
requiring gross margining for secured 30.7 omnibus accounts.\340\ 
Discussing the Commission's statement in the Second Proposal that 
``[r]equiring an FCM to send a larger amount of 30.7 funds upstream to 
a foreign broker or foreign clearing organization would run counter to 
[regulation Sec.  30.7(c)'s] goal of limiting such amounts,'' the JAC 
asserted that requiring a secured 30.7 omnibus account to be gross 
margined under regulation Sec.  1.58 would only require the FCM to 
collect gross margin (i.e., versus a lower net margin amount) from the 
depositing FCM or foreign broker, not for the FCM to send the amount 
along outside the U.S.\341\ The JAC contended that requiring gross 
margining of secured 30.7 omnibus accounts will ensure the FCM's risk-
based capital requirement is accurately based on the risk margin 
required for all customer and noncustomer positions.\342\
---------------------------------------------------------------------------

    \338\ JAC Comment Letter.
    \339\ Id.
    \340\ Id.
    \341\ Id.
    \342\ Id.
---------------------------------------------------------------------------

    CME also suggested that the Commission require FCMs to collect 
margin on a gross basis for the foreign futures and foreign options 
contracts in an omnibus account held by the clearing FCM, noting that 
CME believes gross margining of customer positions is an important 
element of risk management in the event of default by an FCM and is 
essential to the Commission's stated goal in part 190 for porting 
customers regardless of whether the non-DCO foreign clearing 
organization collects margin on a gross or net basis.\343\
---------------------------------------------------------------------------

    \343\ CME Comment Letter.
---------------------------------------------------------------------------

    The Commission has not proposed to require gross margining of 
secured 30.7 omnibus accounts and does not in this final rulemaking 
adopt such a requirement, although the Commission may consider 
proposing to do so in the future. The Commission notes that, with 
respect to the accounts of foreign futures and foreign options 
customers, unless an FCM is a direct clearing member of a non-U.S. DCO, 
porting the positions of the FCM's customers may prove impracticable 
because, to the extent the FCM clears through a foreign affiliate, the 
foreign affiliate will likely be subject to foreign insolvency laws.

N. Amendments to Regulation Sec.  1.73

    The Commission proposed to amend regulation Sec.  1.73 to add new 
paragraph (c) providing that an FCM that is not a clearing member of a 
DCO but that treats the separate accounts of a customer as accounts of 
separate entities for purposes of proposed regulation Sec.  1.44 shall 
comply with regulation Sec.  1.73(a) and (b) with respect to accounts 
and separate accounts of separate account customers, as if the FCM were 
a clearing member of a DCO. Regulation Sec.  1.73 currently sets forth 
risk management requirements only for FCMs that are clearing members of 
DCOs. The Commission proposed this amendment to ensure that, where non-
clearing FCMs are engaging in separate account

[[Page 7919]]

treatment, they are required to comply with the same baseline risk 
management requirements with respect to those separate accounts as 
their clearing counterparts do with respect to all accounts. In 
particular, this amendment links regulation Sec.  1.73 to a non-
clearing FCM's compliance with proposed regulation Sec.  1.44(g)(1)'s 
stress testing and credit limit requirements. Since 2019, clearing FCMs 
have successfully applied regulation Sec.  1.73(a), in conjunction with 
the no-action position's stress testing and credit limit 
conditions,\344\ to manage the risk of accounts subject to separate 
treatment.
---------------------------------------------------------------------------

    \344\ CFTC Letter No. 19-17 (Condition 3).
---------------------------------------------------------------------------

    In proposing to codify the no-action position in part 1 of the 
Commission's regulations, the Commission believes it would be prudent 
from a customer funds protection perspective, and a systemic risk 
mitigation perspective, to ensure that any FCMs that provide for 
separate account treatment, whether clearing or non-clearing, do so 
subject to similarly heightened risk management requirements. The 
Commission expects that, by applying the heightened risk management 
requirements applicable to clearing FCMs to all of a non-clearing FCM's 
accounts for a customer receiving separate treatment, a non-clearing 
FCM will be better able to detect and prevent the emergence of risks 
that could lead to operational or financial distress at such customer, 
reducing the potential risk of a default (or a failure to maintain 
adequate customer funds) by the non-clearing FCM.
    The Commission did not receive any comments with respect to the 
proposed amendments to regulation Sec.  1.73.
    Accordingly, the Commission is adopting the amendments to 
regulation Sec.  1.73 as proposed.\345\
---------------------------------------------------------------------------

    \345\ The Commission is making one technical modification to the 
final amendments to regulation Sec.  1.73. In final regulation Sec.  
1.73(c), the Commission is changing ``[an FCM] . . . shall comply . 
. . as if it was a clearing member of a [DCO]'' to ``[an FCM] . . . 
shall comply . . . as if it were a clearing member of a [DCO].''
---------------------------------------------------------------------------

O. Amendments to Regulation Sec.  30.2

    Regulation Sec.  30.2(b) currently excludes an FCM engaging in 
foreign futures and foreign option transactions for 30.7 customers from 
certain provision of the Commission's regulations, including regulation 
Sec.  1.44, in recognition that such transactions are entered into on 
contract markets that are subject to regulation by non-U.S. 
authorities.\346\ Immediately prior to this final rule, regulation 
Sec.  1.44 was reserved. The Commission proposed to amend regulation 
Sec.  30.2(b) to remove regulation Sec.  1.44 from the list of excluded 
regulations.\347\
---------------------------------------------------------------------------

    \346\ For example, regulation Sec.  30.2 excludes persons and 
foreign futures and foreign options transactions from the 
segregation requirements of Sec.  1.20, which applies only to 
futures customer funds and transactions. Regulation Sec.  30.7 
addresses the segregation requirements of 30.7 customer funds.
    \347\ As previously noted, immediately prior to this final rule, 
regulation Sec.  1.44 was reserved and, accordingly, did not impose 
any regulatory obligation on an FCM. However, at the time regulation 
Sec.  30.2 was promulgated, regulation Sec.  1.44 addressed records 
and reports of warehouses, depositories, and other similar entities. 
This regulation was subsequently deleted.
---------------------------------------------------------------------------

    The amendment to regulation Sec.  30.2(b) is consistent with the 
imposition of the Margin Adequacy Requirement on 30.7 accounts and the 
proposed definition of the term ``account'' in regulation Sec.  
1.44(a), which would include 30.7 accounts in addition to futures 
accounts and Cleared Swaps Customer Accounts.
    The Commission also proposed to remove the exclusion of regulations 
Sec. Sec.  1.41-1.43 from applicability to part 30. When regulation 
Sec.  30.2 was promulgated in 1987 as part of the establishment of part 
30,\348\ it explicitly provided that certain of its existing 
regulations would not be applicable ``to the persons and transactions 
that are subject to the requirements of'' part 30. At that time, 
regulations Sec. Sec.  1.41-1.43 addressed, respectively, crop or 
market information letters, filing of contract market rules with the 
Commission, and warehouses, depositories, and other similar entities. 
Those regulations were subsequently deleted, and those sections were 
reserved.
---------------------------------------------------------------------------

    \348\ Foreign Futures and Foreign Options Transactions, 52 FR 
28980 (Aug. 5, 1987).
---------------------------------------------------------------------------

    When the Commission revised its part 190 bankruptcy rules in 2021, 
the Commission added, as regulations Sec. Sec.  1.41-1.43, designation 
of hedging accounts, delivery accounts, and conditions on accepting 
letters of credit as collateral. Each of these regulations was intended 
to apply to foreign futures accounts. In this final rule, the 
Commission amends regulation Sec.  30.2 to conform with that intention.
    The Commission did not receive any comments with respect to the 
proposed amendments to regulation Sec.  30.2.
    Accordingly, the Commission is adopting the amendments to 
regulation Sec.  30.2 as proposed.

P. Amendments to Regulation Sec.  39.13

    Regulation Sec.  39.13(g)(8)(i) requires DCOs to collect customer 
margin from their clearing members on a gross basis, that is, collect 
margin ``equal to the sum of initial margin amounts that would be 
required by the [DCO] for each individual customer within that account 
if each individual customer were a clearing member.'' \349\ The 
Commission proposed to add new regulation Sec.  39.13(g)(8)(i)(E) to 
clarify that, for purposes of this regulation on gross margining, each 
separate account of a separate account customer shall be treated as an 
account of a separate individual customer.
---------------------------------------------------------------------------

    \349\ 17 CFR 39.13(g)(3)(i)(A).
---------------------------------------------------------------------------

    The Commission also proposed to amend regulation Sec.  
39.13(g)(8)(iii) to provide that such paragraph shall apply except as 
provided for in regulation Sec.  1.44. The Commission proposed this 
amendment to ensure that the carve-out (represented by regulation Sec.  
1.44(c)-(h)) to the Margin Adequacy Requirement (represented by 
regulation Sec.  1.44(b)) that would apply to all FCMs is also 
effectuated with respect to the Margin Adequacy Requirement applicable 
to clearing members through DCOs pursuant to regulation Sec.  
39.13(g)(8)(iii).
    OCC commented that the Second Proposal makes clear, in defining the 
conditions under which an FCM can offer separate account treatment, 
that the Commission intended to make compliance with the requirements 
for such treatment the responsibility of FCMs, and the responsibility 
for monitoring such compliance that of the FCM's DSRO rather than any 
DCO of which it is a member.\350\ OCC noted that, consistent with this, 
the proposal would not require an FCM to notify a DCO of which it is a 
member either of the FCM's initial election for separate account 
treatment, or the occurrence of any non-ordinary course of business 
event, which would have the effect of removing the DCO's visibility 
into its members' separate account treatment practices.\351\
---------------------------------------------------------------------------

    \350\ OCC Comment Letter.
    \351\ Id.
---------------------------------------------------------------------------

    With respect to the Margin Adequacy Requirement of regulation Sec.  
39.13(g)(8)(iii), which, as proposed, would apply except as provided 
for in Sec.  1.44, OCC noted that the requirements for determining 
whether an FCM is operating in compliance with the requirements of 
regulation Sec.  1.44 would require detailed knowledge of an FCM's 
operational and risk management practices on an ongoing basis, 
including, among other information, real-time knowledge of the timing 
of each such customer's margin posting to the FCM, and information as 
to the exact cause of any delay in posing margin.\352\ OCC expressed 
concern that, without clarification, regulation Sec.  39.13(g)(8)(iii), 
as amended, could be interpreted as imposing strict liability

[[Page 7920]]

on DCOs for their members' compliance with regulation Sec.  1.44.\353\ 
Accordingly, OCC recommended that the Commission modify regulation 
Sec.  39.13(g)(8)(iii) to specify that a DCO will not be liable for 
violating regulation Sec.  39.13(g)(8)(iii) on the basis of any failure 
by any clearing member to comply with any requirement or requirements 
of regulation Sec.  1.44.\354\
---------------------------------------------------------------------------

    \352\ Id.
    \353\ Id.
    \354\ Id.
---------------------------------------------------------------------------

    Although both regulation Sec.  1.44(b) and regulation Sec.  
39.13(g)(8)(iii) contain a Margin Adequacy Requirement, the former 
applies directly to FCMs whereas the latter applies to FCMs that are 
clearing members of DCOs through the operation of DCO rules. 
Accordingly, a DCO must have in place rules to effectuate the 
requirements of regulation Sec.  39.13(g)(8)(iii) and must monitor and 
enforce compliance with those rules, consistent with DCO Core Principle 
H \355\ and regulation Sec.  39.17 \356\ regarding rule enforcement, 
but a DCO is not itself responsible for enforcing regulation Sec.  
1.44. Although the Commission disagrees that there are no instances in 
which a DCO could be held liable with respect to a clearing member's 
violation of regulation Sec.  1.44 (i.e., where the violation would 
independently result in a violation of the Margin Adequacy Requirement 
of regulation Sec.  39.13(g)(8)(iii), such as might result where the 
DCO has actual knowledge of an actual or potential underlying violation 
of regulation Sec.  1.44 which results in a violation of the DCO's 
rules to effectuate the Margin Adequacy Requirement of regulation Sec.  
39.13(g)(8)(iii)), the Commission agrees that, as a general matter, 
regulation Sec.  1.44 is not designed to impose on a DCO responsibility 
to meticulously supervise a clearing FCM's compliance with the 
requirements of the regulation. Moreover, DCOs currently have the 
responsibility to enforce their rules established pursuant to 
regulation Sec.  39.13(g)(8)(iii), subject to CFTC Letter No. 19-17.
---------------------------------------------------------------------------

    \355\ 7 U.S.C. 7a-1(c)(2)(H).
    \356\ 17 CFR 39.17.
---------------------------------------------------------------------------

    In its comment letter, CME agreed with the Commission's proposal to 
add new regulation Sec.  39.13(g)(8)(i)(E) to clarify that, for 
purposes of such provision, related to gross margining, each separate 
account of a separate account customer shall be treated as an account 
of a separate individual customer.\357\ CME however requested that the 
Commission clarify, for purposes of ensuring accurate customer gross 
margin, that an FCM must identify not only accounts eligible for 
separate account margining, but also which accounts are currently 
deploying the practice on the FCM's books.\358\ Consistent with its 
response above to the JAC's similar comment with respect to the 
recordkeeping requirement in regulation Sec.  1.44(d)(1), the 
Commission confirms that such requirement, which requires an FCM to 
keep current the required list of separate account customers and their 
separate accounts, is intended to ensure that FCMs maintain a current 
list of separate account customers and their accounts receiving 
separate treatment. Thus, the FCM is required to apply the requirements 
of regulation Sec.  1.44 applicable to separate account customers to 
all customers on that list.
---------------------------------------------------------------------------

    \357\ CME Comment Letter.
    \358\ Id.
---------------------------------------------------------------------------

    Additionally, in connection with proposed changes to regulation 
Sec.  39.13(g)(8)(iii), the Commission requested comment with respect 
to whether the Commission should remove regulation Sec.  
39.13(g)(8)(iii), if the Commission includes the Margin Adequacy 
Requirement and requirements regarding separate account treatment in 
part 1 of its regulations as proposed (Question 8). In its comment 
letter, CME agreed that it would be logical to delete regulation Sec.  
39.13(g)(8)(iii) as regulation Sec.  1.44 will address withdrawals from 
customer accounts at the clearing member.\359\ The Commission did not 
receive any other comments in response to this question.
---------------------------------------------------------------------------

    \359\ Id.
---------------------------------------------------------------------------

    The Commission appreciates CME's comment and acknowledges that the 
Margin Adequacy Requirement in regulation Sec.  39.13(g)(8)(iii) is 
substantially the same as that in regulation Sec.  1.44(b) (albeit 
applicable to FCMs through the instrumentation of DCO rules). The 
Commission, however, notes that in requiring DCOs to prevent clearing 
members from withdrawing margin such that it would lead to 
undermargining in the customer's account, regulation Sec.  
39.13(g)(8)(iii) provides for an additional layer of monitoring and 
enforcement (in addition to FCMs' DSROs and the Commission), to ensure 
that the Margin Adequacy Requirement is being met. Considering this 
substantial oversight benefit and noting the low volume of responses to 
this question, the Commission has determined to retain regulation Sec.  
39.13(g)(8)(iii).
    Accordingly, the Commission is adopting the amendments to 
regulation Sec.  39.13 as proposed.

