Federal Register / Vol. 81, No. 156 / Friday, August 12, 2016 / Notices 53467 

1. The action will not result in any 

additional reporting, recordkeeping or 

other compliance requirements for small 

entities other than the small 

organizations that will furnish the 

products and services to the 

Government. 

2. The action will result in 

authorizing small entities to furnish the 

products and services to the 

Government. 

3. There are no known regulatory 

alternatives which would accomplish 

the objectives of the Javits-WagnerO’Day Act (41 U.S.C. 8501–8506) in 

connection with the products and 

services proposed for addition to the 

Procurement List. 

End of Certification 

Accordingly, the following products 

and services are added to the 

Procurement List: 

Products 

NSN(s)—Product Name(s): MR 753—Pillow, 

Jumbo 

Mandatory for: Military commissaries and 

exchanges in accordance with the Code 

of Federal Regulations, Chapter 51, 51– 

6.4. 

Mandatory Source(s) of Supply: Georgia 

Industries for the Blind, Bainbridge, GA 

Contracting Activity: Defense Commissary 

Agency 

Distribution: C-List 

NSN(s)—Product Name(s) 

7930–00–NIB–0578—Disinfectant 256 

Cleaner, Neutral, Concentrated, High 

Dilution 

7930–00–NIB–0579—Disinfectant PD–128 

Cleaner, Intermediate, Broad Spectrum, 

Concentrated 

8125–00–NIB–0031—Spray Bottle, High 

Dilution 256 Neutral Disinfectant, 32 oz. 

Bottle 

8125–00–NIB–0032—Spray Bottle, PD–128 

Disinfectant Cleaner, 32 oz. Bottle 

Mandatory for: Department of Veterans 

Affairs 

Mandatory Source of Supply: VisionCorps, 

Lancaster, PA 

Contracting Activity: Department of Veterans 

Affairs, Strategic Acquisition Center, 

Fredericksburg, VA 

Distribution: C-List 

Services 

Service Type: Janitorial Service 

Mandatory for: USDA APHIS, Luis Munoz 

Marin Airport, Terminal A & D, 150 

Central Sector, Carolina, PR 

Mandatory Source(s) of Supply: The 

Corporate Source, Inc., New York, NY 

Contracting Activity: Dept of Agriculture, 

USDA APHIS MRPBS, Animal and Plant 

Health Inspection Service, Minneapolis, 

MN 

Service Type: Mailroom Operation Service 

Mandatory for: US Air Force, Postal Service 

Center, Tyndall Air Force Base, Tyndall 

Air Force, FL 

Mandatory Source(s) of Supply: VersAbility, 

Resources, Inc., Hampton, VA 

Contracting Activity: Dept of the Air Force, 

FA4890 ACC AMIC, Newport News, VA 

Deletions 

On 7/8/2016 (81 FR 44597), the 

Committee for Purchase From People 

Who Are Blind or Severely Disabled 

published notice of proposed deletions 

from the Procurement List. 

After consideration of the relevant 

matter presented, the Committee has 

determined that the services listed 

below are no longer suitable for 

procurement by the Federal Government 

under 41 U.S.C. 8501–8506 and 41 CFR 

51–2.4. 

Regulatory Flexibility Act Certification 

I certify that the following action will 

not have a significant impact on a 

substantial number of small entities. 

The major factors considered for this 

certification were: 

1. The action will not result in 

additional reporting, recordkeeping or 

other compliance requirements for small 

entities. 

2. The action may result in 

authorizing small entities to furnish the 

services to the Government. 

3. There are no known regulatory 

alternatives which would accomplish 

the objectives of the Javits-WagnerO’Day Act (41 U.S.C. 8501–8506) in 

connection with the services deleted 

from the Procurement List. 

End of Certification 

Accordingly, the following services 

are deleted from the Procurement List: 

Services 

Service Type: Order Processing Service 

Mandatory for: McGuire Air Force Base, 

McGuire AFB, NJ 

Mandatory Source(s) of Supply: Bestwork 

Industries for the Blind, Inc., Cherry Hill, 

NJ 

Contracting Activity: Dept of the Air Force, 

FA7014 AFDW PK 

Service Type: Operation of Postal Service 

Center Service 

Mandatory for: Luke Air Force Base, 

Glendale, AZ 

Mandatory Source(s) of Supply: Arizona 

Industries for the Blind, Phoenix, AZ 

Contracting Activity: Dept of the Air Force, 

FA7014 AFDW PK 

Service Type: Telephone Switchboard 

Operations Service 

Mandatory for: Barksdale Air Force Base, 

Shreveport, LA 

Mandatory Source(s) of Supply: Louisiana 

Association for the Blind, Shreveport, 

LA 

Contracting Activity: Dept of the Air Force, 

FA7014 AFDW PK 

Service Type: Embroidery of USAF Service 

Name Tapes & Emboss of Plastic Name 

Tags Base 

Mandatory for: Lackland Air Force Base, San 

Antonio, TX 

Mandatory Source(s) of Supply: Delaware 

Division for the Visually Impaired, New 

Castle, DE 

Contracting Activity: Dept of the Air Force, 

FA7014 AFDW PK 

Barry S. Lineback, 

Director, Business Operations. 

[FR Doc. 2016–19236 Filed 8–11–16; 8:45 am] 

BILLING CODE 6353–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

Order Exempting the Federal Reserve 

Banks From Sections 4d and 22 of the 

Commodity Exchange Act 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Order. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is issuing an order to 

exempt Federal Reserve Banks that 

provide customer accounts and other 

services to registered derivatives 

clearing organizations that are 

designated financial market utilities 

from Sections 4d and 22 of the 

Commodity Exchange Act (‘‘CEA’’). 

DATES: Effective Date: August 8, 2016. 

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. Designation of FMUs under Title VIII of 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act 

B. Access to Federal Reserve Bank 

Accounts and Services 

C. Proposed Order 

III. Comment Letters 

IV. Findings and Conclusions 

V. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost and Benefit Considerations 

VI. Order of Exemption 

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53468 Federal Register / Vol. 81, No. 156 / Friday, August 12, 2016 / Notices 

1 7 U.S.C. 6(c). 

