Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

Commodity Futures Trading Commission

Office of Public Affairs

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

www.cftc.gov

Q & A – Final Rule on the Protection of Cleared Swaps Customer 

Contracts and Collateral; Conforming Amendments to the 

Commodity Broker Bankruptcy Provisions

What does the rulemaking do?

This rulemaking sets forth the rules and procedures for protecting collateral posted by cleared swaps customers. 

Specifically, it implements Section 724 of the Dodd-Frank Act, which prescribes the manner in which cleared swaps 

(and related collateral) must be treated prior to and after bankruptcy. Section 724(a) amended the CEA by inserting 

a new section 4d(f), which requires each futures commission merchant (“FCM”) and derivatives clearing 

organization (“DCO”) to (i) hold cleared swaps customer collateral in an account (or location) that is separate from 

the property belonging to the FCM or DCO, and (ii) not use the collateral of one cleared swaps customer to (A) 

cover the obligations of another cleared swaps customer or (B) the obligations of the FCM.

Section 724(b) governed the bankruptcy treatment of cleared swaps (and associated collateral) by clarifying that 

cleared swaps are “commodity contracts” within the meaning of section 761(4)(F) of the Bankruptcy Code, and that 

associated collateral, when deposited by cleared swaps customers, would be subject to the protections of Subchapter 

IV of Chapter 7 of the Bankruptcy Code and Commission Regulation Part 190 (Bankruptcy Rules).

Many regulations are adopted largely as proposed, although a number of provisions have been revised in light of the 

comments received. The regulations are designed to strike an appropriate balance between the benefits of 

enhancing protections for cleared swaps customer collateral and promoting portability, and the costs of such 

changes.

Who must comply with the final regulations?

The regulations apply to all FCMs and DCOs registered with the Commission that clears swaps.

What model is the Commission adopting?

After careful considering of all comments received by the commission through external meetings, filings and 

roundtables, the Commission is adopting a model entitled “Complete Legal Segregation” (also known as the “LSOC 

Model”). This model allows the collateral of all of an FCM’s cleared swaps customers to be kept together 

(“commingled”) pre-bankruptcy and requires information about the FCM’s cleared swaps customers’ portfolios to 

be sent to the applicable clearing organization(s) at least once a day. But, in the event of a default by both a clearing 

member FCM and one or more of the clearing member’s cleared swaps customers, a DCO would not have recourse 

to the collateral posted by non-defaulting cleared swaps customers. The DCO would only have recourse against the 

collateral of the defaulting cleared swaps customers of that clearing member (as well as resources of the clearing 

member itself).
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Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

Under the Complete Legal Segregation Model must an FCM’s cleared swaps customer accounts be 

segregated pre-bankruptcy?

The Complete Legal Segregation Model requires that cleared swaps customer collateral be segregated from the 

FCM’s own property, but permits the cleared swaps collateral of all of the FCM’s cleared swaps customers to be 

kept together pre-bankruptcy. The rules, to the extent applicable, parallel (in updated language) the regulations 

governing the segregated accounts in which FCMs currently hold futures customer collateral pre-bankruptcy.

How does the Complete Legal Segregation Model protect an FCM’s cleared swaps customer 

collateral following a bankruptcy of the FCM?

Following an FCM’s bankruptcy, where there is a shortfall in the cleared swaps customer account due to a cleared 

swaps customer loss that exceeds both the customer’s collateral and the FCM’s ability to pay, the DCO could only 

use the collateral attributable to the cleared swaps customers whose portfolios of positions at the DCO suffered 

losses to meet the loss. Thus, all collateral attributable to cleared swaps customers whose portfolios of positions 

gained or were “flat” (neither gained nor lost), and the remaining collateral attributable to cleared swaps customers 

whose portfolios of positions lost, would be immediately available for transfer. Moreover, the DCO would have 

information that is no more than one business day old tying cleared swaps customers to portfolios of positions, and 

the DCO itself would maintain the margining methodology that would tie such portfolios of positions to the 

collateral requirement associated with such portfolios. Even if the DCO decided to liquidate all cleared swaps 

customer positions, non-defaulting cleared swaps customers would be exposed to less loss. However, if following 

an FCM’s bankruptcy there is a shortfall in the cleared swaps customer account due to an operational issue (for 

example, there is a shortfall due to negligence, theft or some other mishap), cleared swaps customer positions and 

related collateral at a DCO may be delivered to the Trustee, or may transferred by the DCO, but only to the extent 

of each customer’s pro rata share.

What types of investments does the Commission permit for cleared swaps customer collateral?

The rules provide that cleared swaps customer collateral may only be invested pursuant to Commission 

Regulation1.25 (as it may be amended from time to time), which governs the investment of customer property of 

futures customers. The regulations do not, however, limit the types of collateral that a cleared swaps customer may 

post, though such customer must comply with the rules of its FCM and DCO.

What other matters do the rules address?

The Commission amended Regulation Part 190 to implement changes wrought by the Dodd-Frank Act, including 

the inclusion of swaps cleared with a DCO as customer contracts for all commodity brokers, the inclusion of swaps 

execution facilities as a category of trading venue, and to implement additional statutory changes to time periods. 

The rules also include changes to conform Regulation Part 190 to current swaps market practices.