Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices 35337 

1Enhancing Protections Afforded Customers and 

Customer Funds Held by Futures Commission 

Merchants and Derivatives Clearing Organizations, 

78 FR 68506 (Nov. 14, 2013). 

2Enhanced Risk Management Standards for 

Systemically Important Derivatives Clearing 

Organizations, 78 FR 49663 (Aug. 15, 2013). 

3See Section 5b(c)(2) of the CEA; see also 

Derivatives Clearing Organizations and 

International Standards, 78 FR 72476 (Dec. 2, 2013). 

4Under Commission Regulation 39.2, a SIDCO is 

defined as a financial market utility that is a 

registered DCO under Section 5b of the Act, which 

has been designated by the Financial Stability 

Oversight Council to be systemically important and 

for which the Commission acts as the Supervisory 

Agency pursuant to Section 803(8) of the DoddFrank Wall Street Reform and Consumer Protection 

Act (‘‘Dodd-Frank Act’’). 17 CFR 39.2. ‘‘Supervisory 

Agency’’ is defined as the Federal agency that has 

primary jurisdiction over a designated financial 

market utility under Federal banking, securities, or 

commodity futures laws. Section 803(8)(A) of the 

Dodd-Frank Act, Public Law 111–203, 124 Stat. 

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

available at http://www.cftc.gov/idc/groups/public/

@swaps/documents/file/hr4173_enrolledbill.pdf. 

issues may not be the subjects of formal 

action during this meeting. Council 

action will be restricted to those issues 

specifically listed in this notice and any 

issues arising after publication of this 

notice that require emergency action 

under section 305(c) of the MagnusonStevens Act, provided that the public 

has been notified of the Council’s intent 

to take final action to address the 

emergency. 

Special Accommodations 

This meeting is physically accessible 

to people with disabilities. Requests for 

sign language interpretation or other 

auxiliary aids should be directed to 

Kathy Pereira (see ADDRESSES) at least 5 

days prior to the meeting date. 

Dated: May 27, 2016. 

Tracey L. Thompson, 

Acting Deputy Director, Office of Sustainable 

Fisheries, National Marine Fisheries Service. 

[FR Doc. 2016–13017 Filed 6–1–16; 8:45 am] 

BILLING CODE 3510–22–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Notice of Proposed Order and Request 

for Comment on a Proposal To 

Exempt, Pursuant to the Authority in 

Section 4(c) of the Commodity 

Exchange Act, the Federal Reserve 

Banks From Sections 4d and 22 of the 

Commodity Exchange Act 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed order and 

request for comment. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is proposing to permit 

Federal Reserve Banks to hold money, 

securities, and property deposited into a 

customer account by a systemically 

important derivatives clearing 

organization in accordance with the 

standards to which Federal Reserve 

Banks are held, as specified below. 

Thus, the Commission is proposing to 

exempt Federal Reserve Banks that 

provide customer accounts and other 

services to systemically important 

derivatives clearing organizations from 

Sections 4d and 22 of the Commodity 

Exchange Act (‘‘CEA’’ or the ‘‘Act’’). 

DATES: Comments must be received by 

July 5, 2016. 

ADDRESSES: You may submit comments 

by any of the following methods: 

• CFTC Web site: http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Comments Online process 

on the Web site. 

• Mail: Christopher Kirkpatrick, 

Secretary of the Commission, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

• Hand Delivery/Courier: Same as 

Mail, above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one of these methods. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http://

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the established procedures in § 145.9 

of the Commission’s regulations, 17 CFR 

145.9. 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of this action will be retained 

in the public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Eileen A. Donovan, Deputy Director, 

202–418–5096, edonovan@cftc.gov; M. 

Laura Astrada, Associate Director, 202– 

418–7622, lastrada@cftc.gov; or Parisa 

Abadi, Attorney-Advisor, 202–418– 

6620, pabadi@cftc.gov, in each case, at 

the Division of Clearing and Risk, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581; or Joe Opron, Special Counsel, 

312–596–0653, jopron@cftc.gov, 

Division of Clearing and Risk, 

Commodity Futures Trading 

Commission, 525 West Monroe Street, 

Suite 1100, Chicago, IL 60661. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

II. Background 

A. Customer Protection 

B. Designation of Financial Market Utilities 

Under Title VIII of the Dodd-Frank Act 

C. Access to Federal Reserve Bank 

Accounts and Services 

III. Standards of Depository Liability 

A. Depository Liability Under Section 4d of 

the CEA 

B. Federal Reserve Bank Liability Under 

Federal Reserve Bank Governing 

Documents 

IV. Features Specific to the Federal Reserve 

Banks 

V. Section 4(c) of the CEA 

VI. Proposed Exemption From Sections 4d 

and 22 of the CEA 

VII. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost and Benefit Considerations 

VIII. Request for Comment 

IX. Proposed Order of Exemption 

I. Introduction 

In 2013, in response to significant 

segregated account shortfalls 

experienced by futures customers, the 

Commission adopted rules that aimed to 

improve the protection of customer 

funds.1 Recognizing that such 

protection is critical to the sound 

functioning of the futures and swaps 

markets, the Commission reiterated that 

money, securities, and other property 

deposited by customers must be 

carefully safeguarded and segregated at 

all times. 

That same year, the Commission 

adopted enhanced risk management 

standards 2 and additional requirements 

for compliance with the derivatives 

clearing organization (‘‘DCO’’) core 

principles set forth in the CEA 3 for 

DCOs that are designated as 

systemically important (‘‘SIDCOs’’) by 

the Financial Stability Oversight 

Council.4 The Commission adopted 

these requirements in part because of 

the critical role SIDCOs play in fostering 


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5See, e.g., 78 FR at 49672. 

6 Id. at 49674. 

7See id. at 49668–49669; see also 78 FR at 72509. 

8See 78 FR at 72509. 

9Section 801 of the Dodd-Frank Act. 

10See Section 806(a) of the Dodd-Frank Act. 

11See discussion infra Part VI. 

12Section 4d of the CEA permits customer funds 

to be deposited with a bank, trust company, or 

DCO. 7 U.S.C. 6d. 

13As discussed in further detail below, Section 22 

of the CEA would typically provide for private 

rights of action for damages against persons who 

violate Section 4d, or persons who willfully aid, 

abet, counsel, induce, or procure the commission of 

a violation of Section 4d. See discussion supra Part 

VI. 

14 7 U.S.C. 6(c); 7 U.S.C. 25. 

15See Report of the Trustee’s Investigation and 

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

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

Customer claims were eventually paid in full after 

customer funds were recovered through bankruptcy 

proceedings and the Commission’s enforcement 

action. 

16See Complaint, U.S. Commodity Futures 

Trading Commission v. Peregrine Financial Group, 

Inc., and Russell R. Wasendorf, Sr., No. 12–cv–5383 

(N.D. Ill. July 10, 2012). 

17See discussion supra Part I; see also, e.g., 

Investment of Customer Funds and Funds Held in 

an Account for Foreign Futures and Foreign 

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

(revising the types of investments that an FCM or 

DCO could make with customer funds under 

Regulation 1.25 to minimize the exposure of such 

funds to liquidity, credit, and market risks). 

financial stability 5 and because the 

‘‘failure of a SIDCO to complete core 

clearing and settlement functions within 

a rapid period could create systemic 

liquidity and credit dislocations on a 

global scale.’’ 6 Accordingly, these 

additional requirements were designed 

to promote a SIDCO’s financial strength, 

operational integrity, security, and 

reliability.7 By requiring a SIDCO’s 

liquidity arrangements to be highly 

reliable in stressed market conditions, 

the Commission sought to bolster a 

SIDCO’s ability to promptly meet its 

cash obligations to its members in order 

to help avoid the loss of market 

confidence and cascading defaults.8

Title VIII of the Dodd-Frank Act, 

entitled ‘‘Payment, Clearing, and 

Settlement Supervision Act of 2010,’’ 9

also included provisions aimed at 

safeguarding the U.S. financial system. 