2Under Commission Regulation 39.2, a SIDCO is 

defined as a financial market utility that is a 

registered derivatives clearing organization under 

Section 5b of the CEA, which is currently 

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 Dodd-Frank Wall 

Street Reform and Consumer Protection Act. See 17 

CFR 39.2. See also Section 803(8)(A) of the DoddFrank Act, which defines the term Supervisory 

Agency 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, Pub. L. 111–203, 124 Stat. 1376 

(2010). 

3Notice of Proposed Order and Request for 

Comment on 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, 81 FR 35337 (June 2, 2016). 

4For the avoidance of doubt, the term 

‘‘Designated FMU’’ includes the more narrow term 

‘‘SIDCO.’’ 

5See Section 802(b) of the Dodd-Frank Act. 

6See 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). 

7Section 803(6)(A) of the Dodd-Frank Act. 

8See 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. 

9The 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. 

10Financial Market Utilities (Regulation HH), 78 

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

11 Id. 

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

govern Federal Reserve Bank accounts held by 

designated FMUs). 

13See 81 FR at 35339. Further, the Commission 

requires a DCO to obtain from each depository with 

which it deposits customer funds a written 

acknowledgment that the customer funds are being 

I. Introduction 

On June 2, 2016, the Commission 

published in the Federal Register a 

notice and request for public comment 

regarding a proposed Commission order 

that would exempt, pursuant to Section 

4(c) of the CEA,1 Federal Reserve Banks 

that provide customer accounts and 

other services to systemically important 

derivatives clearing organizations 

(‘‘SIDCOs’’) 2 from Sections 4d and 22 of 

the CEA (the ‘‘Proposal’’).3 After 

consideration of the comments and for 

the reasons set forth in the Proposal and 

in this release, the Commission is 

issuing an order that exempts, subject to 

certain conditions, Federal Reserve 

Banks that provide customer accounts 

and other services to designated 

financial market utilities (‘‘FMUs’’) that 

are registered derivatives clearing 

organizations (‘‘Designated FMUs’’) 4

from Sections 4d and 22 of the CEA. 

The exemption enables Federal Reserve 

Banks to maintain customer accounts 

for Designated FMUs in accordance 

with the standards set forth in the 

relevant Federal Reserve Bank 

governing documents, as specified 

below. 

II. Background 

A. Designation of FMUs Under Title VIII 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act 

Title VIII of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (‘‘Dodd-Frank Act’’) was enacted to 

mitigate risk in the financial system and 

promote financial stability.5

Accordingly, Section 804 of the DoddFrank Act requires the Financial 

Stability Oversight Council (‘‘Council’’) 

to designate those FMUs that the 

Council determines are, or are likely to 

become, systemically important.6 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.’’ 7

On July 18, 2012, the Council 

designated eight FMUs as systemically 

important under Title VIII.8 Two of 

these systemically important FMUs, 

Chicago Mercantile Exchange, Inc. 

(‘‘CME’’) and ICE Clear Credit LLC 

(‘‘ICC’’), are SIDCOs (and therefore, 

Designated FMUs). In addition, the 

Options Clearing Corporation (‘‘OCC’’), 

which is a registered derivatives 

clearing organization (‘‘DCO’’) but not a 

SIDCO, is a Designated FMU. OCC was 

designated in its capacity as a securities 

clearing agency; the Securities and 

Exchange Commission is its Supervisory 

Agency. 

B. Access to Federal Reserve Bank 

Accounts and Services 

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 Designated FMU and 

provide to the Designated FMU 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.9 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.’’ 10

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.’’ 11

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.12

C. Proposed Order 

The proposed Commission order 

would, subject to certain terms and 

conditions, exempt Federal Reserve 

Banks that provide customer accounts 

and other services to SIDCOs from 

Sections 4d and 22 of the CEA. In the 

Proposal, the Commission emphasized 

the importance of protecting customers 

and safeguarding customer funds, and 

highlighted the critical role that SIDCOs 

play in the financial markets. The 

Commission recognized that the failure 

of a SIDCO or a disruption to the 

operations of a SIDCO could threaten 

the stability of the U.S. financial system. 

As a result, the Commission determined 

that reducing SIDCOs’ credit and 

liquidity risks would better protect 

market participants and the public, and 

would serve to promote the integrity of 

the financial markets. The Commission 

explained that because Federal Reserve 

Banks are the source of liquidity with 

regard to U.S. dollar deposits, a SIDCO 

would 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. 

With respect to protecting customers 

and safeguarding customer funds, the 

Commission explained that under 

Section 4d of the CEA, a depository will 

be held liable for an improper transfer 

of customer funds by an FCM or DCO 

if it knew or should have known that 

the transfer was improper.13 The 

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Federal Register / Vol. 81, No. 156 / Friday, August 12, 2016 / Notices 53469 

held in accordance with Section 4d of the CEA to 

ensure that the depository has been informed that 

the deposited funds are those of customers. 

14See id. at 35340–35342. 

15The operating circulars of the Federal Reserve 

Banks began having uniform terms and conditions 

across Federal Reserve Bank districts as of January 

2, 1998. 

16 In fact, SIDCOs have established proprietary 

accounts with one or more Federal Reserve Banks 

that are governed by the Federal Reserve Bank 

Governing Documents. 

17 In the Proposal, the Commission explained that 

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. See 81 FR at 35342; see also 

7 U.S.C. 25. The Commission noted 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 has determined that, for the 

reasons discussed herein and in the Proposal, 

exempting the Federal Reserve Banks from liability 

under Section 22 of the CEA would also serve the 

public interest. 

18As discussed in greater detail in the Proposal, 

Board staff has represented that it has a longstanding ‘‘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. See 

81 FR at 35341; see also Federal Reserve’s Key 

Policies for the Provision of Financial Services: 

Standards Related to Priced-Service Activities of 

the Federal Reserve Banks (1984), available at 

http://www.federalreserve.gov/paymentsystems/

pfs_standards.htm. 

19Letters were submitted by CME, ICC, and OCC 

(each of which is a Designated FMU), Minneapolis 

Grain Exchange, Inc. (which is a DCO), American 

Council of Life Insurers, and the International 

Swaps and Derivatives Association, Inc. The 

Commission also received one non-substantive 

comment. All comments referred to herein are 

available on the Commission’s Web site, at http:// 

comments.cftc.gov/PublicComments/

CommentList.aspx?id=1703. 