III. Cost Benefit Considerations

A. Introduction

    Section 15(a) of the CEA requires the Commission to ``consider the 
costs and benefits'' of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\360\ 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 markets; (3) price discovery; (4) sound risk 
management practices; and (5) other public interest considerations 
(collectively referred to herein as the section 15(a) Factors). 
Accordingly, the Commission considers the costs and benefits associated 
with this final rule in light of the section 15(a) Factors. In 
conducting its analysis, the Commission may, in its discretion, give 
greater weight to any one of the five enumerated areas of concern. In 
the sections that follow, the Commission considers: (1) the costs and 
benefits of the final rule; (2) the alternatives contemplated by the 
Commission and their costs and benefits; and (3) the impact of the 
final rule on the section 15(a) Factors.
---------------------------------------------------------------------------

    \360\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of a new rule or to determine whether 
the benefits of the adopted rule outweigh its costs. Nonetheless, the 
Commission has endeavored to assess the expected costs and benefits of 
the final rule in quantitative terms, including Paperwork Reduction 
Act-related costs, where practicable. In situations where the 
Commission is unable to quantify the costs and benefits, the Commission 
identifies and considers the costs and benefits of the applicable 
amendments in qualitative terms. However, the Commission lacks the data 
necessary to reasonably quantify all of the costs and benefits 
considered below. In some instances, it is not reasonably feasible to 
quantify the costs and benefits to FCMs with respect to certain 
factors, such as market integrity. Additionally, any initial and 
recurring compliance costs for any particular FCM will depend on its 
size, existing infrastructure, practices, and cost structures. 
Notwithstanding these types of limitations, the Commission otherwise 
identifies and considers the costs and benefits of these final rule 
amendments in qualitative terms.
    In the following consideration of costs and benefits, the 
Commission first

[[Page 7921]]

identifies and discusses the benefits and costs attributable to the 
final rule amendments. Next, the Commission identifies and discusses 
the benefits and costs attributable to the final rule amendments as 
compared to alternatives to the final rule amendments. The Commission, 
where applicable, then considers the costs and benefits of the final 
rule amendments in light of the section 15(a) Factors.
    The Commission notes that this consideration of costs and benefits 
is based on, inter alia, its understanding that the derivatives markets 
regulated by the Commission function internationally, with (1) 
transactions that involve entities organized in the United States 
occurring across different international jurisdictions, (2) some 
entities organized outside of the United States that are prospective 
Commission registrants, and (3) some entities that typically operate 
both within and outside the United States, and that follow 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
discussion of costs and benefits below refers to the effects of the 
final regulations on all relevant derivatives activity, whether based 
on their actual occurrence in the United States or on their connection 
with, or effect on, U.S. commerce.\361\
---------------------------------------------------------------------------

    \361\ See, e.g., 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    In the Second Proposal, the Commission generally requested comment 
on all aspects of its cost benefit considerations. The Commission also 
included a number of questions for the purpose of eliciting cost and 
benefit estimates from public commenters wherever possible.
1. Final Rule
    The Commission is promulgating new regulations in part 1 of its 
regulations designed to (1) further ensure that FCMs hold customer 
funds sufficient to cover the required initial margin for the 
customer's positions, by prohibiting an FCM from permitting customers 
to withdraw funds from their accounts with such FCM unless the net 
liquidating value plus the margin deposits remaining in the customer's 
account after the withdrawal would be sufficient to meet the customer 
initial margin requirements with respect to the products or portfolios 
in the customer's account (i.e., the Margin Adequacy Requirement) 
(regulation Sec.  1.44(b)) and (2) permit FCMs to treat the separate 
accounts of a single customer as accounts of separate entities for 
purposes of the Margin Adequacy Requirement, subject to requirements 
designed to ensure that such separate account treatment is carried out 
in a documented and consistent manner, and that FCMs, their DSROs, and 
the Commission are apprised of, and able to respond to, conditions 
that, for risk mitigation reasons, would necessitate the cessation of 
disbursements on a separate account basis (regulation Sec.  1.44(c)-
(h)).\362\ The Commission is also adopting revisions to regulations in 
parts 1, 22, and 30 of its regulations related to definitions, FCM 
minimum financial requirements, reporting, collection of margin, and 
clearing FCM risk management (amendments to regulations Sec. Sec.  1.3, 
1.17, 1.20, 1.58, and 1.73, as well as Sec. Sec.  22.2 and 30.7), and 
part 39 of its regulations related to DCO risk management (amendments 
to regulation Sec.  39.13), to facilitate full implementation of the 
Margin Adequacy Requirement and the requirements for separate account 
treatment.
---------------------------------------------------------------------------

    \362\ Regulation Sec.  1.44(a) provides definitions supporting 
the other subsections of the regulation.
---------------------------------------------------------------------------

2. Baseline: Current Part 1 and Regulation 39.13(g)(8)(iii)
    The Commission identifies the costs and benefits of the final 
amendments relative to the baseline of the regulatory status quo. In 
particular, the baseline that the Commission considers for the costs 
and benefits of these final rule amendments is the Commission 
regulations in effect immediately prior to the adoption of this final 
rule; specifically, part 1 of the Commission's regulations (where the 
operative part of the final rule would be codified) and regulation 
Sec.  39.13(g)(8)(iii) (which contains the Commission's current Margin 
Adequacy Requirement). In considering the costs and benefits of the 
final rule against this baseline, the Commission considers the costs 
and benefits for both clearing FCMs and non-clearing FCMs--the two 
categories of market participants that will be directly affected by the 
final rule. To the extent that certain FCMs that are clearing members 
of DCOs have taken actions in reliance on CFTC Letter No. 19-17, the 
Commission recognizes the practical implications of those actions on 
the costs and benefits of the final rule.
a. Baseline With Respect to Clearing FCMs
    Regulation Sec.  39.13(g)(8)(iii) currently provides that DCOs 
shall establish a Margin Adequacy Requirement for their clearing FCMs 
with respect to the products that the DCOs clear. Thus, under the 
status quo baseline, clearing FCMs are, albeit indirectly (through the 
operation of DCO rules designed to implement regulation Sec.  
39.13(g)(8)(iii)), subject to the Margin Adequacy Requirement for 
futures and Cleared Swaps. They are not, however, subject to the Margin 
Adequacy Requirement for foreign futures that are not cleared by a 
DCO.\363\ Under the baseline--which does not include the effect of CFTC 
Letter No. 19-17 and its superseding letters--clearing FCMs are not 
permitted to engage in separate account treatment with respect to the 
Margin Adequacy Requirement.
---------------------------------------------------------------------------

    \363\ While existing regulation Sec.  39.13(g)(8)(iii) does not 
require DCOs to impose a Margin Adequacy Requirement on their 
clearing FCMs with respect to such FCMs' foreign futures (part 30) 
accounts, it may well be the case that such FCMs' existing systems 
and procedures already apply that requirement to those accounts, 
because it may be impracticable operationally to treat those 
accounts differently from futures and Cleared Swaps Accounts. If 
that assumption is correct, then the final part 1 Margin Adequacy 
Requirement is unlikely to impose significant costs on, or cause 
significant benefits with respect to, clearing FCMs.
---------------------------------------------------------------------------

b. Baseline With Respect to Non-Clearing FCMs
    Immediately prior to the adoption of this final rule, Commission 
regulations did not, either directly or indirectly, impose a Margin 
Adequacy Requirement on non-clearing FCMs. Accordingly, non-clearing 
FCMs had no need to engage in separate account treatment with respect 
to such a requirement.
    Additionally, immediately prior to the adoption of this final rule, 
the Commission's part 1 regulations did not contain any requirements 
specifically related to the separate treatment of accounts. As noted 
above, under the baseline, clearing FCMs are not permitted to engage in 
separate account treatment with respect to regulation Sec.  
39.13(g)(8)(iii)'s Margin Adequacy Requirement, and non-clearing FCMs 
previously had no need to engage in separate account treatment with 
respect to the Margin Adequacy Requirement of regulation Sec.  
39.13(g)(8)(iii) (because DCO rules addressing that regulation do not 
apply to non-clearing FCMs). Additionally, a non-clearing FCM was not 
permitted to treat the accounts of a single customer as accounts of 
separate entities for purposes of regulatory requirements imposed by 
the Commission (e.g., capital requirements under regulation Sec.  
1.17).

[[Page 7922]]

B. Consideration of the Costs and Benefits of the Commission's Action

1. Benefits
a. Margin Adequacy Requirement (Regulation Sec.  1.44(b))
    As discussed above, the Commission is (a) promulgating new 
regulations in part 1 of its regulations designed to (1) further ensure 
that FCMs hold customer funds sufficient to cover the required initial 
margin for the customer's positions, and (2) permit FCMs to treat the 
separate accounts of a single customer as accounts of separate entities 
for purposes of such Margin Adequacy Requirement, subject to 
requirements designed to mitigate the risk that such separate account 
treatment could result in or worsen an undermargining scenario; and (b) 
adopting supporting amendments in parts 1, 22, 30, and 39 to facilitate 
the Margin Adequacy Requirement and requirements for separate account 
treatment, namely through changes to definitions, amendment of certain 
margin calculation requirements, application of certain risk management 
requirements to non-clearing FCMs engaged in separate account 
treatment, and amendment of regulation Sec.  39.13(g)(8)(iii)'s Margin 
Adequacy Requirement to accommodate separate account treatment under 
the final rule.
    Existing regulation Sec.  39.13(g)(8)(iii) establishes a Margin 
Adequacy Requirement, designed to mitigate the risk that a clearing 
member fails to hold, from a customer, funds sufficient to cover the 
required initial margin for the customer's cleared positions, and 
thereby designed to avoid the risk that a clearing FCM will, whether 
deliberately or inadvertently, misuse customer funds by using one 
customer's funds to cover another customer's margin shortfall. DCO Core 
Principle D, which concerns DCO risk management, imposes a number of 
duties upon DCOs related to their ability to manage the risks 
associated with discharging their responsibilities as DCOs, such as 
measuring credit exposures, limiting exposures to potential default-
related losses, setting margin requirements, and establishing risk 
management models and parameters.\364\ Among other requirements, Core 
Principle D requires that the margin required from each member and 
participant of a DCO be sufficient to cover potential exposures in 
normal market conditions.\365\ Regulation Sec.  39.13 implements Core 
Principle D, including through regulation Sec.  39.13(g)(8)(iii)'s 
restrictions on withdrawal of customer initial margin.
---------------------------------------------------------------------------

    \364\ Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D).
    \365\ Section 5b(c)(2)(D)(iv) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(iv).
---------------------------------------------------------------------------

    With respect to clearing FCMs, because regulation Sec.  
39.13(g)(8)(iii) already results in the application of a Margin 
Adequacy Requirement to clearing FCMs through DCO rules in the context 
of futures and Cleared Swaps, the benefits of a Margin Adequacy 
Requirement in part 1 that applies directly to FCMs will be more 
limited than the benefits with respect to non-clearing FCMs. However, 
the Commission believes that, to the extent there are failures in 
compliance with respect to margin adequacy, final regulation Sec.  
1.44(b) will provide an additional avenue (i.e., through the Commission 
and an FCM's DSRO) for monitoring and enforcement of margin adequacy 
for clearing FCMs. Moreover, final regulation Sec.  1.44(b) will expand 
the Margin Adequacy Requirement to apply to foreign futures 
transactions cleared through both clearing and non-clearing FCMs.\366\
---------------------------------------------------------------------------

    \366\ To the extent that FCMs already follow the Margin Adequacy 
Requirement for foreign futures, e.g., for reasons of operational 
convenience (for example, if a clearing FCM applies the Margin 
Adequacy Requirement to its customer risk management for futures and 
Cleared Swaps, it may be easier to also apply it in the context of 
customer risk management for foreign futures than to have two 
different approaches) or as a matter of prudent risk management, the 
related costs and benefits would be reduced.
---------------------------------------------------------------------------

    With respect to non-clearing FCMs, the Margin Adequacy Requirement 
of final regulation Sec.  1.44(b) will result in similar benefits to 
those currently experienced with respect to clearing FCMs under 
regulation Sec.  39.13(g)(8)(iii). Regulation Sec.  39.13(g)(8)(iii) 
provides that DCOs shall require clearing FCMs to ensure that their 
customers do not withdraw funds from their accounts unless sufficient 
funds remain to meet customer initial margin requirements with respect 
to all products and swap portfolios held in the customers' accounts and 
cleared by the DCO. This requirement is designed to prevent the 
undermargining of customer accounts, and thus mitigate the risk of a 
clearing member default and the consequences that could accrue to the 
broader financial system.
    Section 4d(a)(2) of the CEA and regulation Sec.  1.20(a) require an 
FCM to separately account for and segregate all money, securities, and 
property which it has received to margin, guarantee, or secure the 
trades or contracts of its commodity customers, and section 4d(a)(2) of 
the CEA and regulation Sec.  1.22(a) prohibit an FCM from using the 
money, securities, or property of one customer to margin or settle the 
trades or contracts of another customer.\367\
---------------------------------------------------------------------------

    \367\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20(a); 17 CFR 1.22(a).
---------------------------------------------------------------------------

    The Commission believes that regulation Sec.  1.44(b), which will 
apply a Margin Adequacy Requirement directly to FCMs, both clearing and 
non-clearing, would further achieve the benefits of serving to protect 
customer funds, and mitigating systemic risk that could arise from 
misuse of customer funds, by applying the undermargining avoidance 
requirements of regulation Sec.  39.13(g)(8)(iii) directly to all FCMs. 
As noted above, this Margin Adequacy Requirement does not currently 
apply to non-clearing FCMs. The Commission further believes that the 
application of such a Margin Adequacy Requirement to all FCMs (and to 
all three types of customer transactions, including (additionally) 
foreign futures transactions), through more broadly preventing 
undermargining situations, is reasonably necessary to effectuate CEA 
sections 4d and 4(b)(2) and to accomplish the purposes of the CEA (from 
section 3(b)) of ``avoidance of systemic risk'' and ``protecting all 
market participants from . . . misuses of customer assets.''
b. Requirements for Separate Account Treatment (Regulation Sec.  
1.44(c)-(h) and Supporting Amendments to Regulations Sec. Sec.  1.3, 
1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 39.13(g)(8))
    As discussed in section I.B above, there are a number of commercial 
reasons why an FCM or customer may wish to treat the separate accounts 
of a single customer as accounts of separate entities. Combination of 
all accounts of the same customer within the same regulatory account 
classification for purposes of margining and determining funds 
available for disbursement may make it challenging for certain 
customers and their asset managers to achieve certain commercial 
purposes.\368\ For example, where a customer has apportioned assets 
among multiple asset managers, neither the customer nor their asset 
managers may be able to obtain certainty that the individual portion of 
funds allocated to one asset manager will not be affected by the 
activities of other asset managers.
---------------------------------------------------------------------------

    \368\ See First FIA Letter.
---------------------------------------------------------------------------

    Where FCMs are able to treat the separate accounts of a single 
customer as accounts of separate entities for purposes of the Margin 
Adequacy Requirement, customers benefit from being better able to 
leverage the skills and expertise of asset managers and realize the 
benefits of a balance of

[[Page 7923]]

investment strategies in order to meet specific commercial goals. 
Moreover, as discussed further below, clearing FCMs and customers of 
clearing FCMs already relying on the no-action position would also 
obtain the benefit of continuing to leverage existing systems and 
procedures to provide for separate account treatment.
    The Commission believes that, where such separate account treatment 
is offered, it should be subject to safeguards that mitigate the risk 
that it will result in the undermargining of customer accounts. By 
applying regulatory safeguards designed to preserve the goals of the 
Margin Adequacy Requirement during such treatment, the final rule would 
achieve the benefit of permitting separate account treatment in a 
manner that would not contravene the customer funds protection and risk 
mitigation purposes of the CEA and Commission regulations.
    The Commission also believes that several years of successful 
separate account activity based on the no-action conditions of CFTC 
Letter No. 19-17 and its superseding letters by DCOs, clearing FCMs, 
and customers demonstrate that separate account treatment can be 
successfully applied, subject to certain safeguards.
    As discussed above, sections 4d(a)(2) of the CEA and regulations 
Sec. Sec.  1.20(a) and 1.22(a) require an FCM to account separately for 
and segregate futures customer funds and prohibit FCMs from using one 
customer's funds to cover another customer's margin shortfall \369\--
requirements which serve to further the CEA's purposes (as set forth in 
section 3(b)) of protecting customer funds and avoiding systemic risk.
---------------------------------------------------------------------------

    \369\ See also the analogous requirements in CEA Sec. Sec.  
4d(f)(2) and 4(b), and regulations Sec. Sec.  22.2 and 30.7 (for, 
respectively, Cleared Swaps and foreign futures).
---------------------------------------------------------------------------

    Part 1 of the Commission's regulations contain the principal 
regulations applicable to the operation of FCMs that support the above-
described statutory purposes and requirements. Such regulations include 
requirements related to financial and other reporting, risk management, 
treatment of customer funds, and recordkeeping, among others. As noted 
above, the Commission believes that a Margin Adequacy Requirement, 
directly applied to all FCMs and combined with separate account 
treatment, can further effectuate CEA section 4d(a)(2)'s customer fund 
protection and risk avoidance requirements \370\ while offering 
commercial utility for a variety of market participants. However, prior 
to the adoption of this final rule, part 1 did not contain any 
regulations imposing such a Margin Adequacy Requirement, or governing 
the manner in which separate account treatment may be conducted.
---------------------------------------------------------------------------

    \370\ And, similarly, those of CEA section 4d(f)(2) and 4(b).
---------------------------------------------------------------------------

    The final rule is designed to achieve the benefit of bridging this 
gap by
    (i) inserting a Margin Adequacy Requirement (regulation Sec.  
1.44(b)) into part 1 to ensure further that an FCM (whether a clearing 
or non-clearing FCM) does not permit margin withdrawals that would 
create or exacerbate an undermargining situation,
    (ii) allowing FCMs to treat the separate accounts of a single 
customer as accounts of separate entities for purposes of the Margin 
Adequacy Requirement, with the benefits discussed above (regulation 
Sec.  1.44(c)),
    (iii) establishing the manner in which FCMs may elect to engage in 
separate account treatment for a particular customer, with the benefit 
of identifying both for the FCM and its supervisory authorities (the 
Commission and SROs) whether it is engaging in separate account 
treatment, and, if so, for which customers, with the benefit of 
facilitating effective regulatory/self-regulatory supervision 
(regulation Sec.  1.44(d)),
    (iv) setting forth financial and operational conditions for 
customers and FCMs that would identify risk management issues that are 
sufficiently significant to disqualify a particular separate account 
customer from receiving (or an FCM with respect to all of its separate 
account customers from making) disbursements on a separate account 
basis (regulation Sec.  1.44(e)),
    (v) requiring that separate accounts be on a one business day 
margin call, while setting forth limited circumstances in which failure 
to actually receive margin on a same-day basis may be excused, with the 
benefit of limiting the extent of potential undermargining, (regulation 
Sec.  1.44(f)), and
    (vi) establishing requirements designed to ensure that separate 
account treatment is carried out in a consistent and documented manner, 
and carrying that treatment through to related FCM capital, customer 
funds protection, and risk management requirements in part 1 
(regulation Sec.  1.44(g)-(h)), with the benefit of further ensuring 
that the risk management objectives of the Margin Adequacy Requirement 
continue to be met during separate account treatment.
    The revisions to regulations Sec. Sec.  1.3, 1.17, 1.20, 1.32, 
1.58, 1.73, 22.2, 30.2, 30.7, and 39.13(g)(8)(i) are designed to define 
terms used in regulation Sec.  1.44 and facilitate implementation of 
provisions in regulation Sec.  1.44 that would affect compliance with 
financial requirements for FCMs, collection of margin, and FCM risk 
management. Additionally, a revision to regulation Sec.  
39.13(g)(8)(iii) is intended to make clear that regulation Sec.  
39.13(g)(8)(iii)'s Margin Adequacy Requirement, applicable directly to 
DCOs and indirectly to clearing FCMs, and similar in substance to the 
Margin Adequacy Requirement of regulation Sec.  1.44(b), does not 
require DCOs to preclude separate account treatment carried out subject 
to regulation Sec.  1.44.
    The Commission believes that final regulation Sec.  1.44(c)-(h), 
and the final supporting amendments to regulations Sec. Sec.  1.3, 
1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 39.13 would benefit 
both clearing FCMs and non-clearing FCMs, in addition to customers and 
other market participants, by providing a comprehensive framework that 
affirms the availability of separate account treatment, and sets forth 
the manner in which such treatment can be carried out consistent with 
the customer fund protection and risk avoidance objectives of 
regulation Sec.  39.13(g)(8)(iii) (as applied via DCO rules, with 
respect to clearing FCMs) and regulation Sec.  1.44(b)'s Margin 
Adequacy Requirement (with respect to both clearing FCMs and non-
clearing FCMs).
    The Commission additionally notes that the allowance of, and 
requirements for separate account treatment in final regulation Sec.  
1.44(c)-(h) are substantially similar to the conditions to the staff 
no-action position in CFTC Letter No. 19-17. A number of clearing FCMs 
have adopted some practices based on this no-action position provided 
by Commission staff. As such, to the extent that some clearing FCMs 
have relied on the no-action position, the actual costs and benefits of 
the rule amendments as realized in the market may not be as significant 
as a comparison of the rule to the regulatory baseline would 
suggest.\371\
---------------------------------------------------------------------------

