[Federal Register Volume 76, Number 111 (Thursday, June 9, 2011)]
[Proposed Rules]
[Pages 33818-33878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10737]
[[Page 33817]]
Vol. 76
Thursday,
No. 111
June 9, 2011
Part II
Commodity Futures Trading Commission
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17 CFR Parts 22 and 190
Protection of Cleared Swaps Customer Contracts and Collateral;
Conforming Amendments to the Commodity Broker Bankruptcy Provisions;
Proposed Rule
Federal Register / Vol. 76 , No. 111 / Thursday, June 9, 2011 /
Proposed Rules
[[Page 33818]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 22 and 190
RIN 3038-AC99
Protection of Cleared Swaps Customer Contracts and Collateral;
Conforming Amendments to the Commodity Broker Bankruptcy Provisions
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')
hereby proposes rules to implement new statutory provisions enacted by
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the ``Dodd-Frank Act''). Specifically, the proposed rules
contained herein impose requirements on futures commission merchants
(``FCMs'') and derivatives clearing organizations (``DCOs'') regarding
the treatment of cleared swaps customer contracts (and related
collateral), and make conforming amendments to bankruptcy provisions
applicable to commodity brokers under the Commodity Exchange Act (the
``CEA'').
DATES: Comments must be received on or before August 8, 2011.
ADDRESSES: You may submit comments, identified by RIN number 3038-AC99,
by any of the following methods:
The agency's Web site, at http://comments.cftc.gov. Follow
the instructions for submitting comments through the Web site.
Mail: David A. Stawick, 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 method.
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 procedures
established in Sec. 145.9 of the Commission's regulations.\1\
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\1\ 17 CFR 145.9.
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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 the rulemaking 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: Robert B. Wasserman, Associate
Director, Division of Clearing and Intermediary Oversight (DCIO), at
202-418-5092 or [email protected]; Jon DeBord, Attorney-Advisor,
DCIO, at 202-418-5478 or [email protected]; Martin White, Assistant
General Counsel, at 202-418-5129 or [email protected]; David Reiffen,
Senior Economist, Office of the Chief Economist, at 202-418-5602 or
[email protected]; or Todd Prono, Financial Economist, Office of the
Chief Economist, at 202-418-5460 or [email protected], in each case, also
at the Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
A. Segregation Requirements
B. Implementation Alternatives
C. Solicitation of Public Input Regarding the Alternatives
1. Roundtable
2. ANPR
a. Questions
b. Comments: Background
c. Comments: Discussion
1. Statutory Issues
2. What is the appropriate starting point?
3. Costs
a. Operational Costs
b. The Risk Costs
i. The Physical Segregation Model and the Complete Legal
Segregation Model
ii. The Legal Segregation With Recourse Model and the Futures
Model
c. Assumptions Underlying Risk Costs
4. Benefits
a. Fellow-Customer Risk and Investment Risk
b. Portability
c. Systemic Risk
d. Induced Changes in Behavior
e. Portfolio Margining
5. The Optional Approach
III. The Proposed Rules
A. Statutory Issues and the Appropriate Starting Point
B. Costs
1. Rationale
2. Questions
C. Benefits
1. Rationale
a. Fellow-Customer Risk and Investment Risk
b. Portability
c. Systemic Risk
d. Induced Changes in Behavior
e. Portfolio Margining
2. Questions
D. Proposing the Complete Legal Segregation Model: Weighing of
Costs and Benefits
E. The Optional Approach
1. Rationale
2. Questions
F. Structure of These Proposed Regulations
IV. Section by Section Analysis: Segregation of Cleared Swaps for
Customers
A. Proposed Regulation 22.1: Definitions
1. ``Segregate'' and ``Commingle''
2. ``Cleared Swap''
3. ``Cleared Swaps Customer'' and ``Customer''
4. ``Cleared Swaps Customer Collateral''
5. ``Cleared Swaps Customer Account'' and ``Cleared Swaps
Proprietary Account''
6. ``Collecting Futures Commission Merchant'' and ``Depositing
Futures Commission Merchant''
B. Proposed Regulation 22.2--Futures Commission Merchants:
Treatment of Cleared Swaps Customer Collateral
1. In General
2. Location of Collateral
a. The First Method
b. The Second Method
3. Commingling
4. Limitations on Use
5. Exceptions
a. Permitted Investments
b. Permitted Withdrawals
c. Deposits of Own Money, Securities, or Other Property
d. Residual Financial Interest
e. Requirements as to Amount
i. Background
ii. Proposed Requirement
iii. Question
f. Segregated Account; Daily Computation and Record
C. Proposed Regulation 22.3--Derivatives Clearing Organizations:
Treatment of Cleared Swaps Customer Collateral
1. In General
2. Location of Collateral
a. The First Method
b. The Second Method
c. Questions
3. Commingling
4. Exceptions
a. FCM Deposits and Withdrawals
b. Permitted Investments
D. Proposed Regulation 22.4--Futures Commission Merchants and
Derivatives Clearing Organizations: Permitted Depositories
1. The Permitted Depositories
2. Question
E. Proposed Regulation 22.5--Futures Commission Merchants and
Derivatives
[[Page 33819]]
Clearing Organizations: Written Acknowledgment
1. Substantive Requirements
2. Question
F. Proposed Regulation 22.6--Futures Commission Merchants and
Derivatives Clearing Organizations: Naming of Cleared Swaps Customer
Accounts
G. Proposed Regulation 22.7--Permitted Depositories: Treatment
of Cleared Swaps Customer Collateral
H. Proposed Regulation 22.8--Situs of Cleared Swaps Accounts
1. Proposed Requirements
2. Questions
I. Proposed Regulation 22.9--Denomination of Cleared Swaps
Customer Collateral and Location of Depositories
J. Proposed Regulation 22.10--Incorporation by Reference
K. Proposed Regulation 22.11--Information To Be Provided
Regarding Customers and Their Cleared Swaps
1. Proposed Requirements
2. Questions
L. Proposed Regulation 22.12--Information To Be Maintained
Regarding Cleared Swaps Customer Collateral
M. Proposed Regulation 22.13--Additions to Cleared Swaps
Customer Collateral
N. Proposed Regulation 22.14--Futures Commission Merchant
Failure To Meet a Customer Margin Call in Full
O. Proposed Regulation 22.15--Treatment of Cleared Swaps
Customer Collateral on an Individual Basis
P. Proposed Regulation 22.16--Disclosures to Customers
V. Section by Section Analysis: Amendments to Regulation Part 190
A. Background
B. Definition
1. Proposed Amendment to Regulation 190.01(a)--Account Class
2. Proposed New Regulation 190.01(e)--Calendar Day
3. Proposed Amendment to Regulation 190.01(f)--Clearing
Organization
4. Proposed Amendment to Regulation 190.01(cc)--Non-Public
Customer
5. Proposed Amendment to Regulation 190.01(hh)--Principal
Contract
6. Proposed Amendment to Regulation 190.01(ll)--Specifically
Identifiable Property
7. Proposed Amendment to Regulation 190.01(pp)--Cleared Swap
C. Proposed Amendments to Regulation 190.02--Operation of the
Debtor's Estate Subsequent to the Filing Date and Prior to the
Primary Liquidation Date
D. Proposed Amendments to Regulation 190.03--Operation of the
Debtor's Estate Subsequent to the Primary Liquidation Date
E. Proposed Amendments to Regulation 190.04--Operation of the
Debtor's Estate--General
F. Proposed Amendments to Regulation 190.05--Making and Taking
Delivery on Commodity Contracts
G. Proposed Amendments to Regulation 190.06--Transfers
H. Proposed Amendments to Regulation 190.07--Calculation of
Allowed Net Equity
I. Proposed Amendments to Regulation 190.09--Member Property
J. Proposed Amendments to Regulation 190.10--General
K. Proposed Amendments to Appendix A to Part 190--Bankruptcy
Forms, Bankruptcy
L. Proposed Amendments to Appendix B to Part 190--Special
Bankruptcy Distributions
VI. Effective Date
VII. Administrative Compliance
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
1. Introduction
2. Information Provided by Reporting Entities
3. Information Collection Comments
C. Cost-Benefit Analysis
1. Introduction
a. Requirement Under Section 15(a) of the CEA
b. Structure of the Analysis
2. Costs of the Complete Legal Segregation Model, the Legal
Segregation With Recourse Model, and the Futures Model
a. Operational Costs
b. Risk Costs
c. Induced Changes in Behavior
d. Portability
e. Potential Preferences of Cleared Swaps Customers
f. The Optional Approach
3. Summary of Benefits of Legal Segregation Models
a. Fellow-Customer Risk
b. Portability and Systemic Risk
c. Induced Changes in Behavior
4. Relevance to Section 15(a)(2) Considerations
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of
Markets
c. Price Discovery
d. Sound Risk Management
e. Other Public Interest Considerations
5. Public Comment
VIII. Text of Proposed Rules
I. Introduction
The Dodd-Frank Act \2\ mandates that each FCM and DCO ``segregate''
customer collateral supporting cleared swaps. In other words, the FCM
and the DCO (i) must hold such customer collateral in an account (or
location) that is separate from the property belonging to the FCM or
DCO, and (ii) must not use the collateral of one customer to (A) cover
the obligations of another customer or (B) the obligations of the FCM
or DCO.\3\
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\2\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376
(2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
\3\ See section 724 of the Dodd-Frank Act. There is some
controversy with respect to section 4d(f)(6) of the CEA as applied
to a DCO. See section II(C) herein.
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In order to implement the segregation requirements in the Dodd-
Frank Act, the Commission has determined to propose that each FCM and
DCO be required to enter (or ``segregate''), in its books and records,
the cleared swaps of each individual customer and relevant collateral.
The Commission also proposes to permit each FCM and DCO to
operationally hold (or ``commingle'') all relevant collateral in one
account. The Commission further proposes that, in the event that an FCM
defaults simultaneously with one or more cleared swaps customers, the
DCO may access the collateral of the FCM's defaulting cleared swaps
customers to cure the default, but not the collateral of the FCM's non-
defaulting cleared swaps customers. However, the Commission is
continuing to assess the benefits and costs of the proposal, and is
considering whether to permit the DCO to access the collateral of non-
defaulting cleared swaps customers, after the DCO attempts to cure the
default by applying its own capital and the guaranty fund contributions
of its non-defaulting FCM members. Moreover, the Commission is also
continuing to assess the feasibility of permitting each DCO to choose
the level of protection that it would accord to the cleared swaps
customer collateral of its FCM members.
In deciding to propose the above requirements, the Commission
looked to current practices for the protection of uncleared swaps
collateral, as well as current practices for the protection of
collateral supporting futures customer contracts. The Commission,
through its staff, sought comment from a wide variety of stakeholders
(i.e., swaps customers, FCMs, and DCOs), through external meetings \4\
and a public roundtable.\5\ Further, the Commission issued an advanced
notice of proposed rulemaking (the ``ANPR'').\6\ After carefully
considering all comments, the Commission has reached the conclusion
that this proposal (i) protects cleared swaps customer collateral in
the manner mandated by the Dodd-Frank Act, and (ii) provides the best
balance between (A) the benefits of mitigating Fellow-Customer Risk,
Investment Risk (as such terms are defined below) and systemic risk,
inducing changes in behavior, and enhancing portability as well as
potentially facilitating portfolio margining, and (B) the operational
and
[[Page 33820]]
risk costs \7\ associated with implementation. This notice of proposed
rulemaking (the ``NPRM'') sets forth the rationale for such conclusion.
The Commission requests comment on each element of its rationale, its
conclusion, and any alternatives to the proposal that it is considering
(such as, whether to permit the DCO to access the collateral of non-
defaulting cleared swaps customers and whether to permit each DCO to
choose the level of protection for such collateral).
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\4\ A list of external meetings is available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_6_SegBankruptcy/index.htm.
\5\ A transcript of the Staff Roundtable on Individual Customer
Collateral Protection (the ``Roundtable'') is available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission6_102210-transcrip.pdf.
\6\ See Advance Notice of Proposed Rulemaking for Protection of
Cleared Swaps Customers Before and After Commodity Broker
Bankruptcies, 75 FR 75162, Dec. 2, 2010.
\7\ See section II(C)(3) below.
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II. Background
A. Segregation Requirements
On July 21, 2010, President Obama signed the Dodd-Frank Act. Title
VII of the Dodd-Frank Act \8\ amended the CEA \9\ to establish a
comprehensive new regulatory framework for swaps and certain security-
based swaps. The legislation was enacted to reduce risk, increase
transparency, and promote market integrity within the financial system
by, among other things: (i) Providing for the registration and
comprehensive regulation of swap dealers and major swap participants;
\10\ (ii) imposing mandatory clearing and trade execution requirements
on clearable swap contracts; (iii) creating robust recordkeeping and
real-time reporting regimes; and (iv) enhancing the rulemaking and
enforcement authorities of the Commission with respect to, among
others, all registered entities and intermediaries subject to the
oversight of the Commission.
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\8\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\9\ 7 U.S.C. 1 et seq.
\10\ In this release, the terms ``swap dealer'' and ``major swap
participant'' shall have the meanings set forth in section 721(a) of
the Dodd-Frank Act, which added sections 1a(49) and (33) of the CEA.
However, section 721(c) of the Dodd-Frank Act directs the Commission
to promulgate rules to further define, among other terms, ``swap
dealer'' and ``major swap participant.'' The Commission is in the
process of this rulemaking. See 75 FR 80173, Dec. 21, 2010.
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Section 724 of the Dodd-Frank Act prescribes the manner in which
cleared swaps (and related collateral) \11\ must be treated prior to
and after bankruptcy. Section 724(a) of the Dodd-Frank Act amends
section 4d of the CEA to add a new paragraph (f). New section 4d(f)
imposes the following requirements on an FCM, as well as any depository
thereof (including, without limitation, a DCO):
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\11\ Proposed regulation 22.1 defines ``Cleared Swap'' and
``Cleared Swaps Customer Collateral.''
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1. The FCM must treat and deal with all collateral (including
accruals thereon) deposited by a customer \12\ to margin its cleared
swaps as belonging to such customer;
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\12\ Proposed regulation 22.1 defines ``Cleared Swaps
Customer.''
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2. The FCM may not commingle such collateral with its own property
and may not, with certain exceptions, use such collateral to margin the
cleared swaps of any person other than the customer depositing such
collateral;
3. A DCO may not hold or dispose of the collateral that an FCM
receives from a customer to margin cleared swaps as belonging to the
FCM or any person other than the customer; and
4. The FCM and the DCO may only invest such collateral in
enumerated investments.
Section 724(b) of the Dodd-Frank Act governs bankruptcy treatment
of cleared swaps by clarifying that cleared swaps are ``commodity
contracts'' within the meaning of section 761(4)(F) of the Bankruptcy
Code.\13\ Therefore, in the event of an FCM or DCO insolvency, cleared
swaps customers may invoke the protections of Subchapter IV of Chapter
7 of the Bankruptcy Code (``Subchapter IV''). Such protections include:
(i) Protected transfers of cleared swaps and related collateral; \14\
and (ii) if cleared swaps are subject to liquidation, preferential
distribution of remaining collateral.\15\
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\13\ 11 U.S.C. 761(4)(F).
\14\ See, e.g., 11 U.S.C. 764.
\15\ See, e.g., 11 U.S.C. 766(h) and (i).
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B. Implementation Alternatives
The Commission considered several alternatives for implementing new
section 4d(f) of the CEA. The first alternative that the Commission
explored was legal segregation with operational commingling (the
``Legal Segregation Model''). Under the Legal Segregation Model, each
FCM and DCO would enter (or ``segregate''), in its books and records,
the cleared swaps of each individual customer and relevant collateral.
Each FCM and DCO would ensure that such entries are separate from
entries indicating (i) FCM or DCO obligations or (ii) the obligations
of non-cleared swaps customers. Operationally, however, each FCM and
DCO would be permitted to hold (or ``commingle'') the relevant
collateral in one account. Each FCM and DCO would ensure that such
account is separate from any account holding FCM or DCO property or
holding property belonging to non-cleared swaps customers.
Under the Legal Segregation Model, the FCM, prior to default, would
ensure that the DCO does not use the collateral of one cleared swaps
customer to support the obligations of another customer by making
certain that the value of the cleared swaps collateral that the DCO
holds equals or exceeds the value of all cleared swaps collateral that
it has received to secure the contracts of the FCM's customers. The
Commission considered two possible scenarios after a simultaneous
default of the FCM and of one or more cleared swaps customers. First,
the Commission contemplated permitting the DCO to access the collateral
of the defaulting cleared swaps customers, but not the collateral of
the non-defaulting cleared swaps customers (the ``Complete Legal
Segregation Model'').\16\ Second, the Commission contemplated
permitting the DCO to access the collateral of the non-defaulting
cleared swaps customers, after the DCO applies its own capital to cure
the default, as well as the guaranty fund contributions of its non-
defaulting FCM members (the ``Legal Segregation with Recourse
Model'').\17\
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\16\ The Complete Legal Segregation Model was referred to as the
Legal Segregation with Commingling model in the ANPR.
\17\ The Legal Segregation with Recourse Model was known as the
Moving Customers to the Back of the Waterfall model in the ANPR.
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As its second alternative, the Commission explored full physical
segregation (the ``Physical Segregation Model'').\18\ Prior to FCM
default, the Physical Segregation Model differs from the Legal
Segregation Model only operationally. Like the Legal Segregation Model,
each FCM and DCO would enter (or ``segregate''), in its books and
records, the cleared swaps of each individual customer and relevant
collateral. However, unlike the Legal Segregation Model, each FCM and
DCO would maintain separate individual accounts for the relevant
collateral. Hence, prior to default, the FCM would ensure that the DCO
does not use the collateral of one cleared swaps customer to support
the obligations of another customer by making certain that the DCO does
not mistakenly transfer collateral in (i) the account belonging to the
former to (ii) the account belonging to the latter. After a
simultaneous default of the FCM and of one or more cleared swaps
customers, the Physical Segregation Model leads to the same result as
the Complete Legal Segregation Model. Specifically, the DCO would be
permitted to access the collateral of the defaulting cleared swaps
customers, but not the collateral of the non-defaulting customers.
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\18\ In the ANPR, the Commission referred to this model as Full
Physical Segregation.
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As its third alternative, the Commission explored replicating the
[[Page 33821]]
segregation requirement currently applicable to futures (the ``Futures
Model'').\19\ Prior to default, the Futures Model shares certain
similarities with the Legal Segregation Model. Specifically, each FCM
would enter (or ``segregate''), in its books and records, the cleared
swaps of each individual customer and relevant collateral. Each DCO,
however, would recognize, in its books and records, the cleared swaps
that an FCM intermediates on a collective (or ``omnibus'') basis. Each
FCM and DCO would be permitted to hold (or ``commingle'') all cleared
swaps collateral in one account. After default, the Futures Model
shares certain similarities with the Legal Segregation with Recourse
Model. Specifically, the DCO would be permitted to access the
collateral of the non-defaulting cleared swaps customers. However,
under the Futures Model, the DCO would be permitted to access such
collateral before applying its own capital or the guaranty fund
contributions of non-defaulting FCM members.
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\19\ See sections 4d(a) and (b) of the CEA, as well as
regulations 1.20 to 1.30. The Futures Model was referred to as the
Baseline model in the ANPR.
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Finally, the Commission explored permitting a DCO to choose between
(i) the Legal Segregation Model (whether Complete or with Recourse),
(ii) the Physical Segregation Model, and (iii) the Futures Model,
rather than mandating any particular alternative.
C. Solicitation of Public Input Regarding the Alternatives
Throughout the fall and winter of 2010, the Commission sought
public comment on the alternatives mentioned above, and on the
advisability of permitting the DCO to choose between alternatives.
First, the Commission, through its staff, held extensive external
meetings with three segments of stakeholders (i.e., DCOs, FCMs, and
swaps customers).\20\ Second, on October 22, 2010, the Commission,
through its staff, held the Roundtable. Third, on November 19, 2010,
the Commission issued the ANPR.
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\20\ A list of external meetings is available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_6_SegBankruptcy/index.htm.
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1. Roundtable
As the ANPR describes, the Roundtable revealed that stakeholders
had countervailing concerns regarding the alternatives that the
Commission set forth. On the one hand, a number of swaps customers
argued that the Commission should focus on effectively eliminating
fellow-customer risk \21\ and investment risk.\22\ Such swaps customers
emphasized that (i) they currently transact in uncleared swaps, (ii)
they are able to negotiate for individual segregation at independent
third parties for collateral supporting such uncleared swaps, and
therefore (iii) they are currently subject to neither Fellow-Customer
Risk nor Investment Risk. Such customers found it inappropriate that,
under certain alternatives that the Commission set forth, they should
be subject to Fellow-Customer Risk and Investment Risk when they
transact in cleared swaps. As the ANPR noted, pension funds were
specifically concerned about whether Fellow-Customer Risk and
Investment Risk would be incompatible with their obligations under the
Employee Retirement Income Security Act.\23\
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\21\ ``Fellow-Customer Risk'' is the risk that a DCO would
access the collateral of non-defaulting cleared swaps customers to
cure an FCM default. Basically, among other things, an FCM functions
as a guarantor of customer transactions with a DCO. Section 4d(f) of
the CEA prohibits an FCM from using the collateral deposited by one
cleared swaps customer to support the transactions of another
customer. Therefore, if one cleared swaps customer owes money to the
FCM (i.e., the customer has a debit balance), the FCM, acting as
guarantor, must deposit its own capital with the DCO to settle
obligations attributable to such customer. If such customer defaults
to the FCM, and the obligations attributable to such customer are so
significant that the FCM does not have sufficient capital to meet
such obligations, then the FCM would default to the DCO.
In general, DCOs maintain packages of financial resources to
cure the default. The first element of such packages is the property
of the defaulting FCM (i.e., collateral deposited to support FCM
proprietary transactions and contributions to the DCO guaranty
fund). As mentioned above, other elements of such packages may
include: (i) The collateral that the FCM deposited to support the
transactions of non-defaulting cleared swaps customers; (ii) a
portion of the capital of the DCO; and (iii) contributions to the
guaranty fund from other DCO members. Typically, a DCO would exhaust
one element before moving onto the next element. Therefore, the risk
that the DCO would use any one element depends on the position of
that element in the package.
\22\ ``Investment Risk'' is the risk that each cleared swaps
customer would share pro rata in any decline in the value of FCM or
DCO investments of cleared swaps customer collateral. Section 4d(f)
of the CEA permits an FCM to invest cleared swaps customer
collateral in certain enumerated instruments. The Commission is
proposing to expand such instruments to include those referenced in
regulation 1.25 (as it may be amended from time to time). Even
though (i) such investments are ``consistent with the objectives of
preserving principal and maintaining liquidity,'' and (ii) both the
FCM, as well as the DCO, value such investments conservatively (by,
e.g., applying haircuts), the value of such investments may decline
to less than the value of the collateral originally deposited. See
regulation 1.25(b) (as proposed to be amended in Investment of
Customer Funds and Funds Held in an Account for Foreign Futures and
Foreign Options Transactions, 75 FR 67642, Nov. 3, 2011). In such a
situation, all customers would share in the decline pro rata, even
if the invested collateral belonged to certain customers and not
others.
\23\ 75 FR at 75163.
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On the other hand, a number of FCMs and DCOs argued that the
benefits of effectively eliminating Fellow-Customer Risk and Investment
Risk are outweighed by the costs. With respect to benefits, these FCMs
and DCOs noted that the Futures Model has served the futures industry
well for many decades. With respect to costs, these FCMs and DCOs
described two potential sources. First, FCMs and DCOs stated that,
depending on the manner in which the Commission proposes to eliminate
or mitigate Fellow-Customer Risk and Investment Risk, they may
experience substantial increases to operational costs. Second, and more
significantly, FCMs and DCOs stated that they may incur additional risk
costs due to proposed financial resources requirements.\24\
Specifically, the Commission has proposed to require each DCO to
maintain a package of financial resources sufficient, at a minimum, to:
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\24\ For a more detailed discussion regarding risk costs, see
section II(C)(3)(b) infra.
[e]nable the derivatives clearing organization to meet its financial
obligations to its clearing members notwithstanding a default by the
clearing member creating the largest financial exposure for the
derivatives clearing organization in extreme but plausible market
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conditions.\25\
\25\ Financial Resources Requirements for Derivatives Clearing
Organizations, 75 FR 63113, 63118, Oct. 14, 2010 (proposed
regulation 39.11(a)(1)).
The Commission has proposed to require systemically-important
DCOs to maintain a financial resources package sufficient to cover a
default by the two clearing members creating the largest combined
financial exposure in extreme but plausible market conditions. Id.
at 63119 (proposed regulation 39.29(a)).
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Some DCOs may have anticipated including collateral from non-
defaulting cleared swaps customers as an element in their financial
resources packages. If DCOs no longer have access to such collateral,
then those DCOs would need to obtain additional financial resources to
meet proposed Commission requirements. As the ANPR noted, DCOs stated
that they could obtain such financial resources in two ways (or a
combination thereof). They can increase the amount of collateral that
each cleared swaps customer must provide to margin its cleared swaps.
Alternatively, they can increase the amount of capital that each FCM
must contribute to the relevant DCO guaranty funds. Both FCMs and DCOs
averred that the costs associated with obtaining such additional
financial resources may be
[[Page 33822]]
substantial, and would ultimately be borne by cleared swaps
customers.\26\
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\26\ 75 FR at 75163. For example, one DCO estimated that it
would have to increase the amount of collateral that each cleared
swaps customer must provide by 60 percent, if it could no longer
access the collateral of non-defaulting cleared swaps customers to
cure certain defaults.
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2. ANPR
a. Questions
Given the countervailing concerns that stakeholders expressed at
the Roundtable, the Commission decided to seek further comment through
the ANPR on the potential benefits and costs of (i) the Legal
Segregation Model (whether Complete or with Recourse), (ii) the
Physical Segregation Model, and (iii) the Futures Model. As the ANPR
explicitly stated, ``[t]he Commission [was] seeking to achieve two
basic goals: Protection of customers and their collateral, and
minimization of costs imposed on customers and on the industry as a
whole.'' \27\
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\27\ Id.
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Although the ANPR sought comment on the abovementioned models from
the general public, it addressed specific questions to the three
segments of stakeholders (i.e., DCOs, FCMs, and swaps customers). The
Commission asked all three segments to identify the benefits of each
model relative to the others. The Commission then asked all three
segments to estimate the costs of implementing each model from their
perspective. Specifically, for FCMs, the Commission asked for estimates
of (i) FCM compliance costs for each model (other than the Futures
Model) and (ii) FCM costs resulting from DCOs seeking additional
financial resources to meet proposed Commission requirements. For DCOs,
the Commission asked for estimates of: (i) DCO, as well as FCM,
compliance costs for each model (other than the Futures Model); and
(ii) DCO, as well as FCM, costs resulting from DCOs seeking additional
financial resources to meet proposed Commission requirements. In
addition to the above, the Commission requested comment on the impact
of each model on behavior, as well as whether Congress evinced intent
for the Commission to adopt any one or more of these models.
b. Comments: Background
The Commission received thirty-one comments from twenty-nine
commenters.\28\ Of the commenters, fifteen represented current or
potential cleared swaps customers (i.e., buy-side firms or groups),\29\
eight represented FCMs or investment firms (or organizations
thereof),\30\ four were DCOs,\31\ one was the National Futures
Association (``NFA''), and one was from a legal practitioner.\32\ The
Commission invites further comment on any of the issues raised and the
factual and analytical points made in the comments received in response
to the ANPR.
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\28\ Federated Investors submitted two comments, both of which
focused on the investment of cleared swaps customer collateral. ISDA
submitted two comments, an original comment (the ``ISDA Original'')
and, later, a supplemental comment (the ``ISDA Supplemental'').
\29\ Buy-side firms or groups (collectively, the ``buy-side'')
included the following: (i) Alternative Investment Management
Association (``AIMA''); (ii) BlackRock, Inc. (``BlackRock''); (iii)
California Public Employees Retirement System (``CALPERS''); (iv)
Coalition for Derivatives End Users (by Gibson, Dunn & Crutcher);
(v) Coalition for Energy End Users; (vi) Committee on Investment of
Employee Benefit Assets (``CIEBA''); (vii) Federal Farm Credit Banks
Funding Corp.; (viii) Federal Home Loan Banks (``FHLB''); (ix)
Fidelity Investments (``Fidelity''); (x) Freddie Mac; (xi)
Investment Company Institute; (xii) Managed Funds Association;
(xiii) Securities Industry and Financial Markets Association Asset
Management Group (``SIFMA-AMG''); (xiv) Tudor Investment
Corporation; and (xv) Vanguard.
\30\ FCMs or investment firms (or organizations thereof)
(collectively, the ``FCMs'') included the following: (i) Citigroup
Global Markets, Inc. (``Citigroup Capital Markets''); (ii) Federated
Investors, Inc. (Freeman and Hawke); (iii) Futures Industry
Association; (iv) International Swaps and Derivatives Association
(``ISDA'') (Original and Supplemental); (v) Newedge USA, LLC
(``Newedge''); (vi) Norges Bank Investment Management; (vii)
Securities Industry and Financial Markets Association (``SIFMA'');
and (viii) State Street Corporation.
\31\ DCOs (collectively, the ``DCOs'') included the following:
(i) CME Group (``CME''); (ii) IntercontinentalExchange, Inc.
(``ICE''); (iii) LCH Clearnet Group (``LCH''); and (iv) Minneapolis
Grain Exchange, Inc.
\32\ Jerrold Salzman.
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The comments were generally divided by the nature of the commenter:
most (though not all) of the buy-side commenters favored either the
Legal Segregation Model (whether Complete or with Recourse) or the
Physical Segregation Model, manifesting a willingness to bear the added
costs. Most of the FCMs and DCOs favored the Futures Model. LCH favored
the Complete Legal Segregation Model. Finally, ISDA, in its
supplemental comment, opined that the most important factor that the
Commission should consider is the extent to which a model fostered the
portability \33\ of cleared swaps belonging to non-defaulting
customers. ISDA noted that the Physical Segregation Model and what is
now referred to as the Complete Legal Segregation Model were most
conducive to that goal.
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\33\ Portability refers to the ability to reliably transfer the
swaps (and related collateral) of a non-defaulting customer from an
insolvent FCM to a solvent FCM, without the necessity of liquidating
and re-establishing the swaps.
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c. Comments: Discussion
In general, comments to the ANPR addressed the following major
issues: (i) Concerns with statutory interpretation; (ii) the
appropriate basis for comparison of benefits and costs for each model;
(iii) estimates of costs, and the assumptions underlying such
estimates; (iv) the benefits of individual collateral protection (e.g.,
on Fellow-Customer Risk, Investment Risk, systemic risk, induced
changes in behavior, and portfolio margining); and (v) the
appropriateness of optional models.
1. Statutory Issues
Section 4d(f)(6) of the CEA prohibits ``any person, including any
derivatives clearing organization * * *'' from holding, disposing, or
using cleared swaps customer collateral ``for deposit in a separate
account or accounts * * * as belonging to * * * any person other than
the swaps customer of the futures commission merchant.'' The emphasis
on ``separate account or accounts'' and the use of ``customer'' in the
singular contrasts with section 4d(b) of the CEA (applicable to futures
customer contracts and related collateral). In the ANPR, the Commission
asked for comment as to whether Congress evinced intent to create a
segregation regime that protects cleared swaps (and related customer
collateral) on a more individualized basis than futures (and related
customer collateral). In general, commenters presented opposing views.
For example, one commenter viewed use of the singular term ``customer''
in section 4d(f)(6) of the CEA as a ``critical difference.'' \34\
Similarly, another commenter viewed such use ``as direction to the * *
* Commission to ensure that customer initial margin [for cleared swaps]
is not put at risk on account of actions of other customers.'' \35\ In
contrast, a third commenter expressed doubt as to whether Congress
would ``adopt such a subtle method of moving away from [omnibus
customer protection] and directing the use of individually segregated
accounts for cleared swaps.'' \36\ The commenter further observed that
it would be anomalous to afford greater protection to cleared
[[Page 33823]]
swaps customers, many of which are large and presumed to be
sophisticated, than futures customers, some of whom might be individual
or ``retail'' customers.\37\
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\34\ CIEBA at 4 at note 2.
\35\ FHLB at 3 at note 3.
Additionally, some commenters maintained that the Futures Model
depends on an interpretive statement issued by the Office of the
General Counsel, which they describe as ``dated and questionable''
in relation to cleared swaps. See FHLB at 4, Federal Farm Credit
Banks Funding Corporation at 3. See also Interpretative Statement,
No. 85-3, Regarding the Use of Segregated Funds by Clearing
Organizations Upon Default by Member Firms (OGC Aug. 12, 1985).
\36\ CME at 5.
\37\ See CME at 5-6.
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2. What is the appropriate starting point?
In general, commenters presented opposing views on whether the
Commission should consider the benefits and costs of each model in
light of current swaps practice or current futures practice. Most buy-
side commenters stated that benefits and costs of each model should be
informed by current swaps practice. First, these commenters emphasized
that they are currently able to negotiate for individual collateral
protection at independent third parties, and are therefore exposed to
neither Fellow-Customer Risk nor Investment Risk. Second, these
commenters stated that they are accustomed to the costs associated with
individual collateral protection and note that their counterparties
enjoy profit from this business model. Finally, these commenters
maintained that the Futures Model forms an inappropriate basis for the
consideration of benefits and costs because:
(i) The Commission is contemplating the appropriate segregation
regime for cleared swaps and related customer collateral; (ii) the
Futures Model references industry conventions for futures contracts and
related collateral; and (iii) the market for cleared swaps has
developed and may continue to develop in a different manner than the
market for futures contracts.\38\
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\38\ For example, the swaps markets have historically been
bespoke, whereas the futures markets have historically been more
standardized. Such historical differences may persist while the
swaps markets transition from the over-the-counter environment to a
cleared and transparent environment. Specifically, while the swaps
market ``dwarf[s]'' the futures market, ``the tremendous diversity
in products and trade parameters'' in the swaps market ``effectively
results in a lower liquidity,'' thereby resulting in the risks that
omnibus clearing poses for swaps customers to be significantly
greater than they are for futures customers. See Fidelity at 6,
Vanguard at 2-5.
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In contrast, a number of commenters, primarily the FCMs and the
DCOs, suggested that the benefits and costs of each model should be
informed by current futures practice. In support of this position,
these commenters note that the futures segregation requirement has
served the futures industry well for many decades.
3. Costs
In general, commenters estimated the costs of implementing each
model in light of the basis for consideration that they viewed most
appropriate. For example, those commenters that argued that current
swaps practice should inform the benefits and costs of each model
emphasized that they have been willing to bear the costs for individual
collateral protection. In contrast, those commenters that argued that
current futures practice should inform the benefits and costs of each
model emphasized that implementing either the Legal Segregation Model
(whether Complete or with Recourse) or the Physical Segregation Model
would lead to substantial costs. As mentioned above, they described two
major sources for such costs: (i) Operational costs; and (ii) costs
associated with obtaining additional financial resources to meet
proposed Commission requirements (assuming that the Commission
prohibits a DCO from accessing the collateral of non-defaulting cleared
swaps customers to cure an FCM default) (the ``Risk Costs'').\39\
Certain other commenters disagreed with the assumptions underlying
estimates of Risk Costs, but not those underlying estimates of
operational costs.
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\39\ Additionally, induced changes in behavior may create a
systemic cost. Such costs have been addressed under the rubric of
moral hazard below.
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a. Operational Costs \40\
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\40\ Some commenters claim that it may be difficult for FCMs and
DCOs to maintain separate models for futures customer collateral and
cleared swaps customer collateral.