20 ICC Comment Letter at 2 (July 1, 2016). 

Commission noted, however, that as this 

standard of liability was developed, the 

unique nature of the Federal Reserve 

Banks was not taken into account.14 The 

accounts and financial services 

provided by Federal Reserve Banks 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’’).15 In the 

Proposal, the Commission explained 

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 

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. 

The Commission found the standard of 

liability as set forth in the Federal 

Reserve Bank Governing Documents to 

be appropriate in the context of Federal 

Reserve Banks, as this standard has been 

developed to more appropriately reflect 

the unique nature of the Federal Reserve 

Banks. Notably, the Commission argued 

that the Board has prescribed detailed 

rules and standards that govern account 

services provided to SIDCOs by the 

Federal Reserve Banks, which 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.16

The Commission noted its concern 

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,17 could disrupt 

these goals and ultimately harm the U.S. 

financial system and, by extension, U.S. 

taxpayers. Accordingly, the Commission 

proposed that 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. 

However, the Commission reiterated 

the importance of the segregation 

requirements set forth in Section 4d of 

the CEA to make sure that customer 

funds are used only for the purpose of 

margining, securing, or guaranteeing 

their futures contracts and options on 

futures contracts, and cleared swaps. 

Therefore, as a condition to the 

proposed order, customer funds held at 

a Federal Reserve Bank would continue 

to be required to be segregated from the 

funds deposited in the SIDCO’s 

proprietary account. In addition, 

Federal Reserve Banks would be 

required to reply promptly and directly 

to any request for confirmation of 

account balances or provision of any 

other information regarding or related to 

the customer account(s) of a SIDCO 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. 

The Commission further noted that 

Title VIII of the Dodd-Frank Act permits 

a Federal Reserve Bank to have access 

to confidential supervisory information 

with respect to a SIDCO. The 

Commission recognized, 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. As a result, the Commission 

recognized that a Federal Reserve Bank 

acting as a depository for customer 

funds could face greater scrutiny than a 

commercial bank acting as such. 

Therefore, the proposed order included 

a statement recognizing that, pursuant 

to the Wall Policy,18 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. 

III. Public Comments 

In response to its request for public 

comment on the Proposal, the 

Commission received six comment 

letters.19 All six letters expressly 

supported the issuance of an order 

exempting the Federal Reserve Banks 

from Sections 4d and 22 of the CEA, 

citing such benefits as mitigating 

systemic risk in the clearing and 

settlement system, reducing credit and 

liquidity risks for Designated FMUs, and 

enhancing the protection of customer 

funds. 

Specifically, ICC agreed that holding 

SIDCO customer funds at a Federal 

Reserve Bank would decrease the 

SIDCO’s credit, liquidity, and 

operational risks. ICC also agreed that 

‘‘the existing limitations on how Federal 

Reserve Banks hold assets provide 

adequate protections to account 

holders,’’ and ‘‘such protections are 

consistent with the customer protection 

initiatives of the CEA.’’ 20 ICC and the 

International Swaps and Derivatives 

Association, Inc. (‘‘ISDA’’) both noted 

that the use of a Federal Reserve Bank 

as a depository for SIDCO customer 

funds would help to reduce systemic 

risk by reducing interconnectedness in 

the financial system. ISDA observed that 

such interconnectedness is particularly 

present when one firm simultaneously 

acts as a custodial bank, settlement 

bank, and/or clearing member with 

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53470 Federal Register / Vol. 81, No. 156 / Friday, August 12, 2016 / Notices 

21 ISDA Comment Letter at 2 (July 5, 2016). 

22OCC Comment Letter at 1 (July 5, 2016). 

23A Subpart C DCO is a DCO registered with the 

Commission pursuant to Section 5b of the CEA that 

is not a SIDCO and has elected to become subject 

to the requirements of Subpart C of Part 39 of the 

Commission’s regulations. 17 CFR 39.2. MGEX has 

made this election and is therefore a Subpart C 

DCO. 

24MGEX Comment Letter at 1 (July 5, 2016). 25SIDCOs and Subpart C DCOs are required to 

comply with the requirements set forth in Subpart 

C of Part 39 of the Commission’s regulations, as 

well as the requirements applicable to all DCOs, 

which are set forth in Subparts A and B of Part 39. 

Subpart C, together with the provisions in Subparts 

A and B, establish domestic regulations that are 

consistent with the Principles for Financial Market 

Infrastructures. As a result, SIDCOs and Subpart C 

DCOs are considered qualified central 

counterparties for purposes of the Basel capital 

requirements for central counterparties. See, e.g., 

Derivatives Clearing Organizations and 

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

(discussing the regulatory framework for SIDCOs 

and Subpart C DCOs and providing further 

background on qualified central counterparties). 

26MGEX Comment Letter at 2 (July 5, 2016). 

27 17 CFR 1.20(g)(4)(ii). 

28CME Comment Letter at 3 (July 1, 2016). 

29As a condition to the exemptive order, the 

Federal Reserve Banks are required to segregate 

customer funds deposited by a Designated FMU 

from the proprietary funds deposited by a 

Designated FMU. 

30CME Comment Letter at 4 (July 1, 2016). 

31ACLI Comment Letter at 2 (July 5, 2016). 

respect to one central counterparty.21

ISDA believes that reducing this 

interconnectedness would positively 

impact SIDCO resilience during a 

market disruption and promote safety 

and soundness in the cleared 

derivatives markets by decreasing 

contagion risk. Furthermore, in ISDA’s 

view, customer accounts at Federal 

Reserve Banks would only benefit 

derivatives customers and promote 

safety and soundness in the cleared 

derivatives markets. ISDA believes that 

the strict limitations on how the Federal 

Reserve Banks hold deposits adequately 

protect customers without the 

additional safeguards provided under 

Sections 4d and 22 of the CEA. 