    \371\ For those clearing FCMs that currently choose not to 
engage in separate account treatment, and therefore, do not adhere 
to CFTC Letter No. 19-17, but choose to do so following the adoption 
of this final rule, the Commission submits that there will be 
significant costs; similar to those faced by non-clearing FCMs. This 
is discussed further below in the costs section.
---------------------------------------------------------------------------

    Moreover, if the Commission were to allow the no-action position in 
CFTC Letter No. 19-17 to expire, and did not adopt the proposed 
regulation, then clearing FCMs that already engage in separate account 
treatment consistent with the terms of CFTC Letter No. 19-17 would be 
required to reverse those

[[Page 7924]]

changes. This could entail significant expenditures of funds and 
resources in order to rework systems, procedures, and customer 
documentation for such FCMs.\372\ Hence, actual benefits to the 
regulation may accrue from the ability of many FCMs to avoid these 
costs.
---------------------------------------------------------------------------

    \372\ See Second FIA Letter. For instance, FIA noted that 
clearing FCMs would again be required to review and amend customer 
agreements, noting that negotiations to amend such agreements would 
likely prove ``extremely difficult'' as ``advisers would seek to 
assure that their ability to manage their clients' assets entrusted 
to them would not be adversely affected by the actions (or 
inactions) of another adviser.'' FIA letter dated May 11, 2022 to 
Robert Wasserman (Third FIA Letter). FIA further noted that ``an 
adviser may be less likely to use exchange-traded derivatives to 
hedge its customers' cash market positions if the adviser could not 
have confidence that it would be able to withdraw its customers' 
excess margin as necessary to meet its obligations in other 
markets.'' Id.
---------------------------------------------------------------------------

    In connection with its discussion of the benefits of the proposed 
requirements for separate account treatment, the Commission asked as 
Question 9 what evidence can be provided that customers have been able 
to achieve better performance by virtue of allowing separate account 
treatment; and whether there is evidence of under margining due to 
separate account treatment since CFTC Letter No. 19-17 was issued. 
Additionally, as Question 10, the Commission asked whether there is 
evidence of regulatory arbitrage between clearing FCMs and non-clearing 
FCMs on the grounds that the latter are not currently subject to the 
Margin Adequacy Requirement. No commenter responded to these questions.
2. Costs
    The final rule (i) amends part 1 of the Commission regulations to 
add a new requirement (regulation Sec.  1.44(b)) for FCMs to hold 
customer funds sufficient to cover the required initial margin for the 
customer's positions (the Margin Adequacy Requirement); (ii) amends 
part 1 to, in the same new section (regulation Sec.  1.44(c)-(h)), 
permit FCMs, subject to certain requirements and for purposes of the 
Margin Adequacy Requirement, treat the accounts of a single customer as 
accounts of separate entities; and (iii) amends existing regulations in 
parts 1 and 39 to facilitate implementation of the new regulation. The 
Commission herein discusses the costs related to each such set of 
amendments with respect to clearing and non-clearing FCMs. There are 
currently approximately 60 registered FCMs, and of these, the 
Commission estimates that approximately 40 are clearing FCMs and 
approximately 20 are non-clearing FCMs.\373\ While the final rule would 
require all FCMs to comply with the Margin Adequacy Requirement, it 
would not require FCMs to engage in separate account treatment, and the 
Commission does not expect that all FCMs will engage in separate 
account treatment. Accordingly, as noted in connection with the 
Commission's discussion below related to the PRA, the Commission 
estimates that 30 FCMs will choose to apply separate account treatment.
---------------------------------------------------------------------------

    \373\ CFTC, Financial Data for FCMs, Aug. 31, 2024, available at 
https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
---------------------------------------------------------------------------

a. Margin Adequacy Requirement (Regulation Sec.  1.44(b))
    The Margin Adequacy Requirement of regulation Sec.  1.44(b) 
requires FCMs to hold customer funds sufficient to cover the required 
initial margin for customer positions. With respect to clearing FCMs, 
the Commission estimates that the cost of compliance would be de 
minimis. As discussed above, existing regulation Sec.  39.13(g)(8)(iii) 
provides that a DCO shall require its clearing members to ensure that 
their customers do not withdraw funds from their accounts with such 
clearing members unless the net liquidating value plus the margin 
deposits remaining in a customer's account after such withdrawal are 
sufficient to meet the customer initial margin requirements with 
respect to all products and swap portfolios held in such customer's 
account which are cleared by the DCO. Thus, regulation Sec.  
39.13(g)(8)(iii) applies a requirement that is substantively identical 
to the Margin Adequacy Requirement of regulation Sec.  1.44(b) 
indirectly to clearing FCMs, through the rules of their DCOs. Because 
clearing FCMs are already functionally subject to the Margin Adequacy 
Requirements of regulation Sec.  1.44(b) as a result of regulation 
Sec.  39.13(g)(8)(iii), the Commission does not expect any significant 
additional cost of compliance for clearing FCMs.
    Prior to this final rule, non-clearing FCMs were not subject to a 
Margin Adequacy Requirement promulgated by the Commission, and the 
Commission expects that the costs for a non-clearing FCM to comply 
could be significant. The Commission expects that compliance with the 
Margin Adequacy Requirement for a non-clearing FCM may entail many of 
the same types of costs noted below in connection with compliance with 
separate account treatment requirements. Such costs could include 
personnel, operational, and other costs related to updating internal 
policies and procedures, updating or renegotiating customer 
documentation, and implementing or configuring internal systems to 
identify and prevent margin withdrawals that would be inconsistent with 
the Margin Adequacy Requirement. The Commission expects that the 
compliance costs for non-clearing FCMs could vary significantly 
depending on factors such as the FCM's size, customer base, and 
existing compliance infrastructure and resources. The extent to which 
non-clearing FCMs need to develop new tools, policies, and procedures 
may however be reduced, to the extent that such FCMs already 
voluntarily take steps to avoid distributing funds back to their 
customers in a manner that would create or exacerbate an undermargined 
condition for a customer, as a means of managing risks to the FCM.
    Moreover, while promoting margin adequacy is a policy goal of many 
of the regulations promulgated under the CEA, there are potential costs 
to individual investors of the Margin Adequacy Requirement. In general, 
tightening the rules concerning margins can reduce the return to 
investors, and some effects of this type could result from requiring 
margin adequacy at non-clearing FCMs.
b. Requirements for Separate Account Treatment (Regulation Sec.  
1.44(c)-(h) and Supporting Amendments to Regulations Sec. Sec.  1.3, 
1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 39.13(g)(8))
    In addition to the Margin Adequacy Requirement of regulation Sec.  
1.44(b), the Commission is also adopting in regulation Sec.  1.44(c)-
(h) rules to allow FCMs to elect to apply separate account treatment 
for purposes of the Margin Adequacy Requirement, and requirements for 
the application of such treatment. The regulation would not require 
FCMs to apply separate account treatment, and FCMs that do not 
presently apply separate account treatment, and do not desire to do so 
in the future, would generally not incur any costs related to the 
application of such treatment. Furthermore, the Commission believes 
that an FCM electing separate account treatment will do so because such 
FCM believes the benefits of doing so will exceed the costs of doing 
so.
    With respect to FCMs that choose to engage in separate account 
treatment under the final rule, the Commission expects that clearing 
FCMs and non-clearing FCMs will generally incur the same types of 
compliance costs, as there are no applicable requirements for separate 
account treatment under the baseline with respect to either clearing

[[Page 7925]]

FCMs or non-clearing FCMs, and the requirements of the final rule 
generally do not distinguish between clearing FCMs and non-clearing 
FCMs.\374\
---------------------------------------------------------------------------

    \374\ There are two distinctions between clearing and non-
clearing FCMs relevant to separate account compliance costs.
    The first would not create a difference in costs: Gross 
collection of margin without netting between separate accounts is 
required by regulation Sec.  1.44(g)(2) and existing regulation 
Sec.  39.13(g)(8)(i), as clarified by regulation Sec.  
39.13(g)(8)(i)(E) for clearing FCMs, and regulation Sec.  1.58(c) 
creates this requirement for non-clearing FCMs.
    The second would create some difference in additional costs: 
Under current regulation Sec.  1.73, clearing FCMs are required to 
establish risk-based credit limits, screen orders for compliance 
with those limits, and monitor adherence to those limits, as well as 
conduct stress testing of positions that could pose material risk. 
Non-clearing FCMs are not currently required to do these things. 
Under regulations Sec. Sec.  1.44(g)(1) and 1.73(c), they would be 
required to do so for separate account customers and separate 
accounts, both on an individual separate account and aggregate 
basis. As such, there are additional incremental costs faced by non-
clearing FCMs that choose separate account treatment.
---------------------------------------------------------------------------

    The costs of the final rule related to application of separate 
account treatment will likely vary across FCMs depending on the nature 
of their existing rule and compliance infrastructures, and as such 
would be difficult to quantify with precision. However, for those FCMs 
that choose to engage in separate account treatment in a manner 
consistent with the final rule, the costs of compliance could be 
significant, and may vary based on factors such as the size and 
existing compliance resources of a particular FCM, as well as the 
extent to which the FCM's existing risk management policies and 
procedures already incorporate risk management measures that overlap 
with those required under the final rule. FCMs that wish to allow for 
separate account treatment would likely incur costs in connection with 
updating their policies and procedures, internal systems, customer 
documentation and (re-)negotiation of customer agreements to allow for 
separate account treatment under the conditions codified in the final 
rule.
    In a letter to the Commission staff dated April 1, 2022, FIA noted 
that, ``For many [clearing] FCMs and their customers, the terms and 
conditions of the no-action position . . . presented significant 
operational and systems challenges,'' as clearing FCMs were required to 
``(i) adopt new practices for stress testing accounts; (ii) review and 
possibly change margin-timing expectations for non-US accounts; (iii) 
undertake legal analysis to clarify interpretive questions; and (iv) 
revise their segregation calculation and recordkeeping practices,'' as 
well as engage in ``time-consuming documentation changes and customer 
outreach.'' \375\
---------------------------------------------------------------------------

    \375\ FIA letter dated Apr. 1, 2022 to Clark Hutchison and 
Amanda Olear (Second FIA Letter).
---------------------------------------------------------------------------

    FIA further described these challenges in a letter to the 
Commission staff dated May 11, 2022, noting that in order to meet the 
conditions of the no-action position, clearing FCMs were required to 
review and in some cases amend customer agreements, and identify and 
implement information technology systems changes.\376\ FIA also 
asserted that clearing FCMs were likely required to revise internal 
controls and procedures.\377\ FIA stated that while the costs incurred 
by each clearing FCM varied depending on its customer base, among 
larger clearing FCMs with a significant institutional customer base, 
personnel costs would have included identifying and reviewing up to 
3,000 customer agreements to determine which agreements required 
modification, and then negotiating amendments with customers or their 
advisers.\378\ FIA further stated that because the relevant provisions 
of these agreements were not uniform, they generally required 
individual attention.\379\
---------------------------------------------------------------------------

    \376\ Third FIA Letter. FIA noted that these changes were 
particularly challenging for FCMs that are part of a bank holding 
company structure, as ``[m]odifying integrated technology 
information systems across a bank holding company structure is 
complicated, expensive and time-consuming.'' Id.
    \377\ Id.
    \378\ Id.
    \379\ Id.
---------------------------------------------------------------------------

    The Commission anticipates that similar costs would arise for FCMs 
attempting to meet the requirements of the final rule.
    Of the costs that FCMs would likely incur related to application of 
separate account treatment, some costs would be incurred on a one-time 
basis (e.g., updates to systems, procedures, disclosure documents, and 
recordkeeping practices, and renegotiation of customer agreements with 
separate account customers), and some would be recurring (e.g., 
monitoring compliance with the one-day margin call requirement and the 
other conditions for ordinary course of business). However, those costs 
could vary widely on an FCM-by-FCM basis, depending on factors such as 
the number of customers at a particular FCM who wish to have separate 
treatment applied to their accounts; thus, for some FCMs, ongoing costs 
of maintaining compliance may be less significant.
    While the Commission, in connection with its Paperwork Reduction 
Act assessment below,\380\ estimates that certain reporting, 
disclosure, and recordkeeping costs would not be significant on an 
entity level, as FIA noted, taken as a whole, compliance with the 
conditions that the regulation codifies could result in significant 
operational and systems costs. In other words, the Commission 
anticipates that FCMs may incur significant costs related to designing 
and implementing new systems, or enhancing existing systems, to comply 
with the final rule, as well as negotiation costs, even where direct 
recordkeeping costs may not be significant on an entity-by-entity 
basis.\381\
---------------------------------------------------------------------------

    \380\ As discussed below, the Commission staff estimates total 
annual costs of $10,292,580 across 7,530 respondents with respect to 
reporting, disclosure, and recordkeeping requirements; however, as 
certain such costs are one-time costs, the Commission staff expects 
such figure would be reduced after the first year of application of 
separate account treatment.
    \381\ This may be true to a somewhat lesser extent with respect 
to new entrants to the FCM business, in that those FCMs would incur 
the cost of implementing policies, procedures, and systems that 
comply with the requirements of the final rule, but would not need 
to retrofit existing policies, procedures, and systems.
---------------------------------------------------------------------------

    In terms of implementation costs relative to the baseline (that 
does not consider the effects of NAL 19-17), the Commission believes 
clearing FCMs and non-clearing FCMs will be subject to the same types 
of costs related to application of separate account treatment.
    As discussed above, a number of clearing FCMs have adopted some 
current practices based not only upon regulation Sec.  
39.13(g)(8)(iii)'s existing Margin Adequacy Requirement applicable to 
clearing FCMs through the rules of such clearing FCMs' DCOs, but also 
on the no-action position provided by Commission staff in CFTC Letter 
No. 19-17, and decisions by DCOs to provide relief from their rules 
adopting a Margin Adequacy Requirement in line with (and subject to the 
conditions specified in) that staff no-action position. As such, to the 
extent that clearing FCMs have relied on the no-action position, the 
actual costs and benefits of the final rule amendments as realized in 
the market may not be as significant as a comparison of the rule to the 
regulatory baseline would suggest.\382\ Specifically, to the extent 
clearing FCMs already rely on the effects of the no-action position, 
the tools (e.g., software) and policies and procedures necessary to 
comply with

[[Page 7926]]

the final rule on an ongoing basis will largely have already been 
built, and the costs associated with compliance will largely have 
already been incurred.\383\ (This would not apply to non-clearing FCMs, 
who have had no need to rely on the effects of the no-action position.) 
However, the Commission notes that because the provisions of the final 
rule vary in some respects from the terms of the no-action position, at 
least some additional costs are likely to be incurred by clearing FCMs 
that already rely on the no-action position.
---------------------------------------------------------------------------

    \382\ For those clearing FCMs that currently choose not to 
engage in separate account treatment, and therefore, do not adhere 
to CFTC Letter No. 19-17, but choose to do so following the adoption 
of the final rule, the Commission submits that there will be 
significant costs similar to non-clearing FCMs.
    \383\ Communications from FIA indicate that significant 
resources have, in fact, been expended to meet the conditions of the 
no-action position of CFTC Letter No. 19-17. See Second FIA Letter.
---------------------------------------------------------------------------