One example of this is Section 806(a), 

which expressly permits the Board of 

Governors of the Federal Reserve 

System (‘‘Board’’) to authorize a Federal 

Reserve Bank to establish and maintain 

a deposit account for a SIDCO and 

provide certain services to the SIDCO, 

subject to any applicable rules, orders, 

standards, or guidelines prescribed by 

the Board.10

The Commission believes that 

establishing SIDCO segregated customer 

accounts at a Federal Reserve Bank and 

enabling SIDCOs to access related 

services there would both augment a 

SIDCO’s liquidity arrangements and 

enhance the protection of customer 

funds.11 The Commission recognizes, 

however, that Section 4d of the CEA 

was not developed with a particular 

focus on the Federal Reserve Banks.12

As a result, the unique role that the 

Federal Reserve Banks play in the 

financial system was not expressly 

taken into account when the 

Commission’s standard of liability was 

developed for depositories. The 

Commission notes that Federal Reserve 

financial services provided by the 

Federal Reserve Banks are governed by 

the terms and conditions that are set 

forth in various federal rules, Federal 

Reserve Board policies, and Federal 

Reserve Bank operating circulars, which 

have been carefully developed over 

several decades. The Commission 

further recognizes that the Federal 

Reserve Banks could be exposed to 

liability under Sections 4d and 22 13 of 

the CEA, which could have disparate 

impact on the treatment of deposits at 

the Federal Reserve Banks and 

ultimately harm U.S. taxpayers. 

Accordingly, to facilitate SIDCOs’ use of 

Federal Reserve Banks as depositories 

for customer funds, the Commission is 

proposing, pursuant to its authority 

under Section 4(c) of the CEA, to 

exempt Federal Reserve Banks that 

provide customer accounts and other 

services to SIDCOs from Sections 4d 

and 22 of the CEA.14 The exemption 

would enable the Federal Reserve Banks 

to maintain SIDCO customer accounts 

in accordance with the standards set 

forth in the relevant Federal Reserve 

Bank governing documents, as specified 

below. 

II. Background 

A. Customer Protection 

The protection of customers—and the 

safeguarding of money, securities, or 

other property deposited by 

customers—is a fundamental 

component of the regulatory and 

oversight framework of the futures and 

swaps markets. Section 4d of the CEA 

requires a futures commission merchant 

(‘‘FCM’’) to segregate from its own assets 

all money, securities, and other property 

deposited by futures or cleared swaps 

customers to margin, secure, or 

guarantee futures contracts and options 

on futures contracts traded on 

designated contract markets, and 

cleared swaps. Section 4d further 

requires an FCM to treat customer funds 

as belonging to the customer, and 

prohibits an FCM from using the funds 

deposited by a customer to margin or 

extend credit to any person other than 

the customer that deposited the funds. 

Similarly, Section 4d of the CEA 

prohibits a DCO and any depository that 

has received such funds from holding, 

disposing of, or using such funds as 

belonging to the depositing FCM or any 

person other than the customers of such 

FCM. 

The importance of this statutory 

mandate to protect customer funds—to 

treat them as belonging to customers 

and not use the funds inappropriately— 

was reinforced in light of the FCM 

insolvency proceedings involving MF 

Global, Inc. (‘‘MF Global’’) and 

Peregrine Financial Group, Inc. 

(‘‘Peregrine’’). In October 2011, MF 

Global, which was dually-registered as 

an FCM with the Commission and as a 

securities broker-dealer with the U.S. 

Securities and Exchange Commission, 

was placed into a liquidation 

proceeding under the Securities Investor 

Protection Act by the Securities Investor 

Protection Corporation. At the time, the 

trustee appointed to oversee the 

liquidation of MF Global reported a 

potential $900 million shortfall of funds 

necessary to repay the account balances 

due to customers trading futures on 

designated contract markets, and an 

approximately $700 million shortfall in 

funds immediately available to repay 

the account balances of customers 

trading on foreign futures markets. The 

shortfall in customer segregated 

accounts was attributed by the MF 

Global trustee to significant transfers of 

funds out of the customer accounts that 

were used by MF Global, Inc. for various 

purposes other than to meet obligations 

to or on behalf of customers.15

Shortly thereafter, in 2012, the 

Commission filed a civil injunctive 

complaint in federal district court 

against Peregrine and its Chief 

Executive Officer and sole owner, 

Russell R. Wasendorf, Sr. 

(‘‘Wasendorf’’), alleging that Peregrine 

and Wasendorf misappropriated 

customer funds, violated customer fund 

segregation laws, and made false 

statements regarding the amount of 

funds in customer segregated accounts 

in financial statements filed with the 

Commission. According to the 

complaint, Peregrine falsely represented 

that it held in excess of $220 million of 

customer funds, when it actually held 

only approximately $5.1 million.16

Spurred in part by these shocking 

failures, the Commission promulgated 

several rules aimed at strengthening the 

protection of customer funds and the 

U.S. financial markets.17

In an effort to further strengthen 

customer protection, the Commission 

has also examined the current 


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18Further information on the public roundtable, 

including video recordings and transcripts of the 

discussions, are available on the Commission’s Web 

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

opaevent_cftcstaff022912 (relating to Feb. 29, 2012); 

http://www.cftc.gov/PressRoom/Events/opaevent_

cftcstaff030112 (relating to Mar. 1, 2012). 19Additional information, including documents 

submitted by meeting participants, is available on 

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

www.cftc.gov/PressRoom/Events/opaevent_

tac072612. 20See Section 802(b) of the Dodd-Frank Act. 21The Council was established by Section 111 of 

the Dodd-Frank Act. In general, the Council is 

tasked with identifying risks to the financial 

stability of the United States that could arise from 

the material financial distress or failure, or ongoing 

activities, of large, interconnected bank holding 

companies or nonbank financial companies, or that 

could arise outside the financial services 

marketplace, promoting market discipline, by 

eliminating expectations on the part of 

shareholders, creditors, and counterparties of such 

companies that the Government will shield them 

from losses in the event of failure, and responding 

to emerging threats to the stability of the United 

States financial system. Section 112(a)(1) of the 

Dodd-Frank Act. 

22See Section 804(a) of the Dodd-Frank Act. The 

term ‘‘systemically important’’ means a situation 

where the failure of or a disruption to the 

functioning of a financial market utility could 

create, or increase, the risk of significant liquidity 

or credit problems spreading among financial 

institutions or markets and thereby threaten the 

stability of the financial system of the United States. 

Section 803(9) of the Dodd-Frank Act; see also 

Authority to Designate Financial Market Utilities as 

Systemically Important, 76 FR 44763, 44774 (July 

27, 2011). 

23Section 803(6)(A) of the Dodd-Frank Act. 

24 76 FR at 44763. 

25Under Section 804(a)(2) of the Dodd-Frank Act, 

in determining whether an FMU is or is likely to 

become systemically important, the Council must 

take into consideration the following: (A) The 

aggregate monetary value of transactions processed 

by the FMU; (B) the aggregate exposure of the FMU 

to its counterparties; (C) the relationship, 

interdependencies, or other interactions of the FMU 

with other FMUs or payment, clearing, or 

settlement activities; (D) the effect that the failure 

of or a disruption to the FMU would have on 

critical markets, financial institutions, or the 

broader financial system; and (E) any other factors 

the Council deems appropriate. 

26 76 FR at 44766. 

27See Press Release, Financial Stability Oversight 

Council, Financial Stability Oversight Council 

Makes First Designations in Effort to Protect Against 

Future Financial Crises (July 18, 2012), available at 

http://www.treasury.gov/press-center/pressreleases/Pages/tg1645.aspx. 

28The services listed in Section 11A(b) of the 

Federal Reserve Act include wire transfers, 

settlement, and securities safekeeping, as well as 

services regarding currency and coin, check 

clearing and collection, and automated clearing 

house transactions. See 12 U.S.C. 248a(b). Section 

806(a) of the Dodd-Frank Act also permits the Board 

to authorize a Federal Reserve Bank to establish 

deposit accounts under the first undesignated 

paragraph of Section 13 of the Federal Reserve Act, 

12 U.S.C. 342. 

29Financial Market Utilities (Regulation HH), 78 

FR 14024, 14025 (Mar. 4, 2013). 