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For the Physical Segregation Model, one commenter estimates that an
FCM would incur upfront operational costs of $33 million and ongoing
operational costs of $136 million.\41\ Another commenter estimates that
a DCO would incur upfront operational costs of $7.5 million and ongoing
operational costs of $40 million.\42\ In contrast, for the Legal
Segregation Model (whether Complete or with Recourse), commenters have
suggested that the operational costs would be more modest. For example,
commenters estimate that an FCM would incur upfront operational costs
of $1 million and ongoing operational costs of $700,000.\43\
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\41\ ISDA Original at 10.
\42\ See generally ICE at 10-12.
As mentioned above, the Physical Segregation Model would require
that each FCM and DCO maintain a separate account for each cleared
swaps customer. Therefore, the costs that commenters identify
include, among other things, (i) the costs to establish and maintain
such accounts, (ii) the costs to effect separate fund transfers
between such accounts, (iii) the costs of account reconciliation,
and (iv) the costs to establish the information technology
infrastructure for such accounts.
\43\ See ISDA Supplemental at 7. This modifies the ongoing
figure in ISDA Original at 10 (the upfront figure there is correct).
In contrast to the Physical Segregation Model, the Legal
Segregation Model (whether Complete or with Recourse) would permit
an FCM and a DCO to continue maintaining omnibus accounts, while
requiring enhanced reporting. Therefore, the costs that commenters
identify pertain mostly to such reporting.
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b. The Risk Costs
i. The physical segregation model and the complete legal
segregation model.
Both the Physical Segregation Model and the Complete Legal
Segregation Model would result in Risk Costs,\44\ because they both
prohibit a DCO from accessing the collateral of non-defaulting cleared
swaps customers. As mentioned above, a DCO may seek to cover Risk Costs
in two different ways (or a combination thereof). First, the DCO may
increase the amount of collateral that each cleared swaps customer must
provide to margin its cleared swaps. One commenter estimated that this
increase may equal 69.75 percent (i.e., a total increase of $581
billion). Second, a DCO may increase the amount of resources that each
FCM must contribute to the guaranty fund. The same commenter estimated
that a DCO may double such contributions (i.e., a total increase of
$128 billion).\45\ Another commenter--a DCO--agrees with such estimate,
stating that it would double FCM contributions to its guaranty fund
(i.e., the guaranty fund would increase from $50 billion to $100
billion).\46\
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\44\ One should note that the dollar figures for Risk Costs
presented by commenters and described in the text represent
increased use of capital, not actual costs. The cost associated with
these figures would reflect the opportunity cost of forgoing
possible higher return from alternative uses of the capital in
question.
\45\ See ISDA Original at 12-13. One should note that this
amount represents increased use of capital, and thus does not
represent hundreds of billions in costs.
\46\ See CME at 8-9. This commenter also would consider the use
of ``concentration margin'' to cover such Risk Costs. According to
such commenter, charging concentration margin would constitute a
``more targeted approach,'' because a DCO would charge extra margin
``to the customer cleared-swap accounts in the clearing system with
the largest potential shortfalls,'' rather than increasing the
overall size of the guaranty fund. The commenter acknowledges that
it ``currently lack[s] sufficient information to precisely assess an
appropriate methodology to incorporate concentration margin in a
potential financial-safeguards regime,'' but does state that
``likely concentration charges would fall in the range of $50
billion to $250 billion.'' The commenter anticipates that customers
using ``cleared swaps to hedge exposures in other markets may bear
the brunt of a concentration margin approach.'' The Commission notes
that such an approach may arguably provide for better alignment of
risk-creation and risk-assumption, which commenters from the buy-
side have requested.
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ii. The legal segregation with recourse model and the futures
model.
Based on the rationale articulated above, neither the Legal
Segregation with Recourse Model nor the Futures Model would result in a
need to obtain
[[Page 33824]]
additional financial resources to meet proposed Commission
requirements, since under these models DCOs would have access to the
collateral of non-defaulting customers in the event of a simultaneous
default by an FCM and one or more customers.\47\ However, one commenter
observed that the Legal Segregation with Recourse Model increases the
likelihood that a DCO would access (i) its own contribution and (ii)
the guaranty fund contributions of non-defaulting FCM members, in each
case, to cure a default. The commenter stated that ``[t]he increased
risk to which the DCO and clearing members would be exposed represents
a real wealth transfer from the clearing infrastructure (DCOs and
clearing members), upon which systemic safety is to depend, to
clients.'' \48\
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\47\ See ISDA Original at 12-13. See ISDA Supplemental at 5-6.
For a sense of scale, ISDA estimated that, under the Futures Model
and the Legal Segregation with Recourse Model, industry-wide initial
margin for cleared swaps customer contracts would total $833
billion, and DCO guaranty funds would total $128 billion.
\48\ See ISDA Supplemental at 6.
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c. Assumptions Underlying Risk Costs
Certain commenters disagreed with the assumptions underlying the
estimates of Risk Costs for the Complete Legal Segregation Model and
the Physical Segregation Model. Specifically, they questioned whether,
upon an FCM default, a DCO would have any collateral of non-defaulting
cleared swaps customers left to access. These commenters noted that, if
an FCM declines over time, customers may begin transferring their
cleared swaps collateral to more creditworthy FCMs.\49\ Therefore, a
DCO may choose not to rely on the collateral of non-defaulting cleared
swaps customers for risk management reasons. If the DCO makes such a
choice, it would incur no Risk Costs in adopting either the Complete
Legal Segregation Model or the Physical Segregation Model. These
commenters observed that certain DCOs experienced in clearing swaps
have already made such a choice.\50\
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\49\ See, e.g., Citigroup Capital Markets at 1-2 (``customers of
a deteriorating, non-defaulted FCM have the ability pursuant to CFTC
regulation and clearing house rules to move their positions to an
alternative FCM''), Federal Farm Credit Banks Funding Corp. at 4
(``when faced with a clearing member's potential deterioration in
credit * * * a customer [may] transfer its positions to another
clearing member which could have the unintended effect of
accelerating a clearing member's credit problems''), LCH at 2-3
(stating that while in a ``shock event,'' a DCO may access
collateral from non-defaulting cleared swaps customers, in the
contrasting case of an FCM default following a gradual decline,
``the assumption of access to non-defaulting client Initial Margin
does not hold'').
\50\ For example, LCH stated that, in order for
DCOs [to be] managed prudently * * * their risk waterfalls must
cater for all events, not just `shock' events. This requires that
DCOs clearing swaps must always assume that no client Initial Margin
is available at the point of a default, as this is the most
conservative assumption from a risk management standpoint.
Id.
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4. Benefits
a. Fellow-Customer Risk and Investment Risk
In general, commenters agreed that the Physical Segregation Model
would eliminate Investment Risk, and that such model, along with the
Legal Segregation Model (whether Complete or with Recourse), would
mitigate Fellow-Customer Risk. As mentioned above, commenters disagreed
on whether such benefits would outweigh the operational costs and Risk
Costs, as applicable, which would be incurred to implement such
models.\51\
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\51\ Compare CME at 4 (`` * * * adopting an individual
segregation model for customer cleared swaps * * * would impose
significantly higher costs on customers and clearing members * * *
the increased costs may decrease participation in the CFTC-regulated
cleared swaps market * * * .'') with BlackRock at 2 (``We fail to
understand why protecting collateral for segregation for the OTC
Derivative Account Class when done at an FCM is associated with high
costs when the OTC derivatives market has been able to function as a
profitable business with collateral segregation as part of this
business model'').
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b. Portability
One commenter emphasized that the most important factor that the
Commission should consider in deciding which model to propose is the
effect of that model on the portability of the cleared swaps of non-
defaulting customers in the event of an FCM default. The commenter
stated that the Physical Segregation Model and the Complete Legal
Segregation Model would most facilitate portability.\52\
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\52\ See ISDA Supplemental at 4.
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c. Systemic Risk
A number of commenters described ways in which the Legal
Segregation Model (whether Complete or with Recourse) or the Physical
Segregation Model may mitigate systemic risk. The commenter that
emphasized the importance of portability stated that the Complete Legal
Segregation Model or the Physical Segregation Model would mitigate
systemic risk by enhancing portability of the cleared swaps of non-
defaulting customers in the event of FCM default.\53\ However, this
commenter did not believe that the Legal Segregation with Recourse
Model would mitigate systemic risk to the same extent since it would
not facilitate portability to the same extent as the Complete Legal
Segregation Model.\54\ Second, certain commenters suggested that the
Legal Segregation Model (whether Complete or with Recourse) or the
Physical Segregation Model may ameliorate certain pro-cyclical
incentives under the Futures Model for bank-style ``runs'' on FCMs that
are perceived to be weakening.\55\
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\53\ See id. at 4, 7. ISDA also noted that ``[f]ellow customer
risk, properly conceived, includes the cost incurred by non-
defaulting clients as the result of a DCO closing out their
positions following a client and FCM default.'' See also id. at 2
(``We believe that the client desire for continuance of transactions
and the avoidance of systemic risk requires additional focus on the
facilitation of trade portability and the re-prioritization of
close-out procedures as the option of last resort. From a client
point of view, the enforced close-out of positions could lead to
significant losses, particularly for a financial entity hedging
other rate exposures. The close-out of even a portion of a large
derivative book, like that which is currently run by a GSE, for
example, may create huge losses for the swap hedger, and ultimately
significant costs to the taxpayer. Further, for clients that are
subject to regulatory capital requirements, a reduction in the
ability to port positions may lead to higher regulatory capital
costs'').
\54\ See id. at 5. The commenter further observed that the Legal
Segregation with Recourse Model represents a ``wealth transfer''
from the DCO and its FCM members to cleared swaps customers relative
to the Futures Model, which may increase systemic risk to the extent
that such transfer weakens the DCO and the FCMs.
\55\ See FHLB at 7 (``the primary way for customers to manage
their fellow-customer risk is to have advance arrangements in place
that would allow them to quickly move their cleared trades from a
defaulting clearing member to another clearing member * * * [this]
may prompt the equivalent of a `run on the bank' when information
becomes available that suggests a clearing member may be facing
financial stress'' which may not ``make[] sense from a systemic risk
perspective''). See also AIMA at 1 (where ``client collateral is
inadequately protected, '' ``lack of confidence in the system * * *
can cause customers to seek to avoid losses by liquidating or moving
their positions in stressed market conditions, causing `runs' on
futures commission merchants, greatly exacerbating market stress and
contributing to wider financial instability'').
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d. Induced Changes in Behavior
In general, commenters offered different opinions on the
appropriate focus of induced changes in behavior analysis. For example,
certain commenters focused on the effects of the Futures Model on the
motivations of the DCO. As mentioned above, under the Futures Model, a
DCO may access the collateral of non-defaulting cleared swaps customers
prior to its own capital in the event of an FCM default. Therefore, the
above-mentioned commenters argued that under the Futures Model a DCO
may be less motivated to ensure that each FCM member is managing the
risks posed by cleared swaps customers properly than under Legal
Segregation or Physical Segregation models.\56\
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\56\ See, e.g., Freddie Mac at 3, 4; BlackRock at 5; Vanguard at
7.
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[[Page 33825]]
Other commenters focused on the effect of the Legal Segregation
Model (especially Complete) and the Physical Segregation Model on the
motivations of cleared swaps customers and FCMs. First, these
commenters argued that such models would cause changes in behavior,
because cleared swaps customers benefitting from individual collateral
protection would be less motivated to create market discipline by
clearing thorough less risky firms.\57\ Second, these commenters
contended that FCMs would be less motivated to maintain substantial
excess net capital in order to present a more attractive profile to
customers.\58\
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\57\ See, e.g., CME at 4, ISDA Supplemental at 6.
\58\ See, e.g., ISDA Supplemental at 6.
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Finally, a number of commenters observed that an important
consideration in selecting a model is the effect that the model would
have on the willingness of cleared swaps customers to maintain excess
margin. The more protective of cleared swaps customer collateral a
model is, the more likely it is that cleared swaps customers would be
willing to maintain excess margin.
e. Portfolio Margining
A number of commenters expressed concern that the use of models
other than the Futures Model would create fragmented segregation
requirements (whether across securities and commodities accounts, or
between different classes of commodities accounts), which in turn would
create barriers to the ability of cleared swaps customers to portfolio
margin.\59\
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\59\ See SIFMA at 3-4, Investment Company Institute at 5-6,
Futures Industry Association at 6.
---------------------------------------------------------------------------
5. The Optional Approach \60\
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\60\ The Optional Approach may be implemented in two ways.
First, the Commission may permit each DCO to offer more than one
model for protecting cleared swaps customer contracts and related
collateral. For example, certain FCM members may choose the Complete
Legal Segregation Model, whereas other FCM members may choose the
Legal Segregation with Recourse Model. Second, the Commission may
permit each DCO to offer a different model for protecting cleared
swaps customer contracts and related collateral. For example, a DCO
could choose to offer the Complete Legal Segregation Model to all of
its FCM members, whereas another DCO could choose to offer the
Futures Model.
---------------------------------------------------------------------------
Finally, a number of commenters suggested that the Commission
permit DCOs the option of offering different models for protecting
cleared swaps customer contracts and related collateral (the ``Optional
Approach'').\61\ However, other commenters found the Optional Approach
to be impracticable.\62\ Still other commenters stated that the
Optional Approach may not succeed in reducing costs for those cleared
swaps customers that do not opt for greater protection, and that the
Optional Approach, depending on the manner in which it is structured,
may indeed increase the amount of funds such customers have at
risk.\63\
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\61\ See, e.g., Freddie Mac at 3 (``requiring DCOs to provide
individual segregation on an optional basis is the best way to
achieve the Commission's twin goals of maximizing customer
protection and minimizing cost''), NFA at 2 (The ``better mousetrap
may involve * * * clearing organizations adopting one of the other
models discussed by the Commission. The Commission's regulations
should ensure that DCOs have the flexibility to offer those
alternative structures * * *'').
\62\ See, e.g., ICE at 12 (``ICE's general sense is that any
bifurcated or optional model will further complicate the settlement
process and lead to greater uncertainty during times of financial
stress''), Investment Company Institute at 6 (``Due to the host of
legal, regulatory, operational and other issues which would be
presented, ICI does not believe that it would be appropriate to
implement individual customer protection on an optional rather than
a mandatory basis in connection with this rulemaking proceeding * *
*'').
\63\ See, e.g., ISDA Original at 13 (``if highly credit worthy
customers choose the more expensive, higher protection option,''
pooling may be less effective from the point of view of the DCO,
which may be required to increase initial margin for all customers,
including those choosing to bear fellow customer risk, forcing the
latter to bear both increased funding cost and a greater amount of
funds at risk).
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III. The Proposed Rules
After carefully considering all comments, the Commission has
decided to propose the Complete Legal Segregation Model in this NPRM
for the following reasons.
First, as discussed in section III(A) herein, the Commission
believes that section 4d(f) of the CEA provides it with authority to
propose the Complete Legal Segregation Model. Further, the Commission
believes that the language of section 4d(f) of the CEA supports
strongly considering the current swaps practice.
Second, as discussed in section III(D) herein, the Commission
believes that the Complete Legal Segregation Model provides the best
balance between benefits and costs in order to protect market
participants and the public. Section III(B) herein describes the
Commission's evaluation of the costs of each model, whereas section
III(C) herein describes the Commission's evaluation of the benefits of
each model.
As mentioned in section I (Introduction) herein, the Commission is
continuing to assess the benefits and costs of the Complete Legal
Segregation Model. As part of such assessment, the Commission is
considering whether to adopt, in the alternative, the Legal Segregation
with Recourse Model. Further, the Commission is continuing to assess
the feasibility of the Optional Approach and the Futures Model, and
seeks comments thereon.
The Commission requests comments on (i) its proposal, (ii) whether
it should adopt, in the alternative, the Legal Segregation with
Recourse Model, and (iii) whether it should adopt the Optional Approach
or the Futures Model. The Commission has set forth specific questions
below.
A. Statutory Issues and the Appropriate Starting Point
Section 4d(f) of the CEA provides the Commission with the authority
to afford individualized protection to cleared swaps customer
collateral. As mentioned above, new section 4d(f)(6) of the CEA
prohibits ``any person, including any derivatives clearing organization
* * * '' from holding, disposing, or using customer collateral ``for
deposit in a separate account or accounts * * * as belonging to * * *
any person other than the swaps customer of the futures commission
merchant.'' The reference to ``separate account or accounts'' and the
use of ``customer'' in the singular contrasts with section 4d(b) of the
CEA, which governs the handling of customer collateral by DCOs in the
futures market. Section 4d(b) prohibits a DCO from holding, disposing,
or using customer collateral ``for deposit in a separate account * * *
as belonging to * * * any person other than the customers of such
futures commission merchant,'' using the plural form ``customers'' to
refer to the property of customers collectively. The contrast between
sections 4d(b) and 4d(f)(6) of the CEA suggests that the Commission
need not treat cleared swaps customer collateral in the same manner as
futures customer collateral. This is particularly true because the
reference to ``separate account or accounts'' and ``customer'' in
section 4d(f)(6) of the CEA accords with the individual collateral
protection currently available in the swaps markets and contrasts with
the omnibus approach traditionally used in futures markets. For the
same reason, the Commission is persuaded that the costs of and
protections provided by current swaps practices are highly relevant to
the evaluation of alternative models for implementing the statute.
B. Costs \64\
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\64\ For additional discussion of cost issues, with particular
reference to the costs of the proposed Complete Legal Segregation
Model and the Legal Segregation with Recourse Model relative to the
Futures Model, see the cost-benefit analysis at section VII(C)
infra.
---------------------------------------------------------------------------
1. Rationale
As mentioned above, the Commission believes that current swaps
practices
[[Page 33826]]
forms an appropriate perspective for considering the costs of each
model for protecting cleared swaps customer collateral. The Commission
further believes that the operational costs and Risk Costs that
commenters have identified for each model should be examined in light
of the current practice of many swaps customers to incur costs to
obtain individual collateral protection with independent third-parties.
With respect to operational costs, the Commission notes that
commenters appeared to have relied upon appropriate assumptions in
their estimates for the Legal Segregation Model (whether Complete or
with Recourse) and the Physical Segregation Model.\65\ With respect to
Risk Costs, the Commission observes that commenters appeared to have
relied upon appropriate assumptions in their estimates for the Legal
Segregation with Recourse Model and the Futures Model.\66\ In contrast,
the Commission finds, at least initially, persuasive the comments
questioning the estimates of Risk Costs for the Complete Legal
Segregation Model and the Physical Segregation Model, to the extent
that such estimates are based on the assumption that collateral from
non-defaulting cleared swaps customers would be fully available to DCOs
in practice.\67\
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\65\ The Commission is not persuaded by the claim that it may be
difficult for FCMs and DCOs to maintain separate models for futures
customer collateral and cleared swaps customer collateral. Many FCMs
are part of organizations that currently (and in the future will)
maintain separate models for futures and uncleared swaps, and there
has been no evidence of problems with the ability of such FCMs to
operate both business lines. Indeed, there are DCOs that currently
maintain different guaranty funds for cleared swaps and futures
contracts, and that apply materially different margin models to such
contracts (e.g., futures contracts vs. credit default swaps vs.
interest rate swaps), again without reported trouble.
\66\ Regarding the comment stating that the Legal Segregation
with Recourse Model would result in a ``wealth transfer'' from the
DCO and its FCM members to cleared swaps customers, the Commission
notes that such comment did not include an estimate for any
additional costs resulting from such ``transfer.'' Moreover, such
statement is simply the obverse of the observation by other
commenters that the Futures Model would involve implicit costs to
customers. See, e.g., Federal Farm Credit Banks Funding Corp. at 3
(``Under the [futures] model, the hundreds of millions of dollars
that the System Banks will likely post as initial margin and
variation margin for cleared trades would be at economic risk'').
\67\ For example, the size of the customer account at Lehman
declined substantially in the days before its bankruptcy filing and
caused DCOs to declare it in default. For additional discussion of
the relationship of estimates of Risk Costs to assumptions about the
availability of the collateral of non-defaulting customers in the
event of an FCM default, see the discussion of fellow-customer
behavior and ``diversification'' effects in relation to the design
of a DCO's financial resources package in the cost-benefit analysis
at section VII(C)(2)(b) infra.
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2. Questions
The Commission seeks comment on potential operational costs
associated with implementing the Futures Model, and whether such costs
could vary depending on the volume of swaps to be cleared.
Further, the Commission seeks comment on potential operational
costs and Risk Costs for all models other than the Futures Model,
especially with respect to (i) the extent to which such costs could be
offset against the costs that swaps customers currently incur to obtain
individual collateral protection, and (ii) the extent to which such
costs may correspond to the implicit costs that customers may bear due
to Fellow-Customer Risk.
The Commission also seeks comment on the assumptions underlying
estimates of Risk Costs for the Complete Legal Segregation Model and
the Physical Segregation Model.
Specifically, is it plausible that an FCM might decline
gradually over time rather than in a sudden event? If so, is it
plausible that customers of such a declining FCM might transfer their
cleared swaps and related collateral to another FCM?
If the Commission were to permit a DCO to access
collateral from non-defaulting cleared swaps customers to cure a
default, would it be prudent, in light of answers to the foregoing
questions, for the DCO to rely upon such collateral in calculating the
financial resources package that it must hold? Why or why not, or to
what extent? If not, or if only to a limited extent, how does that
conclusion affect the Risk Costs for the Complete Legal Segregation
Model (as well as the Physical Segregation Model)? Do DCOs account for
potential differences between fellow customer collateral at the time of
calculation and expected fellow-customer collateral at the time of
default in their default resource calculations? If so, how?
In addition, as discussed above, a number of commenters on the ANPR
suggested that consideration of the costs and benefits of all models
should be informed by the protections for collateral obtained by
customers in the existing swaps market and of the costs incurred for
such protections.\68\ The Commission invites additional comment on
these subjects, including quantitative information. Specifically, the
Commission invites the submission of additional information on the
costs of each level of protection, as well as the submission of
detailed quantitative information on the effects, if any, of the
absence of Fellow-Customer Risk on guaranty fund levels, margin levels
and other economic characteristics of the use of collateral in the
cleared swaps market. Additionally, the Commission invites the
submission of detailed quantitative information on the costs currently
incurred to protect collateral in the cleared and uncleared swaps
markets.
---------------------------------------------------------------------------
\68\ See section II(C)(2)(c)(2) supra.
---------------------------------------------------------------------------
Finally, some commenters on the ANPR stated that swaps, including
cleared swaps, have inherent characteristics that differentiate them
from exchange-traded futures contracts and that affect the magnitude of
the exposure that Cleared Swaps Customers have to Fellow-Customer
Risk.\69\ The Commission invites additional comment on the prevalence
of such characteristics and their bearing on the costs and benefits of
the proposed rule and potential alternatives.
---------------------------------------------------------------------------
\69\ See, e.g., note 38, supra.
---------------------------------------------------------------------------
C. Benefits \70\
---------------------------------------------------------------------------
\70\ For additional discussion of benefits issues, with
particular reference to the benefits of the proposed Complete Legal
Segregation Model and the Legal Segregation with Recourse Model
relative to the Futures Model, see the cost-benefit analysis at
section VII(C) infra.
---------------------------------------------------------------------------
1. Rationale
a. Fellow-Customer Risk and Investment Risk
The Commission agrees with commenters that the Legal Segregation
Model (whether Complete or with Recourse) and the Physical Segregation
Model would mitigate Fellow-Customer Risk and Investment Risk to
differing extents. With respect to Fellow-Customer Risk, the Commission
believes that: (i) The Physical Segregation Model would eliminate
Fellow-Customer Risk, albeit only to the extent permitted under the
Bankruptcy Code; \71\ (ii) the Complete Legal Segregation Model would
largely mitigate Fellow-Customer Risk in FCM defaults of all
magnitudes; \72\ and (iii) the Legal Segregation with Recourse Model
would
[[Page 33827]]
largely mitigate Fellow-Customer Risk \73\ in all but the most extreme
FCM defaults.
---------------------------------------------------------------------------
\71\ As discussed further below, section 766(h) of the
Bankruptcy Code, 11 U.S.C. 766(h), requires that customer property
be distributed ``ratably to customers on the basis and to the extent
of such customers' allowed net equity claims * * *.''
\72\ Because the DCO would allocate collateral between
defaulting and non-defaulting cleared swaps customers based on
information the FCM provided the day prior to default, such
allocation would not reflect movement in the cleared swaps portfolio
of such customers on the day of default.
\73\ Id.
---------------------------------------------------------------------------
The Commission agrees with commenters that the Physical Segregation
Model would eliminate Investment Risk because the FCM and DCO would
invest the collateral of one cleared swaps customer separately from the
collateral of another such customer. Therefore, the FCM or DCO may
attribute losses on such investments to one particular customer. The
Commission believes that the Legal Segregation Model (whether Complete
or with Recourse) and the Futures Model would not mitigate Investment
Risk. Such models permit the FCM and DCO to hold the collateral of all
cleared swaps customers in one account, and therefore neither the FCM
nor the DCO would be able to attribute investments (and losses thereon)
to one particular customer.
b. Portability
The Commission agrees with commenters that the Complete Legal
Segregation Model and the Physical Segregation Model would enhance
portability of the cleared swaps of non-defaulting customers in the
event of an FCM default. The Commission notes that the Legal
Segregation with Recourse Model would not likely facilitate portability
to the same extent, because the DCO is unlikely to release the
collateral of such non-defaulting customers until it has completed the
process of liquidating the portfolio of the defaulting FCM and
customers. Therefore, even if the DCO or trustee ports the cleared
swaps of non-defaulting customers, such customers may need to post
additional collateral at the non-defaulting FCM to support such swaps.
Such customers may not be able to meet such increased capital demands,
especially during a time of resource scarcity.
c. Systemic Risk
The Commission agrees with comments that the Complete Legal
Segregation Model and the Physical Segregation Model would most
mitigate systemic risk by enhancing portability of the cleared swaps of
non-defaulting customers in the event that an FCM defaults. The
Commission notes that certain international regulators also emphasize
the importance of portability. For example, the Consultative Report on
the Principles for Financial Market Infrastructures (the ``CPSS-IOSCO
Principles'') \74\ issued by the Committee on Payment and Settlement
Systems (``CPSS'') and the Technical Committee of the International
Organization of Securities Commissions (``IOSCO,'' and together ``CPSS-
IOSCO'') and the Proposal for a Regulation on OTC Derivatives, Central
Counterparties and Trade Repositories by the European Parliament and
Council (the ``EU Proposal'') \75\ highlight the importance of
portability of cleared swaps customer contracts and related collateral.
As stated in the CPSS-IOSCO Principles, the ``[e]fficient and complete
portability of customer positions and collateral is important in both
pre-default and post-default scenarios, but is particularly critical
when a participant defaults or is undergoing insolvency
proceedings''.\76\ The EU Proposal explains that segregation and
portability are ``critical to effectively reduc[ing] counterparty
credit risk through the use of [central counterparties], to achiev[ing]
a level playing field among European [central counterparties] and to
protect the legitimate interests of clients of clearing members''.\77\
---------------------------------------------------------------------------
\74\ See CPSS-IOSCO, CPSS-IOSCO Principles (March 10, 2011),
available at http://www.bis.org/publ/cpss94.pdf.
\75\ See European Commission, EU Proposal (Sept. 15, 2010),
available at http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/20100915_proposal_en.pdf.
\76\ See CPSS-IOSCO Principles at 69.
\77\ See EU Proposal at 10 (Sept. 15, 2010).
---------------------------------------------------------------------------
d. Induced Changes in Behavior \78\
---------------------------------------------------------------------------
\78\ See section VII(C)(2) herein for a description of induced
changes in behavior for DCOs if the Commission adopts either the
Complete Legal Segregation or the Legal Segregation with Recourse
Models.
---------------------------------------------------------------------------
The Commission agrees with commenters that argued that the better
the protection that a model affords to the collateral of non-defaulting
cleared swaps customers, the more likely customers would leave excess
margin at an FCM. In contrast, the Commission does not find persuasive
arguments that the Legal Segregation Model (especially Complete) and
the Physical Segregation Model would cause changes in behavior, by (i)
discouraging cleared swaps customers from creating market discipline by
clearing through less risky firms,\79\ or (ii) discouraging FCMs from
maintaining substantial excess net capital to present a more attractive
profile to customers.\80\
---------------------------------------------------------------------------
\79\ See, e.g., CME at 4, ISDA Supplemental at 6.
\80\ See, e.g., ISDA Supplemental at 6.
---------------------------------------------------------------------------
With respect to (i), cleared swaps customers generally cannot exert
material market discipline because they lack information to accurately
assess the risk of their FCMs. For example, certain commenters noted
that cleared swaps customers cannot obtain information about the risk
profile of fellow customers.\81\ Buy-side commenters reinforced such
observation by stating that they would not want fellow customers
learning of their own risk profiles.\82\ Even if FCMs were to disclose
general policies regarding the risk profiles of customers that they
accept, it is not clear how cleared swaps customers would learn about
exceptions to the FCM policies that may be granted. Given the
foregoing, the Commission is interested in whether FCM disclosures to
cleared swaps customers could be improved. What measures could FCMs
take to provide more comprehensive and useful disclosures regarding
their proprietary risks and the risk profiles of their customers? For
example, one commenter suggested that the Commission could require FCM
disclosures to include the following:
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\81\ E.g., ADM at 3, BlackRock at 5, CIEBA at 2, 4-6, FFCB at 4,
FHLB at 1, MFA at 8, Tudor at 2.
\82\ E.g., BlackRock at 5, FHLB at 2.
---------------------------------------------------------------------------
The FCM's total equity, regulatory capital and net worth;
The dollar value of the FCM's proprietary margin
requirements as a percentage of its segregated and secured customer
margin requirements;
What number of the FCM's customers comprise an agreed
significant percentage of its customer segregated funds;
The aggregate notional value of non-hedged, principal OTC
transactions into which the FCM has entered;
The amount, generic source and purpose of any unsecured
and uncommitted short-term funding the FCM is using;
The aggregate amount of financing the FCM provides for
customer transactions involving illiquid financial products for which
it is difficult to obtain timely and accurate prices;
The percentage of defaulting assets (debits and deficits)
the FCM had during the prior year compared to its year-end segregated
and secured customer funds; and
A summary of the FCM's current risk practices, controls
and procedures.\83\
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\83\ See NewEdge at 3 to 5.
The Commission requests comment as to whether it would make the FCM
disclosure more useful to customers if such disclosure contained one or
more of the elements above. Which elements would be most helpful to
customers? What would be the cost to FCMs of generating such
disclosures? What would be the costs and benefits to
[[Page 33828]]
customers of receiving and reviewing such disclosures?
With respect to (ii), the Commission notes that FCMs have claimed
in recent net capital rulemakings that Commission capital requirements
are sufficient.\84\ If such capital requirements are sufficient, it
would appear that excess net capital is not necessary.\85\
---------------------------------------------------------------------------
\84\ See, e.g., Newedge Letter of June 8, 2009 at 2
(``increasing capital requirements does not necessarily ensure
fiscal solvency.''), id. at 4 (increasing capital requirements would
be anti-competitive). (Attachment B to the Newedge comment to this
rulemaking).
\85\ See section VII(C)(2)(c) infra for additional discussion of
induced changes in behavior for DCOs, including effects on
monitoring of FCM risk, if the Commission adopts either the Complete
Legal Segregation or the Legal Segregation with Recourse Models.
---------------------------------------------------------------------------
e. Portfolio Margining.\86\
---------------------------------------------------------------------------
\86\ See section IV(A)(2) herein for a more detailed description
of Commission orders under section 4d(f) of the CEA.
---------------------------------------------------------------------------
In response to concerns regarding the impact of models other than
the Futures Model on portfolio margining,\87\ the Commission believes
that such impact would likely be positive. Specifically, a DCO could
more easily justify to the Commission that issuing an order under
section 4d(f) of the CEA (or approving rules permitting commingling
pursuant to proposed regulation 39.15(b)(2)) \88\ is appropriate if the
regulations under such section mitigate Fellow-Customer Risk, since the
impact of any different risk from the product being brought into the
portfolio would be limited to the customer who chooses to trade that
product. This is in contrast to the Futures Model, where the risks that
the product being brought into the portfolio affect customers who do
not--and would not--trade that product.
---------------------------------------------------------------------------
\87\ See SIFMA at 3-4, Investment Company Institute at 5-6,
Futures Industry Association at 6.
\88\ See Notice of Proposed Rulemaking on Risk Management
Requirements for Derivatives Clearing Organizations, 76 FR 3698
(Jan. 20, 2011).
---------------------------------------------------------------------------
2. Questions
The Commission seeks comment on the above analysis of benefits
accorded by each model, including whether there are any additional
benefits that the Commission should consider. What benefits would be
realized by, alternatively, adopting the Futures Model?
D. Proposing the Complete Legal Segregation Model: Weighing of Costs
and Benefits
As mentioned above, commenters generally agreed that customers
would bear the costs of implementing any model. Therefore, the
Commission believes that it is appropriate to give weight to the
preference of customers. The Commission finds it compelling that most
(although not all) buy-side commenters to the ANPR favored a model
other than the Futures Model. The Commission notes that models other
than the Futures Model would provide more individualized protection to
cleared swaps customer collateral in accordance with section 4d(f) of
the CEA. Any such model may provide substantial benefits in the form of
(i) decreased Fellow-Customer Risk (as well as Investment Risk, in
certain circumstances), (ii) increased likelihood of portability, (iii)
decreased systemic risk, and (iv) positive impact on portfolio
margining. The Commission seeks additional comments, in particular from
customers, as to whether and why, in light of this NPRM, they favor or
oppose adoption of the Futures Model. The Commission anticipates that,
to the extent it decides to adopt the Futures Model, the proposed rule
text from proposed regulation 22.2 to proposed regulation 22.10 would
implement such model. The Commission notes that changes to the language
of proposed regulation 22.15 may be necessary. Specifically, proposed
regulation 22.15 would need to include an additional section to the
effect that a DCO may, if its rules so provide, use the Cleared Swaps
Customer Collateral of all Cleared Swaps Customers of a Depositing
Futures Commission Merchant that has defaulted on a payment to the DCO
with respect to its Cleared Swaps Customer Account.
In choosing between the Legal Segregation Model (whether Complete
or with Recourse) and the Physical Segregation Model, the Commission
notes that the operational costs for the Physical Segregation Model are
substantially higher than the operational costs for the Legal
Segregation Model (whether Complete or with Recourse).
With respect to benefits, the Commission believes that the Physical
Segregation Model provides only incremental advantages over the Legal
Segregation Model (whether Complete or with Recourse) with respect to
the mitigation of Fellow-Customer Risk. The Physical Segregation Model,
unlike the Legal Segregation Model (whether Complete or with Recourse),
does eliminate Investment Risk. However, the Commission notes that (i)
it is in the process of further addressing Investment Risk by proposing
amendments to regulation 1.25, and (ii) each FCM and DCO already values
investments conservatively. Finally, the Commission observes that the
Physical Segregation Model generally enhances portability to the same
extent as the Complete Legal Segregation Model, and therefore would
have similar effects on systemic risk. The Physical Segregation Model
and the Legal Segregation Model (whether Complete or with Recourse)
would likely enhance portfolio margining to the same extent.
Consequently, after weighing the potential costs and benefits of
the Physical Segregation Model, the Commission has decided that this
model does not provide the best balance, in that it provides similar
benefits as the Legal Segregation Model (whether Complete or with
Recourse), but costs more to implement. Hence, the Commission has
determined not to propose the Physical Segregation Model.