    In addition to compliance costs, one other type of costs should be 
noted: The Commission is of the view that the risk mitigants in final 
regulation Sec.  1.44(c)-(h) would achieve the benefits of the Margin 
Adequacy Requirement while permitting separate account treatment. 
However, there does exist a possibility that, despite these risk 
mitigants, an undermargin condition could exist, followed by a default 
by the customer to the FCM, and a consequent default by the FCM 
upstream (either to a DCO or to a clearing FCM), where the losses due 
to that default would be greater than they would have been absent 
separate account treatment.
    As Question 11, the Commission asked whether the descriptions of 
the types of costs that would be incurred by FCMs to implement each of 
the Margin Adequacy Requirement and Separate Account Treatment under 
the proposed rules were appropriately comprehensive, and what data can 
be provided about the magnitude of such costs, either by type or in the 
aggregate. As Question 12, the Commission requested comment on the 
extent to which FCMs that are not presently clearing members that rely 
on the no-action position in CFTC Letter No. 19-17 would, following 
implementation of the proposed regulation, seek to engage in separate 
account treatment (requesting that commenters provide data where 
available). As Question 13, the Commission requested comment regarding 
whether there are FCMs that chose not to rely on the no-action position 
in CFTC Letter No. 19-17 due to the conditions required to rely on that 
position. The Commission further requested comment on how the 
implementation of those conditions in the Second Proposal could be 
modified to mitigate the burden of compliance while achieving the goals 
of mitigating systemic risk and protecting customer funds.
    No commenters responded to these questions; however, several 
commenters submitted comments that dealt with potential costs, 
generally qualitatively. For example, in commenting on the Commission's 
definition of ``undermargined amount'' in proposed regulation Sec.  
1.44(a), the JAC asserted that the proposed rule appeared to require 
FCMs to perform margin calculations differently for compliance with 
different regulatory reporting requirements (including, potentially, 
bifurcated treatment for non-separate account customers and separate 
account customers), which the JAC contended may prove burdensome for 
FCMs that permit separate account treatment (e.g., such FCMs may be 
required to update their regulatory reporting records).\384\ As 
discussed above, the Commission has modified the final definition of 
``undermargined amount'' to address the JAC's comment and make clear 
that the final rule is not intended to alter the manner in which FCMs 
determine the undermargined amount for a separate account or non-
separate account customer.
---------------------------------------------------------------------------

    \384\ JAC Comment Letter.
---------------------------------------------------------------------------

    In discussing the permissibility under the proposed regulation of 
certain multi-settlement margining processes, the JAC also noted FCMs 
may be required to undertake significant work to update their 
regulatory records, risk programs, margin calculations, and reports for 
separate account customers and non-separate account customers.\385\ 
While the Commission confirms above that the final rule is not intended 
to preclude FCMs and their customers from, e.g., settling margin in 
multiple currencies, and does not require the disbursement or 
settlement of a single amount, the Commission nonetheless expects that, 
as a general matter, some FCMs will be required to undertake 
significant work to implement requirements for separate account 
treatment (in particular, FCMs that have not provided such treatment 
for customers previously but opt to do so following the adoption of 
this final rule).
---------------------------------------------------------------------------

    \385\ Id.
---------------------------------------------------------------------------

    The JAC discussed in its comment letter that FCMs could be subject 
to significant capital charges for separate accounts in light of the 
requirement in proposed regulation Sec.  1.17(c)(5)(viii)(B) to require 
the calculation of current calls used in computing a separate account's 
undermargined capital charge based on the age of all margin calls in 
all separate accounts of the separate account customer.\386\ With 
respect to the requirement in proposed regulation Sec.  1.17(c)(2)(i), 
which would have required FCMs to look across all separate accounts of 
a separate account customer in determining one-day debits or deficits 
for purposes of ascertaining current assets, the JAC noted that FCMs 
permitting separate account treatment may need to consider additional 
capital needs, particularly in the event that margin calls met in non-
USD currencies would be considered satisfied only when receipts are 
settled.\387\ FIA similarly argued that the proposed revisions to 
regulation Sec.  1.17 would likely be costly to FCMs because they would 
require FCMs to rebuild operational and reporting systems to perform 
the required look-across of separate accounts.\388\ Using a 
quantitative example and information ascertained from a survey of FIA 
members, FIA also argued that the proposed look-across could result in 
capital treatment that, in FIA's view, would be punitive and without 
regard to related financial or operational risk.\389\
---------------------------------------------------------------------------

    \386\ Id.
    \387\ Id.
    \388\ FIA Comment Letter.
    \389\ Id.
---------------------------------------------------------------------------

    As discussed above, in this final rule, the Commission has 
eliminated the requirement to look across separate accounts for 
purposes of regulation Sec.  1.17(c)(2)(i) and regulation Sec.  
1.17(c)(5)(viii)(B), and further confirms that the final rule is not 
intended to preclude treatment of pending non-USD transfers as received 
(subject to conditions identical to those set forth in JAC guidance) 
for purposes of regulation Sec.  1.17(c)(5)(viii), among others.
    Additionally, FIA asserted that the standard for determining the 
occurrence of an unusual administrative error or operational constraint 
that would excuse a margin fail under the one business day margin call 
standard of regulation Sec.  1.44, set forth in proposed regulation 
Sec.  1.44(f)(5), introduces subjectivity and complexity into routine 
determinations that will require material levels of new investment in 
compliance, risk management, and operations time and resources, for no 
discernible risk management benefit.\390\ SIFMA-AMG opined that the 
proposed regulation Sec.  1.44(f)(5) did not appropriately balance 
practicability and burden with risk management,\391\ and MFA contended 
that the proposed requirement would result in additional administrative 
burdens on an FCM.\392\ FIA also contended that proposed regulation 
Sec.  1.44(f)(4), which in part permits a separate account customer or

[[Page 7927]]

investment manager to designate the holiday schedule of a Eurozone 
country to follow for purposes of regulation Sec.  1.44's one business 
day margin call standard where margin is to be paid in EUR, will 
require FCMs to deploy new margin day counting systems and 
protocols.\393\ SIFMA-AMG argued that proposed regulation Sec.  
1.44(f)(4) would be unmanageable and unsustainable, would impose a 
regulatory burden without a corresponding public policy benefit, and 
could require the overhaul of customer agreements and burden FCMs with 
additional monitoring responsibilities.\394\ The Commission is adopting 
regulation Sec.  1.44(f)(4) and 1.44(f)(5) with modifications in light 
of comments received, and responds to FIA's and SIFMA-AMG's comments 
above.
---------------------------------------------------------------------------

    \390\ Id.
    \391\ SIFMA-AMG Comment Letter.
    \392\ MFA Comment Letter.
    \393\ FIA Comment Letter.
    \394\ SIFMA-AMG Comment Letter.
---------------------------------------------------------------------------

    FIA also asserted that proposed regulation Sec.  1.44(h)(4)(i)'s 
30-day stay on reinstating disbursements on a separate account basis 
could have certain negative unintended consequences for customers and 
market liquidity, if, due to an event outside the ordinary course of 
business, an FCM were forced to suspend disbursements to customers on a 
separate account basis (even after the underlying event was 
resolved).\395\ SIFMA-AMG voiced similar concerns.\396\ Here, and 
above, the Commission notes that the 30-day stay on reinstating 
disbursements on a separate account basis is intended to apply only in 
instances in which the election for separate account treatment for a 
separate account customer pursuant to regulation Sec.  1.44(d) is 
revoked. It will not apply where an event outside the ordinary course 
of business has required cessation of disbursements on a separate 
account basis, and that circumstance subsequently has been cured, 
consistent with regulation Sec.  1.44(e)(4).
---------------------------------------------------------------------------

    \395\ FIA Comment Letter.
    \396\ SIFMA-AMG Comment Letter.
---------------------------------------------------------------------------

C. Costs and Benefits of the Commission's Action as Compared to 
Alternatives

    The Commission considered as an alternative to this final rule 
codifying the no-action position absent the conditions. This 
alternative would preserve the benefits of separate account treatment 
for FCMs and customers. However, as discussed further below, the 
conditions of the no-action position--codified herein on an FCM-wide 
basis--are designed to permit separate account treatment only to the 
extent that such treatment would not contravene the risk mitigation 
goals of regulation Sec.  39.13 (and the Margin Adequacy Requirement of 
regulation Sec.  1.44(b)). The Commission believes that codifying the 
staff no-action position without the conditions would intensify risks 
for DCOs, FCMs, and customers. For instance, without a requirement to 
cease disbursements on a separate account basis in cases in which a 
customer is in financial distress, it is more likely that an 
undermargining scenario would be exacerbated, and a customer default to 
the clearing FCM--and potentially a default of the clearing FCM to the 
DCO--would be more likely. It would also forego applying the benefits 
of the Margin Adequacy Requirement and specific risk-mitigating 
requirements for separate account treatment to all FCMs.

D. Section 15(a) Factors

    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
1. Protection of Market Participants and the Public
    Section 15(a)(2)(A) of the CEA requires the Commission, before 
promulgating a regulation or issuing an order, to consider the costs 
and benefits of the action in light of considerations of protection of 
market participants and the public. The Commission believes that the 
amendments adopted herein would strengthen the customer protection and 
risk mitigation provisions of part 1 applicable to FCMs generally, and, 
with respect to clearing FCMs, maintain the efficacy of protections for 
customers and the broader financial system contained in Core Principle 
D and regulation Sec.  39.13.
    The Commission believes that the final rule's Margin Adequacy 
Requirement will have a salutary effect on the protection of market 
participants and the public. Section 4d(a)(2) of the CEA and the 
Commission's implementing regulations under part 1 require FCMs to 
segregate customer funds to margin trades and prohibit FCMs from using 
one customer's funds to margin another customer's trades. The final 
rule is designed to effectuate and support these requirements by 
implementing requirements for FCMs to limit the potential for losses 
from defaults and maintain margin sufficient to cover potential 
exposures in normal market conditions \397\ by requiring FCMs to ensure 
that their customers do not withdraw funds from their accounts if such 
withdrawal would create or exacerbate an initial margin shortfall, and 
to do so in a manner consistent with the Margin Adequacy Requirement in 
regulation Sec.  39.13(g)(8)(iii) already applicable through DCO rules 
to clearing FCMs. This requirement protects not only market 
participants by requiring FCMs to ensure that adequate margin exists to 
cover customer positions; it also protects the public from disruption 
to the wider financial system by mitigating the risk that an FCM will 
default due to customer nonpayment of variation margin obligations 
combined with insufficient initial margin.
---------------------------------------------------------------------------

    \397\ 7 U.S.C. 7a-1(c)(2)(D)(iii)-(iv).
---------------------------------------------------------------------------

    The Commission also believes the requirements in the final rule for 
carrying out separate account treatment will provide for separate 
account treatment in a manner that protects market participants and the 
public. While, with respect to clearing FCMs subject to the indirect 
effects of current Sec.  39.13(g)(8)(iii), permitting separate account 
treatment unavoidably creates some additional risk of a margin 
deficiency, the conditions of the no-action position outlined in CFTC 
Letter No. 19-17, and codified herein, as modified and applicable on an 
FCM-wide basis, are designed to effectuate these customer protection 
and risk mitigation goals notwithstanding an FCM's application of 
separate account treatment (and the consequent additional risk). For 
example, disbursements on a separate account basis are not permitted in 
certain circumstances outside the ordinary course of business (e.g., 
where an FCM learns a customer is in financial distress, and thus may 
be unable promptly to meet initial margin requirements, whether in one 
or more separate accounts or on a combined account basis). The final 
rule also puts in place requirements for FCMs designed to ensure that 
they collect information sufficient to understand the value of assets 
dedicated to a separate account, apply separate account treatment 
consistently, and maintain reliable lines of contact for the ultimate 
customer of the account. Clearing FCMs have, for over five years, 
successfully relied on a no-action letter, as applied through their 
DCOs, establishing conditions substantially similar to the requirements 
for separate account treatment set forth in this final rule, and the 
Commission believes that the codification of these conditions, as set 
forth herein, supports protection of market participants and the 
public.

[[Page 7928]]

2. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Section 15(a)(2)(B) of the CEA requires the Commission to evaluate 
the costs and benefits of its action in light of efficiency, 
competitiveness, and financial integrity of futures markets. The 
Commission believes that the final rule may carry potential 
implications for the financial integrity of markets, but not for the 
efficiency or competitiveness of markets, which the Commission believes 
remain unchanged.
    As stated above, the purposes of the Commission's customer funds 
protection and risk management regulations include not just protection 
of customer assets, but also mitigation of systemic risk: a customer in 
default to an FCM may in turn trigger the FCM to default, either to the 
DCO (if it is a clearing member) or to another FCM that is itself a 
clearing member, with potentially cascading consequences for the 
clearing FCM (if applicable) or the DCO and the wider financial system. 
The Margin Adequacy Requirement of regulation Sec.  1.44(b) advances 
those purposes directly. The final amendments permitting separate 
account treatment reflect the Commission's conclusion that the 
conditions of CFTC Letter No. 19-17, as codified herein, are sufficient 
and appropriate to guard against such risks for purposes of the Margin 
Adequacy Requirement.
    In CFTC Letter No. 19-17, the Commission staff highlighted market 
participants' concerns that the Commission should recognize ``diverse 
practices among FCMs and their customers with respect to the handling 
of separate accounts of the same beneficial owner'' as consistent with 
regulation Sec.  39.13(g)(8)(iii). FIA, in particular, outlined several 
business cases in which a customer may want to apply separate account 
treatment, and each of SIFMA-AMG, FIA, and CME outlined controls that 
clearing FCMs could apply to ensure that, in instances in which 
separate account treatment is desired, such treatment can be applied in 
a manner that effectively prevents systemic risk.\398\ By codifying in 
part 1 a Margin Adequacy Requirement directly applicable to FCMs 
similar to the Margin Adequacy Requirement of regulation Sec.  
39.13(g)(8)(iii), and a modified version of the no-action position 
provided for by CFTC Letter No. 19-17 and its superseding letters, 
applicable to all FCMs, the Commission is promulgating a framework for 
FCMs, whether clearing or non-clearing, to provide separate account 
treatment for customers subject to enhanced customer fund and risk 
mitigation protections, thereby ensuring FCMs can compete on services 
offered to customers to address their financial needs, in a manner 
consistent with the customer protection and risk mitigation goals of 
the CEA.
---------------------------------------------------------------------------

    \398\ See First FIA Letter; SIFMA-AMG Letter; CME Letter.
---------------------------------------------------------------------------

3. Price Discovery
    Section 15(a)(2)(C) of the CEA requires the Commission to evaluate 
the costs and benefits of its action in light of price discovery 
considerations. The Commission believes that the final amendments will 
not have a significant impact on price discovery.
4. Sound Risk Management Practices
    Section 15(a)(2)(D) of the CEA requires the Commission to evaluate 
the costs and benefits of its action in light of sound risk management 
practices. As discussed above, the CEA sets forth requirements 
providing that an FCM may not use one customer's funds to cover another 
customer's margin shortfall. The Margin Adequacy Requirement of 
regulation Sec.  1.44(b) serves these purposes by further ensuring that 
FCMs do not allow customers to create or increase undermargining in 
their accounts through withdrawals of funds. While, as discussed above, 
clearing FCMs are already subject to this requirement as a result of 
DCO rules adopted under regulation Sec.  39.13(g)(8)(iii), the final 
rule also applies this requirement to non-clearing FCMs, and creates 
another avenue to monitoring and enforcement of this requirement for 
clearing FCMs.
    Additionally, the Commission believes that the final rule will 
ensure that application of the requirements for separate account 
treatment occurs in a manner that continues to be consistent with the 
CEA's customer fund protection and risk mitigation objectives. As 
discussed above, the no-action position has been successfully used to 
allow clearing FCMs to engage in separate account treatment in a manner 
that is consistent with the protection of customer funds and the 
mitigation of systemic risk, including by requiring the application of 
separate account treatment in a consistent manner, and requiring 
regulatory notifications and the cessation of disbursements on a 
separate account basis in certain instances of operational or financial 
distress. The Commission believes codification of the no-action 
conditions, and the Margin Adequacy Requirement they address, applied 
directly to all FCMs, promotes sound FCM risk management 
practices.\399\
---------------------------------------------------------------------------

    \399\ See, e.g., First FIA Letter (describing use of separate 
account treatment for hedging purposes).
---------------------------------------------------------------------------

5. Other Public Interest Considerations
    Section 15(a)(2)(e) of the CEA requires the Commission to evaluate 
the costs and benefits of its action in light of other public interest 
considerations. The Commission is identifying a public interest benefit 
in codifying the Divisions' no-action position, where the efficacy of 
that position has been demonstrated. In such a situation, the 
Commission believes it serves the public interest and, in particular, 
the interests of market participants, to engage in notice-and-comment 
rulemaking, where it seeks and considers the views of the public in 
amending its regulations, rather than for market participants to 
continue to rely on a time-limited no-action position that can be 
easily withdrawn, provides less long-term certainty for market 
participants, and offers a more limited opportunity for public input. 
In promulgating this final rule, the Commission sought and considered 
public comment both as to the proposed regulation generally and as to 
specific aspects of the proposal (including costs and benefits).
    As Question 14, the Commission requested comment, including any 
available quantifiable data and analysis, concerning its analysis of 
the section 15(a) factors. No commenters responded to this question.

IV. Related Matters

A. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA in issuing any order or adopting any Commission 
rule or regulation.\400\
---------------------------------------------------------------------------

    \400\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
did not identify any anti-competitive effects in the NPRM. The 
Commission requested comment on whether the proposed regulation 
implicates any other specific public interest to be protected by the 
antitrust laws, as well as on whether the proposed regulation is 
anticompetitive and, if it is, what the anticompetitive effects are. 
The Commission did not receive any comments in response to these 
requests.