30 Id. 

31See 12 CFR 234.5(b)(2) (setting forth rules to 

govern Federal Reserve Bank accounts held by 

designated FMUs). 

32See CFTC Interpretative Letter No. 79–1, 

[1977–1980 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ¶ 20,835 (May 29, 1979). Section 4d of the 

CEA covers customer funds only; it does not relate 

to proprietary funds of clearing members. 

33See 78 FR at 68539. 

regulatory framework through a series of 

roundtables and other public meetings. 

The Commission held a public 

roundtable to solicit input on customer 

protection issues from a broad crosssection of the derivatives industry, 

including market participants, FCMs, 

DCOs, self-regulatory organizations, 

securities regulators, and academics.18

The Commission also hosted a public 

meeting of the Technology Advisory 

Committee to discuss potential 

technological solutions directed at 

enhancing the protection of customer 

funds.19

Customer protection continues to be a 

bedrock guiding principle for the 

Commission, as the protection of 

customer funds is paramount to a 

trusted marketplace. 

B. Designation of Financial Market 

Utilities Under Title VIII of the DoddFrank Act 

Title VIII of the Dodd-Frank Act was 

enacted to mitigate risk in the financial 

system and promote financial 

stability.20 Accordingly, Section 804 of 

the Dodd-Frank Act requires the 

Financial Stability Oversight Council 

(‘‘Council’’) 21 to designate those 

financial market utilities (‘‘FMUs’’) that 

the Council determines are, or are likely 

to become, systemically important.22 An 

FMU includes any person that manages 

or operates a multilateral system for the 

purpose of transferring, clearing, or 

settling payments, securities, or other 

financial transactions among financial 

institutions or between financial 

institutions and the person.23 As noted 

by the Council, FMUs are vital to the 

nation’s financial infrastructure, and 

‘‘their smooth operation is integral to 

the soundness of the financial system 

and the overall economy.’’ 24

In determining whether an FMU is 

systemically important, the Council 

follows a detailed two-stage designation 

process, using statutory 

considerations 25 and other metrics to 

assess, among other things, ‘‘whether 

possible disruptions [to the functioning 

of an FMU] are potentially severe, not 

necessarily in the sense that they 

themselves might trigger damage to the 

U.S. economy, but because such 

disruptions might reduce the ability of 

financial institutions or markets to 

perform their normal intermediation 

functions.’’ 26 Thus, if a systemically 

important FMU fails to perform, this 

failure could pose significant risk to its 

participants and to the U.S. financial 

system more broadly. For example, if a 

systemically important FMU fails to 

complete timely settlement, there could 

be significant credit and/or liquidity 

problems for its participants and 

participants’ customers. On July 18, 

2012, the Council designated eight 

FMUs as systemically important under 

Title VIII.27 Two of these designated 

FMUs, Chicago Mercantile Exchange, 

Inc. and ICE Clear Credit LLC, are 

SIDCOs. 

C. Access to Federal Reserve Bank 

Accounts and Services 

As noted above, Section 806(a) of the 

Dodd-Frank Act permits the Board to 

authorize a Federal Reserve Bank to 

establish and maintain an account for a 

SIDCO and provide to the SIDCO the 

services listed in Section 11A(b) of the 

Federal Reserve Act, subject to any 

applicable rules, orders, standards, or 

guidelines prescribed by the Board.28 In 

adopting regulations pursuant to 

Section 806(a) of the Dodd-Frank Act, 

the Board noted that the ‘‘terms and 

conditions for access to Federal Reserve 

Bank accounts and services are intended 

to facilitate the use of [Federal] Reserve 

Bank accounts and services by a 

designated FMU in order to reduce 

settlement risk and strengthen 

settlement processes, while limiting the 

risk presented by the designated FMU to 

the [Federal] Reserve Banks.’’ 29

Accordingly, the Board ‘‘expects that 

[Federal] Reserve Banks would provide 

services that are consistent with a 

designated FMU’s need for safe and 

sound settlement processes under 

account and service agreements 

generally consistent with the provisions 

of existing [Federal] Reserve Bank 

operating circulars for such services.’’ 30

Highlighting the importance of Federal 

Reserve Bank operating circulars in this 

regard, the Board further requires that 

designated FMUs be in compliance with 

existing operating circulars.31

III. Standards of Depository Liability 

A. Depository Liability Under Section 4d 

of the CEA 

Under Section 4d of the CEA, a 

depository, which may be a bank, trust 

company, or a DCO, will be held liable 

for the improper transfers of customer 

funds by an FCM or DCO if it knew or 

should have known that the transfer was 

improper.32 While a depository has no 

affirmative obligation to police or 

monitor an FCM or DCO account 

holder’s compliance with the CEA or 

Commission regulations, a depository 

cannot ignore signs of wrongdoing.33

To ensure that a depository that holds 

customer funds has been informed that 


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34See 17 CFR 1.20, Appendices A and B. 

35See 78 FR at 68535; see also 17 CFR 

1.20(g)(4)(ii). 

36For example, Federal Reserve Banks provide 

checking accounts for the U.S. Department of 

Treasury, issue and redeem U.S. government 

securities, and act in other ways as a fiscal agent 

for the U.S. government. See Federal Reserve Board, 

The Structure of the Federal Reserve System (Apr. 

17, 2009), http://www.federalreserve.gov/pubs/

frseries/frseri3.htm. 37See, e.g., Federal Reserve Bank Operating 

Circular No. 6 (governing funds transfers through 

the Fedwire Funds Service); Federal Reserve Bank 

Operating Circular No. 7 (governing the 

maintenance of and transfer services for book-entry 

securities accounts); 12 CFR part 210, subpart B 

(governing funds transfers through the Fedwire 

Funds Service); 31 CFR part 357, subpart B (setting 

forth the Department of the Treasury’s regulations 

governing book-entry treasury bonds, notes, and 

bills). 

38A SIDCO’s proprietary account holds the 

proprietary funds of its clearing members. 

39See Federal Reserve Board, Financial Services, 

https://web.archive.org/web/19990125095428/http:/

www.frbservices.org/ (last visited Apr. 28, 2016). 

Prior to 1998, each Federal Reserve Bank had its 

own system with different numbered operating 

circulars; as a result, the circular language was not 

necessarily uniform. 

40Under the Federal Reserve Bank Governing 

Documents, the Federal Reserve Banks are not 

liable to third parties. 

41Federal Reserve Banks ‘‘ ‘are not operated for 

the profit of shareholders;’ rather, they ‘were 

created and are operated in furtherance of the 

national fiscal policy.’ ’’ See Starr Int’l Co. v. Fed. 

Reserve Bank of New York, 742 F.3d 37, 40 (2d Cir. 

2014) (quoting Fed. Reserve Bank of Bos. v. Comm’r 

of Corps. & Taxation of the Commonwealth of 

Mass., 499 F.2d 60, 62 (1st Cir. 1974)). ‘‘Because 

Federal Reserve Banks ‘conduct important 

governmental functions regarding’ matters 

including the ‘general fiscal duties of the United 

States,’ they are ‘instrumentalities of the federal 

government.’ ’’ See id. (quoting Fed. Reserve Bank 

of St. Louis v. Metrocentre Improvement Dist. #1, 

657 F.2d 183, 185–186 (8th Cir. 1981)). 

the deposited funds are those of 

customers being held in accordance 

with Section 4d of the CEA, the 

Commission requires an FCM or DCO to 

obtain from each depository with which 

it deposits customer funds a written 

acknowledgment in this regard.34

Commission regulations require FCMs 

and DCOs to use a template 

acknowledgment letter in order to 

promote a uniform understanding 

among FCMs, DCOs, and depositories as 

to their obligations under the CEA and 

Commission regulations with respect to 

the proper treatment of customer funds. 