In choosing between the Complete Legal Segregation Model and the
Legal Segregation with Recourse Model, the Commission notes that
commenters have argued that implementing the former would result in
significant Risk Costs, whereas implementing the latter would result in
no Risk Costs. As mentioned above, the Commission finds, at least
initially, persuasive comments that question the assumptions underlying
the estimates of Risk Costs for the Complete Legal Segregation Model.
Nevertheless, the Commission recognizes that such assumptions form an
area of divergence between commenters, and therefore asks for
additional comment on the Risk Costs for the Complete Legal Segregation
Model. The Commission observes that operational costs for the Complete
Legal Segregation Model and the Legal Segregation with Recourse Model
are approximately the same.
With respect to benefits, the Commission notes that the Complete
Legal Segregation Model would mitigate Fellow-Customer Risk even in
extreme FCM defaults, unlike the Legal Segregation with Recourse Model.
Further, the Complete Legal Segregation Model would enhance portability
(and therefore mitigate systemic risk) to a significantly greater
extent than the Legal Segregation with Recourse Model. Finally, the
Complete Legal Segregation Model would have an incremental advantage
over the Legal Segregation with Recourse Model with respect to impact
on portfolio margining.
Consequently, after weighing the potential costs and benefits, the
Commission has determined that the Complete Legal Segregation Model
provides the best balance, and therefore has determined to propose the
Complete Legal Segregation Model. Nevertheless, because the Commission
is still evaluating the costs associated with such model, as well as
with the Legal
[[Page 33829]]
Segregation with Recourse Model, the Commission is also considering the
Legal Segregation with Recourse Model.\89\
---------------------------------------------------------------------------
\89\ See generally section IV(O) below.
---------------------------------------------------------------------------
E. The Optional Approach
1. Rationale
As mentioned above, a number of commenters urged the Commission to
propose the Optional Approach. The Commission has preliminarily
declined to propose the Optional Approach because it may not be
compatible with the Bankruptcy Code and regulation part 190 (``Part
190''). Specifically, if customer collateral cannot be transferred,
section 766(h) of the Bankruptcy Code \90\ requires that such
collateral be distributed on a pro rata basis. In implementing this
section of the Bankruptcy Code, the Commission has created in Part 190
the ``account class'' concept, which enables customer collateral to be
separated into different categories for distribution depending on the
type of customer (i.e., futures customer, foreign futures customer, and
cleared swaps customer) holding a claim. All customers belonging to one
``account class'' would share pro rata in the collateral attributed to
that ``account class.'' Therefore, all cleared swaps customers would
belong to one ``account class,'' and would share pro rata in the
cleared swaps collateral remaining after their contracts are ported or
liquidated. If, under the Optional Approach, certain cleared swaps
customers had chosen a model that provided more individual collateral
protection while others had not, the former would still share in any
shortfalls in cleared swaps customer collateral resulting from the
choices of the latter. The Commission notes that the ``account class''
concept, which has been tested and upheld in prior bankruptcy
proceedings, has never permitted customers transacting in the same type
of contracts, with two different segregation requirements, to be deemed
participants in separate ``account classes.'' \91\
---------------------------------------------------------------------------
\90\ 11 U.S.C. 761(h).
\91\ The Commission created the ``account class'' concept in
adopting original part 190. See 46 FR 57535 (Nov. 24, 1981). The
Commission noted that ``the accounts held by a commodity broker
would be divided into four types or classes: Futures accounts,
foreign futures accounts, leverage accounts and commodity options
accounts, which correspond to the four estates a commodity broker
may have based upon the different types of transactions it handles
for customers.'' Id. at 57536. These classes corresponded to
different definitions of ``customer'' found in section 761(9) of the
Bankruptcy Code: With respect to a ``futures commission merchant,''
a ``foreign futures commission merchant,'' a ``leverage transaction
merchant,'' and a ``commodity options dealer.'' See 11 U.S.C.
761(9).
In making that proposal, the Commission cited to text in the
House Report for the 1978 Bankruptcy Code concerning those
definitions, which noted that:
It is anticipated that a debtor with multifaceted
characteristics will have separate estates for each different kind
of customer. Thus, a debtor that is a leverage transaction merchant
and a commodity options dealer would have separate estates for the
leverage transaction customers and for the options customers, and a
general estate for other creditors.
See H.R. Rep. 95-595 at 355, 1978 U.S.C.C.A.N. 5963, 6346.
In the release adopting part 190, the Commission added another
``account class,'' delivery accounts, for property related to the
making or taking of physical delivery by a customer. Delivery
accounts are not mentioned in section 761(9) of the Bankruptcy Code,
but are, again, related to a ``different kind of customer.'' See 48
FR 8716, 8731 (Mar. 1, 1983). Similarly, in April of 2010, the
Commission added another ``account class,'' for cleared OTC
transactions. Once again, this represented a ``separate estate'' for
a ``different kind of customer.'' See 75 FR 17297 (Apr. 6, 2010).
Separating cleared swaps customers by the type of model the DCO
adopts does not fit this tested rubric: The customers are all of the
same ``kind,'' namely, all cleared swaps customers.
---------------------------------------------------------------------------
Moreover, as a number of commenters have noted, optional models may
cause legal, regulatory, operational and other complexities.\92\
---------------------------------------------------------------------------
\92\ See, e.g., ICE at 12, Investment Company Institute at 6,
LCH at 7.
---------------------------------------------------------------------------
2. Questions
It may be possible for the Commission to resolve the
incompatibility between (i) the Optional Approach and (ii) the
Bankruptcy Code and Part 190, by permitting DCOs to require that FCMs
establish separate legal entities, each of which is limited to clearing
at DCOs that use only one of (A) the Complete Legal Segregation Model
or (B) the Legal Segregation with Recourse Model. The Commission notes,
however, that this approach might cause concerns with respect to open
access and competition. The Commission seeks comment on the
practicability of this approach.
What costs (including implementation, operational, and
capital) would such DCOs and FCMs incur?
Would FCMs be willing to establish such separate legal
entities? What systemic risk impacts might there be, if any?
Would such an approach create benefits or burdens in other
contexts?
What would be the effect of this approach on competition
and on opening FCM access to clearing organizations?
In addition, the Commission seeks comment on whether the Optional
Approach should be expanded to add the Futures Model as an option. If
so, what would be the impact on (1) costs, (2) the protection of
Cleared Swaps Customer Collateral, and (3) the existence of effective
choice by customers?
The Commission also seeks comment on whether to implement a model
that permits DCOs to offer the Physical Segregation Model for cleared
swaps customer collateral for some set of customers of their FCM
members, with the remaining cleared swaps customer collateral staying
in an omnibus account under the Futures Model. (Under this model, the
customers in question would hold claims with respect to the collateral
placed in physical segregation directly against the DCO rather than
against the FCM through which the customers clear.) \93\
---------------------------------------------------------------------------
\93\ See comment from Jerrold Salzman, available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=42253&SearchText= (discussing the legal
segregation of certain customer accounts as a way to minimize fellow
customer risk).
---------------------------------------------------------------------------
How would such a model work in the ordinary course of
business (i.e., pre-FCM member default)? For example, how would an FCM
and a DCO structure their respective cash flows to accommodate such
model? To the extent that an FCM or DCO may structure their cash flows
in different ways, what are the issues, costs, or risks of each way?
What changes to proposed Part 22 and Part 190 should the
Commission make to accommodate this model?
Who (e.g., the cleared swaps customer, FCM member, and
DCO) would have what rights in cleared swaps customer collateral at
every stage of clearing (including with respect to initial margin and
variation payments and collections)?
In the event of an FCM bankruptcy, would such cleared
swaps customer collateral constitute ``customer property'' subject to
ratable distribution pursuant to section 766(h) of the Bankruptcy Code?
[cir] To what extent would the answer to this question depend on
the manner in which the FCM and the DCO structured their respective
cash flows in the ordinary course of business?
[cir] To the extent cleared swaps customer collateral is removed
from ``customer property'':
[dec221] What vulnerabilities might that raise for the protection
of such collateral in an FCM or a DCO bankruptcy? For example, is there
a risk that, in some circumstances, such property might be deemed to be
part of a bankrupt FCM's or DCO's bankruptcy estate subject to the
claims of creditors other than the relevant swaps customers?
[dec221] What changes would need to be made to self-regulatory
organization audit programs to ensure protection of
[[Page 33830]]
cleared swaps customer collateral pre-bankruptcy?
Should such a model be an option elected by cleared swaps
customers, or mandatory for defined ``high-risk'' customers?
[cir] By whom would the definition of ``high-risk'' be set?
[cir] What criteria should be included in the definition of ``high
risk''?
[cir] Would the definition of ``high risk'' vary by asset class?
To the extent the model is optional by a cleared swaps
customer, to what extent might there be a tendency for cleared swaps
customers posing greater risk to remain in the omnibus pool? What
policy concerns, if any, might be raised by the inclusion of a larger
concentration of cleared swaps customers posing greater risk in the
omnibus pool?
Please provide a detailed quantitative analysis of the costs and
benefits of this model relative to other models that are being
considered in this NPRM, and relative to the existing uncleared swaps
market. Please specify how each cost and benefit would be ultimately
allocated to, or borne by, cleared swaps customers, FCMs and DCOs.
Specifically, how would this type of model affect operational costs and
Risk Costs?
F. Structure of These Proposed Regulations
Proposed regulation part 22 (``Part 22'') establishes the basic
architecture for protecting cleared swaps customer collateral through
the promulgation of definitions and procedures for the segregation of
cleared swaps pertaining to customers, as well as associated
collateral. The Commission intends for proposed Part 22 to incorporate
legal segregation, and to parallel, for the most part, the substance of
corresponding provisions in part 1 to Title 17 (the ``Part 1
Provisions''), in updated and clarified form, with respect to issues
such as requirements for treatment of customer funds on a day-to-day
basis, required amounts of collateral in customer accounts, and
required qualifications for permitted depositories. While most of the
proposed regulations in Part 22 will remain the same for the Complete
Legal Segregation Model and the Legal Segregation with Recourse Model,
proposed regulation 22.15 sets forth alternatives to take into account
the fact that, under the Legal Segregation with Recourse Model,
following an event of default a DCO would be able to access the
collateral of non-defaulting cleared swaps customers after the DCO
applied (i) its own capital to cure the default and (ii) the guaranty
fund contributions of its non-defaulting FCM members.
The infrastructure supporting legal segregation is established in
proposed regulations 22.11-22.16, including (i) the requirement that an
FCM transmit to its DCO daily information regarding customers and their
swaps, (ii) tools that the DCO may use to manage the risk it incurs
with respect to individual customers, (iii) steps the FCM is required
to take if it fails to meet a cleared swaps customer margin call in
full, and (iv) an explicit requirement that cleared swaps customer
collateral be treated on an individual basis. The Commission requests
comment on whether Part 22 differs in substance from the Part 1
Provisions, other than in the specific instances described in this
NPRM.
In addition, proposed revisions to Part 190 of the Commission's
regulations generally 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 additional conforming
changes to time periods. Additional proposed changes have been made to
conform Part 190 to current market practices (e.g., providing for
auctions of swaps portfolios in the event of a commodity broker
insolvency).
IV. Section by Section Analysis: Segregation of Cleared Swaps for
Customers
A. Proposed Regulation 22.1: Definitions
Proposed regulation 22.1 establishes definitions for, inter alia,
the following terms: ``cleared swap,'' ``cleared swaps customer,''
``cleared swaps customer account,'' ``cleared swaps customer
collateral,'' ``cleared swaps proprietary account,'' ``clearing
member,'' \94\ ``collecting futures commission merchant,''
``commingle,'' ``customer,'' ``depositing futures commission
merchant,'' ``permitted depository,'' \95\ and ``segregate.''
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\94\ Under the Commission's proposal, the term ``clearing
member'' means ``any person that has clearing privileges such that
it can process, clear and settle trades through a derivatives
clearing organization on behalf of itself or others. The derivatives
clearing organization need not be organized as a membership
organization.''
\95\ The Commission is proposing to define ``permitted
depository'' as a depository that meets the following conditions:
(a) The depository must (subject to proposed regulation 22.9) be
one of the following types of entities:
(1) A bank located in the United States;
(2) a trust company located in the United States;
(3) a Collecting Futures Commission Merchant registered with the
Commission (but only with respect to a Depositing Futures Commission
Merchant providing Cleared Swaps Customer Collateral); or
(4) a derivatives clearing organization registered with the
Commission; and
(b) the FCM or the DCO must hold a written acknowledgment letter
from the depository as required by proposed regulation 22.5. See
also the discussion under section IV(D).
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1. ``Segregate'' and ``Commingle''
The Commission has never defined the terms ``segregate'' and
``commingle,'' although the Part 1 Provisions make extensive use of
these terms. Regulation 22.1 proposes definitions for these terms that
are intended to codify the common meaning of such terms under the Part
1 Provisions. Pursuant to the proposal, to ``segregate'' two or more
items means to keep them in separate accounts and to avoid combining
them in the same transfer between accounts. In contrast, to
``commingle'' two or more items means to hold them in the same account,
or to combine such items in a transfer between accounts. For purposes
of these definitions, to keep items in separate accounts means: (i) To
hold tangible items \96\ physically separate within one's own
organization; (ii) to deposit tangible or intangible items \97\ with a
Permitted Depository (as discussed further below) in separate accounts;
and (iii) to reflect tangible or intangible items in separate entries
in books and records. To hold items in the same account means exactly
the opposite--namely, (i) to hold tangible items physically together
within one's own organization; (ii) to deposit tangible or intangible
items with a Permitted Depository in the same account; and (iii) to
reflect tangible or intangible items in the same entries in books and
records.
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\96\ Tangible items may include, e.g., gold ingots or warehouse
receipts, as discussed further below.
\97\ Intangible items may include, e.g., wire transfers or
dematerialized securities, as discussed further below.
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2. ``Cleared Swap''
The term ``Cleared Swap'' has no analog in the Part 1 Provisions.
Regulation 22.1 proposes a definition that incorporates section 1a(7)
of the CEA,\98\ as added by section 721 of the Dodd-Frank Act. This
definition then excludes, for purposes of Part 22 only, cleared swaps
(and related collateral) that, pursuant to Commission order under
section 4d(a) of the CEA,\99\ are
[[Page 33831]]
commingled with futures contracts (and related collateral) in an
account established for the futures contracts. The definition
conversely includes, for purposes of Part 22 only, futures contracts or
foreign futures contracts (and, in each case, related collateral) that,
pursuant to Commission order under section 4d(f) of the CEA,\100\ are
commingled with cleared swaps (and related collateral) in an account
established for the cleared swaps. The rationale for such exclusion and
inclusion is that, under Commission precedent,\101\ once cleared swaps
(and related collateral) are commingled with futures contracts (and
related collateral) in a futures account, the Part 1 Provisions and the
Bankruptcy Rules would apply to the cleared swaps (and related
collateral) as if such swaps constituted futures contracts (and related
collateral). Similarly, once futures contracts or foreign futures
contracts (and, in each case, related collateral) are commingled with
cleared swaps (and related collateral) in a cleared swaps account, the
proposed definition of ``Cleared Swap'' would apply Part 22 and the
Bankruptcy Rules to the former contracts as if they constituted cleared
swaps (and related collateral). Therefore, the proposed definition of
``Cleared Swap,'' with such exclusion and inclusion, simply extends
Commission precedent.
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\98\ 7 U.S.C. 1a(7). The Commission is working on regulations,
along with the Securities and Exchange Commission, that would
further define certain key terms of the Dodd-Frank Act, including
``swaps.'' See Definitions Contained in Title VII of Dodd-Frank Wall
Street Reform and Consumer Protection Act, 75 FR 51429 (Aug. 20,
2010). Such regulations, when finalized, would automatically be
incorporated in the definition of ``cleared swap'' cited herein.
\99\ 7 U.S.C. 6d(a).
\100\ 7 U.S.C. 6d(f).
\101\ For example, current regulation 190.01(a) states: ``* * *
if positions in commodity contracts that would otherwise belong to
one account class (and the money, securities, and/or other property
margining, guaranteeing, or securing such positions), are, pursuant
to a Commission order, commingled with positions in commodity
contracts of the futures account class (and the money, securities,
and/or other property margining, guaranteeing, or securing such
positions), then the former positions (and the relevant money,
securities, and/or other property) shall be treated, for purposes of
this part, as being held in an account of the futures account
class.'' 17 CFR 190.01(a). In the notice proposing current
regulation 190.01(a), 74 FR 40794 (Aug. 13, 2009), the Commission
stated that the regulation codified two previous interpretative
statements: (i) The Interpretative Statement Regarding Funds Related
to Cleared-Only Contracts Determined To Be Included in a Customer's
Net Equity, 73 FR 65514 (Nov. 4, 2008); and (ii) the Interpretative
Statement Regarding Funds Determined to be Held in the Futures
Account Type of Customer Account Class, 69 FR 69510 (Nov. 30, 2004).
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3. ``Cleared Swaps Customer'' and ``Customer''
Regulation 22.1 proposes a definition of ``Cleared Swaps Customer''
that has two elements. First, an entity holding a Cleared Swaps
Proprietary Account (as discussed further below) is not a ``Cleared
Swaps Customer'' with respect to the Cleared Swaps (and related
collateral) in that account. Such exclusion is consistent with
regulation 1.3,\102\ which defines ``customer'' and ``commodity
customer'' for futures contracts. Second, an entity is only a ``Cleared
Swaps Customer'' with respect to its Cleared Swaps (and related
collateral). Additionally, the same entity may be a ``customer'' or
``commodity customer'' (as regulation 1.3 defines such terms) with
respect to its futures contracts, and a ``foreign futures or foreign
options customer'' (as regulation 30.1(c) \103\ defines such term) with
respect to its foreign futures contracts.\104\ Because certain
provisions of Part 22 distinguish the status of such entity (i) as a
``Cleared Swaps Customer'' and (ii) as a ``customer'' or ``commodity
customer'' or ``foreign futures or options customer,'' regulation 22.1
proposes a definition for ``Customer'' that includes any customer of an
FCM other than a ``Cleared Swaps Customer.''
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\102\ 17 CFR 1.3.
\103\ 17 CFR 30.1(c).
\104\ The contracts (and related collateral) of such entity
would be subject to three different segregation regimes.
Specifically, the entity would be entitled to the protections of (i)
the Corresponding Provisions with respect to its futures contracts
(and related collateral), (ii) regulation 30.7 with respect to its
foreign futures contracts (and related collateral), and (iii) Part
22 with respect to its Cleared Swaps (and related collateral).
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4. ``Cleared Swaps Customer Collateral''
Regulation 22.1 proposes to define ``Cleared Swaps Customer
Collateral'' to include money, securities, or other property that an
FCM or a DCO receives, from, for, or on behalf of a Cleared Swaps
Customer, which (i) is intended to or does margin, guarantee, or secure
a Cleared Swap,\105\ or (ii) if the Cleared Swap is in the form or
nature of an option, constitutes the settlement value of such option.
Additionally, regulation 22.1 proposes to define ``Cleared Swaps
Customer Collateral'' to include ``accruals,'' which are the money,
securities, or other property that an FCM or DCO receives, either
directly or indirectly, as incident to or resulting from a Cleared Swap
that the FCM intermediates for a Cleared Swaps Customer.\106\
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\105\ Proposed regulation 22.1 provides that ``Cleared Swaps
Customer Collateral'' includes collateral that an FCM or a DCO
receives from, for, or on behalf of a Cleared Swaps Customer that
either (i) is actually margining, guaranteeing, or securing a
Cleared Swap or (ii) is intended to margin, guarantee, or secure a
Cleared Swap. This provision is a clarification of ``customer
funds'' as defined in regulation 1.3, which includes ``all money,
securities, and property received by a futures commission merchant
or by a clearing organization from, for, or on behalf of, customers
or option customers * * * to margin, guarantee, or secure futures
contracts.''
\106\ The Commission does not intend to include in Part 22 a
parallel to regulation 1.21, given that (i) regulation 22.1 proposes
to broadly include ``accruals'' in the definition of ``Cleared Swaps
Customer Collateral'' and (ii) regulation 22.2(c) proposes to permit
an FCM to commingle the ``Cleared Swaps Customer Collateral'' of
multiple ``Cleared Swaps Customers.''
Regulation 1.21 states: ``All money received directly or
indirectly by, and all money and equities accruing to, a futures
commission merchant from any clearing organization or from any
clearing member or from any member of a contract market incident to
or resulting from any trade, contract or commodity option made by or
through such futures commission merchant on behalf of any commodity
or option customer shall be considered as accruing to such commodity
or option customer within the meaning of the Act and these
regulations. Such money and equities shall be treated and dealt with
as belonging to such commodity or option customer in accordance with
the provisions of the Act and these regulations. Money and equities
accruing in connection with commodity or option customers' open
trades, contracts, or commodity options need not be separately
credited to individual accounts but may be treated and dealt with as
belonging undivided to all commodity or option customers having open
trades, contracts, or commodity option positions which if closed
would result in a credit to such commodity or option customers.'' 17
CFR 1.21.
The Commission requests comment on whether it should include in
Part 22 a parallel to regulation 1.21.
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In general, the proposed definition parallels regulation 1.3,\107\
which defines ``customer funds'' for futures contracts. However, the
proposed definition differs from regulation 1.3 in three
instances.\108\ First, the proposed definition explicitly includes a
Cleared Swap in the form or nature of an option as ``Cleared Swaps
Customer Collateral.'' The Commission believes that such change
appropriately clarifies that a Cleared Swap functioning as an option,
but not labeled as one, falls within the scope of the proposed
definition. Second, the proposed definition does not explicitly include
option premiums as ``Cleared Swaps Customer Collateral.'' The
Commission believes that such amounts are already incorporated in the
settlement value of the option, and that listing such amounts
separately may cause unnecessary confusion. Third, the proposed
definition explicitly includes in ``accruals'' the money, securities,
or other property that a DCO may receive relating to the Cleared Swap
that an FCM intermediates for a Cleared Swap Customer. The Commission
believes that such inclusion is appropriate since proposed regulation
22.3 permits a DCO to invest the ``Cleared Swaps Customer Collateral''
that it receives from the FCM in accordance with regulation 1.25.\109\
Therefore, any increases in value
[[Page 33832]]
resulting from the investment would properly belong to the Cleared
Swaps Customer, and would constitute another form of ``Cleared Swaps
Customer Collateral.''
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\107\ 17 CFR 1.3.
\108\ In addition to these three instances, the proposed
definition does not incorporate certain parallels to regulation 1.3
(exclusion from ``customer funds'' of collateral to secure security
futures products in a securities account) because such parallels are
not applicable to the context of Cleared Swaps (and related
collateral).
\109\ 17 CFR 1.25.
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5. ``Cleared Swaps Customer Account'' and ``Cleared Swaps Proprietary
Account''
Regulation 22.1 proposes to define ``Cleared Swaps Customer
Account'' as (i) an account that an FCM maintains at a Permitted
Depository (as such term is discussed below) for the Cleared Swaps (and
related collateral) of its Cleared Swaps Customers, or (ii) an account
that a DCO maintains at a Permitted Depository, for collateral related
to Cleared Swaps that the FCM members intermediate for their Cleared
Swaps Customers. The proposed definition does not include any physical
locations in which an FCM or a DCO may itself hold tangible Cleared
Swaps Customer Collateral. As described below, regulations 22.2 and
22.3 propose to define such physical locations as the ``FCM Physical
Location'' and the ``DCO Physical Location,'' respectively. The
proposed definition is consistent with regulation 1.3,\110\ which
defines ``futures account.'' However, the proposed definition provides
greater specificity than regulation 1.3 regarding (i) the entities
maintaining the ``Cleared Swaps Customer Account'' (i.e., the FCM or
DCO) and (ii) the Permitted Depositories for a ``Cleared Swaps Customer
Account.''
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\110\ 17 CFR 1.3.
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Regulation 22.1 proposes a definition for ``Cleared Swaps
Proprietary Account'' that is substantially similar to regulation 1.3,
which defines ``Proprietary Account'' for futures contracts.\111\ The
proposed definition contains a proviso, in paragraph (b)(8), that
states ``an account owned by any shareholder or member of a cooperative
association of producers, within the meaning of section 6a of the Act,
which association is registered as an FCM and carries such account on
its records, shall be deemed to be a Cleared Swaps Customer Account and
not a Cleared Swaps Proprietary Account of such association, unless the
shareholder or member is an officer, director, or manager of the
association.'' This proviso parallels paragraph viii in the definition
of ``Proprietary Account'' in regulation 1.3. The Commission requests
comment on whether this proviso remains relevant, and, in particular,
with respect to Cleared Swaps.
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\111\ Id.
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6. ``Collecting Futures Commission Merchant'' and ``Depositing Futures
Commission Merchant''
The terms ``Collecting Futures Commission Merchant'' and
``Depositing Futures Commission Merchant'' have no analogs in the Part
1 Provisions. Regulation 22.1 proposes to define a ``Collecting Futures
Commission Merchant'' as one that carries Cleared Swaps on behalf of
another FCM and the Cleared Swaps Customers of that other FCM and, as
part of doing so, collects Cleared Swaps Customer Collateral. In
contrast, regulation 22.1 proposes to define a ``Depositing Futures
Commission Merchant'' as one that carries Cleared Swaps on behalf of
its Cleared Swaps Customers through a Collecting Futures Commission
Merchant, and, as part of doing so, deposits Cleared Swaps Customer
Collateral with such Collecting Futures Commission Merchant. Regulation
22.7, as described below, proposes to employ the terms ``Collecting
Futures Commission Merchant'' and ``Depositing Futures Commission
Merchant'' to delineate the circumstances in which one FCM may serve as
a Permitted Depository to another.
B. Proposed Regulation 22.2--Futures Commission Merchants: Treatment of
Cleared Swaps Customer Collateral
Regulation 22.2 proposes requirements for an FCM's treatment of
Cleared Swaps Customer Collateral, as well as the associated Cleared
Swaps.
1. In General
Regulation 22.2(a) proposes to require an FCM to treat and deal
with the Cleared Swaps of Cleared Swaps Customers, as well as
associated Cleared Swaps Customer Collateral, as belonging to the
Cleared Swaps Customers. In other words, the FCM may not use Cleared
Swaps Customer Collateral to cover or support (i) its own obligations
or (ii) the obligations of Customers (e.g., entities transacting in
futures or equities contracts). Such proposal parallels regulations
1.20(a) and 1.26(a), which apply to ``customer funds,'' and obligations
purchased with customer funds, for futures contracts.\112\
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\112\ Regulation 1.20(a) states: ``Under no circumstances shall
any portion of customer funds be obligated to a clearing
organization, any member of a contract market, a futures commission
merchant, or any depository except to purchase, margin, guarantee,
secure, transfer, adjust or settle trades, contracts or commodity
option transactions of commodity or option customers.'' 17 CFR
1.20(a).
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2. Location of Collateral
Regulation 22.2(b) proposes to require that an FCM segregate all
Cleared Swaps Customer Collateral that it receives. Such proposal
parallels regulations 1.20(a) and 1.26(a).\113\ Additionally,
regulation 22.2(b) proposes to require that an FCM adopt one of two
methods to hold segregated Cleared Swaps Customer Collateral, which
parallel either implicit assumptions or explicit provisions of
regulation 1.20(a).
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\113\ Regulation 1.20(a) states: ``All customer funds shall be
separately accounted for and segregated as belonging to commodity or
option customers.'' Id.
Regulation 1.26(a) states: ``Each futures commission merchant
who invests customer funds in instruments described in Sec. 1.25
shall separately account for such instruments and segregate such
instruments as belonging to such commodity or option customers.'' 17
CFR 1.26.
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a. The First Method
Paralleling an implicit assumption of regulations 1.20(a) and
1.26(a), the first method permits the FCM to hold Cleared Swaps
Customer Collateral itself.\114\ Continuing such parallel, the first
method limits the FCM to holding tangible collateral (e.g., gold ingots
or warehouse receipts) because no FCM currently serves as a depository
registered with domestic or foreign banking regulators, and because of
uncertainty regarding the effectiveness of such segregation if an FCM
that was so registered held intangible collateral in its own accounts.
Finally, the first method requires the FCM, in holding such Cleared
Swaps Customer Collateral, to:
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\114\ Regulation 1.20(a) does not require that an FCM hold
``customer funds'' in a depository. Rather, it applies certain
requirements to the holding of ``customer funds when deposited with
any bank, trust company, clearing organization or another futures
commission merchant * * *'' (emphasis added). In the absence of a
requirement to use a depository, regulation 1.20(a) must implicitly
permit the FCM to hold ``customer funds'' itself. Id. Regulation
1.26(a) contains similar language regarding the use of a depository.
Id.
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Physically separate the collateral from FCM property
(e.g., in a box or vault);
Clearly identify each physical location (an ``FCM Physical
Location'') in which it holds such collateral as a ``Location of
Cleared Swaps Customer Collateral'' (e.g., by affixing a label or sign
to the box or vault);
Ensure that the FCM Physical Location provides appropriate
protection for such collateral (e.g., by confirming that the box or
vault has locks and is fire resistant); and
Record in its books and records the amount of such
collateral separately from FCM funds (i.e., to reflect the reality of
physical separation in books and records).
[[Page 33833]]
b. The Second Method
Paralleling an explicit provision of regulations 1.20(a) and
1.26(a),\115\ the second method permits the FCM to hold Cleared Swaps
Customer Collateral outside of itself, i.e., at a depository.\116\
Continuing that parallel, the second method limits the FCM to certain
Permitted Depositories (as further discussed below), and requires that
the FCM deposit such collateral in a Cleared Swaps Customer Account.
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\115\ Regulation 1.20(a) states: ``All customer funds shall be
separately accounted for and segregated as belonging to commodity or
option customers. Such customer funds when deposited with any bank,
trust company, clearing organization or another futures commission
merchant shall be deposited under an account name which clearly
identifies them as such and shows that they are segregated as
required by the Act and this part.'' Id. Regulation 1.26(a) contains
similar language. Id.
\116\ If an FCM chooses to accept intangible Cleared Swaps
Customer Collateral, then the proposal effectively requires the FCM
to maintain such collateral outside of itself. If the FCM accepts
tangible Cleared Swaps Customer Collateral (e.g., a gold ingot) and
transfers such collateral to a depository (e.g., a DCO), the FCM
will be considered to be depositing such collateral rather than
maintaining the collateral itself.
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3. Commingling
Regulation 22.2(c) proposes to permit an FCM to commingle the
Cleared Swaps Customer Collateral of multiple Cleared Swaps Customers,
while prohibiting the FCM from commingling Cleared Swaps Customer
Collateral with:
FCM property, except as permitted under proposed
regulation 22.2(e) (as discussed below); or
``Customer funds'' for futures contracts (as regulation
1.3 defines such term) or the ``foreign futures or foreign options
secured amount'' (as regulation 1.3 defines such term), except as
permitted by a Commission rule, regulation or order (or a derivatives
clearing organization rule approved pursuant to regulation
39.15(b)(2)).\117\
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\117\ As the discussion on the proposed definition of ``Cleared
Swaps'' highlights, if the Commission adopts a rule or regulation or
issues an order pursuant to section 4d(a) of the CEA, or if the
Commission approves DCO rules pursuant to proposed regulation
39.15(b)(2) permitting such commingling, the Commission would apply
the Corresponding Provisions and Part 190 to the Cleared Swap (and
related collateral) as if the swap constituted a futures contract
(and related collateral).
In contrast, if the Commission adopts a rule or regulation or
issues an order pursuant to section 4d(f) of the CEA, or if the
Commission approves DCO rules pursuant to proposed regulation
39.15(b)(2) permitting such commingling, the proposed definition of
``Cleared Swap'' would operate to apply Part 22 and Part 190 to (i)
the futures contract (and related collateral) or (ii) the foreign
futures contract (and related collateral) as if such contracts
constituted Cleared Swaps (and related collateral).
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Proposed regulation 22.2(c) parallels regulations 1.20(a), 1.20(c), and
1.26(a).\118\
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\118\ Regulations 1.20(a) and 1.26(a) implicitly (i) permit the
FCM to commingle ``customer funds'' from multiple futures customers
and (ii) prohibit the FCM from commingling ``customer funds'' with
either FCM funds or funds supporting customer transactions in non-
futures contracts. Specifically, regulation 1.20(a) states: ``All
customer funds shall be separately accounted for and segregated as
belonging to commodity or option customers.'' Similarly, regulation
1.26(a) states: ``Each futures commission merchant who invests
customer funds in instruments described in Sec. 1.25 shall
separately account for such instruments and segregate such
instruments as belonging to such commodity or option customers.'' 17
CFR 1.20(a) and 1.26(a).
Regulation 1.20(c), in contrast, first explicitly prohibits an
FCM from commingling the ``customer funds'' of one futures customer
with (i) ``customer funds'' of another futures customer, (ii) funds
supporting customer transactions in non-futures contracts (e.g., the
``foreign futures and options secured amount,'' as defined in
regulation 1.3), and (iii) FCM funds. Specifically, regulation
1.20(c) states: ``Each futures commission merchant shall treat and
deal with the customer funds of a commodity customer or of an option
customer as belonging to such commodity or option customer. All
customer funds shall be separately accounted for, and shall not be
commingled with the money, securities, or property of a futures
commission merchant or of any other person. * * *'' Notwithstanding
the foregoing, however, regulation 1.20(c) then permits an FCM to
commingle ``customer funds'' of multiple futures customers for
convenience. Specifically, regulation 1.20(c) contains the following
proviso: ``Provided, however, that customer funds treated as
belonging to the commodity or option customers of a futures
commission merchant may for convenience be commingled and deposited
in the same account or accounts with any bank or trust company, with
another person registered as a futures commission merchant, or with
a clearing organization. * * *'' Regulation 1.20(c) does not contain
a similar exception for (i) funds supporting customer transactions
in non-futures contracts or (ii) FCM funds. 17 CFR 1.20(c).
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4. Limitations on Use
Regulation 22.2(d) proposes certain limitations on the use that an
FCM may make of Cleared Swaps Customer Collateral. First, regulation
22.2(d)(1) proposes to prohibit an FCM from using, or permitting the
use of, the Cleared Swaps Customer Collateral or one Cleared Swaps
Customer to purchase, margin, or settle the Cleared Swaps, or any other
transaction, of a person other than the Cleared Swaps Customer. Such
proposal parallels regulation 1.20(c) and 1.22.\119\ Second, regulation
22.2(d)(2) proposes to prohibit an FCM from using Cleared Swaps
Customer Collateral to margin, guarantee, or secure the non-Cleared
Swap contracts (e.g., futures or foreign futures contracts) of the
entity constituting the Cleared Swaps Customer.\120\ Such proposal
parallels regulation 1.22.\121\
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\119\ Regulation 1.20(c) states: ``All customer funds shall be
separately accounted for, and shall not * * * be used to secure or
guarantee the trades, contracts or commodity options, or to secure
or extend the credit, of any person other than the one for whom the
same are held.'' Id.
Regulation 1.22 states: ``No futures commission merchant shall
use, or permit the use of, the customer funds of one commodity and/
or option customer to purchase, margin, or settle the trades,
contracts, or commodity options of, or to secure or extend the
credit of, any person other than such customer or option customer.''
17 CFR 1.22.
\120\ As mentioned above, an entity may simultaneously transact
(i) futures contracts, (ii) foreign futures contracts, and (iii)
Cleared Swaps. Such entity would constitute a Cleared Swaps Customer
only with respect to its Cleared Swaps.
\121\ Regulation 1.22 further states: ``Customer funds shall not
be used to carry trades or positions of the same commodity and/or
option customer other than in commodities or commodity options
traded through the facilities of a contract market.'' 17 CFR 1.22.