[[Page 7929]]

    The Commission confirms its determination that this final rule is 
not anti-competitive and has no anti-competitive effects. Given this 
determination, the Commission has not identified any less anti-
competitive means of achieving the purposes of the CEA.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies to consider 
whether their rules have a significant economic impact on a substantial 
number of small entities and, if so, provide a regulatory flexibility 
analysis with respect to such impact.\401\ The rules adopted herein 
would require all FCMs to ensure that they do not permit their 
customers to withdraw funds from their accounts unless the net 
liquidating value plus the margin deposits remaining in the account are 
sufficient to meet the customer initial margin requirements for such 
accounts, but would also establish requirements under which FCMs could 
engage in separate account treatment. The Commission has previously 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its regulations on small 
entities in accordance with the RFA.\402\ The Commission has previously 
determined that FCMs are not small entities for the purpose of the 
RFA.\403\ Accordingly, the Chairman, on behalf of the Commission, 
hereby certifies pursuant to 5 U.S.C. 605(b) that these final rules 
will not have a significant economic impact on a substantial number of 
small entities.
---------------------------------------------------------------------------

    \401\ 5 U.S.C. 601 et seq.
    \402\ Bankruptcy Regulations, 86 FR 19324, 19416 (Apr. 13, 2021) 
(citing Policy Statement and Establishment of Definitions of ``Small 
Entities'' for Purposes of the Regulatory Flexibility Act, 47 FR 
18618 (Apr. 30, 1982)).
    \403\ See id. (citing New Regulatory Framework for Clearing 
Organizations, 66 FR 45604, 45609 (Aug. 29, 2001); Customer Margin 
Rules Relating to Security Futures, 67 FR 53146, 53171 (Aug. 14, 
2002)).
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \404\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any ``collection of 
information'' as defined by the PRA. Under the PRA, an 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. The Office of Management and Budget (OMB) has assigned to this 
new collection the control number 3038-0121.
---------------------------------------------------------------------------

    \404\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The PRA is intended, in part, to minimize the paperwork burden 
created for individuals, business, and other persons as a result of the 
collection of information by Federal agencies, and to ensure the 
greatest possible benefit and utility of information created, 
collected, maintained, used, shared, and disseminated by or for the 
Federal government. The PRA applies to all information, regardless of 
form or format, whenever the Federal government is obtaining, causing 
to be obtained, or soliciting information, and includes required 
disclosure to third parties or the public, of facts or opinions, when 
the information collection calls for answers to identical questions 
posed to, or identical reporting or recordkeeping requirements imposed 
on, ten or more persons.
    This final rule will result in a new collection of information 
within the meaning of the PRA, as discussed below. Responses to this 
collection of information would be required to obtain a benefit. 
Specifically, FCMs would be required to respond to the collection in 
order to obtain the benefit of engaging in separate account treatment 
for purposes of regulation Sec.  1.44.\405\ Beyond the reporting, 
disclosure, and recordkeeping provisions identified below, the 
Commission does not believe the final rule imposes any other new 
collections of information that require approval of OMB under the PRA. 
The Commission requests that OMB approve OMB control number 3038-0121 
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    \405\ As noted below in connection with recordkeeping 
requirements, the final rule may also contain recordkeeping 
implications under the PRA for certain separate account customers/
asset managers to the extent an FCM considers pending non-USD 
transfers as received for certain purposes.
---------------------------------------------------------------------------

    The Commission will protect proprietary information it may receive 
according to the Freedom of Information Act and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the CEA strictly prohibits the Commission, unless specifically 
authorized by the CEA, 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.'' \406\ The 
Commission also is required to protect certain information contained in 
a government system of records according to the Privacy Act of 1974, 5 
U.S.C. 552a.
---------------------------------------------------------------------------

    \406\ 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------

1. Information Provided by Reporting Entities/Persons
    The final rule applies directly to FCMs. All FCMs that engage in 
separate account treatment, both those that are clearing members of 
DCOs and those that are not, would be subject to certain reporting, 
disclosure, and recordkeeping requirements to comply with the 
requirements for separate account treatment specified in regulation 
Sec.  1.44.
    While the Commission staff estimates burden hours and costs using 
current part 1 and regulation Sec.  39.13(g)(8)(iii) as a baseline, the 
Commission notes that FCMs that are clearing members of DCOs are 
already effectively subject to the Margin Adequacy Requirement, in 
order to comply with rules that their DCOs have established in order to 
in turn comply with the DCO's obligations under regulation Sec.  
39.13(g)(8)(iii). Thus, the Commission notes that many clearing FCMs 
already are subject to the conditions of the no-action position, which 
are substantially similar to the requirements for separate account 
treatment under this final rule. For these clearing FCMs, the 
Commission expects that any additional cost or administrative burden 
associated with complying with the final rule would be reduced.\407\
---------------------------------------------------------------------------

    \407\ However, the Commission expects that FCMs that do not 
currently rely on the no-action position, but choose to apply 
separate account treatment following the adoption of this final 
rule, would incur new costs. This would include all non-clearing 
FCMs that choose to apply separate account treatment following the 
adoption of this final rule.
---------------------------------------------------------------------------

a. Reporting Requirements
    The final rule contains two reporting requirements that could 
result in a collection of information from ten or more persons over a 
12-month period.
    There are currently approximately 60 registered FCMs.\408\ The 
Commission staff estimates that slightly less than half of all FCMs 
would engage in separate account treatment under the final rule, 
resulting in approximately 30 respondents.
---------------------------------------------------------------------------

    \408\ See CFTC, Selected FCM Financial Data as of August 31, 
2023, available at https://www.cftc.gov/sites/default/files/2023-10/01%20-%20FCM%20web page%20Update%20-%20August%202023.xlsx.
---------------------------------------------------------------------------

    First, regulation Sec.  1.44(d)(2) provides that, to the extent an 
FCM elects to treat the separate accounts of a customer as accounts of 
separate entities pursuant to the terms of regulation Sec.  1.44, the 
FCM must provide a one-time notification to its DSRO and to the 
Commission that it will apply such treatment. The Commission staff 
estimates this would result in a total of one response per respondent 
on a one-time basis, and that

[[Page 7930]]

respondents could expend up to $268, based on an hourly rate of 
$268,\409\ to comply with regulation Sec.  1.44(d)(2). This would 
result in an annual burden of 30 hours and an aggregated cost of $8,040 
(30 respondents x $268).
---------------------------------------------------------------------------

    \409\ This figure is rounded to the nearest dollar and based on 
the annual mean wage for U.S. Bureau of Labor Statistics (BLS) 
category 13-2061, ``Financial Examiners.'' BLS, Occupational 
Employment and Wages, May 2023 [hereinafter ``BLS Data''], available 
at https://www.bls.gov/oes/current/oes_nat.htm. This category 
consists of professionals who ``[e]nforce or ensure compliance with 
laws and regulations governing financial and securities institutions 
and financial and real estate transactions.'' BLS, Occupational 
Employment and Wages, May 2023: 13-2061 Financial Examiners, 
available at https://www.bls.gov/oes/current/oes132061.htm. 
According to BLS, the mean salary for this category in the context 
of Securities, Commodity Contracts, and Other Financial Investments 
and Related Activities is $116,520. This number is divided by 1,800 
work hours in a year to account for sick leave and vacations and 
multiplied by 4 to account for retirement, health, and other 
benefits or compensation, as well as for office space, computer 
equipment support, and human resources support. This number is 
further multiplied by 1.0357 to account for the 3.57% change in the 
Consumer Price Index for Urban Wage-Earners and Clerical Workers 
between May 2023 and September 2024 (298.382 to 309.046). BLS, CPI 
for Urban Wage Earners and Clerical Workers (CPI-W), U.S. City 
Average, All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of 
$268. The rounding and modifications applied with respect to the 
estimated average burden hour cost for this occupational category 
have been applied with respect to each occupational category 
discussed as part of this analysis.
---------------------------------------------------------------------------

    Second, regulation Sec.  1.44(e)(3) requires an FCM engaging in 
separate account treatment to communicate promptly in writing to its 
DSRO and to the Commission the occurrence of certain enumerated ``non-
ordinary course of business'' events. The Commission staff estimates 
that each such FCM may experience two non-ordinary course of business 
events per year, either with respect to themselves, or a customer. For 
purposes of determining the number of responses, the Commission staff 
anticipates that additional notifications of substantially the same 
information, and at substantially the same time, by means of electronic 
communication to both the DSRO and the Commission would not materially 
increase the time and cost burden for such FCM. Therefore, for purposes 
of these estimates, the Commission staff treats a set of notifications 
sent to the DSRO and to the Commission as a single response.\410\ 
Accordingly, the Commission staff estimates a total of two responses 
per respondent on an annual basis. In addition, the Commission staff 
estimates that each response would take eight hours. This yields a 
total annual burden of 480 hours (2 responses x 8 hours/response x 30 
respondents). In addition, the Commission staff estimates that each 
respondent could expend up to $4,288 annually, based on an hourly rate 
of $268, to comply with this requirement.\411\ This would result in an 
aggregated cost of $128,640 per annum (30 respondents x $4,288).
---------------------------------------------------------------------------

    \410\ The Commission staff applies the same assumption to 
notifications to DSROs and the Commission with respect to regulation 
Sec.  1.44(d)(2) and regulation Sec.  1.44(e)(3).
    \411\ See BLS Data (category 13-2061, ``Financial Examiners,'' 
in Securities, Commodity Contracts, and Other Financial Investments 
and Related Activities).
---------------------------------------------------------------------------

    The aggregate information collection burden estimate associated 
with the reporting requirements is as follows: \412\
---------------------------------------------------------------------------

    \412\ This estimate reflects the aggregate information 
collection burden estimate associated with the reporting 
requirements for the first annual period following implementation of 
the final rule. Because regulation Sec.  1.44(d)(2) will result in a 
one-time reporting requirement, the Commission staff estimates that 
for each subsequent annual period, the number of reports, burden 
hours, and burden cost will be reduced accordingly.
---------------------------------------------------------------------------

    Estimated number of respondents: 30.
    Estimated number of reports: 90.
    Estimated annual hours burden: 510.
    Estimated annual cost: $136,680.
b. Disclosure Requirements
    The final rule contains three disclosure requirements that could 
affect ten or more persons in a 12-month period.
    First, regulation Sec.  1.44(h)(3)(i) requires an FCM to provide 
each customer using separate accounts with a disclosure that, pursuant 
to part 190 of the Commission's regulations, all separate accounts of 
the customer will be combined in the event of the FCM's bankruptcy. The 
Commission staff estimates that this would result in a total of 1 
response per respondent on a one-time basis, and that each respondent 
is likely to spend one hour to comply with this requirement for a total 
of 1 annual burden hour and up to $268 annually, based on an hourly 
rate of $268.\413\ This would result in an annual burden of 30 hours (1 
response/respondent x 1 hour/response x 30 respondents) and an 
aggregated cost of $8,040 (30 respondents x $268). This estimate 
reflects one initial disclosure distributed simultaneously to all 
existing separate account customers. The Commission staff expects that, 
on a going forward basis, this disclosure would be included in standard 
disclosures for new customers and would therefore not result in any 
additional costs.
---------------------------------------------------------------------------

    \413\ This figure is based on the annual mean wage of $264,110 
for BLS category 23-1011, ``Lawyers,'' in Securities, Commodity 
Contracts, and Other Financial Investments and Related Activities, 
available at https://data.bls.gov/oes/#/indOcc/Multiple%20occupations%20for%20one%20industry.
---------------------------------------------------------------------------

    Second, regulation Sec.  1.44(h)(3)(iii) requires that an FCM 
engaging in separate account treatment include the disclosure statement 
required by regulation Sec.  1.44(h)(3) on its website or within its 
Disclosure Document required by regulation Sec.  1.55(i). If the FCM 
opts to update its Disclosure Document, the Commission staff estimates 
that this requirement would result in a total of one response on a one-
time basis, and that each respondent could expend up to $608 annually, 
based on an hourly rate of $608,\414\ to comply with regulation Sec.  
1.44(h)(3)(iii). This would result in an estimated 30 burden hours 
annually (1 response x 1 hour/response x 30 respondents) and an 
aggregated cost of $18,240 (30 respondents x $608). This estimate 
reflects one updated disclosure distributed simultaneously to existing 
customers. If the FCM opts to include the disclosure on its website, 
the Commission staff estimates that this requirement would result in a 
total of one response on a one-time basis, and that each respondent 
could expend up to $324 annually, based on an hourly rate of $324, to 
comply with regulation Sec.  1.44(h)(3)(iii).\415\ This would result in 
an estimated 30 burden hours annually (1 response x 1 hour/response x 
30 respondents) and an aggregated cost of $9,720 (30 respondents x 
$324). The Commission staff expects that once the disclosure is 
included in the Disclosure Document required by regulation Sec.  
1.55(i) or posted on the FCM's website, the FCM would not incur any 
additional costs.
---------------------------------------------------------------------------

    \414\ This figure is based on the annual mean wage of $264,110 
for BLS category 23-1011, ``Lawyers,'' in Securities, Commodity 
Contracts, and Other Financial Investments and Related Activities, 
available at https://data.bls.gov/oes/#/indOcc/Multiple%20occupations%20for%20one%20industry.
    \415\ This figure is based on the annual mean wage of $140,970 
for BLS category 15-1254, ``Web Developers,'' in Securities, 
Commodity Contracts, and Other Financial Investments and Related 
Activities. BLS Data, available at https://www.bls.gov/oes/current/oes_nat.htm.
---------------------------------------------------------------------------

    Third, regulation Sec.  1.44(h)(4) requires an FCM that has made an 
election pursuant to regulation Sec.  1.44(d) to treat the separate 
accounts of a customer as accounts of separate entities for purposes of 
regulation Sec.  1.44(b), to disclose in the Disclosure Document 
required under regulation Sec.  1.55(i) that it permits the separate 
treatment of accounts for the same customer under the requirements of 
regulation Sec.  1.44. The Commission staff estimates that this would 
result in a total of one response per respondent on a one-time basis, 
and

[[Page 7931]]

that respondents could expend up to $608 annually, based on an hourly 
rate of $608,\416\ to comply with regulation Sec.  1.44(h)(4). This 
would result in an estimated 30 burden hours annually (1 response x 1 
hour/response x 30 respondents) and an aggregated cost of $18,240 (30 
respondents x $608). This estimate reflects an initial updated 
disclosure distributed simultaneously to existing customers. The 
Commission staff expects that once this disclosure is made, the 
disclosure would be included in the Disclosure Document required by 
regulation Sec.  1.55(i) going forward and would not result in any 
additional costs.
---------------------------------------------------------------------------

    \416\ See BLS Data (category 23-1011, ``Lawyers,'' in 
Securities, Commodity Contracts, and Other Financial Investments and 
Related Activities).
---------------------------------------------------------------------------

    The aggregate information collection burden estimate associated 
with the disclosure requirements is as follows: \417\
---------------------------------------------------------------------------

    \417\ For purposes of this analysis, the Commission staff 
calculates the aggregate information collection burden assuming that 
respondents choose to include the disclosure statement required by 
regulation Sec.  1.44(h)(3) on their websites and within their 
Disclosure Document required by regulation Sec.  1.55(i), in order 
to comply with regulation Sec.  1.44(h)(3)(iii). Additionally, this 
estimate reflects the aggregate information collection burden 
estimate associated with the disclosure requirements for the first 
annual period following implementation of the final rule. Because 
each of regulation Sec.  1.44(h)(3)(i), Sec.  1.44(h)(3)(iii), and 
Sec.  1.44(h)(4) would result in a one-time disclosure requirement 
for PRA purposes, the Commission staff estimates that for each 
subsequent annual period the number of respondents, reports, burden 
hours, and burden cost would be reduced accordingly.
---------------------------------------------------------------------------

    Estimated number of respondents: 30.
    Estimated number of reports: 120.
    Estimated annual hours burden: 120.
    Estimated annual cost: $54,240.
c. Recordkeeping Requirements
    The final rule contains four recordkeeping requirements that could 
affect ten or more persons in a 12-month period.
    First, regulation Sec.  1.44(d)(1) provides that, to elect to treat 
the separate accounts of a customer as accounts of separate entities, 
for purposes of the Margin Adequacy Requirement, the FCM shall include 
the customer on a list of separate account customers receiving such 
treatment maintained in its books and records. The Commission staff 
estimates that this would result in a total of 125 responses per 
respondent on a one-time basis at a rate of 15 minutes per 
response,\418\ and that respondents could expend up to $8,375 annually 
per respondent, based on an hourly rate of $268,\419\ to comply with 
regulation Sec.  1.44(d)(1). This would result in an estimated 938 
burden hours annually (125 responses x 15 minutes/response x 30 
respondents) and an aggregated cost of $251,250 per annum (30 
respondents x $8,375).
---------------------------------------------------------------------------

    \418\ The Commission does not expect a significant time burden 
required to record that an individual customer is receiving separate 
account treatment and add such customer to a list of customers 
receiving separate account treatment.
    \419\ Financial Examiners.
---------------------------------------------------------------------------

    Second, regulation Sec.  1.44(e)(4) provides that an FCM that has 
ceased permitting disbursements on a separate account basis to a 
separate account customer due to the occurrence of a non-ordinary 
course of business event may resume permitting disbursements on a 
separate account basis if the FCM reasonably believes, based on new 
information, that the circumstances leading to cessation of 
disbursements on a separate account basis have been cured, and the FCM 
documents in writing the factual basis and rationale for its conclusion 
that such circumstances have been cured. Where the Commission staff 
have estimated above that an FCM may experience two non-ordinary course 
of business events per year, the Commission staff conservatively 
estimate that in each case the conditions leading to cessation of 
disbursements on a separate account basis would be cured. Accordingly, 
the Commission staff estimates that documenting the cure of each non-
ordinary course of business event would require two recordkeeping 
responses per respondent on an annual basis, resulting in a total of 60 
annual responses, and that respondents are likely to spend two hours to 
complete the required recordkeeping tasks.\420\ This would result in a 
total of 120 annual burden hours (2 responses x 2 hours/response x 30 
respondents) and up to $1,072 annually per respondent, based on an 
hourly rate of $268,\421\ to comply with this requirement. This would 
result in an aggregated cost of $32,160 per annum (30 respondents x 
$1,072).
---------------------------------------------------------------------------