The Commission requested comments 

regarding whether the proposed 

exemption should be expanded to 

include not just SIDCOs but all 

Designated FMUs (in other words, all 

registered DCOs that have been 

designated as systemically important by 

the Council, regardless of whether the 

Commission is the DCO’s Supervisory 

Agency). In response, OCC requested 

that the Commission expand the 

exemption.22 As previously noted, OCC 

is currently designated by the Council to 

be systemically important; however, it is 

not a SIDCO, as the Securities and 

Exchange Commission is its Supervisory 

Agency. OCC commented that Section 

806(a) of the Dodd-Frank Act supports 

Federal Reserve Banks acting as 

depositories for all Designated FMUs 

and not just SIDCOs. OCC argued that 

denying it the opportunity to deposit 

segregated customer funds in a Federal 

Reserve Bank account would undermine 

one of the purposes of Title VIII and 

would place OCC at an unjustified 

competitive disadvantage with respect 

to other Designated FMUs. ISDA also 

urged the Commission to expand the 

exemption to include customer accounts 

at a Federal Reserve Bank established by 

Designated FMUs given the benefits 

associated with holding customer 

accounts with a Federal Reserve Bank. 

Minneapolis Grain Exchange, Inc. 

(‘‘MGEX’’) requested that the 

Commission expand the exemption to 

include customer accounts held at 

Federal Reserve Banks by Subpart C 

DCOs.23 MGEX stated that limiting 

access to Federal Reserve Bank services 

and accounts to SIDCOs creates a 

competitive disadvantage to those DCOs 

that have not been designated as 

systemically important because such 

DCOs would not have access to these 

credit and liquidity risk reducing 

opportunities afforded to SIDCOs.24

MGEX commented that this 

disadvantage may be more pronounced 

for Subpart C DCOs because they are 

held to the same standards as SIDCOs 

but do not have access to accounts at the 

Federal Reserve Banks.25 MGEX 

recognized, however, that this is due to 

the ‘‘restrictive wording’’ of Section 

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

specifically limits access to Federal 

Reserve Bank accounts to Designated 

FMUs, and the Commission cannot 

simply grant Subpart C DCOs 

permission to have accounts at a Federal 

Reserve Bank.26 MGEX requested that 

the Commission use alternative 

language in the exemptive order, so as 

not to be SIDCO-specific, in the event 

that Federal Reserve Banks are 

subsequently permitted to maintain 

accounts for Subpart C DCOs in the 

future. 

CME supported the exemption, but 

noted that it would be inconsistent with 

Commission Regulation 1.20(g)(4)(ii), 

which requires that a DCO obtain from 

a Federal Reserve Bank acting as a 

depository for customer funds a written 

acknowledgment that the customer 

funds are being held in accordance with 

Section 4d of the CEA.27 CME noted, 

however, that pursuant to the terms of 

the exemptive order, the Federal 

Reserve Banks would be exempt from 

Section 4d.28 CME suggested that the 

exemptive order and Commission 

Regulation 1.20(g)(4)(ii) be harmonized. 

In addition, CME commented that, as 

a SIDCO account holder, it would need 

multiple Federal Reserve Bank accounts 

in order to comply with the segregation 

requirements set forth in the exemptive 

order.29 CME stated that, under the 

Federal Reserve Banks’ Operating 

Circular 1, a financial institution may 

maintain only one Master Account with 

a Federal Reserve Bank, although the 

Federal Reserve Bank may, in its 

discretion, allow multiple Master 

Accounts in certain situations. CME 

noted that this may require a Federal 

Reserve Bank to exercise its discretion 

under its standard policies and 

operating circulars to permit the use of 

multiple Master Accounts for SIDCO 

account holders. 

CME also stated that account 

agreements between the Federal Reserve 

Banks and depository institution 

account holders typically include 

certain set-off rights and liens in favor 

of the Federal Reserve Banks. In this 

regard, CME commented that Federal 

Reserve Bank account agreements may 

need to be tailored in order to provide 

comfort to SIDCO clearing members, 

and customers of SIDCO clearing 

members, that their margin deposits are 

‘‘bankruptcy remote’’ from the SIDCO 

under applicable bank capital 

requirements.30 Similarly, American 

Council of Life Insurers (‘‘ACLI’’) 

requested that the Commission clarify 

‘‘for the benefit of public customers who 

are the ultimate beneficiaries of 

segregated accounts at commercial or 

federal banks, that customer segregated 

funds (i.e., initial margin) shall never be 

used for any other purpose under any 

circumstances, even the most 

exigent.’’ 31

IV. Findings and Conclusions 

After careful review and 

consideration of the comments, and for 

the reasons cited herein and set forth in 

the Proposal, the Commission has 

determined that the requirements of 

Section 4(c) of the CEA have been met 

with respect to exempting Federal 

Reserve Banks that provide customer 

accounts and other services to 

Designated FMUs from Sections 4d and 

22 of the CEA. The Commission is 

therefore issuing an order granting the 

exemption essentially as proposed. 

However, the Commission is making 

minor technical clarifications to the 

language of the order, and is expanding 

the exemption to include those 

customer accounts that are established 

pursuant to the CEA and that are held 

at Federal Reserve Banks by Designated 

FMUs. The Commission agrees with 

OCC and ISDA that Section 806(a) of the 

Dodd-Frank Act supports Federal 

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32Federal Reserve Banks serve only account 

holders authorized by statute, such as depository 

institutions and the U.S. government. See, 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). 

33 17 CFR 1.20(g)(4)(ii). Under Commission 

Regulation 1.20(g)(4)(ii), a DCO must obtain from a 

Federal Reserve Bank acting as a depository for 

customer funds a written acknowledgement that (A) 

The Federal Reserve Bank was informed that the 

customer funds deposited therein are those of 

customers and are being held in accordance with 

the provisions of section 4d of the CEA and 

Commission regulations thereunder; and (B) The 

Federal Reserve Bank agrees to reply promptly and 

directly to any request from Commission staff for 

confirmation of account balances or provision of 

any other information regarding or related to an 

account. Id. 

34Specifically, the Commission is revising 

paragraphs (g)(4)(i) and (g)(4)(ii), and repealing 

paragraphs (g)(4)(ii)(A) and (g)(4)(ii)(B). 

35As a condition to the exemptive order, the 

Federal Reserve Banks are required to segregate 

customer funds deposited by a Designated FMU 

from the proprietary funds deposited by a 

Designated FMU. 

36CME Comment Letter at 4 (July 1, 2016). 

37The Commission is slightly modifying the 

language from the proposed order so that the 

exemptive order makes clear that customer funds 

deposited by a Designated FMU may not be 

commingled with funds held in any other account 

at the Federal Reserve Banks, including the 

Designated FMU’s proprietary account. This 

language is included in the order because, despite 

the exemption for the Federal Reserve Banks, a 

Designated FMU is still subject to the requirements 

of Section 4d of the CEA and Commission 

Regulation 1.20, which require a DCO to separately 

account for and segregate customer funds. 