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Regulation 22.2(d)(2) proposes to prohibit an FCM from imposing, or
permitting the imposition of, a lien on Cleared Swaps Customer
Collateral, including on any FCM residual financial interest therein
(as regulation 22.2(e)(3) discusses further). The Commission believes
that such a prohibition, in the event that an FCM becomes insolvent,
would preempt the claim of an FCM creditor against any portion of the
Cleared Swaps Customer Collateral, and would thereby prevent the FCM
creditor from interfering with the porting of such collateral to a
solvent FCM.
Regulation 22.2(d)(3) proposes to prohibit an FCM from claiming
that any of the following constitutes Cleared Swaps Customer
Collateral:
Money invested in the securities, memberships, or
obligations of any DCO, DCM, SEF, or SDR; or
Money, securities, or other property that any DCO holds
and may use for a purpose other than to margin, guarantee, secure,
transfer, adjust or settle the obligations incurred by the FCM on
behalf of its Cleared Swaps Customers.
Such proposal parallels regulation 1.24.\122\
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\122\ Regulation 1.24 states: ``Money held in a segregated
account by a futures commission merchant shall not include: (a)
Money invested in obligations or stocks of any clearing organization
or in memberships in or obligations of any contract market; or (b)
money held by any clearing organization which it may use for any
purpose other than to purchase, margin, guarantee, secure, transfer,
adjust, or settle the contracts, trades, or commodity options of the
commodity or option customers of such futures commission merchant.''
17 CFR 1.24.
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5. Exceptions
Regulation 22.2(e) proposes certain exceptions to the
abovementioned requirements and limitations.
a. Permitted Investments
Proposed regulation 22.2(e)(1) constitutes an exception to
regulation 22.2(d) (Limitations on Use). Regulation 22.2(e)(1) proposes
to allow an FCM to
[[Page 33834]]
invest Cleared Swaps Customer Collateral in accordance with regulation
1.25, as such regulation may be amended from time to time. Regulation
1.25 delineates permitted investments of ``customer funds'' (as
regulation 1.3 defines such term) for futures contracts.\123\
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\123\ One commenter, Federated Investors, Inc. (Freeman and
Hawke), argues that limitations on the investment of customer
collateral in money market mutual funds are inappropriate for
futures, and even more inappropriate for swaps. As mentioned above,
the Commission has proposed amendments to regulation 1.25. See
Investment of Customer Funds and Funds Held in an Account for
Foreign Futures and Foreign Options Transactions, 75 FR 67642 (Nov.
3, 2010). With respect to limitations on investment of cleared swaps
customer collateral, the Dodd-Frank Act provides, in newly-enacted
section 4d(f)(4) of the CEA, that such collateral
* * * may be invested in obligations of the United States, in
general obligations of any State or of any political subdivision of
a State, and in obligations fully guaranteed as to principal and
interest by the United States, or in any other investment that the
Commission may by rule or regulation prescribe * * *.
Thus, with the exception of the specified government
obligations, Congress chose not to mandate any specific acceptable
customer investments. In exercising the power granted under section
4d(f)(4) to expand the universe of acceptable customer investments,
the Commission is seeking the same goals as in regulation 1.25--
namely, preserving principal and maintaining liquidity. See 75 FR at
67646. Accordingly, the Commission is proposing to incorporate the
provisions of regulation 1.25 (as amended from time to time) by
reference.
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By allowing certain investments of Cleared Swaps Customer
Collateral, proposed regulation 22.2(e)(1) parallels regulation
1.20(c).\124\
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\124\ Regulation 1.20(c) states: ``* * * customer funds may be
invested in instruments described in Sec. 1.25.'' 17 CFR 1.20(c).
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b. Permitted Withdrawals
Proposed regulation 22.2(e)(2) permits an FCM to withdraw Cleared
Swaps Customer Collateral for such purposes as meeting margin calls at
a DCO or a Collecting FCM, or to meet charges lawfully accruing in
connection with a cleared swap, such as brokerage or storage charges.
Regulation 22.2(e)(2) parallels regulation 1.20(c) and implements
section 4d(f)(3)(A)(ii).
c. Deposits of Own Money, Securities, or Other Property
Proposed regulation 22.2(e)(3) constitutes an exception to
regulations 22.2(b) (Location of Cleared Swaps Customer Collateral) and
(c) (Commingling). Regulation 22.2(e)(3) proposes to permit an FCM: (i)
To place its own property in an FCM Physical Location or (ii) to
deposit its own property in a Cleared Swaps Customer Account.\125\ As
further explained below, proposed regulation 22.2(f) (Requirements as
to Amount) mandates an FCM to use its own capital to cover the negative
account balance of any Cleared Swaps Customer. To avoid the possibility
of a deficiency,\126\ an FCM may choose to place or deposit, in
advance, its own property in an FCM Physical Location or a Cleared
Swaps Customer Account, as applicable. By permitting such placement or
deposit, proposed regulation 22.2(e)(3) parallels regulation 1.23.\127\
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\125\ Regulation 22.2(e)(3) proposes to permit an FCM to deposit
only those securities that are unencumbered and are of the types
specified in regulation 1.25. Such proposal accords with regulation
1.23. See infra note 127. The Commission notes, however, that this
proposal does not, and is not meant to, require a DCO to accept all
of the types of securities or other property specified in regulation
1.25.
\126\ See regulation 1.12(h) (requiring an FCM that learns of a
deficiency in segregated funds to notify the Commission and the
FCM's designated self-regulatory organization of that deficiency).
\127\ Regulation 1.23 states: ``The provision in section
4d(a)(2) of the Act and the provision in Sec. 1.20(c), which
prohibit the commingling of customer funds with the funds of a
futures commission merchant, shall not be * * * construed to prevent
a futures commission merchant from adding to such segregated
customer funds such amount or amounts of money, from its own funds
or unencumbered securities from its own inventory, of the type set
forth in Sec. 1.25, as it may deem necessary to ensure any and all
commodity or option customers' accounts from becoming under
segregated at any time.'' 17 CFR 1.23.
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d. Residual Financial Interest
Proposed regulation 22.2(e)(4) clarifies that, if an FCM places or
deposits its own property in an FCM Physical Location or a Cleared
Swaps Customer Account, as applicable, then that property becomes
Cleared Swaps Customer Collateral. This regulation would permit an FCM
to retain a residual financial interest in property in excess of that
necessary to comport with proposed regulation 22.2(f) (Requirements as
to Amount). It allows the FCM to make withdrawals from the FCM Physical
Location or the Cleared Swaps Customer Account, as applicable, so long
as the FCM first ascertains that such withdrawals do not surpass its
residual financial interest. In general, proposed regulation 22.2(e)(4)
parallels regulation 1.23.\128\
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\128\ Regulation 1.23 states, in addition to the text in note
127 supra: ``The provision in section 4d(a)(2) of the Act and the
provision in Sec. 1.20(c), which prohibit the commingling of
customer funds with the funds of a futures commission merchant,
shall not be construed to prevent a futures commission merchant from
having a residual financial interest in the customer funds,
segregated as required by the Act and the rules in this part and set
apart for the benefit of commodity or option customers * * * The
books and records of a futures commission merchant shall at all
times accurately reflect its interest in the segregated funds. A
futures commission merchant may draw upon such segregated funds to
its own order, to the extent of its actual interest therein,
including the withdrawal of securities held in segregated
safekeeping accounts held by a bank, trust company, contract market,
clearing organization or other futures commission merchant. Such
withdrawal shall not result in the funds of one commodity and/or
option customer being used to purchase, margin or carry the trades,
contracts or commodity options, or extend the credit of any other
commodity customer, option customer or other customer.'' Id.
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e. Requirements as to Amount
i. Background
Proposed regulation 22.2(f) sets forth an explicit calculation for
the value of Cleared Swaps Customer Collateral that each FCM must hold,
which parallels the implicit calculation in the Part 1 Provisions. The
Part 1 Provisions clearly require an FCM to segregate ``customer
funds'' (as regulation 1.3 defines such term) for futures
contracts.\129\ However, the Part 1 Provisions also consider ``customer
funds'' to be fungible. Specifically, because the Part 1 Provisions
permit FCM commingling of ``customer funds'' from multiple futures
customers \130\ and FCM investment of such funds,\131\ the Part 1
Provisions implicitly allow an FCM to meet its obligations without
maintaining the exact property that each futures customer conveys. The
Part 1 Provisions do require an FCM to maintain, at a minimum, an
overall amount of ``customer funds'' in segregation.\132\ Nevertheless,
the Part 1 Provisions do not set forth an explicit calculation for such
amount. Instead, the Part 1 Provisions imply that an FCM must maintain
an amount in segregation that would prevent the FCM from using the
``customer funds'' of one futures customer to ``secure or guarantee the
trades, contracts or commodity options, or to secure or extend the
credit of any person other than the one for whom the same are held.''
\133\ Form 1-FR-FCM builds upon this implicit calculation.
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\129\ See regulations 1.20(a) and (c) and 1.26(a).
\130\ See regulation 1.20(c).
\131\ See regulations 1.20(c) and 1.25.
\132\ Regulation 1.32 states: ``Each futures commission merchant
must compute as of the close of each business day, on a currency-by-
currency basis * * * (2) the amount of such customer funds required
by the Act and these regulations to be on deposit in segregated
accounts on behalf of such commodity and option customers. * * *''
17 CFR 1.32.
\133\ Regulation 1.20.
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ii. Proposed Requirement
Consistent with the intention of the Commission to incorporate
updated and clarified versions of the Part 1 Provisions in Part 22, the
Commission proposes an explicit calculation for the amount of Cleared
Swaps Customer Collateral that an FCM must maintain in segregation. As
such this calculation is intended only to make explicit what the Part 1
Provisions left implicit, the
[[Page 33835]]
calculation does not materially differ in the Form 1-FR-FCM from the
calculation for ``customer funds'' of futures customers.
First, regulation 22.2(f) proposes to define ``account'' to
reference FCM's books and records pertaining to the Cleared Swaps
Customer Collateral of a particular Cleared Swaps Customer.
Second, regulation 22.2(f) proposes to require an FCM to reflect in
its account for each Cleared Swaps Customer the market value of any
Cleared Swaps Collateral that it receives from such customer, as
adjusted for:
Any uses that proposed regulation 22.2(d) permits;
Any accruals or losses on investments permitted by
proposed regulation 22.2(e) that, pursuant to the applicable FCM
customer agreement, are creditable or chargeable to such Cleared Swaps
Customer;
Any charges lawfully accruing to the Cleared Swaps
Customer, including any commission, brokerage fee, interest, tax, or
storage fee; and
Any appropriately authorized distribution or transfer of
the Cleared Swaps Collateral.
Third, regulation 22.2(f) proposes to categorize accounts of
Cleared Swaps Customers as having credit or debit balances. Accounts
where the market value of Cleared Swaps Customer Collateral is positive
after adjustments have credit balances. Conversely, accounts where the
market value of Cleared Swaps Customer Collateral is negative after
adjustments have debit balances.
Fourth, regulation 22.2(f) proposes to require an FCM to maintain
in segregation, in its FCM Physical Location and/or its Cleared Swaps
Customer Accounts at Permitted Depositories, an amount equal to the sum
of any credit balances that Cleared Swaps Customers have in their
accounts, excluding from such sum any debit balances that Cleared Swaps
Customers have in their accounts (the ``Collateral Requirement'').
Finally, regulation 22.2(f) proposes an exception to the exclusion
of debit balances, which parallels regulation 1.32(b).\134\
Specifically, to the extent that a Cleared Swaps Customer deposited
``readily marketable securities'' with the FCM to secure a debit
balance in its account, then the FCM must include such balance in the
Collateral Requirement. ``Readily marketable'' is proposed to be
defined as having a ``ready market'' as such latter term is defined in
rule 15c3-1(c)(11) of the Securities and Exchange Commission (Sec.
241.15c3-1(c)(11) of this title). Regulation 22.2(f) proposes to deem a
debit balance ``secured'' only if the FCM maintains a security interest
in the ``readily marketable securities,'' and holds a written
authorization to liquidate such securities in its discretion. To
determine the amount of the debit balance that the FCM must include in
the Collateral Requirement, regulation 22.2(f) proposes to require the
FCM: (i) To determine the market value of such securities, and (ii) to
reduce such market value by applicable percentage deductions (i.e.,
``securities haircuts'') as set forth in rule 15c3-1(c)(2)(vi) of the
Securities and Exchange Commission. The FCM would include in the
Collateral Requirement that portion of the debit balance, not exceeding
100 percent, which is secured by such reduced market value.
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\134\ Regulation 1.32(b) states: ``In computing the amount of
funds required to be in segregated accounts, a futures commission
merchant may offset any net deficit in a particular customer's
account against the current market value of readily marketable
securities, less applicable percentage deductions (i.e.,
``securities haircuts'') as set forth in rule 15c3-1(c)(2)(vi) of
the Securities and Exchange Commission (17 CFR 241.15c3-
1(c)(2)(vi)), held for the same customer's account. The futures
commission merchant must maintain a security interest in the
securities, including a written authorization to liquidate the
securities at the futures commission merchant's discretion, and must
segregate the securities in a safekeeping account with a bank, trust
company, clearing organization of a contract market, or another
futures commission merchant. For purposes of this section, a
security will be considered readily marketable if it is traded on a
``ready market'' as defined in rule 15c3-1(c)(11)(i) of the
Securities and Exchange Commission (17 CFR 240.15c3-1(c)(11)(i)).''
17 CFR 1.32(b).
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iii. Question
The Commission requests comment on the Collateral Requirement
proposed in regulation 22.2(f). Specifically, the Commission requests
comment on whether the explicit calculation of such Collateral
Requirement materially differs from the implicit calculation in the
Part 1 Provisions for segregated ``customer funds'' of futures
customers.
f. Segregated Account; Daily Computation and Record
Regulation 22.2(g), paralleling regulation 1.32,\135\ proposes to
require an FCM to compute, as of the close of each business day, on a
currency-by-currency basis:
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\135\ Regulation 1.32(a) states: ``Each futures commission
merchant must compute as of the close of each business day, on a
currency-by-currency basis: (1) The total amount of customer funds
on deposit in segregated accounts on behalf of commodity and option
customers; (2) the amount of such customer funds required by the Act
and these regulations to be on deposit in segregated accounts on
behalf of such commodity and option customers; and (3) the amount of
the futures commission merchant's residual interest in such customer
funds.'' 17 CFR 1.32(a).
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The aggregate market value of the Cleared Swaps Customer
Collateral in all FCM Physical Locations and all Cleared Swaps Customer
Accounts at Permitted Depositories (the ``Collateral Value'');
The Collateral Requirement; and
The amount of the residual financial interest that the FCM
holds in such Cleared Swaps Customer Collateral (i.e., the difference
between the Collateral Value and the Collateral Requirement).
Regulation 22.2(g), further paralleling regulation 1.32,\136\
proposes to require the FCM to complete the abovementioned computation
prior to noon on the next business day, and to keep all computations,
together with supporting data, in accordance with regulation 1.31.
``Noon'' refers to noon in the time zone where the FCM's principal
office is located.
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\136\ Regulation 1.32(c) states: ``The daily computations
required by this section must be completed by the futures commission
merchant prior to noon on the next business day and must be kept,
together with all supporting data, in accordance with the
requirements of Sec. 1.31.'' 17 CFR 1.32(c).
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C. Proposed Regulation 22.3--Derivatives Clearing Organizations:
Treatment of Cleared Swaps Customer Collateral
Regulation 22.3 proposes requirements for DCO treatment of Cleared
Swaps Customer Collateral from FCMs, as well as the associated Cleared
Swaps. Such requirements generally parallel the Part 1 Provisions.
1. In General
Regulation 22.3(a) proposes to require a DCO to treat and deal with
the Cleared Swaps Customer Collateral deposited by an FCM as belonging
to the Cleared Swaps Customers of such FCM and not other persons,
including, without limitation, the FCM. In other words, the DCO may not
use Cleared Swaps Customer Collateral to cover or support (i) the
obligations of the FCM depositing the Cleared Swaps Customer
Collateral, (ii) the obligations of any other FCM, or (iii) the
obligations of Customers (e.g., entities transacting in futures or
equities contracts) of any FCM. Such proposal parallels regulation
1.20(a), which applies to ``customer funds'' for futures
contracts.\137\
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\137\ See note 112 supra.
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2. Location of Collateral
Regulation 22.3(b) proposes to require that a DCO segregate all
Cleared Swaps Customer Collateral that it receives from
[[Page 33836]]
FCMs. Such proposal parallels regulations 1.20(b) and 1.26(b).\138\
Additionally, regulation 22.2(b) proposes to require that a DCO adopt
one of two methods to hold segregated Cleared Swaps Customer
Collateral, which parallel either implicit assumptions or explicit
provisions of regulation 1.20(b).
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\138\ Regulation 1.20(b) states: ``All customer funds received
by a clearing organization from a member of the clearing
organization to purchase, margin, guarantee, secure or settle the
trades, contracts or commodity options of the clearing member's
commodity or option customers and all money accruing to such
commodity or option customers as the result of trades, contracts or
commodity options so carried shall be separately accounted for and
segregated as belonging to such commodity or option customers. * *
*'' 17 CFR 1.20(b).
Regulation 1.26(b) states: ``Each clearing organization which
invests money belonging or accruing to commodity or option customers
of its clearing members in instruments described in Sec. 1.25 shall
separately account for such instruments and segregate such
instruments as belonging to such commodity or option customers.'' 17
CFR 1.26(b).
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a. The First Method
Paralleling an implicit assumption of regulations 1.20(b) and
1.26(b), the first method permits the DCO to hold Cleared Swaps
Customer Collateral itself.\139\ Continuing such parallel, the first
method limits the DCO to holding tangible collateral (e.g., gold ingots
or warehouse receipts) because no DCO serves as a depository for
intangible collateral. Finally, the first method requires the FCM, in
holding such Cleared Swaps Customer Collateral, to:
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\139\ Regulation 1.20(b) does not require that a DCO hold
``customer funds'' from FCMs in a depository. Rather, it applies
certain requirements to the holding of ``customer funds when
deposited in a bank or trust company * * *'' (emphasis added). In
the absence of a requirement to use a depository, regulation 1.20(b)
must implicitly permit the DCO to hold ``customer funds'' from FCMs
itself. Id. Regulation 1.26(b) contains similar language regarding
the use of a depository. Id.
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Physically separate (e.g., in a box or vault) such
collateral from its own property, the property of any FCM, and the
property of any other person that is not a Cleared Swaps Customer of an
FCM;
Clearly identify each physical location (the ``DCO
Physical Location'') in which it holds such collateral as a ``Location
of Cleared Swaps Customer Collateral'' (e.g., by affixing a label or
sign to the box or vault);
Ensure that each such DCO Physical Location provides
appropriate protection for such collateral (e.g., by confirming that
the box or vault has locks and is fire resistant); and
Record in its books and records the amount of such
collateral separately from its own funds, the funds of any FCM, and the
funds of any other person that is not a Cleared Swaps Customer of an
FCM (i.e., to reflect the reality of physical separation in books and
records).
b. The Second Method
Paralleling explicit provisions of regulations 1.20(b) and
1.26(b),\140\ the second method permits the DCO to hold Cleared Swaps
Customer Collateral from FCMs outside of itself.\141\ Continuing such
parallel, the second method limits the DCO to certain Permitted
Depositories (as further discussed below), and requires that the DCO
maintain a Cleared Swaps Customer Account with each Permitted
Depository.
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\140\ Regulation 1.20(b) states: ``All customer funds received
by a clearing organization from a member of the clearing
organization to purchase, margin, guarantee, secure or settle the
trades, contracts or commodity options of the clearing member's
commodity or option customers and all money accruing to such
commodity or option customers as the result of trades, contracts or
commodity options so carried shall be separately accounted for and
segregated as belonging to such commodity or option customers, and a
clearing organization shall not hold, use or dispose of such
customer funds except as belonging to such commodity or option
customers. Such customer funds when deposited in a bank or trust
company shall be deposited under an account name which clearly shows
that they are the customer funds of the commodity or option
customers of clearing members, segregated as required by the Act and
these regulations.'' Id. Regulation 1.26(b) contains similar
language. Id.
\141\ If a DCO chooses to accept intangible Cleared Swaps
Customer Collateral from an FCM, then the proposal effectively
requires the DCO to maintain such collateral outside of itself.
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c. Questions
As described above, both the first and second methods incorporate
assumptions with respect to DCO structure that were true when
regulations 1.20(b) and 1.26(b) were first adopted and remain true
currently. However, the Commission recognizes that DCO structure may
change after the Dodd-Frank Act and the regulations thereunder become
effective. Notably, the Commission recognizes that a depository
registered with either domestic or foreign banking regulators may seek
to become a DCO, and that such depository may seek to hold Cleared
Swaps Customer Collateral, as well as other forms of customer property.
The Commission therefore requests comment on what, if any, changes to
proposed regulation 22.3 may be appropriate to accommodate such
possibility. Specifically, the Commission requests comment on whether a
DCO that is also a registered depository should be permitted to hold
both tangible and intangible forms of Cleared Swaps Customer Collateral
from FCMs itself. What challenges might this arrangement pose to
protection (including effective segregation) of Cleared Swaps Customer
Collateral (as well as other forms of customer property)? How might
these challenges be addressed?
3. Commingling
Regulation 22.3(c) proposes to permit a DCO to commingle the
Cleared Swaps Customer Collateral that it receives from multiple FCMs
on behalf of their Cleared Swaps Customers, while prohibiting the DCO
from commingling Cleared Swaps Customer Collateral with:
The money, securities, or other property belonging to the
DCO;
The money, securities, or other property belonging to any
FCM; or
Other categories of funds that it receives from an FCM on
behalf of Customers, including ``customer funds'' for futures contracts
(as regulation 1.3 defines such term) or the ``foreign futures or
foreign options secured amount'' (as regulation 1.3 defines such term),
except as permitted by a Commission rule, regulation or order (or by a
derivatives clearing organization rule approved pursuant to regulation
39.15(b)(2)).\142\
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\142\ See note 117 supra.
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Proposed regulation 22.3(c) parallels regulations 1.20(a), 1.20(b),
and 1.26(b).\143\
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\143\ Regulations 1.20(a), 1.20(b), and 1.26(b) implicitly (i)
permit the DCO to commingle the ``customer funds'' that it receives
from multiple FCMs and (ii) prohibit the DCO from commingling
``customer funds'' with DCO funds, FCM funds, or funds supporting
customer transactions in non-futures contracts. Specifically,
regulation 1.20(a) states: ``All customer funds shall be separately
accounted for and segregated as belonging to commodity or option
customers.'' Regulation 1.20(b) further develops such language, as
detailed in note 140 supra. Similarly, regulation 1.26(b) states:
``Each clearing organization which invests money belonging or
accruing to commodity or option customers of its clearing members in
instruments described in Sec. 1.25 shall separately account for
such instruments and segregate such instruments as belonging to such
commodity or option customers.'' 17 CFR 1.20(a), 1.20(b), and
1.26(a).
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4. Exceptions
Regulations 22.3(d) and (e) propose certain exceptions to the
abovementioned requirements and limitations.
a. FCM Deposits and Withdrawals
Regulation 22.3(d) constitutes an exception to regulation 22.3(c)
(Commingling). Regulation 22.3(d) proposes to allow a DCO to place
money, securities, or other property belonging to an FCM in a DCO
Physical Location, or deposit such money, securities, or other property
in the relevant Cleared Swaps Customer Account, pursuant to an
instruction
[[Page 33837]]
from the FCM. Regulation 22.3(d) further proposes to permit FCM
withdrawals of money, securities, or other property from a DCO Physical
Location or Cleared Swaps Customer Account. As discussed below, a DCO
functions as a Permitted Depository for an FCM. Proposed regulation
22.3 enables such function, by facilitating (i) FCM deposits of its own
money, securities, or other property in its Cleared Swaps Customer
Account at the DCO,\144\ and (ii) FCM withdrawals of its residual
financial interest in the Cleared Swaps Customer Collateral.\145\
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\144\ See proposed regulation 22.2(d)(2).
\145\ See proposed regulation 22.2(d)(3).
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b. Permitted Investments
Regulation 22.3(e) constitutes an exception to regulation
22.3(b)(1) (Location of Cleared Swaps Collateral) and regulation 22.15
(Treatment of Cleared Swaps Collateral on an Individual Basis).
Regulation 22.3(e) proposes to allow a DCO to invest Cleared Swaps
Customer Collateral in accordance with regulation 1.25, which
delineates permitted investments of ``customer funds'' (as regulation
1.3 defines such term) for futures contracts.
D. Proposed Regulation 22.4--Futures Commission Merchants and
Derivatives Clearing Organizations: Permitted Depositories
1. The Permitted Depositories
Regulation 22.4 proposes a list of depositories permitted to hold
Cleared Swaps Customer Collateral (the ``Permitted Depositories''). For
a DCO or an FCM, a Permitted Depository must (subject to regulation
22.9) be: (i) A bank located in the United States; (ii) a trust company
located in the United States; or (iii) a DCO. As discussed further
below, regulation 22.9 incorporates regulation 1.49 with respect to
Permitted Depositories located outside the United States.\146\ An FCM
may also serve as a Permitted Depository, but only if it is a
``Collecting Futures Commission Merchant'' carrying the Cleared Swaps
(and related Cleared Swaps Customer Collateral) of a ``Depositing
Futures Commission Merchant'' (as regulation 22.1 proposes to define
each such term). Before an entity may serve as a Permitted Depository,
the DCO or FCM seeking to maintain a Cleared Swaps Customer Account
must obtain a written acknowledgement letter, as discussed further
below.
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\146\ While there is some ambiguity as to whether regulation
1.49 currently applies to DCOs given the provisions of current
regulation 39.2, the Commission has proposed amendments that would
remove regulation 39.2. See Risk Management Requirements for
Derivatives Clearing Organizations, 76 FR 3698, 3714 (Jan. 20,
2011). Thus, if the proposed amendments are finalized as written,
DCOs would be subject to the requirements set forth in regulation
1.49. In addition, notwithstanding regulation 39.2, the Commission
and industry have proceeded on the basis that the requirements of
regulation 1.49 apply to DCOs.
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In general, proposed regulation 22.4 parallels regulations 1.20,
1.26 and 1.49(d)(2), with the exception of allowing an FCM to serve as
a Permitted Depository only if the FCM is a ``Collecting Futures
Commission Merchant.'' \147\ The Commission believes that such a
limitation is appropriate, because the purpose for allowing an FCM to
serve as a Permitted Depository is to facilitate the clearing of swaps
carried by an FCM that is not a member of a particular DCO (i.e., the
Depositing Futures Commission Merchant) through another FCM that is a
member of that DCO (i.e., the Collecting Futures Commission
Merchant).\148\
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\147\ Regulations 1.20(a) and (c) imply that an FCM may deposit
``customer funds'' with ``any bank, trust company, clearing
organization or another futures commission merchant.'' Regulation
1.20(b) implies than a DCO may deposit ``customer funds'' from FCMs
with ``a bank or trust company.'' Regulations 1.26(a) and (b)
contain similar language. Regulation 1.49(d)(2) clarifies that an
FCM or DCO may deposit ``customer funds'' in the United States only
with ``(i) A bank or trust company; (ii) A futures commission
merchant registered as such with the Commission; or (iii) A
derivatives clearing organization.'' 17 CFR 1.20, 1.26, and
1.49(d)(2).
\148\ See section 4d(f)(3)(A)(ii) of the CEA, as amended by
section 724 of the Dodd-Frank Act (explicitly stating that Cleared
Swaps Customer Collateral may be withdrawn to margin, guarantee,
secure, transfer, adjust, or settle a Cleared Swap with a DCO, or
any member of a DCO, and not explicitly allowing withdrawals for any
other purpose (except for permitted investments)).
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2. Question
The Commission seeks public comment on whether the limitation that
it is proposing for an FCM serving as a Permitted Depository is
appropriate.
E. Proposed Regulation 22.5--Futures Commission Merchants and
Derivatives Clearing Organizations: Written Acknowledgement
1. Substantive Requirements
As mentioned above, a DCO or FCM must obtain a written
acknowledgement letter from a potential Permitted Depository before
opening a Cleared Swaps Customer Account.\149\ Regulation 22.5 proposes
substantive requirements for such letter. First, regulation 22.5
proposes to mandate that the FCM or DCO obtain a written
acknowledgement letter in accordance with regulations 1.20 and 1.26,
which shall apply to Cleared Swaps Customer Collateral as if such
collateral constituted ``customer funds'' (as regulation 1.3 defines
such term). The Commission seeks comment as to whether such
incorporation by reference is the most appropriate way to proceed, or
whether the Commission should publish a separate form acknowledgement
letter for swaps. In what way should such separate form letter differ
from the form letter previously published for futures customer funds?
\150\
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\149\ The function of a written acknowledgment letter is to
ensure that a potential Permitted Depository is aware that (i) the
FCM or DCO is opening a Cleared Swaps Customer Account, (ii) the
funds deposited in such account constitute Cleared Swaps Customer
Collateral, and (iii) such Cleared Swaps Customer Collateral is
subject to the requirements of section 4d(f) of the CEA and Part 22
(when finalized).
\150\ See 75 FR 47738 (Aug. 9, 2010) (proposing form
acknowledgment letters for customer funds and secured amount funds).
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Second, regulation 22.5 proposes to exempt the FCM or DCO from the
requirement to obtain a written acknowledgement letter, if the
potential Permitted Depository is a DCO that has adopted rules
providing for the segregation of Cleared Swaps Customer Collateral.
This proposed exemption is consistent with regulation 1.20.\151\
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\151\ Currently, with respect to an FCM, regulation 1.20(a)
states: ``Each registrant shall obtain and retain in its files for
the period provided in Sec. 1.31 a written acknowledgment from such
bank, trust company, clearing organization, or futures commission
merchant, that it was informed that the customer funds deposited
therein are those of commodity or option customers and are being
held in accordance with the provisions of the Act and this part:
Provided, however, that an acknowledgment need not be obtained from
a clearing organization that has adopted and submitted to the
Commission rules that provide for the segregation as customer funds,
in accordance with all relevant provisions of the Act and the rules
and orders promulgated thereunder, of all funds held on behalf of
customers.'' 17 CFR 1.20(a).
Currently, with respect to a DCO, regulation 1.20(b) states:
``The clearing organization shall obtain and retain in its files for
the period provided by Sec. 1.31 an acknowledgment from such bank
or trust company that it was informed that the customer funds
deposited therein are those of commodity or option customers of its
clearing members and are being held in accordance with the
provisions of the Act and these regulations.'' 17 CFR 1.20(b).
However, as noted above, the Commission is currently considering
a notice of proposed rulemaking amending regulation 1.20. See 75 FR
47740 (Aug. 9, 2010).
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2. Question
The Commission is currently considering a notice of proposed
rulemaking amending regulation 1.20 with respect to requirements for
written acknowledgement letters from depositories of ``customer funds''
(as regulation 1.3 defines such term) for futures contracts. The
Commission seeks comment on whether the following are appropriate: (i)
The incorporation of regulation 1.20 (as the Commission may choose to
amend such
[[Page 33838]]
regulation) in proposed regulation 22.5, and (ii) the adaptation of any
form letter that the Commission may choose to promulgate under
regulation 1.20 to accommodate Cleared Swaps Customer Collateral under
regulation 22.5.
F. Proposed Regulation 22.6--Futures Commission Merchants and
Derivatives Clearing Organizations: Naming of Cleared Swaps Customer
Accounts
Regulation 22.6 proposes to require an FCM or DCO to ensure that
the name of each Cleared Swaps Customer Account that it maintains with
a Permitted Depository (i) clearly identifies the account as a
``Cleared Swaps Customer Account,'' and (ii) clearly indicates that the
collateral therein is ``Cleared Swaps Customer Collateral'' subject to
segregation in accordance with section 4d(f) of the CEA and Part 22 (as
final). Proposed regulation 22.6 parallels regulation 1.20(a), 1.20(b),
1.26(a), and 1.26(b).\152\
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\152\ With respect to the responsibilities of an FCM, regulation
1.20(a) states: ``Such customer funds when deposited with any bank,
trust company, clearing organization or another futures commission
merchant shall be deposited under an account name which clearly
identifies them as such and shows that they are segregated as
required by the Act and this part.'' 17 CFR 1.20(a). With respect to
the responsibilities of a DCO, regulation 1.20(b) states: ``Such
customer funds when deposited in a bank or trust company shall be
deposited under an account name which clearly shows that they are
the customer funds of the commodity or option customers of clearing
members, segregated as required by the Act and these regulations.''
17 CFR 1.20(b). Regulations 1.26(a) and (b) contain similar
language.
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G. Proposed Regulation 22.7--Permitted Depositories: Treatment of
Cleared Swaps Customer Collateral
Regulation 22.7 proposes to require a Permitted Depository to treat
all funds in a Cleared Swaps Customer Account as Cleared Swaps Customer
Collateral. Regulation 22.7 further proposes to prohibit a Permitted
Depository from holding, disposing of, or using any Cleared Swaps
Customer Collateral as belonging to any person other than (i) the
Cleared Swaps Customers of the FCM maintaining such Cleared Swaps
Customer Account or (b) the Cleared Swaps Customers of the FCMs for
which the DCO maintains such Cleared Swaps Customer Account. In other
words, no Permitted Depository may use Cleared Swaps Customer
Collateral to cover or support the obligations of the FCM or DCO
maintaining the Cleared Swaps Customer Account. Proposed regulation
22.7 parallels section 4d(f)(6) of the CEA, as added by section 724 of
the Dodd-Frank Act.\153\ Proposed regulation 22.7 also parallels
regulation 1.20.\154\
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\153\ Section 4d(f)(6) of the CEA states: ``It shall be unlawful
for any person, including any derivatives clearing organization and
any depository institution, that has received any money, securities,
or property for deposit in a separate account or accounts as
provided in paragraph (2) to hold, dispose of, or use any such
money, securities, or property as belonging to the depositing
futures commission merchant or any person other than the swaps
customer of the futures commission merchant.'' 7 U.S.C. 6d.
\154\ Regulation 1.20 states: ``No person, including any
clearing organization or any depository, that has received customer
funds for deposit in a segregated account, as provided in this
section, may hold, dispose of, or use any such funds as belonging to
any person other than the option or commodity customers of the
futures commission merchant which deposited such funds.'' 17 CFR
1.20.
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H. Proposed Regulation 22.8--Situs of Cleared Swaps Accounts
1. Proposed Requirements
Proposed regulation 22.8 has no analog in the Part 1 Provisions.
Regulation 22.8 proposes to require (i) each FCM to designate the
United States as the site (i.e., the legal situs) of the FCM Physical
Location and the ``account'' (as regulation 22.2(f)(1) defines such
term) that the FCM maintains for each Cleared Swaps Customer, and (ii)
each DCO to designate the United States as the site (i.e., the legal
situs) of the DCO Physical Location and the Cleared Swaps Customer
Account that the DCO maintains on its books and records for the Cleared
Swaps Customers of each FCM. In light of increased cross-border
activity,\155\ the Commission believes that proposed regulation 22.8 is
appropriate, as it is intended to ensure that, in the event of an FCM
or DCO insolvency, Cleared Swaps Customer Collateral, whether received
by an FCM or DCO, would be treated in accordance with the United States
Bankruptcy Code. The Commission does not intend for proposed regulation
22.8 to affect the actual locations in which an FCM or DCO may hold
Cleared Swaps Customer Collateral. As discussed further below, an FCM
or DCO may hold Cleared Swaps Customer Collateral (i) in denominations
other than the United States dollar and (ii) at depositories within or
outside of the United States. Additionally, the Commission does not
intend for proposed regulation 22.8 to affect choice of law provisions
that a DCO might set forth in its rules or an FCM might set forth in
its agreement with a Cleared Swaps Customer.