    \420\ Regulation Sec.  1.44(e)(4) requires the FCM to document 
in writing the factual basis and rationale for its conclusion that 
the circumstances leading to the cessation of separate account 
treatment for one or more separate account customers has been cured 
but does not otherwise prescribe the form or manner for such 
documentation. Nor does it require that such documentation be 
voluminous. As such, the Commission staff estimates that two hours 
per response may be reasonable in most instances.
    \421\ Financial Examiners.
---------------------------------------------------------------------------

    Third, regulation Sec.  1.44(h)(2) provides that where a separate 
accounts customer has appointed a third-party as the primary contact to 
the FCM, the FCM must obtain and maintain current contact information 
of an authorized representative(s) at the customer and take reasonable 
steps to verify that such contact information is and remains accurate 
and that such person is in fact an authorized representative of the 
customer. The Commission staff estimates this would result in a total 
of 125 responses per respondent on an annual basis at one hour per 
response,\422\ and that respondents could expend up to $20,250 
annually, based on an hourly rate of $162.\423\ This would result in an 
estimated 3,750 burden hours annually (125 responses x 1 hour/response 
x 30 respondents) and an aggregated cost of $607,500 per annum (30 
respondents x $20,250).
---------------------------------------------------------------------------

    \422\ FIA stated that while the costs incurred by each FCM to 
comply with the conditions of CFTC Letter No. 19-17 varies depending 
on customer base, among larger FCMs with a significant institutional 
customer base, personnel costs would have included identifying and 
reviewing up to 3,000 customer agreements to determine which 
agreements required modification, and then negotiating amendments 
with customers or their advisors. Applying a 25% upward adjustment 
to account for the passage of time, potential onboarding of new 
customers, and application to non-clearing FCMs, the Commission 
staff estimates that there are 3,750 customers of FCMs whose 
accounts could be in scope for the final rule, with an average of 
125 customers per FCM (among 30 FCMs).
    \423\ This figure is based on the annual mean wage of $70,470 
for BLS category 43-6012, ``Legal Secretaries & Administrative 
Assistants'' in the New York City Metropolitan Area, one of the top 
paying metropolitan areas for this category. BLS Data, available at 
https://www.bls.gov/oes/current/oes436012.htm.
---------------------------------------------------------------------------

    Fourth, regulation Sec.  1.44(h)(3)(ii) requires that an FCM 
maintain documentation demonstrating that the part 190 disclosure 
statement required by regulation Sec.  1.44(h)(3)(i) was delivered 
directly to the customer. The Commission staff estimates that this 
would result in a total of 125 responses per respondent on a one-time 
basis at an estimated six minutes per response, and that respondents 
could expend up to $2,025 annually, based on an hourly rate of $162, to 
comply with regulation Sec.  1.44(h)(3)(ii). This would result in an 
estimated 375 burden hours annually (125 responses x 6 minutes/response 
x 30 respondents) and an aggregated cost of $60,750 (30 respondents x 
$2,025). This estimate reflects initial recordkeeping of documentation 
that the disclosure was delivered to existing customers subject to 
separate account treatment. The Commission staff estimates that, once 
such recordkeeping is complete, the recordkeeping required by 
regulation Sec.  1.44(h)(3)(ii) would be required only with respect to 
new customers who receive disclosures pursuant to regulation Sec.  
1.44(h)(3)(ii), and the costs and burden hours associated with 
regulation Sec.  1.44(h)(3)(ii) would be reduced accordingly.\424\
---------------------------------------------------------------------------

    \424\ This estimate reflects the aggregate information 
collection burden estimates associated with the disclosure 
requirements for the first annual period following implementation of 
the final rule. Because, as noted above, regulation Sec.  
1.44(h)(3)(i) would result in a one-time recordkeeping requirement 
as to each customer (i.e., once the disclosure is provided to 
existing customers, it would need to be provided only to new 
customers on a going forward basis), the Commission staff estimates 
that for each subsequent annual period the number of reports, burden 
hours, and burden cost would be reduced accordingly.

---------------------------------------------------------------------------

[[Page 7932]]

    Lastly, to the extent FCMs treat pending non-USD transfers as 
received, consistent with JAC guidance, for certain purposes,\425\ as 
discussed above, the Commission appreciates that an FCM's application 
of the condition in JAC guidance that an FCM has a sufficient basis to 
believe that the wire supporting the transfer was actually initiated 
may result in recordkeeping for customers/asset managers. The 
Commission staff estimates that this would result in a total of 1 
response per respondent, 125 times per year,\426\ at an estimated one 
minute per response, and that respondents could expend up to $1,220 
annually, based on an hourly rate of $574, to perform the relevant 
recordkeeping.\427\ This would result in an estimated 15,938 burden 
hours annually (125 responses x 1 minute (approximately 0.017 hours)/
response x 7,500 respondents) \428\ and an aggregated cost of 
$9,150,000 (7,500 respondents x $1,220). The Commission notes that 
while certain other provisions of the final rule may result in 
recordkeeping requirements, the Commission anticipates that any burden 
associated with these requirements is likely to be de minimis and 
therefore does not expect these provisions to increase the 
recordkeeping burden for FCMs.
---------------------------------------------------------------------------

    \425\ I.e., with respect to the final amendments to regulation 
Sec.  1.17(c)(5)(viii), with respect to regulation Sec.  
1.17(c)(5)(ix) as discussed in the JAC's comment letter, and with 
respect to final regulation Sec.  1.44(b) and (g)(5).
    \426\ A response would only be necessary on days when a 
respondent has been called for margin due to an undermargined 
condition, and is meeting that call with at least one currency other 
than USD (or CAD). A conservative estimate of the frequency of this 
happening is on half of the trading days in a year for each 
respondent.
    \427\ This figure is based on the annual mean wage of $249,260 
for BLS category 11-3031, ``Financial Managers,'' in Securities, 
Commodity Contracts, and Other Financial Investments and Related 
Activities, available at https://www.bls.gov/oes/current/oes113031.htm.
    \428\ The Commission staff has estimated that there are 3,750 
separate account customers and further estimates that each customer 
has an average of three separate accounts, and that two thirds of 
these accounts settle at least in part in currencies other than USD 
and CAD. While the same asset manager may, in fact, manage multiple 
separate accounts, the Commission is treating each separate account 
as a separate respondent.
---------------------------------------------------------------------------

    The aggregate information collection burden estimate associated 
with the recordkeeping requirements is as follows:
    Estimated number of respondents: 7,530.
    Estimated number of reports: 948,810.
    Estimated annual hours burden: 21,121.
    Estimated annual cost: $10,101,660.
    The Commission invited, but did not receive, any public comments 
related to the proposed information collection requirements.

D. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as not a ``major rule,'' as defined by 5 U.S.C. 804(2).

List of Subjects

17 CFR Part 1

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

17 CFR Part 22

    Brokers, Clearing, Consumer protection, Reporting and 
recordkeeping, Swaps.

17 CFR Part 30

    Consumer protection.

17 CFR Part 39

    Clearing, Clearing organizations, Commodity futures, Consumer 
protection.

    For the reasons set forth in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR chapter I as follows:

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. Amend Sec.  1.3 by revising the definition of ``business day'' to 
read as follows:


Sec.  1.3  Definitions.

* * * * *
    Business day. This term means any day other than a Saturday, 
Sunday, or holiday. In all notices required by the Act or by the rules 
and regulations in this chapter to be given in terms of business days 
the rule for computing time shall be to exclude the day on which notice 
is given and include the day on which shall take place the act of which 
notice is given.
* * * * *

0
3. Amend Sec.  1.17 by:
0
a. Republishing paragraph (b) introductory text;
0
b. Revising paragraphs (b)(6) and (b)(8) introductory text;
0
c. Adding paragraph (b)(8)(v);
0
d. Republishing paragraphs (c) introductory text and (c)(2) 
introductory text;
0
e. Revising paragraph (c)(2)(i);
0
f. Republishing paragraph (c)(4) introductory text;
0
g. Revising paragraph (c)(4)(ii);
0
h. Republishing paragraph (c)(5) introductory text; and
0
i. Revising paragraph (c)(5)(viii).
    The republications, revisions, and additions read as follows:


Sec.  1.17  Minimum financial requirements for futures commission 
merchants and introducing brokers.

* * * * *
    (b) For the purposes of this section:
* * * * *
    (6) Business day means any day other than a Saturday, Sunday, or 
holiday.
* * * * *
    (8) Risk margin for an account means the level of maintenance 
margin or performance bond required for the customer and noncustomer 
positions by the applicable exchanges or clearing organizations, and, 
where margin or performance bond is required only for accounts at the 
clearing organization, for purposes of the futures commission 
merchant's risk-based capital calculations applying the same margin or 
performance bond requirements to customer and noncustomer positions in 
accounts carried by the futures commission merchant, subject to the 
following.
* * * * *
    (v) If a futures commission merchant carries separate accounts for 
separate account customers pursuant to Sec.  1.44, the futures 
commission merchant shall calculate the risk margin pursuant to this 
section as if the separate accounts are owned by separate entities.
* * * * *
    (c) Definitions: For the purposes of this section:
* * * * *
    (2) The term current assets means cash and other assets or 
resources commonly identified as those which are reasonably expected to 
be realized in cash or sold during the next 12 months. ``Current 
assets'' shall:
    (i) Exclude any unsecured commodity futures, options, cleared 
swaps, or other Commission regulated account containing a ledger 
balance and open trades, the combination of which liquidates to a 
deficit or containing a debit ledger balance only. For purposes

[[Page 7933]]

of this paragraph (c)(2)(i), a futures commission merchant that carries 
separate accounts for separate account customers pursuant to Sec.  1.44 
shall treat each separate account as if it is the account of a separate 
entity, apply only margin collateral held for the particular separate 
account in determining if the deficit or debit ledger balance is 
secured, and exclude from current assets a separate account that 
liquidates to a deficit or contains a debit ledger balance only. 
Provided, however, that any deficit or debit ledger balance in an 
account listed above, including a separate account, which is the 
subject of a call for margin or other required deposits may be included 
in current assets until the close of business on the business day 
following the date on which such deficit or debit ledger balance 
originated provided that the account had timely satisfied, through the 
deposit of new funds, the previous day's deficit or debit ledger 
balance, if any, in its entirety.
* * * * *
    (4) The term liabilities means the total money liabilities of an 
applicant or registrant arising in connection with any transaction 
whatsoever, including economic obligations of an applicant or 
registrant that are recognized and measured in conformity with 
generally accepted accounting principles. ``Liabilities'' also include 
certain deferred credits that are not obligations but that are 
recognized and measured in conformity with generally accepted 
accounting principles. For the purposes of computing ``net capital,'' 
the term ``liabilities'':
* * * * *
    (ii) Excludes, in the case of a futures commission merchant, the 
amount of money, securities and property due to customers which is held 
in segregated accounts in compliance with the requirements of the Act 
and these regulations. For purposes of this paragraph (c)(4)(ii), a 
futures commission merchant that carries separate accounts of a 
separate account customer pursuant to Sec.  1.44 shall compute the 
amount of money, securities and property due to the separate account 
customer as if the separate accounts were accounts of separate 
entities. A futures commission merchant may exclude money, securities 
and property due to customers, including separate account customers, 
only if such money, securities and property held in segregated accounts 
have been excluded from current assets in computing net capital;
* * * * *
    (5) The term adjusted net capital means net capital less:
* * * * *
    (viii)(A) In the case of a futures commission merchant, for 
undermargined 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. If, however, a call for margin or other 
required deposits for an undermargined customer account is outstanding 
for more than one business day, then no such call for that 
undermargined customer account shall be applied until all such calls 
for margin have been met in full.
    (B) If a futures commission merchant carries separate accounts for 
one or more separate account customers pursuant to Sec.  1.44, the 
futures commission merchant shall compute the amount of funds required 
under paragraph (c)(5)(viii)(A) of this section to meet maintenance 
margin requirements for each separate account as if the account is 
owned by a separate entity, after application of calls for margin or 
other required deposits which are outstanding no more than one business 
day. If, however, a call for margin or other required deposits for any 
separate account of a particular separate account customer is 
outstanding for more than one business day, then all outstanding margin 
calls for that separate account shall be treated as if the margin calls 
are outstanding for more than one business day, and shall be deducted 
from net capital until all such calls have been met in full.
    (C) If a customer account or a customer separate account deficit or 
debit ledger balance is excluded from current assets in accordance with 
paragraph (c)(2)(i) of this section, such deficit or debit ledger 
balance amount shall not also be deducted from current assets under 
this paragraph (c)(5)(viii).
    (D) In the event that an owner of a customer account, or a customer 
separate account pursuant to Sec.  1.44, has deposited an asset other 
than cash to margin, guarantee or secure the account, the value 
attributable to such asset for purposes of this paragraph (c)(5)(viii) 
shall be the lesser of:
    (1) The value attributable to the asset pursuant to the margin 
rules of the applicable board of trade, or
    (2) The market value of the asset after application of the 
percentage deductions specified in this paragraph (c)(5);
* * * * *

0
4. Amend Sec.  1.20 by revising paragraph (i)(4) and adding paragraph 
(i)(5) to read as follows:


Sec.  1.20  Futures customer funds to be segregated and separately 
accounted for.

* * * * *
    (i) * * *
    (4) The futures commission merchant must, at all times, maintain in 
segregation an amount equal to the sum of any credit and debit balances 
that the futures customers of the futures commission merchant have in 
their accounts. Notwithstanding the preceding sentence, a futures 
commission merchant must add back to the total amount of funds required 
to be maintained in segregation any futures customer accounts with 
debit balances in the amounts calculated in accordance with paragraph 
(i)(5) of this section.
    (5) The futures commission merchant, in calculating the total 
amount of funds required to be maintained in segregation pursuant to 
paragraph (i)(4) of this section, must include any debit balance, as 
calculated pursuant to this paragraph (i)(5), that a futures customer 
has in its account, to the extent that such debit balance is not 
secured by ``readily marketable securities'' that the particular 
futures customer deposited with the futures commission merchant.
    (i) For purposes of calculating the amount of a futures account's 
debit balance that the futures commission merchant is required to 
include in its calculation of its total segregation requirement 
pursuant to this paragraph (i)(5), the futures commission merchant 
shall calculate the net liquidating equity of each futures account in 
accordance with paragraph (i)(2) of this section, except that the 
futures commission merchant shall exclude from the calculation any 
noncash collateral held in the futures customer account as margin 
collateral. The futures commission merchant may offset the debit 
balance computed under this paragraph (i)(5) to the extent of any 
``readily marketable securities,'' subject

[[Page 7934]]

to percentage deductions (i.e., ``securities haircuts'') as specified 
in paragraph (f)(5)(iv) of this section, held for the particular 
futures customer to secure its debit balance.
    (ii) For purposes of this section, ``readily marketable'' shall be 
defined as having a ``ready market'' as such latter term is defined in 
Rule 15c3-1(c)(11) of the Securities and Exchange Commission (17 CFR 
240.15c3-1(c)(11)).
    (iii) In order for a debit balance to be deemed secured by 
``readily marketable securities,'' the futures commission merchant must 
maintain a security interest in such securities, and must hold a 
written authorization to liquidate the securities at the discretion of 
the futures commission merchant.
    (iv) To determine the amount of such debit balance secured by 
``readily marketable securities,'' the futures commission merchant 
shall:
    (A) Determine the market value of such securities; and
    (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 (17 CFR 240.15c3-
1(c)(2)(vi)). 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.
* * * * *

0
5. Amend Sec.  1.32 by:
0
a. Removing from paragraph (b) the reference ``17 CFR 241.15c3-
1(c)(2)(vi)'' and adding in its place ``17 CFR 240.15c3-1(c)(2)(vi)'' 
wherever it appears, and
0
b. Adding paragraph (l).
    The addition reads as follows:


Sec.  1.32   Reporting of segregated account computation and details 
regarding the holding of futures customer funds.

* * * * *
    (l) A futures commission merchant that carries futures accounts for 
futures customers as separate accounts for separate account customers 
pursuant to Sec.  1.44 shall:
    (1) Calculate the total amount of futures customer funds on deposit 
in segregated accounts carried as separate accounts of separate account 
customers on behalf of such futures customers pursuant to paragraph 
(a)(1) of this section and the total amount of futures customer funds 
required to be on deposit in segregated accounts carried as separate 
accounts of separate account customers on behalf of such futures 
customers pursuant to paragraph (a)(2) of this section by including the 
separate accounts of the separate account customers as if the separate 
accounts were accounts of separate entities;
    (2) Offset a net deficit in a particular futures account carried as 
a separate account of a separate account customer in accordance with 
paragraph (b) of this section against the current market value of 
readily marketable securities held only for the particular separate 
account of such separate account customer; and
    (3) Document its segregation computation in the Statement of 
Segregation Requirements and Funds in Segregation of Customers Trading 
on U.S. Commodity Exchanges required by paragraph (c) of this section 
by incorporating and reflecting the futures accounts carried as 
separate accounts of separate account customers as accounts of separate 
entities.