The template acknowledgment letter 

contains a provision that reflects the 

Commission’s expectation that a 

depository will engage in its customary 

practices and will be held liable for a 

violation of Section 4d if it knew or 

should have known of the violation.35

It is important to note that as the 

aforementioned standard of liability was 

developed, the unique nature of the 

Federal Reserve Banks was not taken 

into account. Indeed, until recently, 

there was no statutory authority 

permitting a SIDCO to hold customer 

funds at a Federal Reserve Bank. 

However, and as discussed below, the 

standard of liability for Federal Reserve 

Banks acting as depositories has been 

carefully developed by the Board and 

not the Commission. 

B. Federal Reserve Bank Liability Under 

Federal Reserve Bank Governing 

Documents 

The Federal Reserve System, which 

serves as the nation’s central bank, was 

created by an act of Congress in 1913. 

The Federal Reserve System consists of 

a seven member Board, and twelve 

Federal Reserve Banks. The Federal 

Reserve Banks operate under the general 

supervision of the Board, although each 

Bank has a Board of Directors that 

oversees its operations. Federal Reserve 

Banks generate their own income, 

which is generally from interest earned 

on U.S. government securities that are 

acquired in the course of Federal 

Reserve monetary policy actions and 

from the provision of priced services to 

depository institutions. Federal Reserve 

Banks do not, however, operate for a 

profit. Indeed, each year they return to 

the U.S. Department of Treasury all 

earnings in excess of Federal Reserve 

Bank operating and other expenses. 

Federal Reserve Banks are, in essence, 

the operating arms of the United States’ 

central banking system. In addition to 

their many responsibilities, Federal 

Reserve Banks operate as a bank for 

depository institutions and the U.S. 

government.36

Some of the services provided by 

Federal Reserve Banks include the 

provision of funds and book-entry 

securities accounts, as well as certain 

financial services, such as wire 

transfers, book-entry securities transfers, 

and multilateral settlement services. 

These accounts and services are 

governed by account agreements, 

operating circulars issued by Federal 

Reserve Banks for each service, the 

Federal Reserve Act, and Federal 

Reserve regulations and policies, and, 

with respect to book-entry securities 

services, the regulations of the domestic 

issuer of the securities or the issuer’s 

regulator (‘‘Federal Reserve Bank 

Governing Documents’’).37

Additionally, one or more Federal 

Reserve Banks have established 

proprietary accounts for SIDCOs 38

pursuant to Section 806 of the DoddFrank Act. These proprietary accounts 

are also governed by the Federal Reserve 

Bank Governing Documents. 

The Federal Reserve Banks’ standard 

of liability for the financial services it 

offers to depository institutions has 

been developed over the 100-plus years 

of Federal Reserve Bank operations, in 

many cases hand-in-hand with the 

development of federal and state 

statutory and regulatory provisions, as 

well as common law governing 

securities transfers, funds transfers, and 

other payment mechanisms. The 

operating circulars of the Federal 

Reserve Banks began having uniform 

terms and conditions across Federal 

Reserve Bank districts as of January 2, 

1998. The 1998 version of the uniform 

Operating Circular 1 (Account 

Relationships) sets out the Federal 

Reserve Banks’ standard and scope of 

liability that limits a Federal Reserve 

Bank’s liability to only damages suffered 

by the account holder that are caused by 

the Federal Reserve Bank’s failure to 

exercise ordinary care, and does not 

include lost profits, claims by third 

parties, or consequential or incidental 

damages.39

The Commission understands that, in 

accordance with the Federal Reserve 

Bank Governing Documents, the Federal 

Reserve Banks are authorized to act on 

the instructions received through the 

use of procedures agreed upon with the 

account holders, without any liability or 

obligation to inquire as to the legitimacy 

or accuracy of the instruction or the 

transaction. By agreement with the 

respective account holders, the 

procedures for accepting an instruction 

are not used to detect an error in the 

transmission or content of the 

instruction, or compliance by the 

account holder with its legal 

obligations. In addition to limiting the 

areas of liability, the Commission 

understands that the Federal Reserve 

Bank Governing Documents limit a 

Federal Reserve Bank’s liability in 

maintaining an account or acting on 

such an instruction to actual damages 

that are incurred solely by the account 

holder 40 and that are proximately 

caused by the Federal Reserve Bank’s 

failure to exercise ordinary care or act 

in good faith in accordance with the 

Federal Reserve Bank Governing 

Documents. 

IV. Features Specific to the Federal 

Reserve Banks 

As noted above, Federal Reserve 

Banks play a unique role in the U.S. 

banking and payment system as 

compared to commercial banks and 

other depositories and payment service 

providers.41 The standards set forth in 

the Federal Reserve Bank Governing 

Documents are reflective of this unique 

role and have been developed over the 

years to capture the distinctive nature of 


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42The current congressional mandate requires 

that Federal Reserve Banks transfer their residual 

earnings in excess of $10 billion to the U.S. 

Treasury. See FAST Act, Pub. L. 114–94, 129 Stat. 

1312 (2015). For prior congressional mandates in 

this regard, see, e.g., District of Columbia 

Appropriations Act, Pub. L. 106–113, 113 Stat. 1501 

(1999) (requiring that, in fiscal year 2000, Federal 

Reserve Banks transfer their residual earnings in the 

amount of $3,752,000,000 to the U.S. Treasury’s 

general fund); Omnibus Budget Reconciliation Act 

of 1993, Pub. L. 103–66, 107 Stat. 312 (requiring 

that, during fiscal years 1997 and 1998, Federal 

Reserve Banks transfer their residual earnings in 

excess of 3 percent of the total paid-in capital and 

surplus to the U.S. Treasury’s general fund). 

43See Press Release, Board of Governors of the 

Federal Reserve System, Reserve Bank Income and 

Expense Data and Transfers to the Treasury for 2014 

(Jan. 9, 2015), available at http://

www.federalreserve.gov/newsevents/press/other/

20150109a.htm; Annual Report, Board of Governors 

of the Federal Reserve System (2014), available at 

http://www.federalreserve.gov/publications/annualreport/files/2014-annual-report.pdf. 

44See, e.g., Federal Reserve Bank of Richmond, 

Consumer Issues and Information, available at 

https://www.richmondfed.org/faqs/consumer/ (last 

visited Feb. 26, 2016) (stating that ‘‘Federal Reserve 

Banks are not authorized to open accounts for 

individuals[; rather, o]nly depository institutions 

and certain other financial entities may open an 

account at a Federal Reserve Bank’’); see also 

Section 806(a) of the Dodd-Frank Act (authorizing 

accounts at a Federal Reserve Bank for designated 

FMUs). 

45See Federal Reserve Board, The Structure of the 

Federal Reserve System (Apr. 17, 2009), http://

www.federalreserve.gov/pubs/frseries/frseri3.htm 

(noting that some supervisory responsibilities are 

delegated to the Federal Reserve Banks by the 

Board). 

46See Section 809(e)(2) of the Dodd-Frank Act. 

47Federal Reserve’s Key Policies for the Provision 

of Financial Services: Standards Related to PricedService Activities of the Federal Reserve Banks 

(1984), available at http://www.federalreserve.gov/

paymentsystems/pfs_standards.htm. The policy 

permits certain limited exceptions in cases where 

such disclosure fulfills an important supervisory 

objective, preserves the integrity of the payment 

mechanism, or protects the assets of the Federal 

Reserve Banks. In such cases, information will be 

provided on a need-to-know basis and only with the 

approval of senior management. 48 7 U.S.C. 6(c). 

the Federal Reserve Banks. In addition 

to the accounts and services that Federal 

Reserve Banks provide to the 

government and to other depository 

institutions, the Federal Reserve Banks 

supervise and examine member banks 

for safety and soundness. They also 

participate in the setting of U.S. 

monetary policy, an activity that is the 

primary responsibility of the Federal 

Reserve System. Moreover, in an effort 

to reduce U.S. taxpayer burden, 

Congress requires that the residual 

earnings of each Federal Reserve Bank 

be distributed to the U.S. Treasury’s 

general fund.42 In fact, the Federal 

Reserve Banks have sent to the U.S. 