Specifically, the Commission is changing the phrase 

‘‘separately accounted for and segregated from’’ in 

the proposed order to ‘‘separately accounted for and 

not commingled with’’ to more closely mirror the 

language used in Section 4d. For purposes of this 

exemption, customer funds held by the Federal 

Reserve Banks can meet this standard so long as the 

customer funds are held in a separate account and 

the funds in the customer account are not used to 

pay or secure the obligations arising out of any 

other account. 

38 5 U.S.C. 601 et seq. 

39See 47 FR 18618, 18618–21 (Apr. 30, 1982). 

40See New Regulatory Framework for Clearing 

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

41 44 U.S.C. 3501 et seq. 

Reserve Banks acting as depositories for 

all Designated FMUs, not just SIDCOs. 

The Commission notes MGEX’s 

request that the Commission expand the 

exemption to include customer accounts 

held at Federal Reserve Banks by any 

Subpart C DCO. However, the 

Commission further notes that Subpart 

C DCOs are not currently eligible for 

Federal Reserve Bank accounts.32

Accordingly, the Commission is 

declining to expand the exemption to 

include customer accounts held at 

Federal Reserve Banks by Subpart C 

DCOs. As MGEX acknowledges, the 

Commission does not have the authority 

to direct the Federal Reserve Banks to 

provide accounts and services to 

Subpart C DCOs. If, in the future, a 

registered DCO that is not a Designated 

FMU is able to establish an account at 

a Federal Reserve Bank, the Commission 

may reconsider the scope of the 

exemption at that time. 

In response to CME’s comment that 

the exemption would be inconsistent 

with the acknowledgement letter 

requirements in Commission Regulation 

1.20(g)(4)(ii),33 the Commission agrees 

and has determined to repeal this 

requirement 34 in a separate Federal 

Register notice. The exemptive order 

will render these provisions 

inapplicable, as the Federal Reserve 

Banks that provide customer accounts 

and other services to Designated FMUs 

would be exempt from Section 4d of the 

CEA. 

In addition, CME commented that, as 

a SIDCO account holder, it would need 

multiple Federal Reserve Bank accounts 

in order to comply with the segregation 

requirements set forth in the exemptive 

order.35 CME noted that obtaining 

multiple Master Accounts may require a 

Federal Reserve Bank to exercise its 

discretion under its standard policies 

and operating circulars. The 

Commission agrees that this issue 

would appear to be within the scope of 

the Federal Reserve’s authority and not 

the Commission’s. 

CME also noted that account 

agreements between the Federal Reserve 

Banks and depository institution 

account holders typically include 

certain set-off rights and liens in favor 

of the Federal Reserve Banks. CME 

argued that Federal Reserve Bank 

account agreements may need to be 

revised to make sure customer margin 

deposits are ‘‘bankruptcy remote’’ from 

the SIDCO under applicable bank 

capital requirements.36 Similarly, ACLI 

argued that the interests of customers in 

their segregated funds should never be 

subordinated for the benefit of any other 

party. The Commission agrees that a 

Designated FMU cannot grant security 

interests in, rights of set-off against, or 

other rights in customer collateral. 

Therefore, the Commission believes that 

a Designated FMU’s account agreement 

must be free from any rights of set-off or 

liens on customer funds. 

The exemptive order applies to all 

Federal Reserve Banks that provide 

customer accounts and other services to 

Designated FMUs. It requires that all 

money, securities, and property 

deposited into a customer account 

established pursuant to the CEA by a 

Designated FMU with a Federal Reserve 

Bank must be separately accounted for 

and not commingled with the money, 

securities, and property deposited into 

the account of any other person, 

including a proprietary account of the 

Designated FMU depositing such 

funds.37 In addition, 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 customer account(s) of a Designated 

FMU 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. 

In light of the foregoing, the 

Commission believes the exemption 

would promote responsible economic 

and financial innovation and fair 

competition, and is consistent with the 

‘‘public interest,’’ as that term is used in 

Section 4(c) of the CEA. 

V. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 38 requires federal agencies, in 

promulgating rules, to consider whether 

those rules 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 exemptive order will 

not have a significant economic impact 

on a substantial number of small 

entities. The exemption will impact 

Designated FMUs 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.39 The Commission has previously 

determined that DCOs, including 

Designated FMUs, are not small entities 

for purposes of the RFA.40 Similarly, the 

Commission believes that Federal 

Reserve Banks are not small entities for 

purposes of the RFA. 

Accordingly, the Commission does 

not expect the 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 exemption would not 

have a significant economic impact on 

a substantial number of small entities. 

B. Paperwork Reduction Act 

The purposes of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’) 41 are, 

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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. Summary of Comments on the Costs 

and Benefits of the Proposed Order 

The Commission requested comments 

on the costs and benefits associated 

with the proposed order. The 

Commission requested but received no 

comments providing data or other 

information to enable the Commission 

to better quantify the expected costs and 

benefits attributable to this exemption. 

In terms of qualitative cost and benefit 

comments, OCC stated that Section 

806(a) of the Dodd-Frank Act supports 

Federal Reserve Banks acting as 

depositories for all Designated FMUs 

and not just SIDCOs. OCC commented 

that limiting the exemption to SIDCO 

customer accounts would place OCC at 

a competitive disadvantage because, 

although OCC is a Designated FMU, it 

is not a SIDCO. In addition, OCC argued 

that denying OCC the opportunity to 

deposit customer funds at a Federal 

Reserve Bank would undermine the 

purpose of Title VIII of the Dodd-Frank 

Act. 

MGEX also supported the proposed 

exemption, but noted that DCOs that are 

not designated as systemically 

important would not have the same 

access to the credit and liquidity risk 

reducing opportunities afforded to 

SIDCOs with access to Federal Reserve 

Bank accounts. MGEX stated that 

limiting access to Federal Reserve Bank 

accounts to SIDCOs would create a 

competitive disadvantage to those DCOs 

that are not designated as systemically 

important, particularly Subpart C DCOs. 