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\155\ For example, the Commission currently regulates certain
entities based outside of the United States (e.g., LCH.Clearnet
Limited and ICE Clear Europe, each of which is based in the United
Kingdom).
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2. Questions
The Commission requests comment on whether proposed regulation 22.8
achieves the purpose of the Commission--namely, to ensure that Cleared
Swaps Customer Collateral be treated in accordance with the United
States Bankruptcy Code, to the extent possible. If proposed regulation
22.8 does not achieve such purpose, what alternatives should the
Commission consider to achieve such purpose? Additionally, the
Commission requests comment on the benefits and costs of proposed
regulation 22.8, as well as any alternatives.
I. Proposed Regulation 22.9--Denomination of Cleared Swaps Customer
Collateral and Location of Depositories
Regulation 22.9 proposes to incorporate regulation 1.49 by
reference, as applicable to Cleared Swaps Customer Collateral.
Regulation 1.49 sets forth, for futures contracts, rules determining
the permitted denominations of customer funds (i.e., permitted
currencies and amounts in each currency), permitted locations of
customer funds (i.e., permitted countries and amounts in each country),
and qualifications that entities outside of the United States must meet
to become Permitted Depositories (e.g., minimum regulatory capital).
However, regulation 22.9 proposes to allow an FCM to serve as a
Permitted Depository only if that FCM is a ``Collecting Futures
Commission Merchant'' carrying the Cleared Swaps, and associated
Cleared Swaps Customer Collateral, for the Cleared Swaps Customers of a
``Depositing Futures Commission Merchant.'' Such proposal accords with
proposed regulation 22.4.
J. Proposed Regulation 22.10--Incorporation by Reference
Regulation 22.10 proposes to incorporate by reference regulations
1.27 (Record of investments), 1.28 (Appraisal of obligations purchased
with customer funds), 1.29 (Increment or interest resulting from
investment of customer funds), and 1.30 (Loans by futures commission
merchants; treatment of proceeds), as applicable to Cleared Swaps
Customers and Cleared Swaps Customer Collateral. Regulation 1.27
requires FCMs and DCOs investing ``customer funds'' (as regulation 1.3
defines such term) to maintain specified records concerning such
investments. Regulation 1.28 requires FCMs investing ``customer funds''
to record and report such investment at no greater than market value.
Regulation 1.29 permits
[[Page 33839]]
FCMs and DCOs investing ``customer funds'' to receive and retain any
increment or interest thereon. Regulation 1.30 permits FCMs to loan
their own funds to customers on a secured basis, and to repledge or
sell such security pursuant to agreement with such customers.
Regulation 1.30 does make clear, however, that the proceeds of such
loans, when used to purchase, margin, guarantee, or secure futures
contracts, shall be treated as ``customer funds.''
K. Proposed Regulation 22.11--Information To Be Provided Regarding
Customers and Their Cleared Swaps
1. Proposed Requirements
In order to implement the Complete Legal Segregation Model,
regulations 22.11 to 22.16 propose, among other things, requirements
that ensure that each DCO and FCM: (i) Obtains, on a daily basis,
information necessary for risk management; (ii) performs, on a daily
basis, risk management calculations and records the results; (iii)
receives on the day of default, any residual Cleared Swaps Customer
Collateral; and (iv) allocates, on the day of default, the value of
Cleared Swaps Customer Collateral that it owes to each individual
customer. Regulations 22.11 to 22.16 recognize that swaps may be
cleared through a multi-tier system, with certain FCMs clearing swaps
for customers directly with the DCO and other FCMs clearing swaps for
customers indirectly through another FCM. Therefore, Part 22 recognizes
the concepts of ``Depositing Futures Commission Merchant'' and
``Collecting Futures Commission Merchant,'' each of which is described
above. Regulations 22.11 to 22.16 extend their requirements through
each potential tier of clearing, from the Depositing Futures Commission
Merchant through the Collecting Futures Commission Merchant and finally
to the DCO.
Regulation 22.11 proposes to require that (i) each Depositing
Futures Commission Merchant provide to its Collecting Futures
Commission Merchant and (ii) each FCM member provide to its DCO, in
each case, information sufficient to identify Cleared Swaps Customers
on a one-time basis, and information sufficient to identify the
portfolio of rights and obligations belonging to such customers with
respect to their Cleared Swaps on a daily basis. If a Depositing
Futures Commission Merchant or FCM member also serves as a Collecting
Futures Commission Merchant, then it must provide the specified
information with respect to each individual Cleared Swaps Customer for
which it acts (on behalf of a Depositing Futures Commission Merchant)
as a Collecting Futures Commission Merchant.
The abovementioned information should aid Collecting Futures
Commission Merchants and DCOs in their daily risk management programs
by (i) revealing ownership of cleared swaps customer contracts (in
contrast to currently available Large Trader information, which is
based on control of futures contracts) and (ii) permitting DCOs to
aggregate the positions of Cleared Swaps Customers clearing through
multiple FCMs, and Collecting Futures Commission Merchants to aggregate
the contracts of Cleared Swaps Customers clearing through multiple
Depositing Futures Commission Merchants. The abovementioned information
will also enable Collecting Futures Commission Merchants and DCOs to
conform to their obligations to allocate Cleared Swaps Customer
Collateral, in the event of an FCM default, pursuant to proposed
regulation 22.15.
The DCO is at the apex of the reporting structure that regulation
22.11 establishes, as it receives all information for each individual
Cleared Swaps Customer that FCMs, Collecting Futures Commission
Merchants, and Depositing Futures Commission Merchants serve.
Therefore, regulation 22.11 proposes to hold the DCO responsible for
taking appropriate steps to confirm that the information that it
receives is accurate and complete, and ensure that the information is
being produced on a timely basis. However, because the DCO may not have
a direct relationship with, e.g., a Depositing Futures Commission
Merchant, the Commission intends for the DCO to take ``appropriate
steps'' to ensure that its FCM members enter into suitable arrangements
with, e.g., a Depositing Futures Commission Merchant to verify the
accuracy and timeliness of information. In this manner, the Commission
intends for the verification requirement to be applied through each
potential tier of clearing.
2. Questions
Does the proposed requirement in regulation 22.11 for a Depositing
Futures Commission Merchant to provide a Collecting Futures Commission
Merchant with information sufficient to identify its Cleared Swaps
Customers raise any, e.g., competitive concerns? Could such concerns be
resolved if the identities of such Cleared Swaps Customers are coded,
with the DCO, but not the Collecting Futures Commission Merchant,
receiving a copy of such code? What other methods would resolve such
concerns?
L. Proposed Regulation 22.12--Information To Be Maintained Regarding
Cleared Swaps Customer Collateral
Regulation 22.12 proposes to require DCOs and Collecting Futures
Commission Merchants to use the information provided pursuant to
proposed regulation 22.11 to calculate, no less frequently than once
each business day, the amount of collateral required (i) for each
relevant Cleared Swaps Customer (including each such customer of a
Depositing Futures Commission Merchant), based on the portfolio of
rights and obligations arising from its Cleared Swaps; and (ii) for all
relevant Cleared Swaps Customers. It is not the responsibility of a DCO
or a Collecting Futures Commission Merchant to monitor or to calculate
the extent to which a Cleared Swaps Customer has, in fact, posted
excess or insufficient collateral. In the latter case, the relevant FCM
will have, in effect, made a loan to the Cleared Swaps Customer and
will have a claim against that customer, outside of the relationship
with the DCO or the Collecting Futures Commission Merchant.
M. Proposed Regulation 22.13--Additions to Cleared Swaps Customer
Collateral
Regulation 22.13 proposes two tools that DCOs or Collecting Futures
Commission Merchants may use to manage the risk they incur with respect
to individual Cleared Swaps Customers. These tools are not intended to
be mandatory or exclusive, and the Commission seeks comment on how the
Commission may enable DCOs or Collecting Futures Commission Merchants
to use other tools to manage such risk.
Regulation 22.13(a) proposes to clarify that a DCO or Collecting
Futures Commission Merchant may increase the collateral required of a
particular Cleared Swaps Customer or group of such customers, based on
an evaluation of the credit risk posed by such customer(s), in which
case such higher amount shall be calculated and recorded as provided in
proposed regulation 22.12, and would (on an individual basis) be
available in the event of a default by any such Cleared Swaps Customer.
This proposed clarification is not intended to interfere with the right
of any FCM to increase the collateral requirements with respect to any
of its customers. The Commission requests comment regarding whether a
DCO or a
[[Page 33840]]
Collecting Futures Commission Merchant may wish to increase the
collateral required, in the manner described above, for any reason
other than credit risk.
Similarly, proposed regulation 22.13(b) clarifies that any
collateral deposited by an FCM out of its own funds pursuant to
proposed regulation 22.2(e)(3), in which the FCM has a residual
financial interest pursuant to proposed regulation 22.2(e)(4), may, to
the extent of such residual interest, be used by a DCO or Collecting
Futures Commission Merchant to margin the cleared swaps of any or all
of such customers. Thus, if a DCO chooses to require an FCM member, or
if a Collecting Futures Commission Merchant chooses to require a
Depositing Futures Commission Merchant, in each case, to post such
additional collateral out of its own funds, the collateral would be
available, to the extent specified above, on an omnibus basis, in the
event of default of any relevant Cleared Swaps Customer.
N. Proposed Regulation 22.14--Futures Commission Merchant Failure To
Meet a Customer Margin Call in Full
The structure of proposed regulations 22.14(a) through (d) is
intended to ensure that each tier of clearing receives the requisite
transmissions of Cleared Swaps Customer Collateral and information to
attribute such collateral on the date of an FCM default. Starting from
the lowest tier, regulation 22.14(a) proposes to require a Depositing
Futures Commission Merchant that fails to meet a margin call with
respect to a Cleared Swaps Customer Account, in full, to (i) transmit
to its Collecting Futures Commission Merchant, with respect to each
Cleared Swaps Customer of the Depositing Futures Commission Merchant
whose contracts contribute to that margin call, the lesser of the
amount called for or the remaining collateral for that customer on
deposit at such Depositing Futures Commission Merchant, and (ii) advise
the Collecting Futures Commission Merchant of the identity of the
Cleared Swaps Customer and the amount transmitted on behalf of such
customer. Moving towards the middle tier, regulation 22.14(b) proposes
to parallel the above requirement for a Depositing Futures Commission
Merchant that also serves as a Collecting Futures Commission Merchant.
Moving towards the apex, regulations 22.14(c) and (d) propose to
parallel the above requirement for an FCM member of a DCO, including if
the FCM member is also a Collecting Futures Commission Merchant.
Regulations 22.14(e) and (f) propose to address a situation
involving investment risk, the loss of value of collateral, despite the
application of haircuts. Specifically, if (i) the collateral collected
by a DCO or Collecting Futures Commission Merchant is sufficient to
meet the amount of collateral required by regulation 22.12 on the
business day before the failure to meet the margin call (with
sufficiency measured including the application of haircuts specified by
the rules and procedures of the DCO or the policies applied by the
Collecting Futures Commission Merchant), and (ii) as of the close of
business on the business day of the failure to meet the margin call,
the value of such collateral is, due to changes in market value, less
than the amount required by regulation 22.12 on the business day before
the failure to meet the margin call, then that loss of value will be
shared among the customers pro rata: The amount of collateral
attributable to each customer will be reduced by the percentage
difference between the amount specified in regulation 22.12 on that
previous business day and the market value of the collateral on the day
of the failure to meet the margin call. The Commission believes that
investment risk, unlike fellow-customer risk, should not be borne by
the DCO. The Commission seeks comment on this allocation of investment
risk.
O. Proposed Regulation 22.15--Treatment of Cleared Swaps Customer
Collateral on an Individual Basis
Proposed regulation 22.15 sets forth the basic principle of
individual collateral protection. It requires each DCO and each
Collecting Futures Commission Merchant to treat the amount of
collateral required with respect to the portfolio of rights and
obligations arising out of the Cleared Swaps intermediated for each
Cleared Swaps Customer as belonging to that customer. That amount may
not be used to margin, guarantee or secure the cleared swaps, or any
other obligations, of an FCM, or of any other customer.
It should be noted that what is protected is an amount (i.e., a
value) of collateral, rather than any specific item of collateral.
As discussed above, the Commission is proposing herein the Complete
Legal Segregation Model, but is seeking comment as to whether the Legal
Segregation with Recourse Model would be more appropriate. Under the
Legal Segregation with Recourse Model, this regulation would be
modified to permit the use of the Cleared Swaps Customer Collateral of
non-defaulting customers after the exhaustion of both the DCO's
contribution to default resources from its own capital, and the
guaranty fund contributions of clearing members.
Specifically, an additional section would be added to the effect
that
a derivatives clearing organization may, if its rules so provide,
and if the derivatives clearing organization has first exhausted the
resources described in Sec. Sec. 39.11(b)(1)(ii) [the derivatives
clearing organization's own capital], (iii) [Guaranty fund
deposits], and (iv) [other financial resources deemed acceptable by
the Commission], use the Cleared Swaps Customer Collateral of all
Cleared Swaps Customers of a depositing futures commission merchant
that has defaulted in a payment to the derivatives clearing
organization with respect to its Cleared Swaps Customer Account.
Under such a proposal, the Commission does not contemplate
requiring the use of a DCO's assessment powers before permitting the
use of the collateral of non-defaulting customers under the Legal
Segregation with Recourse Model.
P. Proposed Regulation 22.16--Disclosures to Customers
In order to make Cleared Swaps Customers aware of the limits of
protection under the Complete Legal Segregation Model, proposed
regulations 22.16(a) and (b) require FCMs to disclose to their Cleared
Swaps Customers the governing provisions relating to use of customer
collateral, transfer of Cleared Swaps and related collateral,
neutralization of the risks of customer positions, or liquidation of
cleared swaps, in each case in the event of a default by its FCM
related to the Cleared Swaps Customer Account, either to a Collecting
Futures Commission Merchant or directly to a DCO. Proposed regulation
22.16(c) specifies that the governing provisions are the rules of the
DCO, or the provisions of the customer agreement between the Depositing
Futures Commission Merchant and the Collecting Futures Commission
Merchant, on or through which the Depositing Futures Commission
Merchant clears swaps for Cleared Swaps Customers.
The Commission is particularly interested in further discussion of
the benefits and costs of each model in light of the proposed
regulations (i.e., the Complete Legal Segregation Model that is
proposed and the Legal Segregation with Recourse Model that is being
considered). In particular, the Commission seeks comment on (1)
Operational costs: The incremental activities commenters would be
required to perform, with respect to
[[Page 33841]]
cleared swaps and cleared swaps collateral under each model that they
are not currently required to perform with respect to futures and
futures collateral, and the initial and annualized costs of such
activities. How can these costs be estimated industry-wide? Please
provide a detailed basis for these estimates; and (2) Risk Environment
Costs: How do you see the industry adapting to the risk changes
attendant to each model? What types of costs would you expect your
institution to incur if the industry adapts to the model in the most
efficient manner feasible? How are those costs different from the costs
your institution incurs relative to futures and futures collateral?
What is a reasonable estimate of the initial and annualized ongoing
incremental costs incurred by your institution, and how can such costs
be estimated industry wide? Please provide a detailed basis for your
estimates.
V. Section by Section Analysis: Amendments to Regulation Part 190
A. Background
In April of 2010, prior to the enactment of the Dodd-Frank Act, the
Commission promulgated rules to establish an account class for cleared
OTC derivatives (and related collateral).\156\ At that time, there were
questions concerning the authority of the Commission to require the
segregation of cleared OTC derivatives (and related collateral), or to
establish the account class for the insolvency of a DCO. As a result,
protection for cleared OTC derivatives (and related) collateral was
limited to those cases where such derivatives and collateral were
required to be segregated pursuant to the rules of a DCO, and the reach
of the account class was limited to cases of the bankruptcy of a
commodity broker that is an FCM. Moreover, while section 4d(a)(2) of
the CEA permitted the inclusion in the domestic futures account class
of transactions and related collateral from outside that class, there
was no similar provision permitting the inclusion in the cleared OTC
account class of transactions and related collateral from outside that
latter class.
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\156\ See Account Class, 75 FR 17297 (Apr. 6, 2010).
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Section 724 of the Dodd-Frank Act has resolved these questions. As
mentioned above, section 4d(f) of the Dodd-Frank Act requires, among
other things, segregation of Cleared Swaps and Cleared Swaps Customer
Collateral. Section 4d(f)(3)(B) of the CEA permits the inclusion of
positions in other contracts (such as exchange-traded futures) and
related collateral with Cleared Swaps and Cleared Swaps Customer
Collateral. Section 724(b) of the Dodd-Frank Act amends the Bankruptcy
Code to include in the definition of ``commodity contracts'' Cleared
Swaps with respect to both FCMs and DCOs. Thus, this section V proposes
amendments to regulation Part 190, pursuant to Commission authority
under section 20 of the CEA, in order to give effect to section 724 of
the Dodd-Frank Act. Such amendments conform to proposed Part 22.
B. Definitions
The Commission proposes certain technical amendments to regulation
190.01 to remove the reference to the definition of ``Opt-out
customer'' from the definition of ``Non-Public Customer,'' and to
include or exclude Cleared Swaps and Cleared Swaps Collateral in the
definitions of ``Clearing Organization,'' ``Non-Public Customer,'' and
``Principal Contract,'' as appropriate. The Commission also proposes
substantive changes to the definitions of ``Account Class'' and
``Cleared Swaps.''
1. Proposed Amendment to Regulation 190.01(a)--Account Class
The Commission proposes amending regulation 190.01(a) to change the
definition of account class to include a class for cleared swaps
accounts, without limiting that definition to commodity brokers that
are FCMs (as is currently the case). In addition, commodity option
accounts would be deleted from the definition because the term
commodity options, as defined in section 1.3, includes options on
futures (which are regulated as futures) and options on commodities
(which under the Dodd-Frank Act are swaps). The additions of
subsections (a)(2)(i) and (a)(2)(ii) are meant to make clear that
options on futures and options on commodities should not be grouped
into one account class; rather options on futures should be deemed part
of the futures account class and options on commodities should deemed
part of the cleared swaps account class. Another proposed amendment,
subsection (a)(3), is intended to clarify that Commission orders
putting futures contracts and related collateral in the cleared swaps
account class (pursuant to new section 4d(f)(3)(B) of the CEA) are
treated, for bankruptcy purposes, in a manner analogous to orders
putting cleared swaps and related collateral in the futures account
class (pursuant to CEA section 4d(a)(2)). The proposed amended Sec.
190.01(a) would clarify that if, pursuant to a Commission rule,
regulation or order (or a derivatives clearing organization rule
approved pursuant to regulation 39.15(b)(2)), positions or transactions
that would otherwise belong to one class are associated with positions
and related collateral in commodity contracts another account class,
then the former positions and related collateral shall be treated as
part of the latter account class.
2. Proposed New Regulation 190.01(e)--Calendar Day
The Commission proposes defining the term ``calendar day'' to
include the time from midnight to midnight.
3. Proposed Amendment to Regulation 190.01(f)--Clearing Organization
The Commission proposes to amend the definition of clearing
organization to remove, as unnecessary, the reference to commodity
options traded on or subject to the rules of a contract market or board
of trade.
4. Proposed Amendment to Regulation 190.01(cc)--Non-Public Customer
The Commission proposes to amend the definition of non-public
customer to include references to non-public customers under regulation
30.1(c) (with respect to foreign futures and options customers) and in
the definition of cleared swaps proprietary account.
5. Proposed Amendment to Regulation 190.01(hh)--Principal Contract
The Commission proposes to amend the definition of principal
contract to include an exclusion for cleared swaps contracts.
6. Proposed Amendment to Regulation 190.01(ll)--Specifically
Identifiable Property
The Commission proposes to amend the definition of specifically
identifiable property to change, in subsection (ll)(2)(ii), an
anachronistic reference to section 5a(a)(12) of the CEA to a reference
to 5c(c) of the CEA, and to change references to ``business days'' in
subsections (ll)(4) and (ll)(5) to references to ``calendar days,'' to
conform to other proposed changes to Part 190 implementing Public Law
111-16, the Statutory Time-Periods Technical Amendments Act of 2009,
which (in relevant part) changed the time period in 11 U.S.C. 764(b)
from five (business) days to seven (calendar) days.\157\ Because the
pace of recent commodity broker bankruptcies has included work on
weekends, references to four or fewer ``business days'' have
[[Page 33842]]
been changed to the same number of calendar days; while references to
five business days have been changed to six calendar days.
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\157\ See generally 75 FR 75432, 75435 (Dec. 3, 2010).
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7. Proposed Amendment to Regulation 190.01 (pp)--Cleared Swap
Proposed new Sec. 190.01(pp) replaces the definition of ``Cleared
OTC Derivative'' that the Commission previously adopted with a
definition of cleared swap that incorporates by reference the
definition of that term in Sec. 22.1.
C. Proposed Amendments to Regulation 190.02--Operation of the Debtor's
Estate Subsequent to the Filing Date and Prior to the Primary
Liquidation Date
The Commission is proposing certain technical amendments to (1)
expand regulation 190.02 to apply to cleared swaps (and related
collateral) and (2) change references to ``business days'' to
references to ``calendar days,'' and require transfer instructions by
the sixth calendar day after the order for relief and instructed
transfers to be completed by the seventh calendar day after the order
for relief, in order to fall within the protection of section 764(b) of
the Bankruptcy Code. Other proposed amendments to Sec. 190.02(g)(1)(i)
are intended to clarify that maintenance margin refers to the
maintenance margin requirements of the applicable designated contract
market or swap execution facility. Inclusion of the words ``if any''
reflects Commission recognition that there may be situations where
there is no applicable designated contract market or swap execution
facility.
D. Proposed Amendments to Regulation 190.03--Operation of the Debtor's
Estate Subsequent to the Primary Liquidation Date
In addition to certain technical amendments to (1) expand
regulation 190.03 to apply to cleared swaps (and related collateral)
and (2) change references to ``business days'' to references to
``calendar days,'' proposed amendments to Sec. 190.03(a)(3) are
intended to clarify that maintenance margin refers to the maintenance
margin requirements of the applicable designated contract market or
swap execution facility. Inclusion of the words ``if any'' reflects
Commission recognition that there may be situations where there is no
applicable designated contract market or swap execution facility.
E. Proposed Amendments to Regulation 190.04--Operation of the Debtor's
Estate--General
Proposed amendments to regulation 190.04 would extend the
liquidation of open commodity contracts held for a house account or a
customer account by or on behalf of a commodity broker that is a debtor
to commodity contracts traded on swap execution facilities.\158\ These
commodity contracts would be liquidated in accordance with the rules of
the relevant swap execution facility or designated contract market,
under a liquidation process that, to the extent possible under market
conditions at the time of liquidation, results in competitive pricing.
In addition, in order to conform to current market practice, the
amendments would allow open commodity contracts that are liquidated by
book entry to be offset using the settlement price as calculated by the
relevant clearing organization pursuant to its rules, which rules would
also be required to promote competitive pricing to the extent feasible
under market conditions at the time of liquidation. Such rules are
required to be submitted to the Commission for approval pursuant to
section 5c(c) of the CEA, or approved by the Commission (or its
delegate) pursuant to regulation 190.10(d).
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\158\ Open commodity contracts traded on a designated contract
market would continue to be liquidated in accordance with the rules
of the relevant designated contract market.
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F. Proposed Amendments to Regulation 190.05--Making and Taking Delivery
on Commodity Contracts
Proposed amendments to regulation 190.05 are technical in nature,
changing a reference to ``contract market'' to ``designated contract
market, swap execution facility, or clearing organization,'' and
requiring the submission of rules for approval subject to section 5c(c)
of the CEA.
G. Proposed Amendments to Regulation 190.06--Transfers
Proposed amendments to regulation 190.06(a) are intended to clarify
that nothing in paragraph (a) would constrain the contractual right of
the DCO to liquidate open commodity contracts, even those pertaining to
customers (whether transacting in futures, cleared swaps, or other
products).
Proposed amendments to regulation 190.06(e) would permit the
trustee to transfer accounts with no open commodity contracts. In past
commodity broker bankruptcies, the Commission has permitted the
transfer of such accounts. Moreover, section 761(9)(A)(ii)(I) and (II)
of the Bankruptcy Code define a ``customer'' to include an entity that
holds a claim against the FCM arising out of: (i) the liquidation of a
commodity contract and (ii) a deposit or payment of property with such
FCM for the purpose of making or margining a commodity contract, either
of which might occur after or before the customer holds a commodity
contract. Further, section 764 of the Bankruptcy Code prohibits the
trustee from avoiding post-petition transfers: (i) facilitating the
liquidation of a commodity contract, and presumably claims attendant
thereto, and (ii) of any cash, securities, or other property margining
or securing a commodity contract, and presumably claims thereto.
Proposed amendments to regulation 190.06(g) would prohibit the
trustee from avoiding pre-petition transfers made by a clearing
organization on behalf of customers of the debtor of accounts held for
or on behalf of customers of the debtor as long as the money,
securities, or other property accompanying such transfer would not
exceed the funded balance of such accounts based on information
available as of the close of business on the business day immediately
preceding such transfer minus the value on the date of return or
transfer of any property previously returned or transferred thereto.
The Commission believes that this change promotes portability by
allowing clearing organizations to efficiently manage the customer
accounts of the debtor in a default scenario.
In light of the importance of transfers to swaps markets, the
Commission observes that certain portions of regulation 190.06 are not
being changed. Specifically, regulation 190.06(f)(3) addresses partial
transfers, whether with respect to fewer than all customers (subsection
(i)), or with respect to fewer than all contracts cleared on behalf of
a particular customer (subsection (ii)). Moreover, regulation
190.06(e)(2) limits the amount of equity that may be transferred in
respect of any account to the funded balance of that account, subject
to certain adjustments, ``based on available information as of the
calendar day immediately preceding transfer'' (emphasis supplied).
While a transfer of all contracts in all accounts may be
preferable, it may, in certain circumstances, be impracticable. If so,
the regulations described above accommodate partial transfers.
In addition, technical amendments have been made to change
``business day'' to ``calendar day.''
[[Page 33843]]
H. Proposed Amendments to Regulation 190.07--Calculation of Allowed Net
Equity
Proposed amendments to regulation 190.07(b) clarify that individual
cleared swaps customer accounts within an omnibus account are to be
treated individually. A proposed amendment to regulation 190.07(c)
corrects a typographical error. Proposed amendments to regulation
190.07(e) would change the valuation of an open commodity contract so
that the value of the commodity contract would be derived from the
settlement price as calculated by the relevant clearing organization
pursuant to its rules, provided that such rules have been submitted to
the Commission for approval pursuant to section 5c(c)(4) of the CEA and
have received such approval, or have been approved pursuant to
regulation 190.10(d). This change is intended to conform the valuation
of an open commodity contract to current market practices. Another
proposed amendment to regulation 190.07(e) would change references to
securities traded over-the-counter pursuant to the National Association
of Securities Dealers Automated Quotation System to securities not
traded on an exchange, again to conform to current market practices.
I. Proposed Amendments to Regulation 190.09--Member Property
Proposed amendments to regulation 190.09(b) have been made to
include references to an account excluded pursuant to the proviso in
regulation 30.1(c) (with respect to proprietary foreign futures and
options customers) and to the cleared swaps proprietary account.
J. Proposed Amendments to Regulation 190.10--General
Proposed amendments to regulation 190.10 (a) have been made to
remove references to providing notice by telegram or ordinary postal
mail and to require notice by e-mail and overnight mail.
K. Proposed Amendments to Appendix A to Part 190--Bankruptcy Forms,
Bankruptcy
Proposed changes to appendix A, form 1 would remove references to
``bulk transfers'' and replace the term with the word ``transfers.''
While the Commission believes that the trustee should transfer as much
of a customer account as possible for each account class \159\ to one
non-defaulting FCM, the Commission recognizes that there may be
situations where a bulk transfer may not be possible.\160\
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\159\ Account class means each of the following types of
customer accounts that must be recognized as a separate class of
account by the trustee: futures accounts, foreign futures accounts,
leverage accounts, delivery accounts as defined in Sec.
190.05(a)(2) of this part, and cleared swaps accounts.
\160\ For example, when evaluating the creditworthiness of
various FCMs, the trustee may conclude that it would be preferable
to transfer portions of a customer account to several different non-
defaulting FCMs who have high credit ratings instead of one non-
defaulting futures commission merchant with lower credit quality.
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Technical amendments also are being proposed for appendix A to Part
190. These amendments would include revisions to reflect the addition
of section 4d(f) by section 724 of the Dodd-Frank Act. In addition,
amendments have been made to clarify that Commission approval with
respect to the rules of a registered entity that require Commission
approval means Commission approval under section 5c(c) of the CEA.
Additional technical amendments to appendix A to Part 190 have been
proposed to conform certain time periods to the proposed changes made
by the Commission to implement Public Law 111-16, the Statutory Time-
Periods Technical Amendments Act of 2009.
L. Proposed Amendments to Appendix B to Part 190--Special Bankruptcy
Distributions
Proposed amendments to appendix B would clarify that the cross
margining program is intended to apply only to futures customers and
futures customer funds.
VI. Effective Date
The Commission requests comment on the appropriate timing of
effectiveness for the final rules for Part 22.\161\ Specifically, is
six months after the promulgation of final rules sufficient? If not,
please specify a recommended time period, and explain in detail the
reasons why no shorter period will be sufficient.
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\161\ The amendments to Part 190 appear to be self-executing,
but commenters are invited to suggest why an implementation period
for these amendments might be necessary.
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VII. Administrative Compliance
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'')\162\ requires that
agencies, in proposing rules, consider whether the rules they propose
will have a significant economic impact on a substantial number of
small entities and, if so, provide a regulatory flexibility analysis
addressing the impact. The proposed rules will affect DCOs and FCMs.
The Commission has previously determined that DCOs and FCMs are not
small entities for purposes of the RFA.\163\
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\162\ 5 U.S.C. 601 et seq.
\163\ See 66 FR 45605, 45609 (Aug. 29, 2001) (DCOs); 47 FR
18618, 18619-20 (Apr. 30, 1982) (FCMs).
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Accordingly, pursuant to section 605(b) of the RFA, 5 U.S.C.
605(b), the Chairman, on behalf of the Commission, certifies that these
proposed rule amendments will not have a significant economic impact on
a substantial number of small entities. The Commission invites the
public to comment on this finding.
B. Paperwork Reduction Act
1. Introduction
Provisions of proposed new Part 22 of the Commission's rules
include new information disclosure and recordkeeping requirements that
constitute the collection of information within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\164\ The Commission
therefore is submitting this proposed collection of information to the
Office of Management and Budget (``OMB'') for review in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11. Under the PRA, an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.\165\ The title for this collection of information is
``Disclosure and Retention of Certain Information Relating to Cleared
Swaps Customer Collateral,'' OMB Control Number 3038-NEW. This
collection of information will be mandatory. The information in
question will be held by private entities and, to the extent it
involves consumer financial information, may be protected under Title V
of the Gramm-Leach-Bliley Act as amended by the Dodd-Frank Act.\166\
This collection of information has not yet been assigned an OMB control
number.
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\164\ 44 U.S.C. 3501 et seq.
\165\ Id.
\166\ See generally Notice of Proposed Rulemaking, Privacy of
Consumer Financial Information; Conforming Amendments Under Dodd-
Frank Act, 75 FR 66014 (Oct. 27, 2010).
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2. Information Provided by Reporting Entities
Proposed section 22.2(g) requires each FCM with Cleared Swaps
Customer Accounts to compute daily the amount of Cleared Swaps Customer
Collateral on deposit in Cleared Swaps Customer Accounts, the amount of
such collateral
[[Page 33844]]
required to be on deposit in such accounts and the amount of the FCM's
residual financial interest in such accounts. The computations and
supporting data must be kept in accordance with the CFTC regulation
1.31, which establishes generally applicable rules for recordkeeping
under the CEA. The purpose of this collection of information is to help
ensure that FCMs' Cleared Swaps Customer Accounts are in compliance at
all times with statutory and regulatory requirements for such accounts.
Proposed section 22.5(a) requires an FCM or DCO to obtain, from
each depository with which it deposits cleared swaps customer
funds,\167\ a letter acknowledging that such funds belong to the
cleared swaps customers of the FCM, and not the FCM itself or any other
person. The purpose of this collection of information is to confirm
that the depository understands its responsibilities with respect to
protection of cleared swaps customer funds.
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\167\ Proposed section 22.5(c) provides an exception for a DCO
serving as a depository where such DCO has made effective rules that
provide for the segregation of Cleared Swaps Customer Collateral in
accordance with all relevant provisions of the CEA and the
regulations thereunder.
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Proposed section 22.11 requires each FCM that intermediates cleared
swaps for customers on or subject to the rules of a DCO, whether
directly as a clearing member or indirectly through a Collecting
Futures Commission Merchant, to provide the DCO or the Collecting
Futures Commission Merchant, as appropriate, with information
sufficient to identify each customer of the FCM whose swaps are cleared
by the FCM. Section 22.11 also requires the FCM, at least once daily,
to provide the DCO or the Collecting Futures Commission Merchant, as
appropriate, with information sufficient to identify each customer's
portfolio of rights and obligations arising out of cleared swaps
intermediated by the FCM. The purpose of this collection of information
is to facilitate risk management by DCOs and Collecting Futures
Commission Merchants, and, in the event of default by the FCM, to
enable DCOs and Collecting Futures Commission Merchants to perform
their duty, pursuant to section 22.15, to treat the collateral
attributed to each customer of the FCM on an individual basis.
Proposed section 22.12 requires that each Collecting Futures
Commission Merchant and DCO, on a daily basis, calculate, based on
information received pursuant to proposed section 22.11 and on
information generated and used in the ordinary course of business by
the Collecting Futures Commission Merchant or DCO, and record certain
information about the amount of collateral required for each Cleared
Swaps Customer and the sum of these amounts.
Proposed section 22.16 requires that each FCM who has cleared swaps
customers disclose to each of such customers the governing provisions,
as established by DCO rules or customer agreements between collecting
and depositing FCMs, relating to use of customer collateral, transfer,
neutralization of the risks, or liquidation of cleared swaps in the
event of a default by a depositing FCM relating to a cleared swaps
customer account. The purpose of this collection of information is to
ensure that cleared swaps customers are informed of the procedures to
which accounts containing their swaps collateral may be subject in the
event of a default by their FCM.
The recordkeeping and disclosure requirements of sections 22.2(g)
and 22.11 are expected to apply to approximately 100 entities on a
daily basis.\168\ The recordkeeping requirement of section 22.5 is
expected to apply to approximately 100 entities on an approximately
annual basis. Based on experience with analogous recordkeeping and
disclosure requirements for FCMs in futures transactions, the
recordkeeping and disclosure required by section 22.2(g) is expected to
require about 100 hours annually per entity, for a total burden of
approximately 20,000 hours. At an hourly rate of $25 per hour, the cost
burden would be approximately $2500 per entity per year for a total of
$250,000. Also based on experience with analogous recordkeeping
requirements for FCMs in futures transactions, the recordkeeping
requirement of section 22.5 is expected to require about 5 hours per
entity per year, for a total burden of approximately 500 hours per
year. At an hourly rate of $25 per hour, the cost burden would be
approximately $125 annually per entity, for a total of $12,500.
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\168\ This estimate is based on the following: there are
currently approximately 125 FCMs registered with the Commission.