Treasury approximately $98.7 billion in 

residual earnings in 2014 and about 

$500 billion on a cumulative basis since 

2008.43

Federal Reserve Banks also do not 

provide financial services to businesses 

generally; rather, they serve only 

account holders authorized by statute, 

such as depository institutions and the 

U.S. government.44 In addition, Federal 

Reserve Banks may engage in a set range 

of services and only with the respective 

account holder. As such, Federal 

Reserve Banks do not provide the range 

of related account services that a 

commercial bank might provide, such as 

offering services to executives of the 

account holder as an additional 

incentive to do business with the bank. 

Therefore, the Commission believes that 

the Federal Reserve Banks do not have 

the potential conflict of interest that 

may arise when a commercial bank 

provides such services. 

Moreover, Federal Reserve Banks play 

a distinctive, dual role with respect to 

SIDCOs, as they may be both account 

service providers and participants in the 

supervision of SIDCOs. Under Title VIII 

of the Dodd-Frank Act, the Board may 

participate in any Commission 

examination of a SIDCO and otherwise 

consult and share information with the 

Commission regarding SIDCOs. Federal 

Reserve Banks may be delegated 

authority to assist the Board in fulfilling 

this function.45

Further, Title VIII of the Dodd-Frank 

Act expressly permits the Commission 

and the Board to provide confidential 

supervisory information to, among 

others, the Federal Reserve Banks.46

Although a Federal Reserve Bank may 

have access to confidential supervisory 

information regarding a particular 

SIDCO, Board staff has represented that 

it has a long-standing ‘‘Wall Policy’’ that 

generally prohibits, subject to the 

limitations contained therein, the 

sharing of confidential supervisory 

information with Federal Reserve Bank 

account services staff, and requires that 

care be exercised to avoid actual or 

apparent conflict between a Federal 

Reserve Bank’s role as a provider of 

financial services and its role as a 

regulator, supervisor, and lender.47 The 

Board has adopted certain standards 

regarding the organization, operations, 

and business practices of Federal 

Reserve Bank financial services which, 

among other things, generally prohibit 

Federal Reserve Bank personnel 

involved in day-to-day monetary policy, 

bank supervision, or the lending 

function from providing confidential 

information obtained in the course of 

their duties to Federal Reserve Bank 

personnel involved in day-to-day 

account services. In addition, the Wall 

Policy would generally prohibit Board 

supervisory staff from sharing any 

confidential supervisory information 

they receive about a SIDCO with the 

Federal Reserve Bank staff responsible 

for managing the SIDCO’s account and 

financial services. Accordingly, given 

the unique role that Federal Reserve 

Banks play in the U.S. financial system, 

Federal Reserve Bank account services 

staff are unlikely to face conflicts of 

interest that would motivate them to 

overlook information that would 

otherwise raise suspicion of 

wrongdoing. 

V. Section 4(c) of the CEA 

Section 4(c) of the CEA provides that, 

in order to promote responsible 

economic or financial innovation and 

fair competition, the Commission, by 

rule, regulation, or order, after notice 

and opportunity for hearing, may 

exempt any agreement, contract, or 

transaction, or class thereof, including 

any person or class of persons offering, 

entering into, rendering advice, or 

rendering other services with respect to, 

the agreement, contract, or transaction, 

from the contract market designation 

requirements of Section 4(a) of the CEA, 

or any other provision of the CEA other 

than certain enumerated provisions, if 

the Commission determines that the 

exemption would be consistent with the 

public interest.48

VI. Proposed Exemption From Sections 

4d and 22 of the CEA 

The Commission proposes to exempt 

Federal Reserve Banks that provide 

customer accounts and other services to 

SIDCOs from Sections 4d and 22 of the 

CEA. The Commission further proposes 

to permit SIDCOs to maintain customer 

accounts with a Federal Reserve Bank 

pursuant to the standard of liability set 

forth in the Federal Reserve Bank 

Governing Documents. The proposed 

exemption would, however, require a 

Federal Reserve Bank to segregate 

customer funds deposited by a SIDCO 

from the proprietary funds deposited by 

a SIDCO, and to reply to any request 

from Commission staff for confirmation 

of account balances or for provision of 

any other information regarding the 

SIDCO account. 

As discussed above, Title VIII of the 

Dodd-Frank Act supports Federal 

Reserve Banks acting as depositories for 

SIDCOs. A Federal Reserve Bank, in its 

capacity as an instrument of the U.S. 

central bank, does not present the same 

types of risks as traditional commercial 

banks. Federal Reserve Banks are an 

integral part of the Federal Reserve 

System, serving the public interest and 

helping to maintain stability in the U.S. 

financial markets. Further, deposits at a 

Federal Reserve Bank have the lowest 


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49 7 U.S.C. 25. By enacting Section 22, Congress 

provided private rights of action as a means for 

addressing violations of the Act as an alternative or 

supplement to Commission enforcement action. 

Specifically, Congress found that private damages 

actions are ‘‘critical to protecting the public and 

fundamental to maintaining the credibility of the 

futures market.’’ H.R. Rep. No. 97–565, at 57 (1982). 

50Cf. Effective Date for Swap Regulation, 76 FR 

42508, 42517 (July 19, 2011) (stating that 

‘‘exemptive relief would, in effect, preclude a 

person from succeeding in a private right of action 

under CEA section 22(a)’’). However, for the 

avoidance of doubt, the Commission believes that 

an express exemption from Section 22 of the CEA 

for the Federal Reserve Banks is appropriate. 

51See Section 806(a) of the Dodd-Frank Act. 

52See 12 CFR 234.5 (setting forth the conditions 

and requirements for Federal Reserve Banks to open 

and maintain accounts for and provide financial 

services to designated FMUs); see also discussion 

supra Part III.B (discussing the Federal Reserve 

Bank Governing Documents). 

credit risk. The Board and, through their 

role in the Federal Reserve System, 

Federal Reserve Banks are also the 

source of liquidity with regard to U.S. 

dollar deposits. A SIDCO would, 

therefore, face much lower credit and 

liquidity risk with a deposit at a Federal 

Reserve Bank than it would with a 

deposit at a commercial bank. 

Moreover, customer funds held at a 

Federal Reserve Bank would not be 

exposed to the risks associated with a 

commercial bank insolvency. As a 

result, the Commission believes that 

customer funds would be protected in 

an account held by a Federal Reserve 

Bank and would continue to be required 

to be segregated from the funds 

deposited in the SIDCO’s proprietary 

account. The Commission notes that the 

standard of liability as set forth in the 

Federal Reserve Bank Governing 

Documents appears to be appropriate in 

the context of Federal Reserve Banks 

because this standard has been 

developed over the years to more 

appropriately reflect the unique nature 

of the Federal Reserve Banks. At this 

time, the Commission does not have any 

reason to believe that holding a Federal 

Reserve Bank to this standard would 

have the potential to harm futures and 

cleared swaps customers. 

The Federal Reserve Banks would 

also be exempt from liability under 

Section 22 of the CEA. Section 22 of the 

CEA provides for private rights of action 

for damages against persons who violate 

the CEA, or persons who willfully aid, 

abet, counsel, induce, or procure the 

commission of a violation of the CEA.49

The proposed exemption would 

preclude a third party from succeeding 

in a private right of action under Section 

22 for a violation of Section 4d.50 The 

Commission believes that an exemption 

from Section 22 is appropriate because, 

for those requirements from which the 

Federal Reserve Banks are exempt, it 

follows that there should be no claim 

under Section 22 of the CEA with 

respect to those requirements. The 

Commission further notes that under the 

Federal Reserve Bank Governing 

Documents, the Federal Reserve Banks 

are currently insulated from third-party 

claims. While the Commission 

continues to believe that private claims 

empower injured parties to seek 

compensation for damages where the 

Commission lacks the resources to do so 

on their behalf, and the prospect of such 

claims serves the public interest in 

deterring misconduct, the Commission 

believes that, for the reasons discussed 

herein, exempting the Federal Reserve 

Banks from liability under Section 22 of 

the CEA would also serve the public 

interest. 

Federal Reserve Banks were created 

and are operated in furtherance of the 

national interest; they are not for-profit 

enterprises. Moreover, as discussed 

above, Federal Reserve Banks return all 

earnings in excess of operating and 

other expenses to the U.S. Treasury. All 

such amounts transferred to the U.S. 