0
6. Add Sec.  1.44 to read as follows:


Sec.  1.44  Margin Adequacy and Treatment of Separate Accounts

    (a) Definitions. These following definitions apply only for 
purposes of this section, except to the extent explicitly noted:
    Account means a futures account as defined in Sec.  1.3, a Cleared 
Swaps Customer Account as defined in Sec.  1.3, or a 30.7 account as 
defined in Sec.  30.1 of this chapter.
    Business day has the meaning set forth in Sec.  1.3, with the 
clarification that ``holiday'' has the meaning defined in paragraph (a) 
of this section.
    Holiday means Federal holidays as established by 5 U.S.C. 6103.
    One business day margin call means a margin call that is issued and 
met in accordance with the requirements of paragraph (f) of this 
section.
    Ordinary course of business means the operation of the futures 
commission merchant's business relationship with its separate account 
customer absent the occurrence of one or more of the events specified 
in paragraph (e) of this section.
    Separate account means any one of multiple accounts of the same 
separate account customer that are carried by the same futures 
commission merchant.
    Separate account customer means a customer for which the futures 
commission merchant has made the election set forth in paragraph (d) of 
this section.
    Undermargined amount for an account means the amount, if any, by 
which the customer margin requirements with respect to all products 
held in that account exceed the net liquidating value plus the margin 
deposits currently remaining in that account. For purposes of this 
definition, ``margin requirements'' shall mean the level of maintenance 
margin or performance bond required for the positions in the account by 
the applicable exchanges or clearing organizations. Market risk 
collateral haircuts based on Rule 15c3-1 of the Securities and Exchange 
Commission (17 CFR 240.15c3-1) and Sec.  1.17(c)(5) shall be applied to 
the value of the margin deposits held by a futures commission merchant. 
With respect to positions for which maintenance margin is not 
specified, ``margin requirements'' shall refer to the clearing 
organization margin requirements applicable to such positions.
    (b) Ensuring adequacy of customer initial margin. (1) A futures 
commission merchant shall ensure that a customer does not withdraw 
funds from its accounts with such futures commission merchant unless 
the net liquidating value (calculated as of the close of business on 
the previous business day) plus the margin deposits remaining in the 
customer's account after such withdrawal are sufficient to meet the 
customer initial margin requirements with respect to all products held 
in such customer's account, except as provided in paragraph (c) of this 
section.
    (2) For the purposes of paragraph (b)(1) of this section, where the 
previous day (excluding Saturdays and Sundays) is a holiday, as defined 
in paragraph (a) of this section, where any designated contract market 
or other board of trade on which the futures commission merchant trades 
is open for trading, and where an account of any of the futures 
commission merchant's customers includes positions traded on such a 
market, the net liquidating value for such an account should instead be 
calculated as of the close of business on such holiday.
    (c) Separate account treatment with respect to withdrawal of 
customer initial margin. A futures commission merchant may, only during 
the ``ordinary course of business'' as that term is defined in this 
section, treat the separate accounts of a separate account customer as 
accounts of separate entities for purposes of paragraph (b) of this 
section if such futures commission merchant elects to do so as 
specified in paragraph (d) of this section. A futures commission 
merchant that has made such an election shall comply with the

[[Page 7935]]

requirements set forth in this section, and maintain written internal 
controls and procedures designed to ensure such compliance.
    (d) Election to treat a customer's accounts as separate accounts. 
(1) To elect to treat the separate accounts of a customer as accounts 
of separate entities for purposes of paragraph (b) of this section, the 
futures commission merchant shall include the customer on a list of 
separate account customers maintained in its books and records. This 
list shall include the identity of each separate account customer, 
identify each separate account of such customer, and be kept current.
    (2) The first time that the futures commission merchant includes a 
customer on the list of separate account customers, it shall, within 
one business day, provide notification of the election to allow 
separate account treatment for customers to its designated self-
regulatory organization and to the Commission. The notice shall be 
provided in accordance with the process specified in Sec.  1.12(n)(3).
    (e) Events inconsistent with the ordinary course of business. (1) 
The following events are inconsistent with the ordinary course of 
business with respect to the separate accounts of a particular separate 
account customer, and the occurrence of any such event would require 
the futures commission merchant to cease permitting disbursements on a 
separate account basis with respect to all accounts of the relevant 
separate account customer:
    (i) The separate account customer, including any separate account 
of such customer, fails to deposit initial margin or maintain 
maintenance margin or make payment of variation margin or option 
premium as specified in paragraph (f) of this section.
    (ii) The occurrence and declaration by the futures commission 
merchant of an event of default as defined in the account documentation 
executed between the futures commission merchant and the separate 
account customer.
    (iii) A good faith determination by the futures commission 
merchant's chief compliance officer, one of its senior risk managers, 
or other senior manager, following such futures commission merchant's 
own internal escalation procedures, that the separate account customer 
is in financial distress, or there is significant and bona fide risk 
that the separate account customer will be unable promptly to perform 
its financial obligations to the futures commission merchant, whether 
due to operational reasons or otherwise.
    (iv) The insolvency or bankruptcy of the separate account customer 
or a parent company of such customer.
    (v) The futures commission merchant receives notification that a 
board of trade, a derivatives clearing organization, a self-regulatory 
organization as defined in Sec.  1.3 or section 3(a)(26) of the 
Securities Exchange Act of 1934, the Commission, or another regulator 
with jurisdiction over the separate account customer, has initiated an 
action with respect to such customer based on an allegation that the 
customer is in financial distress.
    (vi) The futures commission merchant is directed to cease 
permitting disbursements on a separate account basis, with respect to 
the separate account customer, by a board of trade, a derivatives 
clearing organization, a self-regulatory organization, the Commission, 
or another regulator with jurisdiction over the futures commission 
merchant, pursuant to, as applicable, board of trade, derivatives 
clearing organization or self-regulatory organization rules, government 
regulations, or law.
    (2) The following events are inconsistent with the ordinary course 
of business with respect to the separate accounts of all separate 
account customers of the futures commission merchant, and the 
occurrence of any such event would require the futures commission 
merchant to cease permitting disbursements on a separate account basis 
with respect to any of its customers:
    (i) The futures commission merchant is notified by a board of 
trade, a derivatives clearing organization, a self-regulatory 
organization, the Commission, or another regulator with jurisdiction 
over the futures commission merchant, that the board of trade, the 
derivatives clearing organization, the self-regulatory organization, 
the Commission, or other regulator, as applicable, believes the futures 
commission merchant is in financial or other distress.
    (ii) The futures commission merchant is under financial or other 
distress as determined in good faith by its chief compliance officer, 
senior risk managers, or other senior management.
    (iii) The insolvency or bankruptcy of the futures commission 
merchant or a parent company of the futures commission merchant.
    (3) The futures commission merchant must provide notice to its 
designated self-regulatory organization and to the Commission of the 
occurrence of any of the events enumerated in paragraph (e)(1) or (2) 
of this section. The notice must identify the event and (if applicable) 
the customer, and be provided promptly in writing, and in any case no 
later than the next business day following the date on which the 
futures commission merchant identifies or has been informed that such 
event has occurred. Such notice must be provided in accordance with the 
process specified in Sec.  1.12(n)(3).
    (4) A futures commission merchant that has ceased permitting 
disbursements on a separate account basis to a separate account 
customer due to the occurrence of any of the events enumerated in 
paragraph (e)(1) of this section with respect to a specific separate 
account customer (or in paragraph (e)(2) with respect to all of its 
separate account customers) may resume permitting disbursements on a 
separate account basis to that customer (or, respectively, all 
customers) if such futures commission merchant reasonably believes, 
based on new information, that those circumstances have been cured, and 
such futures commission merchant documents in writing the factual basis 
and rationale for that conclusion. If the circumstances triggering 
cessation of disbursements on a separate account basis were an action 
or direction by one of the entities described in paragraph (e)(1)(v) or 
(vi) or (e)(2)(i) of this section, then the cure of those circumstances 
would require the withdrawal or other appropriate termination of such 
action or direction by that entity.
    (f) Requirements: One business day margin call. Each separate 
account must be on a one business day margin call. The following 
provisions apply solely for purposes of this paragraph (f):
    (1) Except as explicitly provided in this paragraph (f), if, as a 
result of market movements or changes in positions on the previous 
business day, a separate account is undermargined (i.e., the 
undermargined amount for that account is greater than zero), the 
futures commission merchant shall issue a margin call for the separate 
account for at least the amount necessary for the separate account to 
meet the initial margin required by the applicable exchanges or 
clearing organizations (including, as appropriate, the equity component 
or premium for long or short option positions) for the positions in the 
separate account, and that call must be met by the applicable separate 
account customer no later than the close of the Fedwire Funds Service 
on the same business day.
    (2) Payment of margin in currencies listed in appendix A to this 
part shall be considered in compliance with the requirements of this 
paragraph (f) if received by the applicable futures

[[Page 7936]]

commission merchant no later than the end of the second business day 
after the day on which the margin call is issued.
    (3) Payment of margin in fiat currencies other than U.S. Dollars, 
Canadian Dollars, or currencies listed in Appendix A to this part shall 
be considered in compliance with the requirements of this paragraph (f) 
if received by the applicable futures commission merchant no later than 
the end of the business day after the day on which the margin call is 
issued.
    (4) The relevant deadline for payment of margin in fiat currencies 
other than U.S. Dollars may be extended to the next business day 
following any banking holiday in the jurisdiction of issue of the 
currency, and still be considered in compliance with the requirements 
of this paragraph (f) if payment is delayed due to such banking 
holiday.
    (5) A failure with respect to a specific separate account to 
deposit, maintain, or pay margin or option premium that was called 
pursuant to this paragraph (f), due to administrative error or 
operational constraints, does not constitute a failure to comply with 
the requirements of this paragraph (f). For these purposes, a futures 
commission merchant's determination that the failure to deposit, 
maintain, or pay margin or option premium is due to such administrative 
error or operational constraints must be based on the futures 
commission merchant's reasonable belief in light of information known 
to the futures commission merchant at the time the futures commission 
merchant learns of the relevant administrative error or operational 
constraint.
    (6) A futures commission merchant would not be in compliance with 
the requirements of this paragraph (f) if it contractually agrees to 
provide separate account customers with periods of time to meet margin 
calls that extend beyond the time periods specified in this paragraph 
(f), or engages in practices that are designed to circumvent this 
paragraph (f).
    (7) In the case of a holiday where any designated contract market 
or other board of trade on which the futures commission merchant trades 
is open for trading, or any derivatives clearing organization that 
clears the Cleared Swaps of such futures commission merchant's Cleared 
Swaps Customers is open for clearing such swaps, and where a separate 
account of any of the futures commission merchant's separate account 
customers includes positions traded on such a market or cleared at such 
a derivatives clearing organization, then for any such separate 
account:
    (i) If, as a result of market movements or changes in positions on 
the business day before the holiday, a separate account is 
undermargined, the futures commission merchant shall issue a margin 
call for the separate account for at least the undermargined amount, 
and that call must be met by the applicable separate account customer 
no later than the close of the Fedwire Funds Service on the next 
business day after the holiday, and,
    (ii) If, as a result of market movements or changes in positions on 
the holiday, a separate account is undermargined by an amount greater 
than the amount it was undermargined as a result of market movements or 
changes in positions on the business day before the holiday, the 
futures commission merchant shall issue a margin call for the separate 
account for at least the incremental undermargined amount, and that 
call must be met by the applicable separate account customer no later 
than the close of the Fedwire Funds Service on the next business day 
after the holiday.
    (8) Any person may submit to the Commission any currency that such 
person proposes should be added to or removed from appendix A to this 
part.
    (i) A submission pursuant to this paragraph (f)(8) shall include:
    (A) A statement that margin payments in the relevant currency 
cannot, in the case of a proposed addition, or can, in the case of a 
proposed removal, practicably be received by the futures commission 
merchant issuing a margin call no later than the end of the first 
business day after the day on which the margin call is issued;
    (B) Documentation or other information sufficient to support the 
statement contemplated by paragraph (f)(8)(i)(A) of this section; and
    (C) Any additional information specifically requested by the 
Commission.
    (ii) A submitter pursuant to paragraph (f)(8)(i) of this section 
that wishes to request confidential treatment for portions of its 
submission may do so in accordance with the procedures set out in Sec.  
145.9(d).
    (iii) The Commission shall review a submission made pursuant to 
this paragraph (f)(8) and determine whether to propose to add the 
relevant currency to, or remove the relevant currency from, appendix A 
to this part.
    (iv) If the Commission proposes to add a currency to or remove a 
currency from appendix A to this part, the Commission shall issue such 
determination through notice and comment rulemaking, and shall provide 
a public comment period of no less than thirty days.
    (v) The Commission may, of its own accord and absent a submission 
pursuant to this paragraph (f)(8), propose to issue a determination to 
add a currency to or remove a currency from appendix A to this part 
pursuant to the procedure set forth in paragraph (f)(8)(iv) of this 
section.
    (g) Requirements: Calculations for capital, risk management, and 
segregation. (1) The futures commission merchant's internal risk 
management policies and procedures shall provide for stress testing and 
credit limits as set forth in Sec.  1.73 for separate account 
customers. Such stress testing must be performed, and the credit limits 
must be applied, both on an individual separate account and on a 
combined account basis.
    (2) A futures commission merchant shall calculate the margin 
requirement for each separate account of a separate account customer 
independently from such margin requirement for all other separate 
accounts of the same customer with no offsets or spreads recognized 
across the separate accounts.
    (3) A futures commission merchant shall, in computing its adjusted 
net capital for purposes of Sec.  1.17, record each separate account of 
a separate account customer in the books and records of the futures 
commission merchant as a distinct account of a customer. This includes 
recording each separate account with a net debit balance or a deficit 
as a receivable from the separate account customer, with no offsets 
between the other separate accounts of the same separate account 
customer.
    (4) A futures commission merchant shall, in calculating the amount 
of its own funds it is required to maintain in segregated accounts to 
cover deficits or debit ledger balances pursuant to Sec.  1.20(i), 
Sec.  22.2(f), or Sec.  30.7(f)(2) of this chapter in any futures 
customer accounts, Cleared Swaps Customer Accounts, or 30.7 accounts, 
respectively, include any deficits or debit ledger balances of any 
separate accounts as if the accounts are accounts of separate entities.
    (5) For purposes of its residual interest and legally segregated 
operationally commingled compliance calculations, as applicable under 
Sec. Sec.  1.22(c), 22.2(f)(6), and 30.7(f)(1)(ii) of this chapter, a 
futures commission merchant shall treat the separate accounts of a 
separate account customer as if the accounts were accounts of separate 
entities and include the undermargined amount of each separate account, 
and cover such undermargined amount with its own funds.

[[Page 7937]]

    (6) In determining its residual interest target for purposes of 
Sec. Sec.  1.11(e)(3)(i)(D) and 1.23(c), the futures commission 
merchant must consider the impact of calculating customer receivables 
for separate account customers on a separate account basis.
    (h) Requirements: information and disclosures. (1) A futures 
commission merchant shall obtain from each separate account customer 
or, as applicable, the manager of a separate account, information 
sufficient for the futures commission merchant to:
    (i) Assess the value of the assets dedicated to such separate 
account; and
    (ii) Identify the direct or indirect parent company of the separate 
account customer, as applicable, if such customer has a direct or 
indirect parent company.
    (2) Where a separate account customer has appointed a third-party 
as the primary contact to the futures commission merchant, the futures 
commission merchant must obtain and maintain current contact 
information of an authorized representative of the customer, and take 
reasonable steps to verify that such contact information is and remains 
accurate, and that the person is in fact an authorized representative 
of the customer.
    (3) A futures commission merchant must provide each separate 
account customer a disclosure that, pursuant to part 190 of the 
Commission's regulations (17 CFR part 190), all separate accounts of 
the customer in each account class will be combined in the event of the 
futures commission merchant's bankruptcy.
    (i) The disclosure statement required by this paragraph (h)(3) must 
be delivered directly to the customer via electronic means, in writing 
or in such other manner as the futures commission merchant customarily 
delivers disclosures pursuant to applicable Commission regulations, and 
as permissible under the futures commission merchant's customer 
documentation.
    (ii) The futures commission merchant must maintain documentation 
demonstrating that the disclosure statement required by this paragraph 
(h)(3) was delivered directly to the customer.
    (iii) The futures commission merchant must include the disclosure 
statement required by this paragraph (h)(3) on its website or within 
its Disclosure Document required by paragraph 1.55(i).
    (4) A futures commission merchant that has made an election 
pursuant to paragraph (d) of this section shall disclose in the 
Disclosure Document required under Sec.  1.55(i) that it permits the 
separate treatment of accounts for the same customer pursuant to the 
requirements of this section and that, in the event that separate 
account treatment for some customers were to contribute to a loss that 
exceeds the futures commission merchant's ability to cover, that loss 
may affect the segregated funds of all of the futures commission 
merchant's customers in one or more account classes.
    (i) A futures commission merchant that applies separate account 
treatment pursuant to this section shall apply such treatment in a 
consistent manner over time.

0
7. Revise Sec.  1.58 to read as follows:


Sec.  1.58  Gross collection of exchange-set margins.