However, it is expected that only FCMs with substantial capital will
be capable of clearing swaps. There are approximately 75 FCMs with
adjusted net capital in excess of $25 million, accordingly, and
allowing room for growth, it is estimated that there will be 100
FCMs subject to these requirements.
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The disclosure required by section 22.11 involves information that
FCMs that intermediate swaps generate and use in the usual and
customary ordinary course of their business. It is expected that the
required disclosure will be performed using automated data systems that
FCMs maintain and use in the usual and customary ordinary course of
their business but that certain additional functionality will need to
be added to these systems to perform the required disclosure. Because
of the novel character of proposed section 22.11, it is not possible to
make a precise estimate of the paperwork burden. We estimate that the
necessary modifications to, and maintenance of, systems may require a
range of between 20 and 40 hours of work annually at a salary of
approximately $75 per hour.\169\ The total annual burden for section
22.11 therefore is estimated at 2,000 to 4,000 hours and $150,000 to
$300,000.
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\169\ The range of estimates of hours is influenced by the fact
that FCMs commonly use similar or identical data systems produced by
a small number of vendors, so there may be significant economies of
scale in making the system modifications required for the section
22.11 disclosure. The estimates also are based on the assumption
that half of the time required to modify systems will be expended on
a one-time basis and annualized over five years.
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The recordkeeping required by proposed section 22.12 involves
information that Collecting Futures Commission Merchants and DCOs will
receive pursuant to proposed section 22.11 or that they generate and
use in the usual and customary ordinary course of their business. It is
expected that the required recordkeeping will be performed using
automated data systems that Collecting Futures Commission Merchants and
DCOs maintain and use in the usual and customary ordinary course of
their business but that certain additional functionality will need to
be added to these systems to perform the required disclosure. Because
of the novel character of proposed section 22.12, it is not possible to
make a precise estimate of the paperwork burden. We estimate that the
necessary modifications to, and maintenance of, systems may require a
range of between 20 and 40 hours of work annually at a salary of
approximately $75 per hour.\170\ It is expected that the required
recordkeeping will be performed by approximately 100 entities. The
total annual burden for section 22.11
[[Page 33845]]
therefore is estimated at 2,000 to 4,000 hours and $150,000 to
$300,000.
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\170\ The range of estimates of hours is influenced by the fact
that FCMs and DCOs commonly use similar or identical data systems
produced by a small number of vendors, so there may be significant
economies of scale in making the system modifications required for
the section 22.12 recordkeeping. The estimates also are based on the
assumption that half of the time required to modify systems will be
expended on a one-time basis and annualized over five years.
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Proposed section 22.16 would apply to the same estimated 100
entities as sections 22.2(g), 22.5(a) and 22.11. The required
disclosure would have to be made once each time a swaps customer begins
to be cleared through a particular DCO or collecting FCM and each time
a DCO or collecting FCM through which a customer's swaps are cleared
changes it polices on the matters covered by the disclosure. It is
expected that each disclosure would require about 0.2 hours of staff
time by staff with a salary level of about $25 per hour. It is
uncertain what average number of swaps customers FCMs will have, and
what average number of disclosures will be required for each customer
annually. Assuming an average of 500 customers per FCM and two
disclosures per customer per year, the estimated total annual burden
would be 200 hours and $5000 per entity, for an overall burden of
$500,000.
3. Information Collection Comments
The Commission requests comment on all aspects of this proposed
mandatory collection of information and document retention.
Specifically, the Commission requests comment on whether the Commission
has provided sufficient clarity concerning the types of information
that would be required to be disclosed and retained.
C. Cost-Benefit Analysis
1. Introduction
a. Requirement Under Section 15(a) of the CEA
Section 15(a) of the CEA \171\ requires the Commission to consider
the costs and benefits of its actions before issuing a rulemaking under
the CEA. Section 15(a) further specifies that the costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: (i) Protection of market participants and the public; (ii)
efficiency, competitiveness, and financial integrity of futures
markets; (iii) price discovery; (iv) sound risk management practices;
and (v) 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 rule is necessary or appropriate to protect the public
interest or to effectuate any of the provisions or accomplish any of
the purposes of the CEA.
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\171\ 7 U.S.C. 19(a).
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b. Structure of the Analysis
As mentioned above, the Commission has decided to propose the
Complete Legal Segregation Model. A number of commenters to the ANPR
suggested that the costs and benefits of the Complete Legal Segregation
Model should be informed by the Futures Model. Such commenters provided
quantitative estimates of such costs (but not such benefits). Using
these quantitative estimates of cost, the Commission discusses the
costs and benefits of the Complete Legal Segregation Model (as well as
the Legal Segregation with Recourse Model) in relation to a common
baseline--namely, the Futures Model.
The Commission notes that other commenters suggested that the costs
and benefits of the Complete Legal Segregation Model should be informed
by the protections for collateral obtained by customers in the existing
swaps markets and of the costs incurred for such protections. While
this alternative is not part of the formal analysis, it can inform us
of the costs of the various models. Therefore, the Commission has asked
for additional comment on such protections, including quantitative
estimates of costs, in section III(B) herein.
Finally, as mentioned above, the Commission is considering the
Legal Segregation with Recourse Model. The Commission has asked for
additional comment on the Legal Segregation with Recourse Model, as
well as (i) the Futures Model and (ii) the Optional Approach.
2. Costs of the Complete Legal Segregation Model, the Legal Segregation
With Recourse Model, and the Futures Model
There are several kinds of costs associated with the Complete Legal
Segregation and the Legal Segregation with Recourse Models, relative to
the Futures Model. These can be categorized as operational costs, Risk
Costs (as section II(C)(3) defines such term), and costs associated
with induced changes in behavior. The Complete Legal Segregation, the
Legal Segregation with Recourse, and the Futures Models will require
different payments from various parties in the event that there is a
simultaneous default of one or more Cleared Swaps Customers and their
FCMs. The direct effect of the Complete Legal Segregation and the Legal
Segregation with Recourse Models, in contrast to the Futures Model,
would be to protect the Cleared Swaps Customer Collateral of non-
defaulting customers against claims by the relevant DCO.\172\ In
general, this protection of non-defaulting customers makes it more
likely, relative to the Futures Model, that the financial resource
package of the DCO (including, e.g., the DCO's own capital contribution
and the guaranty funds contributed by member FCMs) would need to be
applied to the liability of the defaulting Cleared Swaps Customer(s).
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\172\ According to comments on the ANPR, the direct benefit to
customers in the form of reduced risk of loss of collateral stemming
from the activities of fellow customers may generate indirect
benefits. For example, commenters indicated that increased security
for collateral could increase their ability to use swaps for
business purposes, although this effect could be counterbalanced by
increased dollar costs. Commenters also stated that the increased
protection against Fellow-Customer Risk would reduce their need to
incur costs to protect against the effects of loss of Cleared Swaps
Customer Collateral.
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a. Operational Costs
Operational costs associated with the Complete Legal Segregation
and the Legal Segregation with Recourse Models result from a greater
need, relative to the Futures Model, to transfer information about
individual Cleared Swaps Customer Contracts between FCMs and DCOs, an
increased amount of account information kept by DCOs, potential
increases in compliance costs, and related kinds of costs. Some of
these costs will be one-time set-up costs, and other costs will be
recurring. Operational costs associated with the Complete Legal
Segregation and the Legal Segregation with Recourse Models can be
expected to be identical or close to identical because the
informational and other operational requirements of both models are
substantially similar--where the two models differ is in the scope of
DCO's claim to Cleared Swaps Customer Collateral in the event of the
simultaneous default of one or more Cleared Swaps Customers and their
FCMs.
Precise determination of the extent of operational costs associated
with the Complete Legal Segregation and the Legal Segregation with
Recourse Models depends on the number of Cleared Swaps Customers at
each FCM, the number and types of Cleared Swaps Customer Accounts held
by each customer, and other factors. Some estimates of the typical
FCM's costs were provided by ISDA. As discussed above, in comments on
the ANPR, ISDA estimates that the Complete Legal Segregation and the
Legal Segregation with Recourse Models would involve a one-time cost
increase of $0.8 million to $1 million per FCM, plus a recurring
[[Page 33846]]
annual cost with a median estimate of roughly $0.7 million.\173\ In
addition, there would be costs faced by each DCO, which would likely be
of a similar magnitude, unless the DCO already possesses the
information required to implement the Complete Legal Segregation and
the Legal Segregation with Recourse Models. A DCO with such information
may find the operational costs associated with the Complete Legal
Segregation and the Legal Segregation with Recourse Models to be
negligible.
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\173\ See note 43 supra.
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b. Risk Costs
Risk Costs refer to the costs associated with reassigning liability
in the event of a customer default (i.e., the Complete Legal
Segregation Model or the Legal Segregation with Recourse Model compared
to the Futures Model). This can usefully be divided into direct and
indirect costs (and associated benefits). The direct costs of the
Complete Legal Segregation and the Legal Segregation with Recourse
Models are the increased risk the DCO will face when one or more
Cleared Swaps Customers and their FCMs default. Under the Complete
Legal Segregation Model, this is equal to the probability of a default
by a Cleared Swaps Customer and its FCM, times the expected
contribution that fellow customers would have provided toward the
uncovered loss. The gain to Cleared Swaps Customers under this model is
the value they place on avoiding this same cost (i.e., owning insurance
against Fellow-Customer Risk). The Legal Segregation with Recourse
Model is fundamentally similar, except that the Cleared Swaps Customers
may ultimately be responsible for some of that deficiency, should the
capital of the DCO and the guaranty fund contributions of non-
defaulting FCM members be exhausted.\174\
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\174\ Implicitly then, unless there are offsetting changes, the
resources available to the DCO to cover its obligations to
counterparties in the event of the default of one or more Cleared
Swaps Customers and their FCMs would potentially be smaller under
the Complete Legal Segregation Model than under the Legal
Segregation with Recourse Model, and hence the guarantee offered to
Cleared Swaps counterparties by the DCO would potentially be less
secure under the Complete Legal Segregation Model. Such offsetting
changes, however, are required by proposed Commission requirements
regarding DCO financial resource packages. See section II(C)(1)
herein. As the following discussion indicates, the DCO may take
steps, in terms of enhanced resources and use of risk-management
tools to insure the security that it offers to Cleared Swaps
counterparties.
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Thus, the Complete Legal Segregation Model will potentially result
in a decrease in the financial resources package available to the DCO
in the event of default. Hence, maintaining the same assurance of
performance requires the DCO to raise additional financial resources.
While the Legal Segregation with Recourse Model does not directly
reduce DCO financial resources, it restructures them so as to likely
lead a DCO to change its default management structure. The exact nature
of the Risk Costs will depend on how each DCO structures its default
management structure if the Complete Legal Segregation or the Legal
Segregation with Recourse Models is chosen over the Futures Model. The
comments sent to the Commission have suggested two possible ways by
which the DCO may vary its default management structure: (i) By
increasing the amount of collateral that each Cleared Swaps Customer
must provide; or (ii) by increasing the amount of resources that each
FCM must contribute to the guaranty fund.
Focusing on (i) (an increase in the amount of collateral that each
Cleared Swaps Customer must provide), estimates of the size of the
increase vary, and in principle depend on whether the Complete Legal
Segregation Model or the Legal Segregation with Recourse Model is under
consideration. In comments on the ANPR, both CME and ISDA suggest that
the Complete Legal Segregation Model would require an increase of
approximately 70% in Cleared Swaps Customer Collateral, or an increase
of roughly $500-600 billion in total required Cleared Swaps Customer
Collateral relative to the Futures Model. The organizations had
somewhat different views of the Legal Segregation with Recourse Model.
ISDA noted that the total pool of capital available to a DCO under this
model would not be changed, although there would be ``a real wealth
transfer'' from the FCMs and DCO to the customers, while CME suggested
that the increase would be of a similar magnitude to the effect of the
Complete Legal Segregation Model.
If instead the capital structure is restored though (ii) (an
increase in the amount of resources that each FCM would contribute to
the guaranty fund), what were described as ``conservative'' estimates
suggest an increase of $50 billion (CME) to $128 billion (ISDA) in
guaranty funds for the Complete Legal Segregation Model.\175\ By
contrast, LCH, in its comment, stated that there would be no need for
additions to the guaranty fund under either the Complete Legal
Segregation Model or the Legal Segregation with Recourse Model because
the manner in which it currently calculates the size of its guaranty
fund provides adequate resources against default risk under the
Complete Legal Segregation Model and the Legal Segregation with
Recourse Model and because, in the view of LCH, a guaranty fund of
similar size would be required to provide adequate security under the
Futures Model.
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\175\ Presumably, some of the cost to the FCMs would be offset
by enhanced charges to customers. Buy-side commenters to the ANPR
have indicated that they would be willing to bear such charges.
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The wide divergence in these figures is due in large part to
different implicit assumptions about fellow customer behavior, and how
such behavior should affect a DCO's prudent design of its financial
resources package. Specifically, Core Principle B for DCOs, section
5b(c)(2)(B) of the CEA, requires the sufficiency of a DCO's financial
resources package to be judged relative to the ``worst'' exposure, in a
probabilistic sense, created by a member or participant in extreme but
plausible market conditions. In the Complete Legal Segregation Model,
such an approach likely requires an assessment of the largest stressed
loss on a to-be-specified number of the largest customers to the given
FCM since, in this instance, the DCO would not have access to the
collateral of non-defaulting customers in such an event. By contrast,
the Futures and the Legal Segregation with Recourse Models allow (to a
degree) for the sufficiency of the DCO financial resources package to
be judged relative to the ``worst'' loss that an FCM suffers in its
omnibus customer account, recognizing that account as a diversified
pool and taking advantage of the diversification benefit realized by
the DCO across the customers within that pool. This is so because the
Futures Model (and, at a later point, the Legal Segregation with
Recourse Model) would allow the DCO to use the collateral of non-
defaulting customers to cover losses the DCO would otherwise face as a
result of a simultaneous default of one or more Cleared Swaps Customers
and their FCMs.\176\
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\176\ While the Legal Segregation with Recourse Model permits
the DCO to take into account the omnibus customer account, as a
diversified pool, in calculating the total resources available to
cover the DCO's obligations resulting from a combined customer/FCM
default, as explained above, it would expose the DCO to a higher
risk of having to use the DCO's own capital and the guaranty fund
contributions of non-defaulting FCM members than the Futures Model.
---------------------------------------------------------------------------
However, the extent of the diversification effect arising from the
DCO's access to the entire omnibus customer account allowed by the
Futures Model (and, at a later point in the process, the Legal
Segregation with Recourse Model) depends on how much
[[Page 33847]]
of the resources supplied by non-defaulting Cleared Swaps Customers
(via initial margin) will be present in the account following a
default. If all Cleared Swaps Customer Contracts remained with the
defaulting FCM through the default, then the DCO could potentially
measure the adequacy of the guaranty fund based on a fully diversified
pool of customer positions. Conversely, if all Cleared Swaps Customers
would transfer their positions to a different FCM in anticipation of
the default, then the diversification (and its consequence for the
DCO's financial resources package) would be eliminated.\177\
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\177\ LCH states that a methodology in which no diversification
is assumed represents their current practice, and is the most
``conservative'' in terms of capital adequacy. It argues that it is
imprudent to assume that any funds in the omnibus Cleared Swaps
Customer Account will remain at the time of default because that
default may plausibly occur not as a sudden shock but, rather, as
the end of a process of credit deterioration taking place over a
number of days (potentially a number of weeks), during which time
the Cleared Swaps Customers have time to port their Cleared Swaps
Contracts and associated collateral away from the defaulting FCM.
Thus, according to the logic of LCH's approach, the size of the
guaranty fund and/or initial margin levels would need to be as high
under the Futures Model as under either the Complete Legal
Segregation or the Legal Segregation with Recourse Models.
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More generally, the extent to which the Complete Legal Segregation
or the Legal Segregation with Recourse Models really requires a larger
guaranty fund or higher levels of collateral per Cleared Swaps Customer
(relative to the Futures Model) depends on the extent to which Cleared
Swaps Customer Contracts can be expected to remain with the defaulting
FCM during the time period immediately before the default.\178\ Since
the circumstances of particular FCM defaults will vary, DCOs, in
determining their financial resources package, can be expected to take
into consideration the possibility that, at least for some FCM
defaults, there will be warning signs, resulting in a portion of
Cleared Swaps Customer Collateral being transferred out of the Cleared
Swaps Customer Account maintained by the defaulting FCM. And while
determining the appropriate assumptions regarding customer behavior
under either the Futures or the Legal Segregation with Recourse Models
is central to the issue of capital adequacy, it may prove less central
to the consideration of costs and benefits under this rule, since both
those costs and benefits depend on the extent to which Cleared Swaps
Customers will transfer their Cleared Swaps Contracts.
---------------------------------------------------------------------------
\178\ The LCH's observation also impacts the requisite change in
Cleared Swaps Customer Collateral. The question of how to
appropriately evaluate the omnibus customer account is a question of
financial resources and is beyond the scope of this rulemaking. We
note, however, that to the extent that immediate history may provide
some guidance, the aggregate amount of segregated funds in Lehman's
omnibus customer account dropped by roughly 75% during the week
prior to its filing for bankruptcy.
---------------------------------------------------------------------------
A distinct question in evaluating Risk Cost is how to translate a
Cleared Swaps Customer Collateral or guaranty fund increase to a cost
increase. A customer required to post an additional $100 of Cleared
Swaps Customer Collateral is not made worse off by $100. Moreover, the
cost to the customer is, at least in part, offset by the benefit to the
DCO. The cost to the customer of a Cleared Swaps Customer Collateral
increase of $100 is the difference between the gain he or she would
have received by retaining that $100, and the return he or she will
receive on the asset while it is on deposit with the FCM or DCO. For
example, the customer might invest the $100 in buying and holding grain
over the pendency of the swap if the level of Cleared Swaps Customer
Collateral were not increased, while he or she is limited to the return
on assets the DCO will accept as margin payment (e.g., the t-bill rate)
under the new, higher margins. While an exact figure for this
difference is difficult to calculate precisely, it is likely to be in a
range of 1-4% per year over the life of the swap. Offsetting this cost
is the gain to the DCO of having additional assets available in the
event of the simultaneous default of one or more Cleared Swaps
Customers and their FCMs, which may enable it to obtain a higher rate
of return on some of its other assets.\179\ Similarly, the cost to an
FCM of a guaranty fund contribution increase is equal to the difference
in return between acceptable instruments for deposit to the guaranty
fund and the FCM's potential return on that $100 if it were not
deposited to the guaranty fund.
---------------------------------------------------------------------------
\179\ An additional offset to this cost is the value that
customers assign to the increased safety of their collateral from
fellow customer risk, a point which is discussed further below.
---------------------------------------------------------------------------
The benefit to customers of greater protection for customer margin
provided by the Complete Legal Segregation Model and the Legal
Segregation with Recourse Model also depends, to some extent, on
assumptions about customers' behavior in advance of a fellow-customer
default. Under the extreme assumption that all customers costlessly
anticipate the default and move their positions to a different FCM,
then neither the Complete Legal Segregation Model nor the Legal
Segregation with Recourse Model provides any benefit to customers
(since their Cleared Swaps Customer Accounts would not have been at
risk under the benchmark). More generally, the greater the extent to
which customers will move their positions, the lower the benefits of
the Complete Legal Segregation Model and the Legal Segregation with
Recourse Model relative to the Futures Model. Of course, under the
Futures Model there exists uncertainty surrounding a customer's ability
to anticipate an FCM default, and this uncertainty is either wholly or
mostly eliminated under the Complete Legal Segregation and the Legal
Segregation with Recourse Models. However, this benefit afforded the
customer needs to be balanced against the cost to the DCO of insuring
against this uncertainty, a portion of which can be anticipated to be
passed along to the customer. Thus, both the capital costs and the
benefits of the Complete Legal Segregation and the Legal Segregation
with Recourse Models, relative to the Futures Model, will tend to be
lower to the extent customers are likely to move their positions in
advance of an FCM default and higher to the extent customers are
unlikely to be able to move their positions. As a result, differing
assumptions about customer mobility in advance of default are likely to
have smaller implications for the relative costs and benefits of
differing approaches than they do for Risk Cost considered in
isolation.
c. Induced Changes in Behavior
Finally, in the category of costs and benefits associated with
induced changes in behavior, several issues are worth noting. CME has
argued that the Complete Legal Segregation and the Legal Segregation
with Recourse Models could potentially reduce the incentives of
individual customers to exercise due diligence when choosing an FCM. In
effect, they argue that because the financial condition of the FCM, and
of the FCM's other customers, will be less relevant to the customer's
liability in the event of fellow customer default, the customer will
devote less effort to monitoring the FCM and its customers. While this
is likely to be true, these liability regimes have offsetting increased
monitoring incentives on the part of FCMs and the DCO. That is, because
the Complete Legal Segregation and the Legal Segregation with Recourse
Models increase the likelihood that a customer default would impact the
guaranty fund, increased incentives exist to protect that fund through
more careful monitoring by the suppliers of the guaranty fund and their
agent (the
[[Page 33848]]
DCO). Indeed, as discussed above,\180\ other commenters (BlackRock,
Freddie Mac, and Vanguard) observe that the availability of fellow-
customer collateral as a buffer reduces the incentives of DCOs to
provide vigorous oversight. The net effect of these incentive changes
on the incentive to monitor is difficult to quantify. However, the
basic economics of monitoring suggest that there are efficiency gains
to centralizing monitoring in a small number of parties.\181\ This is
because there are ``free rider'' effects associated with diffuse
liability; when liability is spread upon a large number of agents, each
gains little from devoting resources to monitoring the firm.\182\ This
effect is compounded by an information effect; even if the incentive
exists, it is difficult for individual customers to gain access to
information about the financial condition of the FCM, and even more so
about the financial condition of their fellow customers. In contrast,
the DCO will, especially under the Complete Legal Segregation Model and
the Legal Segregation with Recourse Model, have good information about
the financial condition of both FCMs and customers.
---------------------------------------------------------------------------
\180\ See note 56 supra.
\181\ In the banking literature, this argument supports capital
requirements as effective disincentives to excessive risk-taking.
\182\ See, e.g., Andrei Shleifer and Robert W. Vishny, A Survey
of Corporate Governance, 52 J. Fin. 737, 753 (1997) (discussing
effect of ``free rider'' issues on monitoring in context of
corporate governance).
---------------------------------------------------------------------------
d. Portability
Another issue is the ease of moving Cleared Swaps Customer
Contracts to new FCMs following an FCM default. Following a default by
an FCM, the Cleared Swaps Contracts of the FCM's customers either have
to be moved to another FCM, or closed. Moving a position to another FCM
allows the DCO to maintain its net position in that contract at zero,
which is generally a goal of a DCO. It also prevents a customer from
needing to reestablish a position, which potentially can be costly,
especially in a stressed economic state.\183\ As discussed above, the
various models result in different amounts of customer-specific
information residing with the DCO under the various models. While it is
difficult to quantify the effects of the alternatives on the cost of
moving positions between FCMs, it would seem that both the Complete
Legal Segregation and the Legal Segregation with Recourse models do not
decrease portability, especially given the increases in capital
requirements that many commenters view as a likely consequence of
either model. In fact, ISDA emphasizes that the Complete Legal
Segregation Model likely increases portability.
---------------------------------------------------------------------------
\183\ See ISDA Supplemental at 2.
---------------------------------------------------------------------------
e. Potential Preferences of Cleared Swaps Customers
Overall, evaluating the costs and benefits of the Complete Legal
Segregation Model and the Legal Segregation with Recourse Model
relative to the Futures Model requires one to know the inherently-
subjective valuation end-users place on the lower likelihood of losing
their initial margin, as well as more precise estimates of the cost.
Given the constraints on such knowledge, and the likelihood that the
benefits to customers will, to some extent, vary with the cost to DCOs
(that is, both are related to the same underlying factors), the best
indirect evidence of the likely effect is the comments provided by the
buy-side. While the Commission has not canvassed all buy-side members,
most of those that chose to comment on the ANPR support the change. It
is not knowable if these commenters fully internalized all of the
potential costs outlined above (e.g., potentially higher margins,
increased costs imposed by FCMs). However, these commenters generally
told the Commission that they understood that more protection for
customer collateral was likely to come at a cost and that they
nevertheless favored more protective approaches.
f. The Optional Approach
A final option is giving DCOs the choice of which segregation model
to employ. If all DCOs would adopt the same model when given a choice,
then the foregoing analysis would apply. In contrast, if different DCOs
might adopt different models, then the analysis of the system-wide
costs and benefits would need to account for the choices made by the
extant DCOs. The Commission seeks comment on the likely alternatives
that would emerge if DCOs had the option of choosing their segregation
model, and the likely costs and benefits of having alternative default
models available.\184\
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\184\ Section III(E) describes certain concerns with adopting
the Optional Approach.
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3. Summary of Benefits of Legal Segregation Models
Based on the discussion in the previous section, the primary
expected benefits of adopting the Complete Legal Segregation or the
Legal Segregation with Recourse Models to implementing section 724 of
the Dodd-Frank Act can be summarized as follows.
a. Fellow-Customer Risk
The primary direct benefit from either the Complete Legal
Segregation or the Legal Segregation with Recourse Models is to reduce
the risk to Cleared Swaps Customers of losing the value of their
collateral in a scenario in which an FCM and one or more of its
customers defaults on its obligations in connection with Cleared Swaps
transactions. The Complete Legal Segregation Model would largely
eliminate this risk.\185\ The Legal Segregation with Recourse Model
would limit this risk to defaults in which the magnitude of the Cleared
Swaps Customer component of the default exceeds the aggregate of the
DCO's own capital and the guaranty fund contributions of non-defaulting
FCM members.
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\185\ As noted above, this model would leave some residual
fellow-customer risk because the DCO would allocate collateral
between defaulting and non-defaulting customers based on information
the FCM provided the day prior to default, so the allocation would
not reflect movement in the cleared swaps portfolio of customers on
the day of default.
---------------------------------------------------------------------------
As discussed in the previous section, the value of this reduced
risk of loss to Cleared Swaps Customers will, to some degree, depend on
the extent to which such customers are able to anticipate FCM defaults
and voluntarily transfer their Cleared Swaps Contracts, and associated
collateral, to other FCMs before the default occurs. In practice, some
FCM defaults may be anticipated by a substantial proportion of Cleared
Swaps Customers, while others may occur suddenly with few or no
customers able to transfer their collateral.\186\ For this reason, an
important benefit of the Legal Segregation Model (particularly the
Complete Legal Segregation Model) is greater certainty. By providing
post-default protection against Fellow-Customer Risk (as such term is
defined above), the Legal Segregation Model provides Cleared Swaps
Customers with a degree of certainty that they will not lose their
collateral due to the actions of other customers regardless of whether
they are able to anticipate an FCM default. Swaps customers who
commented on the ANPR indicated that such certainty was critical to
their business model. The direct benefit to Cleared Swaps Customers of
reduced Fellow-Customer Risk and reduced
[[Page 33849]]
uncertainty may generate a variety of indirect benefits, for example an
increased ability by some businesses to use cleared swaps as a risk
management tool or a reduced need by Cleared Swaps Customers to incur
costs to protect against the consequences of Fellow-Customer Risk in
the event of an FCM default.
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\186\ See footnote 178 supra (regarding recent experience with
Lehman). Cf. e.g., Inskeep v. Griffin, 440 B.R. 148, 151-52
(Beginning on Monday, December 21, 1998 and continuing into the
morning of Tuesday, December 22, 1998 * * * Park * * * a trader who
operated out of Griffin Trading Company's London office,
substantially exceeded his trading limits and suffered losses * * *
As a result of Park's losses, Griffin Trading became insolvent.'').
---------------------------------------------------------------------------
b. Portability and Systemic Risk
An additional benefit of the Complete Legal Segregation Model is to
foster portability. By preserving the collateral of non-defaulting
Cleared Swaps Customers, this model increases the likelihood that the
Cleared Swaps Contracts of these customers can be successfully
transferred. Fostering such transfer, as opposed to the liquidation of
these Cleared Swaps Contracts, will carry benefits both for the Cleared
Swaps Customers and for the financial system as a whole (the latter by
reducing the likelihood that markets would be roiled by a mass
liquidation).
c. Induced Changes in Behavior
Further benefits are expected to result from changes in behavior
induced by the direct costs and benefits of the Complete Legal
Segregation or Legal Segregation with Recourse Models. Because DCOs
will not be able to rely on the collateral of non-defaulting Cleared
Swaps Customers, they will have incentives to increase the extent of
their monitoring of the risk posed by their FCM members and the major
customers of those FCMs. This will have a tendency to reduce the
incidence of FCM and major customer defaults. Some commenters on the
ANPR suggested that the greater protection provided by the Legal
Segregation Model (particularly the Complete Legal Segregation Model)
will mean that Cleared Swaps Customers have less incentive to monitor
the riskiness of their FCMs than under the Futures Model in which
customers are exposed to greater risk of loss. However, for reasons
explained in the previous section, DCOs are in a better position than
Cleared Swaps Customers to monitor FCMs, and the customers thereof, so
the benefits from increased monitoring by DCOs can be expected to
outweigh any reduced monitoring by customers.\187\
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\187\ Moreover, any reduced monitoring by customers would also
imply a reduced monitoring cost.
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4. Relevance to Section 15(a)(2) Considerations
The costs and benefits discussed in the previous sections bear on a
number of the considerations listed in section 15(a)(2) of the CEA:
a. Protection of market participants and the public. The primary
benefit of the Complete Legal Segregation Model, reduction in the risk
of loss of Cleared Swaps Customer Collateral, advances this interest.
The Commission notes that the Legal Segregation with Recourse Model,
which the Commission is considering, also achieves such benefit, but to
a lesser extent.
b. Efficiency, competitiveness, and financial integrity of markets.
As mentioned above, the Complete Legal Segregation Model would increase
the likelihood that, in the event of a simultaneous FCM and Cleared
Swaps Customer default, the DCO would be able to transfer the Cleared
Swaps of non-defaulting Cleared Swaps Customers. Therefore, to the
extent that the Complete Legal Segregation Model would enable Cleared
Swaps Customers to avoid liquidation of their existing Cleared Swaps,
this model would avoid what one commenter described as ``major market
disruption with significant adverse economic impact.'' \188\ Such
avoidance would therefore promote the financial integrity of the
markets.
---------------------------------------------------------------------------
\188\ See ISDA Supplemental at 3.
---------------------------------------------------------------------------
Additionally, behavioral responses to the Complete Legal
Segregation Model discussed above may also affect the financial
integrity of markets. To the extent that the Complete Legal Segregation
Model creates incentives for DCOs to employ higher levels of monitoring
of FCMs and their Cleared Swaps Customers, it will enhance the
financial integrity of markets.
The Commission notes that, in contrast to the Complete Legal
Segregation Model, the Legal Segregation with Recourse Model increases
the likelihood of the transfer of Cleared Swaps Customer Contracts to a
lesser extent. Therefore, the Legal Segregation with Recourse Model
does not enhance the financial integrity of markets as much as the
Complete Legal Segregation Model.
As mentioned above, the Complete Legal Segregation Model arguably
entails greater Risk Costs, although not operational costs, than the
Legal Segregation with Recourse Model. Both such models arguably entail
greater operational costs than the Futures Model. However:
As discussed above, commenters exhibited considerable
divergence in their estimates of Risk Costs.
As discussed above, ANPR commenters suggested that the
incremental operational costs of the Complete Legal Segregation or the
Legal Segregation with Recourse Models, as compared with the Futures
Model, would be relatively modest against the size of the market for
cleared swaps.
Despite the possibility of increased Risk Costs and
operational costs, most buy-side commenters to the ANPR suggested that
they valued the degree of certainty that they will not lose Cleared
Swaps Customer Collateral, and several such commenters indicated that
the absence of this level of certainty would impair their ability to
use cleared swaps for risk management purposes. To the extent that
these commenters represented the perspective of swaps users generally,
then, notwithstanding the possibility of increased Risk Costs and
operational costs, adoption of either the Complete Legal Segregation or
the Legal Segregation with Recourse Models may increase the efficiency
and competitiveness of markets, because they may encourage buy-side use
of such markets in the management of risk.
Because the Complete Legal Segregation Model would eliminate the
ability of DCOs to access the collateral of non-defaulting Cleared
Swaps Customers in the event of an FCM default accompanied by the
default of one or more customers, other things held constant, there
could potentially be negative effects on a DCO's financial integrity.
Such potential negative effects would not be present for the Legal
Segregation with Recourse Model, because DCOs would still have the
ability to access the collateral of non-defaulting Cleared Swaps
Customers. To the extent that negative effects may exist, Core
Principle B for DCOs, section 5b(c)(2)(B) of the CEA would require a
DCO to have available alternative resources to protect the DCO from the
consequences of a major FCM default, such as higher margin levels or
larger guaranty funds. Consistent with this requirement, commenters on
the ANPR who considered access to the collateral of non-defaulting
Cleared Swaps Customers to be important generally assumed that DCOs
would procure alternative financial resources if the Complete Legal
Segregation Model is adopted. As a result, any potential negative
effect of the Complete Legal Segregation Model on market integrity will
be reflected in higher capital costs rather than an actual reduction in
market integrity.
c. Price discovery. The effect of the Complete Legal Segregation
Model (or the Legal Segregation with Recourse Model), as proposed, on
price discovery will depend on the value that Cleared Swaps Customers
assign to the additional protection that they will
[[Page 33850]]
receive for Cleared Swaps Collateral against the cost that they will
pay for such protection. If the former would exceed the latter, as buy-
side commenters to the ANPR suggested, then Cleared Swaps Customers may
be encouraged to participate in the markets, which could have a
positive impact on price discovery
d. Sound risk management practices. To the extent that the Complete
Legal Segregation Model or the Legal Segregation with Recourse Model
creates incentives for higher levels of monitoring of FCMs and their
Cleared Swaps Customers by DCOs, it will enhance sound risk management
practices. As discussed above, some commenters suggested that the
Complete Legal Segregation Model or the Legal Segregation with Recourse
Model would reduce incentives for Cleared Swaps Customers to ``risk
manage'' their FCMs. As noted above, there are significant questions
about the ability of customers to ``risk manage'' their FCMs
effectively. Moreover, the Commission expects that any such effect
would be outweighed by enhanced risk management on the part of DCOs.
e. Other public interest considerations. As discussed above, some
commenters suggested that the Complete Legal Segregation Model would
increase market stability in times of stress facilitating the prompt
transfer of customer positions without the need for liquidation when an
FCM defaults.
5. Public Comment
The Commission invites public comment on its cost-benefit
considerations, including the costs and benefits of the Complete
Segregation Model (as proposed), the Legal Segregation with Recourse
Model (which is under consideration), the Futures Model, and giving
DCOs a choice of such approaches. Commenters are also invited to submit
any data or other information that they may have quantifying or
qualifying the costs and benefits with their comment letters.
List of Subjects
17 CFR Part 22
Brokers, Clearing, Consumer protection, Reporting and recordkeeping
requirements, Swaps.
17 CFR Part 190
Bankruptcy, Brokers, Commodity futures, Reporting and recordkeeping
requirements, Swaps.
VIII. Text of Proposed Rules
For the reasons stated in this release, the Commission hereby
proposes to amend Chapter as follows:
1. Add Part 22 to read as follows:
PART 22--CLEARED SWAPS
Sec.
22.1 Definitions.
22.2 Futures Commission Merchants: Treatment of Cleared Swaps
Customer Collateral.
22.3 Derivatives Clearing Organizations: Treatment of Cleared Swaps
Customer Collateral.