Treasury’s general fund inure to the 

benefit of U.S. taxpayers. In this case, 

private claims against a Federal Reserve 

Bank would reduce the amount of 

excess earnings that could be returned 

to the U.S. Treasury. In the 

Commission’s view, the benefits 

afforded customers by holding SIDCO 

customer funds at a Federal Reserve 

Bank exceed the benefits of preserving 

the ability to bring any private claims 

under Section 22 of the CEA. 

Furthermore, the Commission 

recognizes that Title VIII of the DoddFrank Act permits a Federal Reserve 

Bank to have access to confidential 

supervisory information. Specifically, 

Section 809(e)(2) provides that the 

Board of Governors or any Supervisory 

Agency may provide confidential 

supervisory information and other 

information obtained under Title VIII to 

each other and to the Federal Reserve 

Banks, State financial institution 

supervisory agencies, and foreign 

financial supervisors, provided, 

however, that no person or entity 

receiving information pursuant to this 

section may disseminate such 

information to entities or persons other 

than those listed in this paragraph 

without complying with applicable law, 

including section 8 of the CEA (7 U.S.C. 

12). By permitting the Federal Reserve 

Banks to receive confidential 

supervisory information, Congress 

recognized the unique role of Federal 

Reserve Banks in the U.S. financial 

system, as distinguished from the role of 

commercial banks and other depository 

institutions. The Commission further 

recognizes, however, that the fact that 

Board supervisory staff may have access 

to confidential supervisory information 

about a SIDCO could create the false 

perception that Federal Reserve Bank 

staff responsible for managing the 

SIDCO’s account and financial services 

would gain special knowledge about the 

SIDCO. Accordingly, and 

notwithstanding the Wall Policy 

described above, the Commission 

recognizes that a Federal Reserve Bank 

acting as a depository for customer 

funds could face greater scrutiny than a 

commercial bank acting as such. As a 

result, the proposed exemption would 

specify that: (1) Pursuant to the Wall 

Policy, information obtained by the 

Board supervisory staff during the 

course of supervising SIDCOs or any 

counterparty to a SIDCO will not be 

attributed by the Commission to any 

Federal Reserve Bank providing 

accounts and financial services to 

SIDCO account holders; and (2) a 

Federal Reserve Bank acting as a 

depository for SIDCO customer funds or 

otherwise providing account services to 

a SIDCO would continue to be held to 

the standard of liability set forth in the 

Federal Reserve Bank Governing 

Documents. 

Finally, the unique role that the 

Federal Reserve Banks play in the 

Federal Reserve System was not 

expressly taken into account when the 

Commission’s standard of liability was 

developed for depositories. In fact, as 

described above, it was the Dodd-Frank 

Act that, for the first time, authorized 

designated FMUs (including SIDCOs) 

that are not banks or trust companies to 

open deposit accounts with a Federal 

Reserve Bank. However, while the 

Federal Reserve Banks may establish 

deposit accounts for SIDCOs, such 

accounts are subject to any applicable 

rules, orders, standards, or guidelines 

prescribed by the Board.51 The 

Commission notes that the Board has 

prescribed detailed rules and standards 

that govern account services provided to 

SIDCOs by the Federal Reserve Banks.52

These rules and standards have been 

carefully developed to provide clarity 

surrounding the provision of Federal 

Reserve financial services and to 

promote consistency in the treatment of 

deposit accounts at the Federal Reserve 

Banks for the benefit of the U.S. 

financial system. The Commission is 

concerned that exposing the Federal 

Reserve Banks to the standard of 

liability set forth in Section 4d of the 

CEA, as well as to potential third-party 

claims under Section 22 of the CEA, 

could disrupt these goals and ultimately 


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53 5 U.S.C. 601 et seq. 

54See 47 FR 18618, 18618–21 (Apr. 30, 1982). 

55See New Regulatory Framework for Clearing 

Organizations, 66 FR 45604, 45609 (Aug. 29, 2001). 

56 44 U.S.C. 3501 et seq. 

57For a more detailed discussion of the standard 

of liability set forth in the Federal Reserve Bank 

Governing Documents, see discussion supra Part IV. 

58See, e.g., CPSS–IOSCO, PFMIs, ¶ 3.9.3 (noting 

that ‘‘[c]entral banks have the lowest credit risk and 

Continued 

harm the U.S. financial system and, by 

extension, U.S. taxpayers. 

For the reasons discussed above, the 

Commission believes that the proposed 

exemption would promote the 

safeguarding of futures and cleared 

swaps customer funds in a manner that 

would also benefit U.S. taxpayers. In 

light of the foregoing, the Commission 

believes the proposed exemption would 

promote responsible economic and 

financial innovation and fair 

competition, and would be consistent 

with the ‘‘public interest,’’ as that term 

is used in Section 4(c) of the CEA. 

VII. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 53 requires that agencies 

consider whether the proposed 

exemption will have a significant 

economic impact on a substantial 

number of small entities and, if so, 

provide a regulatory flexibility analysis 

respecting the impact. The Commission 

believes that the proposed exemption 

will not have a significant economic 

impact on a substantial number of small 

entities. The exemption proposed by the 

Commission will impact SIDCOs and 

Federal Reserve Banks. The Commission 

has previously established certain 

definitions of ‘‘small entities’’ to be used 

by the Commission in evaluating the 

impact of its actions on small entities in 

accordance with the RFA.54 The 

Commission has previously determined 

that DCOs, including SIDCOs, are not 

small entities for purposes of the RFA.55

Similarly, the Commission believes that 

Federal Reserve Banks are not small 

entities for purposes of the RFA. 

Accordingly, the Commission does 

not expect the proposed exemption to 

have a significant impact on a 

substantial number of small entities. 

Therefore, the Chairman, on behalf of 

the Commission, hereby certifies, 

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

proposed exemption would not have a 

significant economic impact on a 

substantial number of small entities. 

The Commission invites the public to 

comment on whether the entities 

covered by this proposed exemption 

should be considered small entities for 

purposes of the RFA, and, if so, whether 

there is a significant impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

The purposes of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’) 56 are, 

among other things, to minimize the 

paperwork burden to the private sector, 

ensure that any collection of 

information by a government agency is 

put to the greatest possible uses, and 

minimize duplicative information 

collections across the government. The 

PRA applies to all information, 

‘‘regardless of form or format,’’ 

whenever the government is ‘‘obtaining, 

causing to be obtained [or] soliciting’’ 

information, and requires ‘‘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.’’ The 

PRA would not apply in this case given 

that the exemption would not impose 

any new recordkeeping or information 

collection requirements, or other 

collections of information on ten or 

more persons that require approval of 

the Office of Management and Budget. 

C. Cost and Benefit Considerations 

1. Costs 

The proposed exemption would 

exempt the Federal Reserve Banks from 

Sections 4d and 22 of the CEA. The 

Commission recognizes that such relief 

could represent a cost to a SIDCO, its 

FCM clearing members, and the FCMs’ 

customers in the event of a loss of the 

deposited customer funds. For instance, 

if customer funds were lost due to the 

fault of a Federal Reserve Bank, the 

SIDCO, FCM clearing member, or 

customer would not have a cause of 

action under the CEA. Rather, as 

discussed above, the Federal Reserve 

Banks would be held to the standard of 

liability set forth in the Federal Reserve 

Bank Governing Documents.57 This 

cost, however, will never be realized if 

an incident does not occur. Therefore, 

given the resilience of the Federal 

Reserve Banks and the standards set 

forth in the Federal Reserve Bank 

Governing Documents, the Commission 

estimates that the circumstances that 

may give rise to such costs would be 

remote. Similarly, as discussed above, 

while the Commission continues to 

believe that private claims empower 

injured parties to seek compensation for 

damages where the Commission lacks 

the resources to do so on their behalf, 

and the prospect of such claims serves 

the public interest in deterring 

misconduct, the Commission believes 

that, for the reasons discussed herein, 

exempting the Federal Reserve Banks 

from liability under Section 22 of the 

CEA would also serve the public 

interest. The Commission further 

believes that the condition in the 

proposed exemption that would require 

Federal Reserve Banks to segregate 

customer funds deposited by a SIDCO 

from the proprietary funds deposited by 

a SIDCO and the benefits of facilitating 

SIDCOs’ use of these accounts mitigate 

any costs that would flow from the loss 

of protection under Section 4d of the 

CEA. 