MGEX recognized that the Commission 

cannot grant Subpart C DCOs 

permission to have accounts at a Federal 

Reserve Bank. However, MGEX argued 

that the Commission should expand the 

exemption to cover customer accounts 

maintained by Federal Reserve Banks 

for Subpart C DCOs in the event that 

Federal Reserve Banks are subsequently 

permitted to maintain accounts for 

Subpart C DCOs. 

ICC commented that accounts at 

Federal Reserve Banks would reduce 

credit, operational, and liquidity risks 

that are associated with traditional 

deposit accounts. ISDA and ICC further 

noted that such accounts may reduce 

interconnectedness in the cleared 

derivatives market. CME commented 

that migrating a portion of the eligible 

assets it has on deposit from clearing 

members to a Federal Reserve Bank may 

have a number of positive effects on its 

clearing members and their customers. 

ACLI stated that the proposed order 

would reduce overall systemic risk that 

could arise from liquidity and other 

risks on commercial banks where 

SIDCOs currently deposit their customer 

funds. 

In the discussion that follows, the 

Commission considers the costs and 

benefits of the exemptive order to the 

public and market participants. It also 

considers the costs and benefits of the 

exemption in light of the public interest 

factors enumerated in Section 15(a) of 

the CEA. 

2. Costs 

This order is exemptive and provides 

the Federal Reserve Banks relief from 

certain of the requirements in the CEA 

and attendant Commission regulations. 

As with any exemptive rule or order, the 

exemption in the order is permissive, 

meaning that the Federal Reserve Banks 

are not required to rely on it. In 

addition, Designated FMUs are not 

required to deposit customer funds with 

a Federal Reserve Bank. Accordingly, 

the Commission assumes that interested 

parties would rely on the exemption 

only if the anticipated benefits warrant 

the costs of the exemption. 

The exemptive order would exempt 

the Federal Reserve Banks from Sections 

4d and 22 of the CEA. All of the 

commenters generally supported issuing 

this exemption. However, two 

commenters raised the possibility that 

the proposed order could place them at 

a competitive disadvantage. First, as 

discussed above, OCC argued that, 

under Title VIII of the Dodd-Frank Act, 

a Federal Reserve Bank may be 

permitted to maintain an account for a 

Designated FMU. OCC argued that, as a 

result, it would be placed at a 

competitive disadvantage with respect 

to SIDCOs. The Commission agrees that 

Title VIII of the Dodd-Frank Act permits 

Federal Reserve Banks to maintain 

accounts for, and provide services to, 

Designated FMUs, and not just SIDCOs. 

Accordingly, and as discussed above, 

the Commission has determined to 

expand the exemption to include 

customer accounts held at Federal 

Reserve Banks by Designated FMUs 

generally, for purposes of consistency 

with Title VIII. 

Second, MGEX argued that it would 

be placed at a competitive disadvantage 

with respect to SIDCOs because, as a 

Subpart C DCO, MGEX is held to the 

same standards as SIDCOs under the 

Commission’s regulations, but is not 

afforded the same opportunity to hold 

customer accounts at a Federal Reserve 

Bank. The Commission has declined to 

expand the exemption to include 

customer accounts held at Federal 

Reserve Banks by Subpart C DCOs. 

Under Title VIII, the Board may 

authorize a Federal Reserve Bank to 

maintain accounts only for Designated 

FMUs. As MGEX recognizes, the 

Commission does not have the authority 

to authorize a Federal Reserve Bank to 

maintain accounts for Subpart C DCOs. 

Accordingly, the competitive 

disadvantage identified by MGEX 

cannot be remedied by the Commission 

by expanding the scope of the 

exemption. Moreover, the Commission 

does not believe it would be appropriate 

to expand the scope of the exemption 

based on the theoretical possibility that 

Federal Reserve Banks may one day be 

permitted to provide accounts to 

Subpart C DCOs. In the event that a 

Federal Reserve Bank is authorized to 

maintain an account for other registered 

DCOs, the Commission may reconsider 

the scope of the exemptive relief at that 

time. 

3. Benefits 

The exemption will benefit market 

participants by facilitating Designated 

FMUs’ use of Federal Reserve Banks as 

depositories for customer funds. 

Whereas commercial banks present 

credit and liquidity risks to a Designated 

FMU, 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 Designated FMUs. 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 

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42A Designated FMU’s access to Federal Reserve 

Bank deposit accounts is also consistent with the 

international standards set forth in the Principles 

for Financial Market Infrastructures, which 

acknowledge the protections afforded by central 

banks from such credit and liquidity risks. See, e.g., 

CPSS–IOSCO, Principles for Financial Market 

Infrastructures, ¶ 3.9.3 (noting that ‘‘[c]entral banks 

have the lowest credit risk and are the source of 

liquidity with regard to their currency of issue’’); 

see also Principles for Financial Market 

Infrastructures, 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’’). 43 7 U.S.C. 19(a). 

Designated FMU and provide to the 

Designated FMU 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 Designated FMUs with a 

potential safeguard during an 

extraordinary liquidity event. The 

exemption would therefore help 

promote Congress’ goal of better 

preparing the U.S. financial system for 

potential future liquidity events.42

Commenters generally agreed that the 

exemption would benefit market 

participants by enhancing the protection 

of customer funds. Commenters noted 

that accounts at Federal Reserve Banks 

would decrease a SIDCO’s credit, 

liquidity and operational risk, and 

reduce interconnectedness in the 

cleared derivatives market. 

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 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 could benefit from the 

exemption. Therefore, the Commission 

believes that it is appropriate to apply 

the Federal Reserve Banks’ standard of 

liability in order to facilitate the use of 

these accounts. 

4. 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.43 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 exemption would serve to 

facilitate Designated FMUs’ use of 

Federal Reserve Banks as depositories 

for customer funds. Because the Federal 

Reserve System is the nation’s central 

bank, such accounts would provide 

Designated FMUs 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, Designated FMUs with access 

to a deposit account at a Federal Reserve 

Bank would also be better equipped to 

handle a liquidity event. Since 

Designated FMUs 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 Designated FMU 

could cause widespread and significant 

damage to the financial integrity of 

derivatives markets as a whole. 

Therefore, by facilitating a Designated 

FMU’s use of Federal Reserve Banks as 

depositories for customer funds, the 

exemption would reduce liquidity and 

credit risk to the Designated FMU, 

which would, in turn, promote the 

financial integrity of the derivatives 

markets. 