22.4 Futures Commission Merchants and Derivatives Clearing
Organizations: Permitted Depositories.
22.5 Futures Commission Merchants and Derivatives Clearing
Organizations: Written Acknowledgement.
22.6 Futures Commission Merchants and Derivatives Clearing
Organizations: Naming of Cleared Swaps Customer Accounts.
22.7 Permitted Depositories: Treatment of Cleared Swaps Customer
Collateral
22.8 Situs of Cleared Swaps Accounts.
22.9 Denomination of Cleared Swaps Customer Collateral and Location
of Depositories.
22.10 Incorporation by Reference.
22.11 Information To Be Provided Regarding Customers and Their
Cleared Swaps.
22.12 Information To Be Maintained Regarding Cleared Swaps Customer
Collateral.
22.13 Additions to Cleared Swaps Customer Collateral.
22.14 Futures Commission Merchant Failure To Meet a Customer Margin
Call in Full.
22.15 Treatment of Cleared Swaps Customer Collateral on an
Individual Basis.
22.16 Disclosures to Customers.
Authority: 7 U.S.C. 1a, 6d, 7a-1 as amended by Pub. L. 111-203,
124 Stat. 1376.
Sec. 22.1 Definitions.
For the purposes of this part:
Cleared Swap. This term refers to a transaction constituting a
``cleared swap'' within the meaning of section 1a(7) of the Act.
(1) This term shall exclude any swap (along with money, securities,
or other property received to margin, guarantee, or secure such a swap)
that, pursuant to a Commission rule, regulation, or order (or a
derivatives clearing organization rule approved in accordance with
Sec. 39.15(b)(2) of this chapter), is (along with such money,
securities, or other property) commingled with a commodity future or
option (along with money, securities, or other property received to
margin, guarantee, or secure such a future or option) that is
segregated pursuant to section 4d(a) of the Act.
(2) This term shall include any trade or contract (along with
money, securities or other property received to margin, guarantee, or
secure such a trade or contract), that (i) Would be required to be
segregated pursuant to section 4d(a) of the Act, or (ii) Would be
subject to Sec. 30.7 of this chapter, but which is, in either case,
pursuant to a Commission rule, regulation, or order (or a derivatives
clearing organization rule approved in accordance with Sec.
39.15(b)(2) of this chapter), commingled with a swap (along with money,
securities, or other property received to margin, guarantee, or secure
such a swap) in an account segregated pursuant to section 4d(f) of the
Act.
Cleared Swaps Customer. This term refers to any person entering
into a Cleared Swap, but shall exclude any owner or holder of a Cleared
Swaps Proprietary Account with respect to the Cleared Swaps in such
account. A person shall be a Cleared Swaps Customer only with respect
to its Cleared Swaps.
Cleared Swaps Customer Account. This term refers to any account for
the Cleared Swaps of Cleared Swaps Customers and associated Cleared
Swaps Customer Collateral that:
(1) A futures commission merchant maintains on behalf of Cleared
Swaps Customers (including, in the case of a Collecting Futures
Commission Merchant, the Cleared Swaps Customers of a Depositing
Futures Commission Merchant) or
(2) A derivatives clearing organization maintains for futures
commission merchants on behalf of Cleared Swaps Customers thereof.
Cleared Swaps Customer Collateral. (1) This term means all money,
securities, or other property received by a futures commission merchant
or by a derivatives clearing organization from, for, or on behalf of a
Cleared Swaps Customer, which money, securities, or other property:
(i) Is intended to or does margin, guarantee, or secure a Cleared
Swap; or
(ii) Constitutes, if a Cleared Swap is in the form or nature of an
option, the settlement value of such option.
(2) This term shall also include accruals, i.e., all money,
securities, or other property that a futures commission merchant or
derivatives clearing organization receives, directly or indirectly,
which is incident to or results from a Cleared Swap that a futures
commission merchant intermediates for a Cleared Swaps Customer.
Cleared Swaps Proprietary Account. (1) This term means an account
for Cleared Swaps and associated collateral that is carried on the
books and records of a futures commission merchant for persons with
certain relationships with
[[Page 33851]]
that futures commission merchant, specifically:
(i) Where such account is carried for a person falling within one
of the categories specified in paragraph (2) of this definition, or
(ii) Where ten percent or more of such account is owned by a person
falling within one of the categories specified in paragraph (2) of this
definition, or
(iii) Where an aggregate of ten percent or more of such account is
owned by more than one person falling within one or more of the
categories specified in paragraph (2) of this definition.
(2) The relationships to the futures commission merchant referred
to in paragraph (1) of this definition are as follows:
(i) Such individual himself, or such partnership, corporation or
association itself;
(ii) In the case of a partnership, a general partner in such
partnership;
(iii) In the case of a limited partnership, a limited or special
partner in such partnership whose duties include:
(A) The management of the partnership business or any part thereof;
(B) The handling, on behalf of such partnership, of (i) the Cleared
Swaps of Cleared Swaps Customers or (ii) the Cleared Swaps Customer
Collateral;
(C) The keeping, on behalf of such partnership, of records
pertaining to (i) the Cleared Swaps of Cleared Swaps Customers or (ii)
the Cleared Swaps Customer Collateral; or
(D) The signing or co-signing of checks or drafts on behalf of such
partnership;
(iv) In the case of a corporation or association, an officer,
director, or owner of ten percent or more of the capital stock of such
organization;
(v) An employee of such individual, partnership, corporation or
association whose duties include:
(A) The management of the business of such individual, partnership,
corporation or association or any part thereof;
(B) The handling, on behalf of such individual, partnership,
corporation, or association, of the Cleared Swaps of Cleared Swaps
Customers or the Cleared Swaps Customer Collateral;
(C) The keeping of records, on behalf of such individual,
partnership, corporation, or association, pertaining to the Cleared
Swaps of Cleared Swaps Customers or the Cleared Swaps Customer
Collateral; or
(D) The signing or co-signing of checks or drafts on behalf of such
individual, partnership, corporation, or association;
(vi) A spouse or minor dependent living in the same household of
any of the foregoing persons;
(vii) A business affiliate that, directly or indirectly, controls
such individual, partnership, corporation, or association; or
(viii) A business affiliate that, directly or indirectly, is
controlled by or is under common control with, such individual,
partnership, corporation or association. Provided, however, that an
account owned by any shareholder or member of a cooperative association
of producers, within the meaning of section 6a of the Act, which
association is registered as a futures commission merchant and carries
such account on its records, shall be deemed to be a Cleared Swaps
Customer Account and not a Cleared Swaps Proprietary Account of such
association, unless the shareholder or member is an officer, director,
or manager of the association.
Clearing Member. This term means any person that has clearing
privileges such that it can process, clear and settle trades through a
derivatives clearing organization on behalf of itself or others. The
derivatives clearing organization need not be organized as a membership
organization.
Collecting Futures Commission Merchant. A futures commission
merchant that carries Cleared Swaps on behalf of another futures
commission merchant and the Cleared Swaps Customers of the latter
futures commission merchant, and as part of carrying such Cleared
Swaps, collects Cleared Swaps Customer Collateral.
Commingle. To commingle two or more items means to hold such items
in the same account, or to combine such items in a transfer between
accounts.
Customer. This term means any customer of a futures commission
merchant, other than a Cleared Swaps Customer, including, without
limitation:
(1) Any ``customer'' or ``commodity customer'' within the meaning
of Sec. 1.3 of this chapter; and
(2) Any ``foreign futures or foreign options customer'' within the
meaning of Sec. 30.1(c) of this chapter.
Depositing Futures Commission Merchant. A futures commission
merchant that carries Cleared Swaps on behalf of its Cleared Swaps
Customers through another futures commission merchant and, as part of
carrying such Cleared Swaps, deposits Cleared Swaps Customer Collateral
with such futures commission merchant.
Permitted Depository. This term shall have the meaning set forth in
Sec. 22.4 of this part.
Segregate. To segregate two or more items is to keep them in
separate accounts, and to avoid combining them in the same transfer
between two accounts.
Sec. 22.2 Futures Commission Merchants: Treatment of Cleared Swaps
and Associated Cleared Swaps Customer Collateral.
(a) General. A futures commission merchant shall treat and deal
with the Cleared Swaps of Cleared Swaps Customers and associated
Cleared Swaps Customer Collateral as belonging to Cleared Swaps
Customers.
(b) Location of Cleared Swaps Customer Collateral. (1) A futures
commission merchant must segregate all Cleared Swaps Customer
Collateral that it receives, and must either hold such Cleared Swaps
Customer Collateral itself as set forth in subparagraph (b)(2) of this
section, or deposit such collateral into one or more Cleared Swaps
Customer Accounts held at a Permitted Depository, as set forth in
subparagraph (b)(3) of this section.
(2) If a futures commission merchant holds Cleared Swaps Customer
Collateral itself, then the futures commission merchant must:
(i) Physically separate such collateral from its own property;
(ii) Clearly identify each physical location in which it holds such
collateral as a ``Location of Cleared Swaps Customer Collateral'' (the
``FCM Physical Location'');
(iii) Ensure that the FCM Physical Location provides appropriate
protection for such collateral; and
(iv) Record in its books and records the amount of such Cleared
Swaps Customer Collateral separately from its own funds.
(3) If a futures commission merchant holds Cleared Swaps Customer
Collateral in a Permitted Depository, then:
(i) The Permitted Depository must qualify pursuant to the
requirements set forth in Sec. 22.4 of this part, and
(ii) The futures commission merchant must maintain a Cleared Swaps
Customer Account with each such Permitted Depository.
(c) Commingling. (1) A futures commission merchant may commingle
the Cleared Swaps Customer Collateral that it receives from, for, or on
behalf of multiple Cleared Swaps Customers.
(2) A futures commission merchant shall not commingle Cleared Swaps
Customer Collateral with either of the following:
(i) Funds belonging to the futures commission merchant, except as
expressly permitted in paragraph (e)(3) of this section; or
(ii) Other categories of funds belonging to Customers of the
futures
[[Page 33852]]
commission merchant, including customer funds (as Sec. 1.3 of this
chapter defines such term) and the foreign futures or foreign options
secured amount (as Sec. 1.3 of this chapter defines such term), except
as expressly permitted by Commission rule, regulation, or order, or by
a derivatives clearing organization rule approved in accordance with
Sec. 39.15(b)(2) of this chapter.
(d) Limitations on Use. (1) No futures commission merchant shall
use, or permit the use of, the Cleared Swaps Customer Collateral of one
Cleared Swaps Customer to purchase, margin, or settle the Cleared Swaps
or any other trade or contract of, or to secure or extend the credit
of, any person other than such Cleared Swaps Customer. Cleared Swaps
Customer Collateral shall not be used to margin, guarantee, or secure
trades or contracts of the entity constituting a Cleared Swaps Customer
other than in Cleared Swaps, except to the extent permitted by a
Commission rule, regulation or order, or by a derivatives clearing
organization rule approved in accordance with Sec. 39.15(b)(2) of this
chapter.
(2) A futures commission merchant may not impose or permit the
imposition of a lien on Cleared Swaps Customer Collateral, including
any residual financial interest of the futures commission merchant in
such collateral, as described in paragraph (e)(4) of this section.
(3) A futures commission merchant may not include, as Cleared Swaps
Customer Collateral,
(i) Money invested in the securities, memberships, or obligations
of any derivatives clearing organization, designated contract market,
swap execution facility, or swap data repository, or
(ii) Money, securities, or other property that any derivatives
clearing organization holds and may use for a purpose other than those
set forth in Sec. 22.3 of this part.
(e) Exceptions. Notwithstanding the foregoing:
(1) Permitted Investments. A futures commission merchant may invest
money, securities, or other property constituting Cleared Swaps
Customer Collateral in accordance with Sec. 1.25 of this chapter,
which section shall apply to such money, securities, or other property
as if they comprised customer funds or customer money subject to
segregation pursuant to section 4d(a) of the Act and the regulations
thereunder.
(2) Permitted Withdrawals. Such share of Cleared Swaps Customer
Collateral as in the normal course of business shall be necessary to
margin, guarantee, secure, transfer, adjust, or settle a Cleared Swaps
Customer's cleared swaps with a derivatives clearing organization, or
with a Collecting Futures Commission Merchant, may be withdrawn and
applied to such purposes, including the payment of commissions,
brokerage, interest, taxes, storage, and other charges, lawfully
accruing in connection with such cleared swaps.
(3) Deposits of Own Money, Securities, or Other Property. In order
to ensure that it is always in compliance with paragraph (f) of this
section, a futures commission merchant may place in an FCM Physical
Location or deposit in a Cleared Swaps Customer Account its own money,
securities, or other property (provided, that such securities or other
property are unencumbered and are of the types specified in Sec. 1.25
of this chapter).
(4) Residual Financial Interest. (i) If, in accordance with
paragraph (e)(3) of this section, a futures commission merchant places
in an FCM Physical Location or deposits in a Cleared Swaps Customer
Account its own money, securities, or other property, then such money,
securities, or other property (including accruals thereon) shall
constitute Cleared Swaps Customer Collateral.
(ii) The futures commission merchant shall have a residual
financial interest in any portion of such money, securities, or other
property in excess of that necessary for compliance with paragraph
(f)(4) of this section.
(iii) The futures commission merchant may withdraw money,
securities, or other property from the FCM Physical Location or Cleared
Swaps Customer Account, to the extent of its residual financial
interest therein. At the time of such withdrawal, the futures
commission merchant shall ensure that the withdrawal does not cause its
residual financial interest to become less than zero.
(f) Requirements as to Amount. (1) For purposes of this section
22.2(f), the term ``account'' shall reference the entries on the books
and records of a futures commission merchant pertaining to the Cleared
Swaps Customer Collateral of a particular Cleared Swaps Customer.
(2) The futures commission merchant must reflect in the account
that it maintains for each Cleared Swaps Customer the market value of
any Cleared Swaps Customer Collateral that it receives from such
customer, as adjusted by:
(i) Any uses permitted under Sec. 22.2(d) of this part;
(ii) Any accruals or losses on permitted investments of such
collateral under Sec. 22.2(e) of this part that, pursuant to the
futures commission merchant's customer agreement with that customer,
are creditable or chargeable to such customer;
(iii) Any charges lawfully accruing to the Cleared Swaps Customer,
including any commission, brokerage fee, interest, tax, or storage fee;
and
(iv) Any appropriately authorized distribution or transfer of such
collateral.
(3) If the market value of Cleared Swaps Customer Collateral in the
account of a Cleared Swaps Customer is positive after adjustments, then
that account has a credit balance. If the market value of Cleared Swaps
Customer Collateral in the account of a Cleared Swaps Customer is
negative after adjustments, then that account has a debit balance.
(4) The futures commission merchant must maintain in segregation,
in its FCM Physical Locations and/or its Cleared Swaps Customer
Accounts at Permitted Depositories, an amount equal to the sum of any
credit balances that the Cleared Swaps Customers of the futures
commission merchant have in their accounts, excluding from such sum any
debit balances that the Cleared Swaps Customers of the futures
commission merchant have in their accounts.
(5) Notwithstanding the foregoing, the futures commission merchant
must include, in calculating the sum referenced in paragraph (f)(4) of
this section, any debit balance that a Cleared Swaps Customer may have
in its account, to the extent that such balance is secured by ``readily
marketable securities'' that the Cleared Swaps Customer deposited with
the futures commission merchant.
(i) For purposes of this section, ``readily marketable'' shall be
defined as having a ``ready market'' as such latter term is defined in
Rule 15c3-1(c)(11) of the Securities and Exchange Commission (Sec.
241.15c3-1(c)(11) of this title).
(ii) In order for a debit balance to be deemed secured by ``readily
marketable securities,'' the futures commission merchant must maintain
a security interest in such securities, and must hold a written
authorization to liquidate the securities at the discretion of the
futures commission merchant.
(iii) To determine the amount secured by ``readily marketable
securities,'' the futures commission merchant shall: (A) determine the
market value of such securities; and (B) reduce such market value by
applicable percentage deductions (i.e., ``securities haircuts'') as set
forth in Rule 15c3-1(c)(2)(vi) of the
[[Page 33853]]
Securities and Exchange Commission (Sec. 240.15c3-1(c)(2)(vi) of this
title). The portion of the debit balance, not exceeding 100 per cent,
that is secured by the reduced market value of such readily marketable
securities shall be included in calculating the sum referred to in
paragraph (f)(4) of this section.
(g) Segregated Account; Daily Computation and Record. (1) Each
futures commission merchant must compute as of the close of each
business day, on a currency-by-currency basis:
(i) The aggregate market value of the Cleared Swaps Customer
Collateral in all FCM Physical Locations and all Cleared Swaps Customer
Accounts held at Permitted Depositories (the ``Collateral Value'');
(ii) The sum referenced in paragraph (f)(4) of this section (the
``Collateral Requirement''); and
(iii) The amount of the residual financial interest that the
futures commission merchant holds in such Cleared Swaps Customer
Collateral, which shall equal the difference between the Collateral
Value and the Collateral Requirement.
(2) The futures commission merchant must complete the daily
computations required by this section prior to noon on the next
business day and must keep such computations, together with all
supporting data, in accordance with the requirements of Sec. 1.31 of
this chapter.
Sec. 22.3 Derivatives Clearing Organizations: Treatment of Cleared
Swaps Customer Collateral.
(a) General. A derivatives clearing organization shall treat and
deal with the Cleared Swaps Customer Collateral deposited by a futures
commission merchant as belonging to the Cleared Swaps Customers of such
futures commission merchant and not other persons, including, without
limitation, the futures commission merchant.
(b) Location of Cleared Swaps Customer Collateral. (1) The
derivatives clearing organization must segregate all Cleared Swaps
Customer Collateral that it receives from futures commission merchants,
and must either hold such Cleared Swaps Customer Collateral itself as
set forth in paragraph (b)(2) of this section, or deposit such
collateral into one or more Cleared Swaps Customer Accounts held at a
Permitted Depository, as set forth in paragraph (b)(3) of this section.
(2) If a derivatives clearing organization holds Cleared Swaps
Customer Collateral itself, then the derivatives clearing organization
must:
(i) Physically separate such collateral from its own property, the
property of any futures commission merchant, and the property of any
other person that is not a Cleared Swaps Customer of a futures
commission merchant;
(ii) Clearly identify each physical location in which it holds such
collateral as ``Location of Cleared Swaps Customer Collateral'' (the
``DCO Physical Location'');
(iii) Ensure that the DCO Physical Location provides appropriate
protection for such collateral; and
(iv) Record in its books and records the amount of such Cleared
Swaps Customer Collateral separately from its own funds, the funds of
any futures commission merchant, and the funds of any other person that
is not a Cleared Swaps Customer of a futures commission merchant.
(3) If a derivatives clearing organization holds Cleared Swaps
Customer Collateral in a Permitted Depository, then:
(i) The Permitted Depository must qualify pursuant to the
requirements set forth in Sec. 22.4 of this part; and
(ii) The derivatives clearing organization must maintain a Cleared
Swaps Customer Account with each such Permitted Depository.
(c) Commingling. (1) A derivatives clearing organization may
commingle the Cleared Swaps Customer Collateral that it receives from
multiple futures commission merchants on behalf of their Cleared Swaps
Customers.
(2) A derivatives clearing organization shall not commingle the
Cleared Swaps Customer Collateral that it receives from a futures
commission merchant on behalf of Cleared Swaps Customers with any of
the following:
(i) The money, securities, or other property belonging to the
derivatives clearing organization;
(ii) The money, securities, or other property belonging to any
futures commission merchant; or
(iii) Other categories of funds that it receives from a futures
commission merchant on behalf of Customers, including customer funds
(as Sec. 1.3 of this chapter defines such term) and the foreign
futures or foreign options secured amount (as Sec. 1.3 of this chapter
defines such term), except as expressly permitted by Commission rule,
regulation or order, (or a derivatives clearing organization rule
approved in accordance with Sec. 39.15(b)(2) of this chapter).
(d) Exceptions; Deposits and Withdrawals from Futures Commission
Merchants. Notwithstanding the foregoing, pursuant to an instruction
from a futures commission merchant, a derivatives clearing organization
may place money, securities, or other property belonging to the futures
commission merchant in a DCO Physical Location, or deposit such money,
securities, or other property in the Cleared Swaps Customer Accounts
that the derivatives clearing organization maintains. The derivatives
clearing organization may permit the futures commission merchant to
withdraw such money, securities, or other property from a DCO Physical
Location or Cleared Swaps Customer Account.
(e) Exceptions; Permitted Investments. Notwithstanding the
foregoing and Sec. 22.15 of this part, a derivatives clearing
organization may invest the money, securities, or other property
constituting Cleared Swaps Customer Collateral in accordance with Sec.
1.25 of this chapter, which section shall apply to such money,
securities, or other property as if they comprised customer funds or
customer money subject to segregation pursuant to section 4d(a) of the
Act and the regulations thereunder.
Sec. 22.4 Futures Commission Merchants and Derivatives Clearing
Organizations: Permitted Depositories.
In order for a depository to be a Permitted Depository:
(a) The depository must (subject to Sec. 22.9) be one of the
following types of entities:
(1) A bank located in the United States;
(2) A trust company located in the United States;
(3) A Collecting Futures Commission Merchant registered with the
Commission (but only with respect to a Depositing Futures Commission
Merchant providing Cleared Swaps Customer Collateral); or
(4) A derivatives clearing organization registered with the
Commission; and
(b) The futures commission merchant or the derivatives clearing
organization must hold a written acknowledgment letter from the
depository as required by Sec. 22.5 of this part.
Sec. 22.5 Futures Commission Merchants and Derivatives Clearing
Organizations: Written Acknowledgement.
(a) Before depositing Cleared Swaps Customer Collateral, the
futures commission merchant or derivatives clearing organization shall
obtain and retain in its files a separate written acknowledgment letter
from each depository in accordance with Sec. Sec. 1.20 and 1.26 of
this chapter, with all references to ``customer funds'' modified to
apply to Cleared Swaps Customer Collateral, and with all references to
section 4d(a) or 4d(b) of the Act and the regulations thereunder
modified to apply to section 4d(f) of the Act and the regulations
thereunder.
[[Page 33854]]
(b) The futures commission merchant or derivatives clearing
organization shall adhere to all requirements specified in Sec. Sec.
1.20 and 1.26 of this chapter regarding retaining, permitting access
to, filing, or amending the written acknowledgment letter, in all cases
as if the Cleared Swaps Customer Collateral comprised customer funds
subject to segregation pursuant to section 4d(a) or 4d(b) of the Act
and the regulations thereunder.
(c) Notwithstanding paragraph (a) of this section, an
acknowledgement letter need not be obtained from a derivatives clearing
organization that has made effective, pursuant to section 5c(c) of the
Act and the regulations thereunder, rules that provide for the
segregation of Cleared Swaps Customer Collateral, in accordance with
all relevant provisions of the Act and the regulations thereunder.
Sec. 22.6 Futures Commission Merchants and Derivatives Clearing
Organizations: Naming of Cleared Swaps Customer Accounts.
The name of each Cleared Swaps Customer Account that a futures
commission merchant or a derivatives clearing organization maintains
with a Permitted Depository shall (a) clearly identify the account as a
``Cleared Swaps Customer Account'' and (b) clearly indicate that the
collateral therein is ``Cleared Swaps Customer Collateral'' subject to
segregation in accordance with the Act and this part.
Sec. 22.7 Permitted Depositories: Treatment of Cleared Swaps Customer
Collateral.
A Permitted Depository shall treat all funds in a Cleared Swaps
Customer Account as Cleared Swaps Customer Collateral. A Permitted
Depository shall not hold, dispose of, or use any such Cleared Swaps
Customer Collateral as belonging to any person other than:
(a) The Cleared Swaps Customers of the futures commission merchant
maintaining such Cleared Swaps Customer Account or;
(b) The Cleared Swaps Customers of the futures commission merchants
for which the derivatives clearing organization maintains such Cleared
Swaps Customer Account.
Sec. 22.8 Situs of Cleared Swaps Accounts.
The situs of each of the following shall be located in the United
States:
(a) Each FCM Physical Location or DCO Physical Location;
(b) Each ``account,'' within the meaning of Sec. 22.2(f)(1), that
a futures commission merchant maintains for each Cleared Swaps
Customer; and
(c) Each Cleared Swaps Customer Account on the books and records of
a derivatives clearing organization with respect to the Cleared Swaps
Customers of a futures commission merchant.
Sec. 22.9 Denomination of Cleared Swaps Customer Collateral and
Location of Depositories.
(a) Futures commission merchants and derivatives clearing
organizations may hold Cleared Swaps Customer Collateral in the
denominations, at the locations and depositories, and subject to the
same segregation requirements specified in Sec. 1.49 of this chapter,
which section shall apply to such Cleared Swaps Customer Collateral as
if it comprised customer funds subject to segregation pursuant to
section 4d(a) of the Act.
(b) Each depository referenced in paragraph (a) of this section
shall be considered a Permitted Depository for purposes of this part.
Provided, however, that a futures commission merchant shall only be
considered a Permitted Depository to the extent that it is acting as a
Collecting Futures Commission Merchant (as Sec. 22.1 of this part
defines such term).
Sec. 22.10 Incorporation by Reference.
Sections 1.27, 1.28, 1.29, and 1.30 of this chapter shall apply to
the Cleared Swaps Customer Collateral held by futures commission
merchants and derivatives clearing organizations to the same extent as
if such sections referred to:
(a) ``Cleared Swaps Customer Collateral'' in place of ``customer
funds;''
(b) ``Cleared Swaps Customers'' instead of ``commodity or option
customers'' or ``customers or option customers;''
(c) ``Cleared Swaps Contracts'' instead of ``trades, contracts, or
commodity options;'' and
(d) ``Section 4d(f) of the Act'' instead of ``section 4d(a)(2) of
the Act.''
Sec. 22.11 Information to be Provided Regarding Customers and their
Cleared Swaps.
(a) Each Depositing Futures Commission Merchant shall provide to
its Collecting Futures Commission Merchant the following information:
(1) The first time that the Depositing Futures Commission Merchant
intermediates a Cleared Swap for a Cleared Swaps Customer, information
sufficient to identify such customer; and
(2) At least once each business day thereafter, information
sufficient to identify, for each Cleared Swaps Customer, the portfolio
of rights and obligations arising from the Cleared Swaps that the
Depositing Futures Commission Merchant intermediates for such customer.
(b) If an entity serves as both a Depositing Futures Commission
Merchant and a Collecting Futures Commission Merchant, then:
(1) The information that such entity must provide to its Collecting
Futures Commission Merchant pursuant to paragraph (a)(1) of this
section shall also include information sufficient to identify each
Cleared Swaps Customer of the Depositing Futures Commission Merchant
for which such entity serves as a Collecting Futures Commission
Merchant; and
(2) The information that such entity must provide to its Collecting
Futures Commission Merchant pursuant to paragraph (a)(2) of this
section shall also include information sufficient to identify, for each
Cleared Swaps Customer referenced in paragraph (b)(1) of this section,
the portfolio of rights and obligations arising from the Cleared Swaps
that such entity intermediates as a Collecting Futures Commission
Merchant, on behalf of its Depositing Futures Commission Merchant, for
such customer.
(c) Each futures commission merchant that intermediates a Cleared
Swap for a Cleared Swaps Customer, on or subject to the rules of a
derivatives clearing organization, directly as a Clearing Member shall
provide to such derivatives clearing organization the following
information:
(1) The first time that such futures commission merchant
intermediates a Cleared Swap for a Cleared Swaps Customer, information
sufficient to identify such customer; and
(2) At least once each business day thereafter, information
sufficient to identify, for each Cleared Swaps Customer, the portfolio
of rights and obligations arising from the Cleared Swaps that such
futures commission merchant intermediates for such customer.
(d) If the futures commission merchant referenced in paragraph (c)
of this section is a Collecting Futures Commission Merchant, then:
(1) The information that it must provide to the derivatives
clearing organization pursuant to paragraph (c)(1) of this section
shall also include information sufficient to identify each Cleared
Swaps Customer of any entity that acts as a Depositing Futures
Commission Merchant in relation to the Collecting Futures Commission
Merchant (including, without limitation, each Cleared Swaps Customer of
any Depositing Futures Commission Merchant for which such entity also
serves as a Collecting Futures Commission Merchant); and
[[Page 33855]]
(2) The information that it must provide to the derivatives
clearing organization pursuant to paragraph (c)(2) of this section
shall also include information sufficient to identify, for each Cleared
Swaps Customer referenced in paragraph (d)(1) of this section, the
portfolio of rights and obligations arising from the Cleared Swaps that
the Collecting Futures Commission Merchant intermediates, on behalf of
the Depositing Futures Commission Merchant, for such customer.
(e) Each derivatives clearing organization shall (1) take
appropriate steps to confirm that the information it receives pursuant
to paragraphs (c)(1) or (c)(2) of this section is accurate and
complete, and (2) ensure that the futures commission merchant is
providing the derivatives clearing organization the information
required by paragraphs (c)(1) or (c)(2) of this section on a timely
basis.
Sec. 22.12 Information to be Maintained Regarding Cleared Swaps
Customer Collateral.
(a) Each Collecting Futures Commission Merchant receiving Cleared
Swaps Customer Funds from an entity serving as a Depositing Futures
Commission Merchant shall, no less frequently than once each business
day, calculate and record:
(1) the amount of collateral required at such Collecting Futures
Commission Merchant for each Cleared Swaps Customer of the entity
acting as Depositing Futures Commission Merchant (including, without
limitation, each Cleared Swaps Customer of any Depositing Futures
Commission Merchant for which such entity also serves as a Collecting
Futures Commission Merchant); and
(2) the sum of the individual collateral amounts referenced in
paragraph (a)(1) of this section.
(b) Each Collecting Futures Commission Merchant shall calculate the
collateral amounts referenced in paragraph (a) of this section with
respect to the portfolio of rights and obligations arising from the
Cleared Swaps that the Collecting Futures Commission Merchant
intermediates, on behalf of the Depositing Futures Commission Merchant,
for each Cleared Swaps Customer referenced in paragraph (a)(1).
(c) Each derivatives clearing organization receiving Cleared Swaps
Customer Funds from a futures commission merchant shall, no less
frequently than once each business day, calculate and record:
(1) The amount of collateral required at such derivatives clearing
organization for each Cleared Swaps Customer of the futures commission
merchant; and
(2) the sum of the individual collateral amounts referenced in
paragraph (c)(1) of this section.
(d) If the futures commission merchant referenced in paragraph (c)
of this section is a Collecting Futures Commission Merchant, then the
derivatives clearing organization shall also perform and record the
results of the calculation required in paragraph (c) of this section
for each Cleared Swaps Customer of an entity acting as a Depositing
Futures Commission Merchant in relation to the Collecting Futures
Commission Merchant (including, without limitation, any Cleared Swaps
Customer for which such entity is also acting as a Collecting Futures
Commission Merchant).
(e) Each futures commission merchant shall calculate the collateral
amounts referenced in paragraph (c) of this section with respect to the
portfolio of rights and obligations arising from the Cleared Swaps that
the futures commission merchant intermediates (including, without
limitation, as a Collecting Futures Commission Merchant on behalf of a
Depositing Futures Commission Merchant), for each Cleared Swaps
Customer referenced in paragraphs (c)(1) and (d).
(f) The collateral requirement referenced in paragraph (a) of this
section with respect to a Collecting Futures Commission Merchant shall
be no less than that imposed by the relevant derivatives clearing
organization with respect to the same portfolio of rights and
obligations for each relevant Cleared Swaps Customer.
Sec. 22.13 Additions to Cleared Swaps Customer Collateral.
(a)(1) At the election of the derivatives clearing organization or
Collecting Futures Commission Merchant, the collateral requirement
referred to in Sec. 22.12(a), (c), and (d) of this part applicable to
a particular Cleared Swaps Customer or group of Cleared Swaps Customers
may be increased based on an evaluation of the credit risk posed by
such customer or group, in which case the derivatives clearing
organization or Collecting Futures Commission Merchant shall collect
and record such higher amount as provided in section 22.12 of this
part.
(2) Nothing in paragraph (a)(1) of this section is intended to
interfere with the right of a futures commission merchant to increase
the collateral requirements at such futures commission merchant with
respect to any of its Cleared Swaps Customers or Customers.
(b) Any collateral deposited by a futures commission merchant
(including a Depositing Futures Commission Merchant) pursuant to Sec.
22.2(e)(3) of this part, which collateral is identified as funds or
securities in which such futures commission merchant has a residual
financial interest pursuant to Sec. 22.2(e)(4) of this part, may, to
the extent of such residual financial interest, be used by the
derivatives clearing organization or Collecting Futures Commission
Merchant, as applicable, to margin, guarantee or secure the cleared
swaps of any or all of such Cleared Swaps Customers.
Sec. 22.14 Futures Commission Merchant Failure to Meet a Customer
Margin Call in Full.
(a) A Depositing Futures Commission Merchant which receives a call
for either initial margin or variation margin with respect to a Cleared
Swaps Customer Account from a Collecting Futures Commission Merchant,
which call such Depositing Futures Commission Merchant does not meet in
full, shall, with respect to each Cleared Swaps Customer of such
Depositing Futures Commission Merchant whose Cleared Swaps contribute
to such margin call,
(1) Transmit to the Collecting Futures Commission Merchant an
amount equal to the lesser of
(i) The amount called for; or
(ii) The remaining Cleared Swaps Collateral on deposit at such
Depositing Futures Commission Merchant for that Cleared Swaps Customer;
and
(2) Advise the Collecting Futures Commission Merchant of the
identity of each such Cleared Swaps Customer, and the amount
transmitted on behalf of each such customer.
(b) If the entity acting as Depositing Futures Commission Merchant
referenced in paragraph (a) of this section is also a Collecting
Futures Commission Merchant, then:
(1) Such entity shall include in the transmission required in
paragraph (a)(1) of this section any amount that it receives, pursuant
to paragraph (a)(1) of this section, from a Depositing Futures
Commission Merchant for which such entity acts as a Collecting Futures
Commission Merchant; and
(2) Such entity shall present its Collecting Futures Commission
Merchant with the information that it receives, pursuant to paragraph
(a)(2) of this section, from a Depositing Futures Commission Merchant
for which such
[[Page 33856]]
entity acts as a Collecting Futures Commission Merchant.
(c) A futures commission merchant which receives a call for margin
(whether initial or variation) with respect to a Cleared Swaps Customer
Account from a derivatives clearing organization, which call such
futures commission merchant does not meet in full, shall, with respect
to each Cleared Swaps Customer of such futures commission merchant
whose Cleared Swaps contribute to such margin call:
(1) Transmit to the derivatives clearing organization an amount
equal to the lesser of
(i) The amount called for; or
(ii) The remaining Cleared Swaps Collateral on deposit at such
futures commission merchant for each such Cleared Swaps Customer; and
(2) advise the derivatives clearing organization of the identity of
each such Cleared Swaps Customer, and the amount transmitted on behalf
of each such customer.
(d) If the futures commission merchant referenced in paragraph (c)
is a Collecting Futures Commission Merchant, then:
(1) Such Collecting Futures Commission Merchant shall include in
the transmission required in paragraph (c)(1) of this section any
amount that it receives from a Depositing Futures Commission Merchant
pursuant to paragraph (a)(1) of this section; and
(2) Such Collecting Futures Commission shall present the
derivatives clearing organization with the information that it receives
from a Depositing Futures Commission Merchant pursuant to paragraph
(a)(2) of this section.