As described above, the Commission 

has reinforced and enhanced the 

provisions of Section 4d of the CEA in 

order to further protect customer funds, 

and this proposal represents a limited 

exception to those provisions. 

2. Benefits 

The proposed exemption would 

benefit market participants by 

permitting SIDCOs to deposit customer 

funds at the Federal Reserve Banks. 

Whereas commercial banks present 

credit and liquidity risks to a SIDCO, its 

FCM clearing members, and the FCMs’ 

customers, the Federal Reserve Banks 

are substantially insulated from such 

risks. As discussed in greater detail 

above, Title VIII of the Dodd-Frank Act 

was enacted to mitigate systemic risk in 

the financial system and to promote 

financial stability, in part, through an 

enhanced supervisory framework for 

SIDCOs. In addition to this framework, 

Title VIII, and more specifically, Section 

806(a) of the Dodd-Frank Act, permits 

the Board to authorize a Federal Reserve 

Bank to establish and maintain an 

account for a SIDCO and provide to the 

SIDCO certain financial services. By 

enacting Title VIII in general, and 

Section 806(a) in particular, Congress 

recognized the importance of reducing 

systemic risk and providing SIDCOs 

with a potential safeguard during an 

extraordinary liquidity event. The 

proposed exemption would therefore 

help promote Congress’s goal of better 

preparing the U.S. financial system for 

potential future liquidity events. A 

SIDCO’s access to Federal Reserve Bank 

deposit accounts is also consistent with 

the international standards set forth in 

the Principles for Financial Market 

Infrastructures (‘‘PFMIs’’), which 

acknowledge the protections afforded by 

central banks from such credit and 

liquidity risks.58


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are the source of liquidity with regard to their 

currency of issue’’); see also PFMIs, Key 

Consideration 8 (specifying that a financial market 

infrastructure ‘‘with access to central bank 

accounts, payment services, or securities services 

should use these services, where practical, to 

enhance its management of liquidity risk’’). 

59 7 U.S.C. 19(a). 

Moreover, the Federal Reserve Banks’ 

standard of liability, as set forth in the 

Federal Reserve Bank Governing 

Documents, is better suited for the 

Federal Reserve Banks than Section 4d 

of the CEA, which was designed to 

govern customer funds deposited with a 

commercial bank, trust company, or 

DCO. Unlike commercial banks, Federal 

Reserve Banks do not operate for profit 

and serve only account holders 

authorized by statute, such as 

depository institutions and the U.S. 

government. Indeed, each year they 

return to the U.S. Department of 

Treasury all earnings in excess of 

Federal Reserve Bank operating and 

other expenses, such as litigation 

expenses. By exempting the Federal 

Reserve Banks from certain potential 

enforcement actions and private suits, 

the proposed exemption would reduce 

the Federal Reserve Banks’ exposure to 

litigation. Because the Federal Reserve 

Banks return their earnings to the U.S. 

Department of Treasury’s general fund, 

U.S. taxpayers may benefit from the 

proposed exemption. Therefore, the 

Commission believes that it is 

appropriate to apply the Federal Reserve 

Bank’s standard of liability in order to 

facilitate the use of these accounts. 

3. Section 15(a) Factors 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its action before issuing an 

order under the CEA.59 By its terms, 

Section 15(a) does not require the 

Commission to quantify the costs and 

benefits of an order or to determine 

whether the benefits of the order 

outweigh its costs. Rather, Section 15(a) 

simply requires the Commission to 

‘‘consider the costs and benefits’’ of its 

action. 

Section 15(a) of the CEA further 

specifies that costs and benefits shall be 

evaluated in light of five broad areas of 

market and public concern: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. The Commission may in 

its discretion give greater weight to any 

one of the five enumerated areas and 

could in its discretion determine that, 

notwithstanding its costs, a particular 

order is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or to 

accomplish any of the purposes of the 

CEA. 

a. Protection of Market Participants and 

the Public 

The proposed exemption would serve 

to facilitate SIDCOs’ use of Federal 

Reserve Banks as depositories for 

customer funds. As the Federal Reserve 

System is the nation’s central bank, 

such accounts would provide SIDCOs 

with the lowest possible credit risk in 

the event of a market disruption. 

Moreover, as Federal Reserve Banks are 

the source of liquidity with regard to 

U.S. dollar deposits, SIDCOs with 

access to a deposit account at a Federal 

Reserve Bank would also be better 

equipped to handle a liquidity event. As 

SIDCOs have been so designated 

because of their importance to the 

broader financial system, reducing these 

risks would protect market participants 

and the public. 

b. Efficiency, Competitiveness, and 

Financial Integrity 

A temporary or permanent disruption 

to the operations of a SIDCO could 

cause wide-spread and significant 

damage to the financial integrity of 

derivatives markets as a whole. 

Therefore, by facilitating a SIDCO’s use 

of Federal Reserve Banks as depositories 

for customer funds, the proposed 

exemption would reduce liquidity and 

credit risk to the SIDCO, which would, 

in turn, promote the financial integrity 

of the derivatives markets. 

The Commission does not anticipate 

the proposed exemption to have a 

significant impact on the efficiency and 

competitiveness of the derivatives 

markets. 

c. Price Discovery 

The Commission does not anticipate 

the proposed exemption to have an 

impact on the price discovery process. 

d. Sound Risk Management Practices 

The Commission believes that 

establishing SIDCO segregated customer 

accounts and enabling SIDCOs to access 

related services at a Federal Reserve 

Bank would improve a SIDCO’s ability 

to manage liquidity risk and protect 

customer funds. Additionally, the 

Commission believes that the 

availability of a Federal Reserve Bank 

account could allow a SIDCO to reduce 

its concentration risk by adding an 

additional creditworthy depository in 

which to diversify funds. Accordingly, 

the proposed exemption promotes 

sound risk management practices. 

The Commission further notes that, 

notwithstanding the proposed 

exemption from Section 4d of the CEA, 

the Federal Reserve Banks would still be 

required to segregate customer funds 

deposited by a SIDCO from the 

proprietary funds deposited by a SIDCO 

and adhere to the longstanding 

standards of liability that govern the 

Federal Reserve Banks. 

e. Other Public Interest Considerations 

The Commission believes that 

facilitating a SIDCO’s access to Federal 

Reserve Bank accounts will promote the 

public interest by bolstering a SIDCO’s 

ability to conduct settlements with a 

high degree of confidence under a wide 

range of stress scenarios, thereby 

increasing the likelihood of the SIDCO 

being able to provide its customers with 

access to their funds in times of market 

distress. 

VIII. Request for Comment 

The Commission requests comment 

on all aspects of the proposed 

exemption, including, without 

limitation, the Commission’s 

determination that the proposed 

exemption is consistent with the public 

interest, and the Commission’s 

consideration of the costs and benefits 

of the proposed exemption. 

The Commission requests comment 

regarding whether the proposed 

exemption should be expanded to 

include those customer accounts that 

are established pursuant to the CEA and 

that are held at Federal Reserve Banks 

by designated FMUs for which the 

Commission is not the Supervisory 

Agency. 

IX. Proposed Order of Exemption 

After considering the above factors, 

the Commission proposes to issue the 

following: 

Proposed Order 

Pursuant to Title VIII of the Dodd-Frank 

Wall Street Reform and Consumer Protection 

Act (‘‘Dodd-Frank Act’’), the Commodity 

Futures Trading Commission 

(‘‘Commission’’) is the supervisory agency for 

certain derivatives clearing organizations 

(‘‘DCOs’’) that have been designated by the 

Financial Stability Oversight Council as 

systemically important. Under Section 806(a) 

of the Dodd-Frank Act, the Board of 

Governors (‘‘Board’’) of the Federal Reserve 

System is permitted to authorize a Federal 

Reserve Bank to establish and maintain a 

deposit account for a systemically important 

DCO (‘‘SIDCO’’) and provide certain services 

to the SIDCO, subject to any applicable rules, 

orders, standards, or guidelines prescribed by 

the Board. 