As noted above, two commenters 

raised concerns that the exemptive 

order may result in a competitive 

disadvantage. The Commission has 

addressed the concern of one 

commenter (OCC) by expanding the 

exemption to include customer accounts 

held at Federal Reserve Banks by 

Designated FMUs generally. On the 

other hand, the Commission does not 

have the authority to take action to 

address the concerns of the other 

commenter (MGEX). 

The Commission does not anticipate 

the exemption will have a significant 

impact on the efficiency of the 

derivatives markets. 

c. Price Discovery 

The Commission does not anticipate 

the exemption will have an impact on 

the price discovery process. 

d. Sound Risk Management Practices 

The Commission believes that 

establishing segregated customer 

accounts for Designated FMUs and 

enabling Designated FMUs to access 

related services at a Federal Reserve 

Bank would improve a Designated 

FMU’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 Designated 

FMU to reduce its concentration risk by 

adding an additional creditworthy 

depository in which to diversify funds. 

Accordingly, the exemption promotes 

sound risk management practices. 

The Commission further notes that, 

notwithstanding the exemption from 

Section 4d of the CEA, the Federal 

Reserve Banks are still required to 

segregate customer funds deposited by a 

Designated FMU from the proprietary 

funds deposited by a Designated FMU 

and to adhere to the longstanding 

standards of liability that govern the 

Federal Reserve Banks. 

e. Other Public Interest Considerations 

The Commission believes that 

facilitating a Designated FMU’s access 

to Federal Reserve Bank accounts will 

promote the public interest by 

bolstering a Designated FMU’s ability to 

conduct settlements with a high degree 

of confidence under a wide range of 

stress scenarios, thereby increasing the 

likelihood of the Designated FMU being 

able to provide its customers with 

access to their funds in times of market 

distress. 

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VI. Order of Exemption 

After considering the above factors 

and the comment letters received in 

response to the request for comments, 

the Commission has determined to issue 

the following: 

Order 

Pursuant to Title VIII of the DoddFrank Wall Street Reform and Consumer 

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

Financial Stability Oversight Council 

(‘‘Council’’) is required to designate 

those financial market utilities 

(‘‘FMUs’’) that the Council determines 

are, or are likely to become, systemically 

important. A derivatives clearing 

organization registered with the 

Commodity Futures Trading 

Commission (‘‘Commission’’) and 

designated by the Council as 

systemically important is referred to 

herein as a ‘‘Designated FMU’’. 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, among others, a Designated 

FMU and provide certain services to the 

Designated FMU, subject to any 

applicable rules, orders, standards, or 

guidelines prescribed by the Board. 

Designated FMUs are required to hold 

funds belonging to customers of their 

clearing members in accounts subject to 

Section 4d of the Commodity Exchange 

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

the CEA would 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 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 bookentry 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 

Designated FMU 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 Designated FMU 

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 is issuing 

an exemption to the Federal Reserve 

Banks in order to facilitate Federal 

Reserve Banks’ ability to establish 

customer accounts for Designated 

FMUs. 

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 Designated FMU with a Federal 

Reserve Bank shall be separately 

accounted for and not commingled with 

the money, securities, and property 

deposited into the account of any other 

person, including a proprietary account 

of the Designated FMU depositing such 

funds. 

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 customer account(s) of a Designated 

FMU 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 

Designated FMUs. 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 Designated FMUs, 

pursuant to Title VIII of the Dodd-Frank 

Act, or any counterparty to a Designated 

FMU under any authority, shall not be 

attributed by the Commission to any 

Federal Reserve Bank providing 

accounts and financial services to 

Designated FMU 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 August 8, 

2016, by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Appendices to Order Exempting the 

Federal Reserve Banks From Sections 

4d and 22 of the Commodity Exchange 

Act—Commission Voting Summary, 

Chairman’s Statement, and 

Commissioner’s Statement 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Massad and 

Commissioners Bowen and Giancarlo voted 

in the affirmative. No Commissioner voted in 

the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

Today, the Commission continues its work 

to ensure the resiliency of clearinghouses and 

protect customers in our markets. To provide 

the necessary context for these efforts, it is 

useful to look back at recent history. 

Most participants in our markets will recall 

what happened at the beginning of the 

financial crisis in September 2008, when the 

Reserve Fund—a money market fund— 

‘‘broke the buck’’ following the bankruptcy of 

Lehman Brothers. Redemptions were 

suspended and investors were not able to 

make withdrawals. As a result, many futures 

commission merchants (FCMs) were not able 

to access customer funds invested in the 

Reserve Fund. Absent relief by the CFTC, 

many would have been undercapitalized, 

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Federal Register / Vol. 81, No. 156 / Friday, August 12, 2016 / Notices 53475 

potentially ending up in bankruptcy. In 

addition, clearinghouses could not liquidate 

investments in the Reserve Fund. And there 

could have easily been a widespread run on 

money market funds, but for the emergency 

actions taken by the U.S. government. 

As a result of the crisis, as well as the 

collapse of MF Global, the CFTC and our selfregulatory organizations took a number of 

actions to better protect customer funds. We 

required customer funds to be strictly 

segregated and limited the ways they can be 

invested. We enhanced accounting and 

auditing procedures at FCMs, including by 

requiring daily verification from depositories 

of the amounts deposited by FCMs. 

Today, CFTC rules require that customer 

funds be invested in highly liquid assets and 

be convertible into cash within one business 

day without a material discount in value. Our 

rules also require that clearinghouses invest 

initial margin deposits in a manner that 

allows them to promptly liquidate any such 

investment. 

Over the last few years, the Securities and 

Exchange Commission (SEC) has also taken 

action in response to the lessons of the 

financial crisis, by adopting a number of 

measures to address the potential 

vulnerabilities of money market funds. One 

such recent reform, which takes effect in 

October of this year, sets forth the 

circumstances where prime money market 

funds are permitted, or in some 

circumstances required, to suspend 

redemptions in order to prevent the risk of 

investor runs. 

While we recognize the benefit of the SEC’s 

new rule in preventing investor runs, a 

suspension of redemptions by a money 

market fund would mean investments in 

such funds are not accessible and cannot be 

promptly liquidated. Such an event could 

result in customers, FCMs, and 

clearinghouses being unable to access the 

funds necessary to satisfy margin obligations. 