    (a) Each futures commission merchant which carries a futures, 
options on futures, or Cleared Swaps position for another futures 
commission merchant or for a foreign broker on an omnibus basis must 
collect, and each futures commission merchant and foreign broker for 
which an omnibus account is being carried must deposit, initial and 
maintenance margin on each position so carried at a level no less than 
that established for customer accounts by the rules of the applicable 
contract market or other board of trade. If the contract market or 
other board of trade does not specify any such margin level, the level 
required will be that specified by the relevant clearing organization.
    (b) If the futures commission merchant which carries a futures, 
options on futures, or Cleared Swaps position for another futures 
commission merchant or for a foreign broker on an omnibus basis allows 
a position to be margined as a spread position or as a hedged position 
in accordance with the rules of the applicable contract market, the 
carrying futures commission merchant must obtain and retain a written 
representation from the futures commission merchant or from the foreign 
broker for which the omnibus account is being carried that each such 
position is entitled to be so margined.
    (c) Where a futures commission merchant has established an omnibus 
account that is carried by another futures commission merchant, and the 
depositing futures commission merchant has elected to treat the 
separate accounts of a futures customer or a Cleared Swaps Customer as 
accounts of separate entities for purposes of Sec.  1.44, the 
depositing futures commission merchant shall calculate the required 
initial and maintenance margin for purposes of paragraph (a) of this 
section separately for each such separate account.

0
8. Amend Sec.  1.73 by adding paragraph (c) to read as follows:


Sec.  1.73  Clearing futures commission merchant risk management.

* * * * *
    (c) A futures commission merchant that is not a clearing member of 
a derivatives clearing organization, but that treats the separate 
accounts of a customer as accounts of separate entities for purposes of 
Sec.  1.44, shall comply with paragraphs (a) and (b) of this section 
with respect to the accounts and separate accounts of separate account 
customers as if it were a clearing member of a derivatives clearing 
organization.

0
9. Add appendix A to part 1 to read as follows:

Appendix A to Part 1--Treatment of Certain Foreign Currencies for 
Margin Adequacy Requirements Under Regulation 1.44

    Payment of margin in currencies listed in this Appendix A shall 
be considered in compliance with the requirements of Regulation 
1.44(f) of Part 1 of the Commission's regulations (17 CFR 1.44(f)) 
if received by the applicable futures commission merchant no later 
than the end of the second business day after the day on which the 
margin call is issued.

Currency

Australian dollar (AUD)
Chinese renminbi (CNY)
Hong Kong dollar (HKD)
Hungarian forint (HUF)
Israeli new shekel (ILS)
Japanese yen (JPY)
New Zealand dollar (NZD)
Singapore dollar (SGD)
South African rand (ZAR)
Turkish lira (TRY)

PART 22--CLEARED SWAPS

0
10. The authority citation for part 22 continues to read as follows:

    Authority:  7 U.S.C. 1a, 6d, 7a-1 as amended by Pub. L. 111-203, 
124 Stat 1376.


0
11. Amend Sec.  22.2 by
0
a. Republishing the paragraph (f) heading;
0
b. Revising paragraphs (f)(4) and (5);
0
c. Republishing the paragraph (g) heading; and
0
d. Adding paragraph (g)(11).
    The republications, revisions, and addition to read as follows:


Sec.  22.2  Futures Commission Merchants: Treatment of Cleared Swaps 
and Associated Cleared Swaps Customer Collateral.

* * * * *
    (f) Requirements as to amount.* * *
    (4) The futures commission merchant must, at all times, maintain in

[[Page 7938]]

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 and debit balances that the Cleared Swaps Customers of 
the futures commission merchant have in their accounts. Notwithstanding 
the preceding sentence, a futures commission merchant must add back to 
the total amount of funds required to be maintained in segregation any 
Cleared Swaps Customer Accounts with debit balances in the amounts 
calculated in accordance with paragraph (f)(5) of this section.
    (5) The futures commission merchant, in calculating the total 
amount of funds required to be maintained in segregation pursuant to 
paragraph (f)(4) of this section, must include any debit balance, as 
calculated pursuant to this paragraph (f)(5), that a Cleared Swaps 
Customer has in its account, to the extent that such debit balance is 
not secured by ``readily marketable securities'' that the particular 
Cleared Swaps Customer deposited with the futures commission merchant.
    (i) For purposes of calculating the amount of a Cleared Swaps 
Customer Account's debit balance that the futures commission merchant 
is required to include in its calculation of its total segregation 
requirement pursuant to this paragraph (f)(5), the futures commission 
merchant shall calculate the net liquidating equity of each Cleared 
Swaps Customer Account in accordance with paragraph (f)(2) of this 
section, except that the futures commission merchant shall exclude from 
the calculation any noncash collateral held in the Cleared Swaps 
Customer Account as margin collateral. The futures commission merchant 
may offset the debit balance computed under this paragraph (f)(5) to 
the extent of any ``readily marketable securities,'' subject to 
percentage deductions (i.e., ``securities haircuts'') as specified in 
paragraph (f)(5)(iv) of this section, held for the particular Cleared 
Swaps Customer to secure its debit balance.
    (ii) For purposes of this section, ``readily marketable'' shall be 
defined as having a ``ready market'' as such latter term is defined in 
Rule 15c3-1(c)(11) of the Securities and Exchange Commission (17 CFR 
240.15c3-1(c)(11)).
    (iii) In order for a debit balance to be deemed secured by 
``readily marketable securities,'' the futures commission merchant must 
maintain a security interest in such securities, and must hold a 
written authorization to liquidate the securities at the discretion of 
the futures commission merchant.
    (iv) To determine the amount of such debit balance secured by 
``readily marketable securities,'' the futures commission merchant 
shall:
    (A) Determine the market value of such securities; and
    (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 (17 CFR 240.15c3-
1(c)(2)(vi)). 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.
* * * * *
    (g) Segregated account; Daily computation and record.* * *
    (11) A futures commission merchant that carries Cleared Swaps 
Accounts for Cleared Swaps Customers as separate accounts for separate 
account customers pursuant to Sec.  1.44 of this chapter shall:
    (i) Calculate the total amount of Cleared Swaps Customer Collateral 
on deposit in segregated accounts on behalf of Cleared Swaps Customers 
pursuant to paragraph (g)(1)(i) of this section and the total amount of 
Cleared Swaps Customer Collateral required to be on deposit in 
segregated accounts on behalf of Cleared Swaps Customers pursuant to 
paragraph (g)(1)(ii) of this section by including the separate accounts 
of the separate account customers as if the separate accounts were 
accounts of separate entities;
    (ii) Offset a net deficit in a particular Cleared Swaps Customer 
Account carried as a separate account of a separate account customer in 
accordance with paragraphs (f)(4) and (5) and (g)(1)(ii) of this 
section against the current market value of readily marketable 
securities held only for the particular separate account of such 
separate account customer; and
    (iii) Document its segregation computation in 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 by incorporating and reflecting the Cleared 
Swaps Customer Accounts carried as separate accounts of separate 
account customers as accounts of separate entities.

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

0
12. The authority citation for part 30 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6, 6c, and 12a, unless otherwise 
noted.


0
13. Amend Sec.  30.2 by revising paragraph (b) to read as follows:


Sec.  30.2  Applicability of the Act and rules.

* * * * *
    (b) The provisions of Sec. Sec.  1.20 through 1.30, 1.32, 
1.35(a)(2) through (4) and (c) through (i), 1.36(b), 1.38, 1.39, 1.40, 
1.45 through 1.51, 1.53, 1.54, 1.55, 1.58, 1.59, 33.2 through 33.6, and 
parts 15 through 20 of this chapter shall not be applicable to the 
persons and transactions that are subject to the requirements of this 
part.

0
14. Amend Sec.  30.7 by:
0
a. Republishing the paragraph (f) and (f)(2) headings;
0
c. Revising paragraph (f)(2)(iv);
0
d. Adding paragraph (f)(2)(v);
0
e. Republishing the paragraph (l) heading; and
0
f. Adding paragraph (l)(11).
    The republications, revisions, and additions read as follows:


Sec.  30.7  Treatment of foreign futures or foreign options secured 
amount.

* * * * *
    (f) Limitations on use of 30.7 customer funds.
* * * * *
    (2) Requirements as to amount.* * *
    (iv) The futures commission merchant must, at all times, maintain 
in segregation an amount equal to the sum of any credit and debit 
balances that 30.7 customers of the futures commission merchant have in 
their accounts. Notwithstanding the preceding sentence, a futures 
commission merchant must add back to the total amount of funds required 
to be maintained in segregation any 30.7 accounts with debit balances 
in the amounts calculated in accordance with paragraph (f)(2)(v) of 
this section.
    (v) The futures commission merchant, in calculating the total 
amount of funds required to be maintained in segregation pursuant to 
paragraph (f)(2)(iv) of this section, must include any debit balance, 
as calculated pursuant to this paragraph (f)(2)(v), that a 30.7 
customer has in its account, to the extent that such debit balance is 
not secured by ``readily marketable securities'' that the particular 
30.7 customer deposited with the futures commission merchant.
    (A) For purposes of calculating the amount of a 30.7 account's 
debit balance that the futures commission merchant is required to 
include in its calculation of

[[Page 7939]]

its total segregation requirement pursuant to this paragraph (f)(2)(v), 
the futures commission merchant shall calculate the net liquidating 
equity of each 30.7 account in accordance with paragraph (f)(2)(ii) of 
this section, except that the futures commission merchant shall exclude 
from the calculation any noncash collateral held in the 30.7 account as 
margin collateral. The futures commission merchant may offset the debit 
balance computed under this paragraph (f)(2)(v) to the extent of any 
``readily marketable securities,'' subject to percentage deductions 
(i.e., ``securities haircuts'') as specified in paragraph (f)(2)(v)(D) 
of this section, held for the particular 30.7 customer to secure its 
debit balance.
    (B) For purposes of this section, ``readily marketable'' shall be 
defined as having a ``ready market'' as such latter term is defined in 
Rule 15c3-1(c)(11) of the Securities and Exchange Commission (17 CFR 
240.15c3-1(c)(11)).
    (C) In order for a debit balance to be deemed secured by ``readily 
marketable securities,'' the futures commission merchant must maintain 
a security interest in such securities, and must hold a written 
authorization to liquidate the securities at the discretion of the 
futures commission merchant.
    (D) To determine the amount of such debit balance secured by 
``readily marketable securities.'' To do so, the futures commission 
merchant shall:
    (1) Determine the market value of such securities; and
    (2) 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 (17 CFR 240.15c3-
1(c)(2)(vi)). 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.
* * * * *
    (l) Daily computation of 30.7 customer secured amount requirement 
and details regarding the holding and investing of 30.7 customer funds.
* * * * *
    (11) A futures commission merchant that carries 30.7 accounts for 
30.7 customers as separate accounts for separate account customers 
pursuant to Sec.  1.44 of this chapter shall:
    (i) Calculate the total amount of 30.7 customer funds on deposit in 
30.7 accounts on behalf of 30.7 customers pursuant to paragraph (l)(1) 
of this section and the total amount of 30.7 customer funds required to 
be on deposit in segregated accounts on behalf of 30.7 customers 
pursuant to paragraph (l)(1) of this section by including the separate 
accounts of the separate account customers as if the separate accounts 
were accounts of separate entities;
    (ii) Offset a net deficit in a particular 30.7 account carried as a 
separate account of a separate account customer in accordance with this 
paragraph (l) against the current market value of readily marketable 
securities held only for the particular separate account of such 
separate account customer; and
    (iii) Document its segregation computation in 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)(3) of 
this section by incorporating and reflecting the 30.7 accounts carried 
as separate accounts of separate account customers as accounts of 
separate entities.

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
15. The authority citation for part 39 continues to read as follows:

    Authority:  7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464; 
15 U.S.C. 8325; section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July 
21, 2010, 124 Stat. 1749.


0
16. Amend Sec.  39.13 by:
0
a. Republishing the paragraph (g) and (g)(8) headings;
0
c. Adding paragraph (g)(8)(i)(E); and
0
d. Revising paragraph (g)(8)(iii).
    The republications, addition, and revision read as follows:


Sec.  39.13  Risk management.

* * * * *
    (g) Margin requirements--
* * * * *
    (8) Customer margin--
* * * * *
    (i) * * *
    (E) For purposes of this paragraph (g)(8)(i), each separate account 
of a separate account customer (as such terms are defined in Sec.  1.44 
of this chapter) shall be treated as an account of a separate 
individual customer.
* * * * *
    (iii) Withdrawal of customer initial margin. A derivatives clearing 
organization shall require its clearing members to ensure that their 
customers do not withdraw funds from their accounts with such clearing 
members unless the net liquidating value plus the margin deposits 
remaining in a customer's account after such withdrawal are sufficient 
to meet the customer initial margin requirements with respect to all 
products and swap portfolios held in such customer's account which are 
cleared by the derivatives clearing organization, except as provided 
for in Sec.  1.44 of this chapter.
* * * * *

    Issued in Washington, DC, on December 20, 2024, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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

Appendices to Regulations To Address Margin Adequacy and To Account for 
the Treatment of Separate Accounts by Futures Commission Merchants--
Commission Voting Summary and Chairman's and Commissioner's Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Behnam and Commissioner Goldsmith 
Romero voted in the affirmative. Commissioners Johnson and Pham 
voted to concur. Commissioner Mersinger voted in the negative.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    Since 2019, derivatives clearing organizations (DCOs) and 
futures commission merchants (FCMs) faithfully relied on guidance 
and a no-action position issued through CFTC Staff Letter 19-17 \1\ 
to comply with DCO rules. In the several years during which the 
original letter was issued, DCOs and FCMs invested accordingly in 
anticipation that the Commission would act diligently and engage the 
Commission in the process to implement appropriate relief on a 
permanent basis. I am pleased today that, consistent with my 
commitment to improving rules and codifying longstanding staff 
positions through rulemakings that benefit from the engagement and 
expertise of

[[Page 7940]]

our entire Commission, the CFTC is issuing a final rule that 
allocates greater protections and more importantly, provides long 
awaited certainty.
---------------------------------------------------------------------------

    \1\ CFTC Letter No. 19-17, July 10, 2019, available at https://www.cftc.gov/csl/19-17/download as extended by CFTC Letter No. 20-
28, Sept. 15, 2020, available at https://www.cftc.gov/csl/20-28/download; CFTC Letter No. 21-29, Dec. 21, 2021, available at https://www.cftc.gov/csl/21-29/download; CFTC Letter No. 22-11, Sept. 15, 
2022, available at https://www.cftc.gov/csl/22-11/download; CFTC 
Letter No. 23-13, Sept. 11, 2023, available at https://www.cftc.gov/csl/23-13/download; and CFTC Letter No. 24-07, June 24, 2024, 
available at https://www.cftc.gov/csl/24-07/download.
---------------------------------------------------------------------------

    I fully support the final rule which protects customer funds, 
promotes effective DCO and FCM risk management, and balances risk 
management with practicability. To ensure that the final rule was 
workable, there were numerous discussions and extensive engagement 
between staff and industry, in addition to two notices of proposed 
rulemaking.\2\ This final rule is the culmination of these efforts 
and serves as an example of effective collaboration with industry 
yielding positive results.
---------------------------------------------------------------------------

    \2\ On April 14, 2023, the Commission published in the Federal 
Register a notice of proposed rulemaking designed to codify the no-
action position in CFTC Letter No. 19-17. Derivatives Clearing 
Organization Risk Management Regulations to Account for the 
Treatment of Separate Accounts by Futures Commission Merchants, 88 
FR 22934 (Apr. 14, 2023) (First Proposal). The First Proposal sought 
to codify the provisions of CFTC Letter No. 19-17 in regulation 
39.13, where it would have applied directly to DCOs, and only 
indirectly to FCMs that are clearing members of DCOs through DCO 
rules. The Second Proposal, which withdrew the First Proposal, 
sought to codify these provisions in part 1 of the Commission's 
regulations, which apply to FCMs directly. Regulations To Address 
Margin Adequacy and To Account for the Treatment of Separate 
Accounts by Futures Commission Merchants, 89 FR 15312 (Mar. 1, 2024) 
(Second Proposal). The final rule follows from the Second Proposal.
---------------------------------------------------------------------------

    I thank Alicia Lewis in my office, and staff in the Division of 
Clearing and Risk, Market Participants Division, Office of the 
General Counsel, and the Office of the Chief Economist for their 
work on the final rule.

Appendix 3--Concurring Statement of Commissioner Caroline D. Pham

    I respectfully concur on the Regulations to Address Margin 
Adequacy and to Account for the Treatment of Separate Accounts by 
Futures Commission Merchants (FCMs) (Separate Accounts Final Rule). 
I am pleased that the Separate Accounts Final Rule has resolved two 
critical issues with the proposed rule that were unworkable because 
of (1) conflicts of law under U.S. banking and securities regulation 
and foreign banking law, and operational realities regarding the 
cross-border movement of funds, and (2) lack of regulatory clarity 
for the handling of administrative errors and operational 
constraints. In particular, the significant changes in the proposed 
rule from existing regulatory requirements under CFTC Letter No. 19-
17, which FCMs have implemented and complied with for the past 5 
years, were not supported by robust cost-benefit analysis to justify 
imposing overly burdensome new rules. I greatly appreciate the 
support of Chairman Behnam and the efforts by CFTC staff to address 
my concerns, and the engagement with my fellow Commissioners.
    I would like to thank Daniel O'Connell, Bob Wasserman, and Clark 
Hutchison in the Division of Clearing and Risk for their work on the 
Separate Accounts Final Rule and the significant time and effort 
spent working with my office, especially to reconsider the 
requirements for a one business day margin call and circumstances 
involving banking holidays in the eurozone, and ``unusual'' 
administrative errors and operational constraints.\1\ I applaud 
their dedication to strengthening our markets and addressing the 
public comments.
---------------------------------------------------------------------------

    \1\ Statement of Commissioner Caroline D. Pham in Support of the 
Treatment of Separate Accounts Proposal (Feb. 20, 2024), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement022024b.

[FR Doc. 2024-31177 Filed 1-14-25; 4:15 pm]
BILLING CODE 6351-01-P`