DCOs, including SIDCOs, are required to 

hold funds belonging to customers of their 

clearing members in accounts subject to 


asabaliauskas on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices 35345 

Section 4d of the Commodity Exchange Act 

(‘‘CEA’’). In addition, Section 22 of the CEA 

would typically provide for private rights of 

action for damages against persons who 

violate Section 4d, or persons who willfully 

aid, abet, counsel, induce, or procure the 

commission of a violation of Section 4d. 

However, the Commission understands that 

deposit accounts maintained by any Federal 

Reserve Bank would also be governed by 

applicable account agreements, operating 

circulars issued by Federal Reserve Banks for 

each service, the Federal Reserve Act, and 

Federal Reserve regulations and policies, 

and, with respect to book-entry securities 

services, the regulations of the domestic 

issuer of the securities or the issuer’s 

regulator (‘‘Federal Reserve Bank Governing 

Documents’’). The Federal Reserve Bank 

Governing Documents, as may be amended 

from time to time, include, but are not 

limited to, Federal Reserve Bank Operating 

Circular No. 6 (governing funds transfers 

through the Fedwire Funds Service); Federal 

Reserve Bank Operating Circular No. 7 

(governing the maintenance of and transfer 

services for book-entry securities accounts); 

12 CFR part 210, subpart B (governing funds 

transfers through the Fedwire Funds 

Service); and 31 CFR part 357, subpart B 

(setting forth the U.S. Department of the 

Treasury’s regulations governing book-entry 

treasury bonds, notes, and bills). 

The Commission understands that under 

the Federal Reserve Bank Governing 

Documents, a Federal Reserve Bank has no 

requirement or obligation to inquire as to the 

legitimacy or accuracy of the instructions, or 

the transactions related to those instructions, 

or compliance by the SIDCO with its 

obligations under the CEA. To the extent that 

liability may accrue under the Federal 

Reserve Bank Governing Documents, the 

Commission understands that the Federal 

Reserve Bank may be held liable only for 

actual damages that are (i) incurred solely by 

the SIDCO account holder, and (ii) 

proximately caused by the Federal Reserve 

Bank’s failure to exercise ordinary care or act 

in good faith in accordance with the Federal 

Reserve Bank Governing Documents. The 

Commission proposes to exempt the Federal 

Reserve Banks in order to facilitate Federal 

Reserve Banks’ ability to accept SIDCO 

customer accounts. 

Therefore, it is ordered, pursuant to 

Section 4(c) of the CEA, 7 U.S.C. 6(c), that 

the Federal Reserve Banks are granted an 

exemption from Sections 4d and 22 of the 

CEA, subject to the terms and conditions 

specified herein: 

1. Segregation. Money, securities, and 

property deposited into a customer account 

established pursuant to the CEA by a SIDCO 

with a Federal Reserve Bank shall be 

separately accounted for and segregated from 

the money, securities, and property 

deposited into a proprietary account of the 

SIDCO depositing such funds and from the 

money, securities, and property deposited 

into the account of any person other than the 

customers for whom the money, securities, or 

property is held. 

2. Information Requests. Federal Reserve 

Banks must reply promptly and directly to 

any request for confirmation of account 

balances or provision of any other 

information regarding or related to the SIDCO 

customer account(s) that are established 

pursuant to the CEA from the director of the 

Division of Clearing and Risk of the 

Commission, or any successor division, or 

such director’s designees. 

3. Applicability to Federal Reserve Banks. 

Subject to the conditions contained herein, 

the order applies to all Federal Reserve Banks 

that provide customer accounts and other 

services to SIDCOs. In addition, pursuant to 

the Federal Reserve’s Key Policies for the 

Provision of Financial Services: Standards 

Related to Priced-Service Activities of the 

Federal Reserve Banks, information obtained 

by the Board of Governors of the Federal 

Reserve System or its designees during the 

course of supervising SIDCOs, pursuant to 

Title VIII of the Dodd-Frank Act, or any 

counterparty to a SIDCO under any authority, 

shall not be attributed by the Commission to 

any Federal Reserve Bank providing accounts 

and financial services to SIDCO account 

holders. 

4. Reservation of Rights. This order is 

based upon the analysis set forth above. Any 

material change in law or circumstances 

pursuant to which this order is granted might 

require the Commission to reconsider its 

finding that the exemption contained herein 

is appropriate and/or consistent with the 

public interest and purposes of the CEA. 

Further, the Commission reserves the right, 

in its discretion, to revisit any of the terms 

and conditions of the relief provided herein, 

including but not limited to, making a 

determination that certain entities described 

herein should be subject to the Commission’s 

full jurisdiction, and to condition, suspend, 

terminate, or otherwise modify or restrict the 

exemption granted in this order, as 

appropriate, upon its own motion. 

Issued in Washington, DC, on May 27, 

2016, by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Appendix to Notice of Proposed Order 

and Request for Comment on a 

Proposal To Exempt, Pursuant to the 

Authority in Section 4(c) of the 

Commodity Exchange Act, the Federal 

Reserve Banks From Sections 4d and 22 

of the Commodity Exchange Act— 

Commission Voting Summary 

On this matter, Chairman Massad and 

Commissioners Bowen and Giancarlo voted 

in the affirmative. No Commissioner voted in 

the negative. 

[FR Doc. 2016–13055 Filed 6–1–16; 8:45 am] 

BILLING CODE 6351–01–P 

CORPORATION FOR NATIONAL AND 

COMMUNITY SERVICE 

Information Collection; Submission for 

OMB Review, Comment Request 

AGENCY: Corporation for National and 

Community Service. 

ACTION: Notice. 

SUMMARY: The Corporation for National 

and Community Service (CNCS) has 

submitted a public information 

collection request (ICR) entitled 

National Service Trust Voucher and 

Payment Request Form/National Service 

Trust Manual Payment Request Form for 

review and approval in accordance with 

the Paperwork Reduction Act of 1995, 

Public Law 104–13, (44 U.S.C. Chapter 

35). Copies of this ICR, with applicable 

supporting documentation, may be 

obtained by calling the Corporation for 

National and Community Service, 

Nahid Jarrett, at 202–606–6753 or email 

to njarrett@cns.gov. Individuals who use 

a telecommunications device for the 

deaf (TTY–TDD) may call 1–800–833– 

3722 between 8 a.m. and 8 p.m. Eastern 

Time, Monday through Friday. 

DATES: Comments may be submitted, 

identified by the title of the information 

collection activity, within July 5, 2016. 

ADDRESSES: Comments may be 

submitted, identified by the title of the 

information collection activity, to the 

Office of Information and Regulatory 

Affairs, Attn: Ms. Sharon Mar, OMB 

Desk Officer for the Corporation for 

National and Community Service, by 

any of the following two methods 

within 30 days from the date of 

publication in the Federal Register: 

(1) By fax to: 202–395–6974, 

Attention: Ms. Sharon Mar, OMB Desk 

Officer for the Corporation for National 

and Community Service; or 

(2) By email to: smar@omb.eop.gov. 

SUPPLEMENTARY INFORMATION: The OMB 

is particularly interested in comments 

which: 

• Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of CNCS, including whether 

the information will have practical 

utility; 

• Evaluate the accuracy of the 

agency’s estimate of the burden of the 

proposed collection of information, 

including the validity of the 

methodology and assumptions used; 

• Propose ways to enhance the 

quality, utility, and clarity of the 

information to be collected; and 

• Propose ways to minimize the 

burden of the collection of information 

on those who are to respond, including 

through the use of appropriate 

automated, electronic, mechanical, or 

other technological collection 

techniques or other forms of information 

technology. 

Comments 

A 60-day Notice requesting public 

comment was published in the Federal 

Register on February 12, 2016, at 81 FR 


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