Therefore, CFTC staff is today providing 

guidance making clear that Commission rules 

prohibit a clearing member from investing 

customer funds, or a clearinghouse from 

investing amounts deposited as initial 

margin, in such money market funds. 

Some industry participants have suggested 

we should interpret or revise our rules to 

permit investments of at least some customer 

monies in such money market funds unless 

and until redemptions are suspended. We 

have declined to do so, as it would be too late 

to protect customers at that point. Moreover, 

there are alternatives to prime funds, 

including certain government money markets 

funds or Treasury securities. In fact, 

investments in prime money market funds 

represent a relatively small portion of the 

total customer funds on deposit and the total 

initial margin deposits at clearinghouses. 

Some of our clearinghouses and FCMs do not 

have any investments in prime funds. 

Staff has been careful not to be overly 

restrictive, and therefore has issued no-action 

relief to allow FCMs to invest certain 

‘‘excess’’ proprietary funds held in customer 

accounts in these money market funds. That 

is, our existing rules require FCMs to deposit 

their own funds (i.e., targeted residual 

interest) into customer accounts to make sure 

that there are sufficient funds in the 

segregated customer accounts to cover all 

obligations due to customers. FCMs 

frequently deposit an amount of their own 

funds that is in excess of the targeted residual 

interest amount required under our rules, 

and that excess amount can be withdrawn at 

any time. Indeed, if an FCM should default, 

customers—and the system as a whole—are 

better off if excess funds are on deposit, and 

we do not wish to incentivize FCMs to 

withdraw such excess funds from the 

segregated account. Therefore, the no action 

relief makes clear that FCMs can continue to 

invest their own funds in excess of their 

targeted residual interest in such money 

market funds, even though they cannot invest 

the customer funds—or any proprietary 

funds they are required to deposit—in this 

manner. 

Finally, the Commission is taking action 

today that will further ensure the safety of 

customer funds. We are issuing an order that 

will help make it possible for systemically 

important clearinghouses to deposit customer 

funds at Federal Reserve Banks. Our order 

makes clear that a Federal Reserve Bank that 

opens such an account would be subject to 

the same standards of liability that generally 

apply to it as a depository, rather than any 

potentially conflicting standard under the 

commodity laws. 

Although Federal Reserve accounts for 

customer funds held by systemically 

important clearinghouses do not exist today, 

they are allowed under the Dodd-Frank Act, 

and we have been working with the Board of 

Governors to facilitate them. The two 

clearinghouses designated as systemically 

important in our markets have been approved 

to open Federal Reserve Bank accounts for 

their proprietary funds. We hope that with 

today’s action, accounts for customer funds 

can be opened soon. Doing so will help 

protect customer funds and enhance the 

resiliency of clearinghouses. 

I thank the dedicated CFTC staff and my 

fellow Commissioners for their work on these 

matters. 

Appendix 3—Concurring Statement of 

Commissioner Sharon Y. Bowen 

I am pleased to concur with the two 

Commission actions: The ‘‘Order Exempting 

the Federal Reserve Banks from Sections 4d 

and 22 of the Commodity Exchange Act’’ and 

‘‘Written Acknowledgment of Customer 

Funds from Federal Reserve Banks.’’ I have 

long believed that, in order to protect 

customer funds, we need to keep that money 

at our central bank. In the event of a major 

market event, I, and I believe the rest of the 

American people, would feel much better 

knowing that investors’ money is at the 

Federal Reserve instead of at multiple central 

counterparties. I am glad that our agency and 

the Federal Reserve have come to an 

agreement on an effective way to accomplish 

this. 

I am similarly pleased with the Division of 

Clearing and Risk’s (DCR) ‘‘Staff 

Interpretation Regarding CFTC Part 39 In 

Light Of Revised SEC Rule 2a–7,’’ which 

clearly outlines the staff’s understanding 

that, given the limitations that the Securities 

and Exchange Commission (SEC) has 

imposed on redemptions for prime money 

market funds, that they are no longer 

considered Rule 1.25 assets. This is the 

correct interpretation. The key feature in a 

Rule 1.25 asset is that it must be available 

quickly in times of crisis or illiquidity. And 

we know that funds are more likely to close 

the gates on redemptions when market 

dislocation happens. That is just the time 

when futures commission merchants (FCMs) 

and customers would need access to their 

money, and a multi-day delay can mean 

catastrophe for some businesses. 

For that very reason, I have concerns about 

the Division of Swap Dealer and 

Intermediary Oversight’s (DSIO) ‘‘No-Action 

Relief With Respect to CFTC Regulation 1.25 

Regarding Money Market Funds.’’ While the 

4(c) exemption and the DCR interpretation 

are clearly customer protection initiatives, 

the DSIO no action letter is not. This no 

action letter would allow FCMs to keep 

money in segregated customer accounts that 

actually would not be readily available in a 

crisis. Thus, while it may appear that an FCM 

had considerable funds available to settle 

customer accounts during a market 

dislocation, in fact that would be only be an 

illusion; a portion of those funds could be 

locked down behind the prime money market 

funds’ gates and therefore not actually be 

available when needed. 

I do not think that the staff of the 

Commission should be supporting this kind 

of ‘‘window dressing’’—giving the 

impression of greater security than there 

actually is. If the funds are not suitable 

investments for customer funds, then they 

are not suitable for the additional capital that 

the FCMs put in those accounts to protect 

against potential shortfalls. Having lived 

through bankruptcies, such as MF Global and 

Peregrine, I have a healthy respect for the 

importance of having strong clearing 

members with a large cushion of funds that 

can be accessed when needed. This no action 

letter undermines that effort. Given the 

importance of this topic to the general public, 

we should at least have asked for comments 

or even held a roundtable before making this 

change. I therefore hope to reexamine this 

subject in the near future. 

[FR Doc. 2016–19210 Filed 8–11–16; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF EDUCATION 

Applications for New Awards; Training 

of Interpreters for Individuals Who Are 

Deaf or Hard of Hearing and 

Individuals Who Are Deaf-Blind 

Program; Correction 

Catalog of Federal Domestic Assistance 

(CFDA) Number: 84.160C. 

AGENCY: Office of Special Education and 

Rehabilitative Services, Department of 

Education. 

ACTION: Notice; correction. 

SUMMARY: On July 25, 2016, we 

published in the Federal Register 

(81 FR 48409) a notice inviting 

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