(e) If,
(1) On the business day prior to the business day on which the
Depositing Futures Commission Merchant fails to meet a margin call with
respect to a Cleared Swaps Customer Account, such Collecting Futures
Commission Merchant referenced in paragraph (a) of this section held,
with respect to such account, Cleared Swaps Collateral of a value no
less than the amount specified in Sec. 22.12(a)(2) of this part, after
the application of haircuts specified by policies applied by such
Collecting Futures Commission Merchant in its relationship with the
Depositing Futures Commission Merchant, and
(2) As of the close of business on the business day on which the
margin call is not met, the market value of the Cleared Swaps
Collateral held by the derivatives clearing organization or Collecting
Futures Commission Merchant is, due to changes in such market value,
less than the amount specified in Sec. 22.12(a)(2) of this part, then
the amount of such collateral attributable to each Cleared Swaps
Customer pursuant to Sec. 22.12(a)(1) of this part shall be reduced by
the percentage difference between the amount specified in Sec.
22.12(a)(2) of this part and such market value.
(f) If:
(1) On the business day prior to the business day on which the
futures commission merchant fails to meet a margin call with respect to
a Cleared Swaps Customer Account, the derivatives clearing organization
referenced in paragraph (c) of this section held, with respect to such
account, Cleared Swaps Collateral of a value no less than the amount
specified in Sec. 22.12(c)(2) of this part, after the application of
haircuts specified by the rules and procedures of such derivatives
clearing organization, and
(2) As of the close of business on the business day on which the
margin call is not met, the market value of the Cleared Swaps
Collateral held by the derivatives clearing organization is, due to
changes in such market value, less than the amount specified in Sec.
22.12(c)(2) of this part, then the amount of collateral attributable to
each Cleared Swaps Customer pursuant to Sec. 22.12(c)(1) of this part
shall be reduced by the percentage difference between the amount
specified in Sec. 22.12(c)(2) and such market value.
Sec. 22.15 Treatment of Cleared Swaps Customer Collateral on an
Individual Basis.
Subject to Sec. 22.3(e) of this part, each derivatives clearing
organization and each Collecting Futures Commission Merchant receiving
Cleared Swaps Customer Collateral from a Depositing Futures Commission
Merchant shall treat the value of collateral required with respect to
the portfolio of rights and obligations arising out of the Cleared
Swaps intermediated for each Cleared Swaps Customer, and collected from
the Depositing Futures Commission Merchant, as belonging to such
customer, and such amount shall not be used to margin, guarantee, or
secure the Cleared Swaps or other obligations of the Depositing Futures
Commission Merchant or of any other Cleared Swaps Customer or Customer.
Sec. 22.16 Disclosures to Customers.
(a) A futures commission merchant shall disclose, to each of its
Cleared Swaps Customers, the governing provisions, as described in
paragraph (c) of this section, relating to use of Cleared Swaps
Customer Collateral, transfer, neutralization of the risks, or
liquidation of Cleared Swaps in the event of a default by the futures
commission merchant relating to the Cleared Swaps Customer Account, as
well as any change in such governing provisions.
(b) If the futures commission merchant referenced in paragraph (a)
of this section is a Depositing Futures Commission Merchant, then such
futures commission merchant shall disclose, to each of its Cleared
Swaps Customers, the governing provisions, as described in paragraph
(c) of this section, relating to use of Cleared Swaps Customer
Collateral, transfer, neutralization of the risks, or liquidation of
Cleared Swaps in the event of a default by:
(1) Such futures commission merchant or
(2) Any relevant Collecting Futures Commission Merchant relating to
the Cleared Swaps Customer Account, as well as any change in such
governing provisions.
(c) The governing provisions referred to in paragraphs (a) and (b)
of this section are the rules of each derivatives clearing
organization, or the provisions of the customer agreement between the
Collecting Futures Commission Merchant and the Depositing Futures
Commission Merchant, on or through which the Depositing Futures
Commission Merchant will intermediate Cleared Swaps for such Cleared
Swaps Customer.
PART 190--BANKRUPTCY
2. The authority citation for part 190 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise
noted.
3. In 17 CFR Part 190:
A. Remove the words ``commodity account'' and ``commodity futures
account'' and add, in their place, the words ``commodity contract
account'' in:
i. Sections 190.01(w), (y), and (kk)(6),
ii. Sections 190.02(d)(1), (6), and (7),
iii. Section 190.03(a)(2),
iv. Sections 190.06(g)(1)(i), (ii), and (3),
v. Sections 190.10(d)(1) and (h),
B. Remove the words ``commodity futures contract'' and add, in
their place, the words ``commodity contract'' in Sec. 190.05(a)(1) and
(b)(1).
C. Remove the words ``contract market'' and ``board of trade'' and
add, in their place, the words ``designated contract market'' in:
i. Sections 190.01(gg), (kk)(2)(i), (4) and (5),
ii. Section 190.04(d)(1)(i), and
iii. Section 190.07(e)(2)(ii)(B) Remove the words ``commodity
transaction'' and
[[Page 33857]]
add, in their place, the words ``commodity contract transaction'' in
Sec. 190.02(d)(3).
4. In Sec. 190.01, redesignate paragraphs (e) through (oo) as (f)
through (pp), add a new paragraph (e) and revise paragraphs (a), (f),
and newly redesignated paragraphs (cc), (hh), (ll)(2)(ii), (ll)(4),
(ll)(5), and (pp) to read as follows:
Sec. 190.01 Definitions.
* * * * *
(a)(1) Account class means each of the following types of customer
accounts which must be recognized as a separate class of account by the
trustee: futures accounts, foreign futures accounts, leverage accounts,
delivery accounts as defined in Sec. 190.05(a)(2) of this part, and
cleared swaps accounts.
(2)(i) To the extent that the equity balance, as defined in Sec.
190.07 of this part, of a customer in a commodity option, as defined in
Sec. 1.3 of this chapter, may be commingled with the equity balance of
such customer in any domestic commodity futures contract pursuant to
regulations under the Act, the aggregate shall be treated for purposes
of this part as being held in a futures account.
(ii) To the extent that such equity balance of a customer in a
commodity option may be commingled with the equity balance of such
customer in any cleared swaps account pursuant to regulations under
this act, the aggregate shall be treated for purposes of this part as
being held in a cleared swaps account.
(iii) If positions or transactions in commodity contracts that
would otherwise belong to one account class (and the money, securities,
or other property margining, guaranteeing, or securing such positions
or transactions), are, pursuant to a Commission rule, regulation, or
order (or a derivatives clearing organization rule approved in
accordance with Sec. 39.15(b)(2) of this chapter), held separately
from other positions and transactions in that account class, and are
commingled with positions or transactions in commodity contracts of
another account class (and the money, securities, or other property
margining, guaranteeing, or securing such positions or transactions),
then the former positions (and the relevant money, securities, or other
property) shall be treated, for purposes of this part, as being held in
an account of the latter account class.
* * * * *
(e) Calendar day. A calendar day includes the time from midnight to
midnight.
(f) Clearing organization shall have the same meaning as that set
forth in section 761(2) of the Bankruptcy Code.
* * * * *
(cc) Non-public customer means any person enumerated in the
definition of Proprietary Account in sections 1.3 or 31.4(e) of this
chapter, any person excluded from the definition of ``foreign futures
or foreign options customer'' in the proviso to section 30.1(c) of this
chapter, or any person enumerated in the definition of Cleared Swaps
Proprietary Account in section 22.1 of this chapter, in each case, if
such person is defined as a ``customer'' under paragraph (k) of this
section.
* * * * *
(hh) Principal contract means a contract which is not traded on a
designated contract market, and includes leverage contracts and dealer
options, but does not include:
(1) Transactions executed off the floor of a designated contract
market pursuant to rules approved by the Commission or rules which the
designated contract market is required to enforce, or pursuant to rules
of a foreign board of trade located outside the United States, its
territories or possessions; or (2) cleared swaps contracts.
* * * * *
(ll) * * *
(2) * * *
(ii) Is a bona fide hedging position or transaction as defined in
Sec. 1.3 of this chapter or is a commodity option transaction which
has been determined by the registered entity to be economically
appropriate to the reduction of risks in the conduct and management of
a commercial enterprise pursuant to rules which have been approved by
the Commission pursuant to section 5c(c) of the Commodity Exchange Act;
and
* * * * *
(4) Any cash or other property deposited prior to the entry of the
order for relief to pay for the taking of physical delivery on a long
commodity contract or for payment of the strike price upon exercise of
a short put or a long call option contract on a physical commodity,
which cannot be settled in cash, in excess of the amount necessary to
margin such commodity contract prior to the notice date or exercise
date, which cash or other property is identified on the books and
records of the debtor as received from or for the account of a
particular customer on or after three calendar days before the first
notice date or three calendar days before the exercise date
specifically for the purpose of payment of the notice price upon taking
delivery or the strike price upon exercise, respectively, and such
customer takes delivery or exercises the option in accordance with the
applicable contract market rules.
(5) The cash price tendered for any property deposited prior to the
entry of the order for relief to make physical delivery on a short
commodity contract or for exercise of a long put or a short call option
contract on a physical commodity, which cannot be settled in cash, to
the extent it exceeds the amount necessary to margin such contract
prior to the notice date or exercise date, which property is identified
on the books and records of the debtor as received from or for the
account of a particular customer on or after three calendar days before
the first notice date or three calendar days before the exercise date
specifically for the purpose of a delivery or exercise, respectively,
and such customer makes delivery or exercises the option in accordance
with the applicable contract market rules.
* * * * *
(pp) Cleared Swap. This term shall have the same meaning as set
forth in Sec. 22.1 of this chapter.
* * * * *
5. In Sec. 190.02, revise paragraphs (a), (b)(1), (b)(2), (d)(11),
(e), (f)(1), and (g)(2)(i) to read as follows:
Sec. 190.02 Operation of the debtor's estate subsequent to the filing
date and prior to the primary liquidation date.
* * * * *
(a) Notices to the Commission and Designated Self-Regulatory
Organizations--
(1) General. Each commodity broker which files a petition in
bankruptcy shall, at or before the time of such filing, and each
commodity broker against which such a petition is filed shall, as soon
as possible, but no later than one calendar day after the receipt of
notice of such filing, notify the Commission and such broker's
designated self-regulatory organization, if any, in accordance with
Sec. 190.10(a) of the filing date, the court in which the proceeding
has been filed, and the docket number assigned to that proceeding by
the court.
(2) Of transfers under section 764(b) of the Bankruptcy Code. As
soon as possible, but in no event later than the close of business on
third calendar day after the order for relief, the trustee, the
applicable self-regulatory organization, or the commodity broker must
notify the Commission in accordance with Sec. 190.10(a) whether such
entity or organization intends to transfer or to apply to transfer open
commodity contracts on behalf of the commodity
[[Page 33858]]
broker in accordance with section 764(b) of the Bankruptcy Code and
Sec. 190.06(e) or (f).
(b) Notices to customers. (1) Specifically identifiable property
other than commodity contracts. The trustee must use its best efforts
to promptly, but in no event later than two calendar days after entry
of the order for relief, commence to publish in a daily newspaper or
newspapers of general circulation approved by the court serving the
location of each branch office of the commodity broker, for two
consecutive days a notice to customers stating that all specifically
identifiable property of customers other than open commodity contracts
which has not otherwise been liquidated will be liquidated commencing
on the sixth calendar day after the second publication date if the
customer has not instructed the trustee in writing on or before the
fifth calendar day after the second publication date to return such
property pursuant to the terms for distribution of specifically
identifiable property contained in Sec. 190.08(d)(1) and, on the
seventh calendar day after such second publication date, if such
property has not been returned in accordance with such terms on or
prior to that date. Such notice must describe specifically identifiable
property in accordance with the definition in this part and must
specify the terms upon which that property may be returned. Publication
of the form of notice set forth in the appendix to this part will
constitute sufficient notice for purposes of this paragraph (b)(1).
(2) Request for instructions regarding transfer of open commodity
contracts. The trustee must use its best efforts to request promptly,
but in no event later than two calendar days after entry of an order
for relief, customer instructions concerning the transfer or
liquidation of the specifically identifiable open commodity contracts,
if any, not required to be liquidated under paragraph (f)(1) of this
section. The request for customer instructions required by this
paragraph (b)(2) must state that the trustee is required to liquidate
any such commodity contract for which transfer instructions have not
been received on or before the sixth calendar day after entry of the
order for relief, and any such commodity contract for which
instructions have been received which has not been transferred in
accordance with Sec. 190.08(d)(2) on or before the seventh calendar
day after entry of the order for relief. A form of notice is set forth
in the appendix to this part.
* * * * *
(d) * * *
(11) Whether the claimant's positions in security futures products
are held in a futures account or a securities account, as these terms
are defined in Sec. 1.3 of this chapter;
(e) Transfers--(1) All cases. The trustee for a commodity broker
must immediately use its best efforts to effect a transfer in
accordance with Sec. 190.06(e) and (f) no later than the seventh
calendar day after the order for relief of the open commodity contracts
and equity held by the commodity broker for or on behalf of its
customers.
(2) Involuntary cases. A commodity broker against which an
involuntary petition in bankruptcy is filed, or the trustee if a
trustee has been appointed in such case, must use its best efforts to
effect a transfer in accordance with Sec. 190.06(e) and (f) of all
open commodity contracts and equity held by the commodity broker for or
on behalf of its customers and such other property as the Commission in
its discretion may authorize, on or before the seventh calendar day
after the filing date, and immediately cease doing business: Provided,
however, That the commodity broker may trade for liquidation only,
unless otherwise directed by the Commission, by any applicable self-
regulatory organization or by the court: And, Provided further, That if
the commodity broker demonstrates to the Commission within such period
that it was in compliance with the segregation and financial
requirements of this chapter on the filing date, and the Commission
determines, in its sole discretion, that such transfer or liquidation
is neither appropriate nor in the public interest, the commodity broker
may continue in business subject to applicable provisions of the
Bankruptcy Code and of this chapter.
(f) * * *
(1) Open commodity contracts. All open commodity contracts except:
(i) Dealer option contracts, if the dealer option grantor is not
the debtor, which cannot be transferred on or before the seventh
calendar day after the order for relief; and
(ii) Specifically identifiable commodity contracts as defined in
Sec. 190.01(kk)(2) for which an instruction prohibiting liquidation is
noted prominently in the accounting records of the debtor and timely
received under paragraph (b)(2) of this section. Notwithstanding the
foregoing, an open commodity contract must be offset if: such contract
is a futures contract or a cleared swaps contract which cannot be
settled in cash and which would otherwise remain open either beyond the
last day of trading (if applicable), or the first day on which notice
of intent to deliver may be tendered with respect thereto, whichever
occurs first; such contract is a long option on a physical commodity
which cannot be settled in cash and would be automatically exercised,
has value and would remain open beyond the last day for exercise; such
contract is a short option on a physical commodity which cannot be
settled in cash; or, as otherwise specified in these rules.
* * * * *
(g) * * *
(2) * * *
(i) 100% of the maintenance margin requirements of the applicable
designated contact market or swap execution facility, if any, with
respect to the open commodity contracts in such account; or
* * * * *
6. In Sec. 190.03, revise paragraphs (a)(3), (b)(3), (b)(4),
(b)(5), and (c) to read as follows:
Sec. 190.03 Operation of the debtor's estate subsequent to the
primary liquidation date.
* * * * *
(a) * * *
(3) Margin calls. The trustee must promptly issue margin calls with
respect to any account referred to under paragraph (a)(1) of this
section in which the balance does not equal or exceed 100% of the
maintenance margin requirements of the applicable designated contact
market or swap execution facility, if any, with respect to the open
commodity contracts in such account, or if there are no such
maintenance margin requirements, 100% of the clearing organization's
initial margin requirements applicable to the open commodity contracts
in such account, or if there are no such maintenance margin
requirements or clearing organization initial margin requirements, then
50% of the customer initial margin applicable to the commodity
contracts in such account: Provided, That no margin calls need be made
to restore customer initial margin.
* * * * *
(b) * * *
(3) The trustee has received no customer instructions with respect
to such contract by the sixth calendar day after entry of the order for
relief;
(4) The commodity contract has not been transferred in accordance
with Sec. 190.08(d)(2) on or before the seventh calendar day after
entry of the order for relief; or
(5) The commodity contract would otherwise remain open (e.g.,
because it cannot be settled in cash) beyond the last day of trading in
such contract (if
[[Page 33859]]
applicable) or the first day on which notice of delivery may be
tendered with respect to such contract, whichever occurs first.
(c) Liquidation of specifically identifiable property other than
open commodity contracts.
All specifically identifiable property other than open commodity
contracts which have not been liquidated prior to the primary
liquidation date, and for which no customer instructions have been
timely received must be liquidated, to the extent reasonably possible,
no later than the sixth calendar day after final publication of the
notice referred to in Sec. 190.02(b)(1). All other specifically
identifiable property must be liquidated or returned, to the extent
reasonably possible, no later than the seventh calendar day after final
publication of such notice.
7. In Sec. 190.04, revise paragraph (d)(1) to read as follows:
Sec. 190.04 Operation of the debtor's estate--general.
* * * * *
(d) Liquidation--(1) Order of Liquidation. (i) In the Market.
Liquidation of open commodity contracts held for a house account or
customer account by or on behalf of a commodity broker which is a
debtor shall be accomplished pursuant to the rules of a clearing
organization, a designated contract market, or a swap execution
facility, as applicable. Such rules shall ensure that the process for
liquidating open commodity contracts, whether for the house account or
the customer account, results in competitive pricing, to the extent
feasible under market conditions at the time of liquidation. Such rules
must be submitted to the Commission for approval, pursuant to section
5c(c) of the Act, and be approved by the Commission. Alternatively,
such rules must otherwise be submitted to and approved by the
Commission (or its delegate pursuant to Sec. 190.10(d) of this part)
prior to their application.
(ii) Book entry. Notwithstanding paragraph (d)(1) of this section,
in appropriate cases, upon application by the trustee or the affected
clearing organization, the Commission may permit open commodity
contracts to be liquidated, or settlement on such contracts to be made,
by book entry. Such book entry shall offset open commodity contracts,
whether matched or not matched on the books of the commodity broker,
using the settlement price for such commodity contracts as determined
by the clearing organization. Such settlement price shall be determined
by the rules of the clearing organization, which shall ensure that such
settlement price is established in a competitive manner, to the extent
feasible under market conditions at the time of liquidation. Such rules
must be submitted to the Commission for approval pursuant to section
5c(c) of the Act, and be approved by the Commission. Alternatively,
such rules must otherwise be approved by the Commission (or its
delegate pursuant to Sec. 190.10(d) of this part) prior to their
application.
* * * * *
8. In Sec. 190.05, revise paragraph (b) introductory text to read
as follows:
Sec. 190.05 Making and taking delivery on commodity contracts.
* * * * *
(b) Rules for deliveries on behalf of a customer of a debtor.
Except in the case of a commodity contract which is settled in cash,
each designated contract market, swap execution facility, or clearing
organization shall adopt, maintain in effect and enforce rules which
have been submitted in accordance with section 5c(c) of the Act for
approval by the Commission, which:
* * * * *
9. In Sec. 190.06, remove paragraph (e)(1)(iv) and redesignate
paragraph (e)(1)(v) as (e)(1)(iv), revise paragraphs (a), (e)(1)(iii),
(e)(2), (f)(3)(i) and (g)(2), and add paragraph (g)(1)(iii) to read as
follows:
Sec. 190.06 Transfers.
(a) Transfer rules. No clearing organization or other self-
regulatory organization may adopt, maintain in effect or enforce rules
which:
(1) Are inconsistent with the provisions of this part;
(2) Interfere with the acceptance by its members of open commodity
contracts and the equity margining or securing such contracts from
futures commission merchants, or persons which are required to be
registered as futures com-mission merchants, which are required to
transfer accounts pursuant to Sec. 1.17(a)(4) of this chapter; or
(3) Prevent the acceptance by its members of transfers of open
commodity contracts and the equity margining or securing such contracts
from futures commission merchants with respect to which a petition in
bankruptcy has been filed, if such transfers have been approved by the
Commission. Provided, however, that this paragraph shall not limit the
exercise of any contractual right of a clearing organization or other
registered entity to liquidate open commodity contracts.
* * * * *
(e) * * *
(1) * * *
(iii) Dealer option accounts, if the debtor is the dealer option
grantor with respect to such accounts; or
* * * * *
(2) Amount of equity which may be transferred. In no case may
money, securities or property be transferred in respect of any eligible
account if the value of such money, securities or property would exceed
the funded balance of such account based on available information as of
the calendar day immediately preceding transfer less the value on the
date of return or transfer of any property previously returned or
transferred with respect thereto.
(f) * * *
(3) * * *
(i) If all eligible customer accounts held by a debtor cannot be
transferred under this section, a partial transfer may nonetheless be
made. The Commission will not disapprove such a transfer for the sole
reason that it was a partial transfer if it would prefer the transfer
of accounts, the liquidation of which could adversely affect the market
or the bankrupt estate. Any dealer option contract held by or for the
account of a debtor which is a futures commission merchant from or for
the account of a customer which has not previously been transferred,
and is eligible for transfer, must be transferred on or before the
seventh calendar day after entry of the order for relief.
* * * * *
(g) * * *
(1) * * *
(iii) The transfer prior to the order for relief by a clearing
organization of one or more accounts held for or on behalf of customers
of the debtor, provided that (I) the money, securities, or other
property accompanying such transfer did not exceed the funded balance
of each account based on available information as of the close of
business on the business day immediately preceding such transfer less
the value on the date of return or transfer of any property previously
returned or transferred thereto, and (II) the transfer is not
disapproved by the Commission.
(2) Post-relief transfers. On or after the entry of the order for
relief, the following transfers to one or more transferees may not be
avoided by the trustee:
(i) The transfer of a customer account eligible to be transferred
under paragraph (e) or (f) of this section made by the trustee of the
commodity broker or by any self-regulatory organization of the
commodity broker:
[[Page 33860]]
(A) On or before the seventh calendar day after the entry of the
order for relief; and
(B) The Commission is notified in accordance with Sec.
190.02(a)(2) prior to the transfer and does not disapprove the
transfer; or
(ii) The transfer of a customer account at the direction of the
Commission on or before the seventh calendar day after the order for
relief upon such terms and conditions as the Commission may deem
appropriate and in the public interest.
* * * * *
10. In Sec. 190.07, redesignate paragraph (b)(2)(xiii) as
paragraph (b)(2)(xiv), add a new paragraph (b)(2)(xiii), and revise
paragraphs (b)(2)(viii), (b)(2)(ix), (b)(3)(v), (c)(1)(i), (e)
introductory text, (e)(1) and (e)(4) to read as follows:
Sec. 190.07 Calculation of allowed net equity.
* * * * *
(b) * * *
(2) * * *
(viii) Subject to paragraph (b)(2)(ix) of this section, the futures
accounts, leverage accounts, options accounts, foreign futures
accounts, delivery accounts (as defined in Sec. 190.05(a)(2)), and
cleared swaps accounts of the same person shall not be deemed to be
held in separate capacities: Provided, however, that such accounts may
be aggregated only in accordance with paragraph (b)(3) of this section.
(ix) an omnibus customer account of a futures commission merchant
maintained with a debtor shall be deemed to be held in a separate
capacity from the house account and any other omnibus customer account
of such futures commission merchant.
* * * * *
(xiii) with respect to the cleared swaps customer account class,
each individual customer account within each omnibus customer account
referred to in paragraph (ix) of this section shall be deemed to be
held in a separate capacity from each other such individual customer
account; subject to the provisions of paragraphs (i) through (xii) of
this paragraph (b)(2).
* * * * *
(3) * * *
(v) The rules pertaining to separate capacities and permitted
setoffs contained in this section must be applied subsequent to the
entry of an order for relief; prior to the filing date, the provisions
of Sec. 1.22 of this chapter and of sections 4d(a)(2) and 4d(f) of the
Act shall govern what setoffs are permitted.
* * * * *
(c) * * *
(1) * * *
(i) Multiplying the ratio of the amount of the net equity claim
less the amounts referred to in (c)(1)(ii) of this section of such
customer for any account class bears to the sum of the net equity
claims less the amounts referred to in (c)(1)(ii) of this section of
all customers for accounts of that class by the sum of:
(A) The value of the money, securities or property segregated on
behalf of all accounts of the same class less the amounts referred to
in (1)(ii) of this section;
(B) The value of any money, securities or property which must be
allocated under Sec. 190.08 to customer accounts of the same class;
and
(C) The amount of any add-back required under paragraph (b)(4) of
this section; and
* * * * *
(e) Valuation. In computing net equity, commodity contracts and
other property held by or for a commodity broker must be valued as
provided in this paragraph (e): Provided, however, that for all
commodity contracts other than those listed in paragraph (e)(1) of this
section, if identical commodity contracts, securities, or other
property are liquidated on the same date, but cannot be liquidated at
the same price, the trustee may use the weighted average of the
liquidation prices in computing the net equity of each customer holding
such contracts, securities, or property.
(1) Commodity Contracts. Unless otherwise specified in this
paragraph (e), the value of an open commodity contract shall be equal
to the settlement price as calculated by the clearing organization
pursuant to its rules: Provided, that such rules must either be
submitted to the Commission, pursuant to section 5c(c)(4) of the Act
and be approved by the Commission, or such rules must be otherwise
approved by the Commission (or its delegate pursuant to Sec. 190.10(d)
of this part) prior to their application; Provided, further, that if
such contract is transferred its value shall be determined as of the
end of the settlement cycle in which it is transferred; and Provided,
finally, that if such contract is liquidated, its value shall be equal
to the net proceeds of liquidation.
* * * * *
(4) Securities. The value of a listed security shall be equal to
the closing price for such security on the exchange upon which it is
traded. The value of all securities not traded on an exchange shall be
equal in the case of a long position, to the average of the bid prices
for long positions, and in the case of a short position, to the average
of the asking prices for the short positions. If liquidated prior to
the primary liquidation date, the value of such security shall be equal
to the net proceeds of its liquidation. Securities which are not
publicly traded shall be valued by the trustee, subject to approval of
the court, using such professional assistance as the trustee deems
necessary in its sole discretion under the circumstances.
* * * * *
11. In Sec. 190.09, revise paragraph (b) to read as follows:
Sec. 190.09 Member property.
* * * * *
(b) Scope of Member Property. Member property shall include all
money, securities and property received, acquired, or held by a
clearing organization to margin, guarantee or secure, on behalf of a
clearing member, the proprietary account, as defined in Sec. 1.3 of
this chapter, any account not belonging to a foreign futures or foreign
options customer pursuant to the proviso in Sec. 30.1(c), and any
Cleared Swaps Proprietary Account, as defined in Sec. 22.1: Provided,
however, that any guaranty deposit or similar payment or deposit made
by such member and any capital stock, or membership of such member in
the clearing organization shall also be included in member property
after payment in full of that portion of the net equity claim of the
member based on its customer account and of any obligations due to the
clearing organization which may be paid therefrom in accordance with
the by-laws or rules of the clearing organization, including
obligations due from the clearing organization to customers or other
members.
12. In Sec. 190.10, revise paragraph (a) to read as follows:
Sec. 190.10 General.
(a) Notices. Unless instructed otherwise by the Commission, all
mandatory or discretionary notices to be given to the Commission under
this part shall be directed by electronic mail to
[email protected], with a copy sent by overnight mail to
Director, Division of Clearing and Intermediary Oversight, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581. For purposes of this part, notice to the
Commission shall be deemed to be given only upon actual receipt.
* * * * *
13. Revise Appendix A to Part 190 to read as follows:
[[Page 33861]]
Appendix A to Part 190--Bankruptcy Forms
Bankruptcy Appendix Form 1--Operation of the Debtor's Estate--Schedule
of Trustee's Duties
For the convenience of a prospective trustee, the Commission has
constructed an approximate schedule of important duties which the
trustee should perform during the early stages of a commodity broker
bankruptcy proceeding. The schedule includes duties required by this
part, subchapter IV of chapter 7 of the Bankruptcy Code as well as
certain practical suggestions, but it is only intended to highlight
the more significant duties and is not an exhaustive description of
all the trustee's responsibilities. It also assumes that the
commodity broker being liquidated is an FCM. Moreover, it is
important to note that the operating facts in a particular
bankruptcy proceeding may vary the schedule or obviate the need for
any of the particular activities.
All Cases
Date of Order for Relief
1. Assure that the commodity broker has notified the Commission,
its designated self-regulatory organization (``DSRO'') (if any), and
all applicable clearing organizations of which it is a member that a
petition or order for relief has been filed (Sec. 190.02(a)(1)).
2. Attempt to effectuate the transfer of entire customer
accounts wherein the commodity contracts are transferred together
with the money, securities, or other property margining,
guaranteeing, or securing the commodity contracts (hereinafter the
``transfer'').
3. Attempt to estimate shortfall of customer funds segregated
pursuant to sections 4d(a) and (b) of the Act; customer funds
segregated pursuant to section 4f of the Act; and the foreign
futures or foreign options secured amount, as defined in Sec. 1.3
of this chapter.
a. The trustee should:
i. Contact the DSRO (if any) and the clearing organizations and
attempt to effectuate a transfer with such shortfall under section
764(b) of the Code; notify the Commission for assistance (Sec.
190.02(a)(2) and (e)(1), Sec. 190.06(b)(2), (e), (f)(3), (g)(2),
and (h)) but recognize that if there is a substantial shortfall, a
transfer of such funds or amounts is highly unlikely.
ii. If a transfer cannot be effectuated, liquidate all customer
commodity contracts that are margined, guaranteed, or secured by
funds or amounts with such shortfall, except dealer options and
specifically identifiable commodity contracts which are bona fide
hedging positions (as defined in Sec. 190.01(kk)(2)) with
instructions not to be liquidated. (See Sec. Sec. 190.02(f) and
190.06(d)(1)). (In this connection, depending upon the size of the
debtor and other complications of liquidation, the trustee should be
aware of special liquidation rules, and in particular the
availability under certain circumstances of book-entry liquidation
(Sec. 190.04(d)(1)(ii)).
b. If there is a small shortfall in any of the funds or amounts
listed in paragraph 2, negotiate with the clearing organization to
effect a transfer; notify the Commission (Sec. Sec. 190.02(a)(2)
and (e)(1), 190.06(b)(2), (e), (f)(3), (g)(2), and (h)).
4. Whether or not a transfer has occurred, liquidate or offset
open commodity contracts not eligible for transfer (i.e., deficit
accounts, accounts with no open positions) (Sec. 190.06(e)(1)).
5. Offset all futures contracts and cleared swaps contracts
which cannot be settled in cash and which would otherwise remain
open either beyond the last day of trading (if applicable) or the
first day on which notice of intent to deliver may be tendered with
respect thereto, whichever occurs first; offset all long options on
a physical commodity which cannot be settled in cash, have value and
would be automatically exercised or would remain open beyond the
last day of exercise; and offset all short options on a physical
commodity which cannot be settled in cash (Sec. 190.02(f)(1)).
6. Compute estimated funded balance for each customer commodity
account containing open commodity contracts (Sec. 190.04(b)) (daily
thereafter).
7. Make margin calls if necessary (Sec. 190.02(g)(1)) (daily
thereafter).
8. Liquidate or offset any open commodity account for which a
customer has failed to meet a margin call (Sec. 190.02(f)(1))
(daily thereafter).
9. Commence liquidation or offset of specifically identifiable
property described in Sec. 190.02(f)(2)(i) (property which has lost
10% or more of value) (and as appropriate thereafter).
10. Commence liquidation or offset of property described in
Sec. 190.02(f)(3) (``all other property'').
11. Be aware of any contracts in delivery position and rules
pertaining to such contracts (Sec. 190.05).
First Calendar Day After the Entry of an Order for Relief
1. If a transfer occurred on the date of entry of the order for
relief:
a. Liquidate any remaining open commodity contracts, except any
dealer option or specifically identifiable commodity contract
[hedge] (See Sec. 190.01(kk)(2) and Sec. 190.02(f)(1)), and not
otherwise transferred in the transfer.
b. Primary liquidation date for transferred or liquidated
commodity contracts (Sec. 190.01(ff)).
2. If no transfer has yet been effected, continue attempt to
negotiate transfer of open commodity contracts and dealer options
(Sec. 190.02(c)(1)).
3. Provide the clearing house or carrying broker with assurances
to prevent liquidation of open commodity contract accounts available
for transfer at the customer's instruction or liquidate all open
commodity contracts except those available for transfer at a
customer's instruction and dealer options.
Second Calendar Day After the Entry of an Order for Relief
If no transfer has yet been effected, request directly customer
instructions regarding transfer of open commodity contracts and
publish notice for customer instructions regarding the return of
specifically identifiable property other than commodity contracts
(Sec. Sec. 190.02(b) (1) and (2)).
Third Calendar Day After the Entry of an Order for Relief
1. Second publication date for customer instructions (Sec.
190.02(b)(1)) (publication is to be made on two consecutive days,
whether or not the second day is a business day).
2. Last day on which to notify the Commission with regard to
whether a transfer in accordance with section 764(b) of the
Bankruptcy Code will take place (Sec. 190.02(a)(2) and Sec.
190.06(e)).
Sixth Calendar Day After the Entry of an Order for Relief
Last day for customers to instruct the trustee concerning open
commodity contracts (Sec. 190.02(b)(2)).
Seventh Calendar Day After the Entry of an Order for Relief
1. If not previously concluded, conclude transfers under Sec.
190.06(e) and (f). (See Sec. 190.02(e)(1) and Sec.
190.06(g)(2)(i)(A)).
2. Transfer all open dealer option contracts which have not
previously been transferred (Sec. 190.06(f)(3)(i)).
3. Primary liquidation date (Sec. 190.01(ff)) (assuming no
transfers and liquidation effected for all open commodity contracts
for which no customer instructions were received by the sixth
calendar day).
4. Establishment of transfer accounts (Sec. 190.03(a)(1))
(assuming this is the primary liquidation date); mark such accounts
to market (Sec. 190.03(a)(2)) (daily thereafter until closed).
5. Liquidate or offset all remaining open commodity contracts
(Sec. 190.02(b)(2)).
6. If not done previously, notify customers of bankruptcy and
request customer proof of claim (Sec. 190.02(b)(4)).
Eighth Calendar Day After the Entry of an Order for Relief
Customer instructions due to trustee concerning specifically
identifiable property (Sec. 190.02(b)(1)).
Ninth Calendar Day After the Entry of an Order for Relief
Commence liquidation of specifically identifiable property for
which no arrangements for return have been made in accordance with
customer instructions (Sec. Sec. 190.02(b)(1), 190.03(c)).
Tenth Calendar Day After the Entry of an Order for Relief
Complete liquidation to the extent reasonably possible of
specifically identifiable property which has yet to be liquidated
and for which no customer instructions have been received (Sec.
190.03(c)).
Separate Procedures for Involuntary Petitions for Bankruptcy
1. Within one business day after notice of receipt of filing of
the petition in bankruptcy, the trustee should assure that proper
notification has been given to the Commission, the commodity
broker's designated self-regulatory organization (Sec.
190.02(a)(1)) (if any), and all applicable clearing organizations;
margin calls should be issued if necessary (Sec. 190.02(g)(2)).
2. On or before the seventh calendar day after the filing of a
petition in bankruptcy,
[[Page 33862]]
the trustee should use his best efforts to effect a transfer in
accordance with Sec. 190.06(e) and (f) of all open commodity
contracts and equity held for or on behalf of customers of the
commodity broker (Sec. 190.02(e)(2)) unless the debtor can provide
certain assurances to the trustee.
Bankruptcy Appendix Form 2--Request for Instructions Concerning Non-
Cash Property Deposited With (Commodity Broker)
Please take notice: On (date), a petition in bankruptcy was
filed by [against] (commodity broker). Those customers of (commodity
broker) who deposited certain kinds of non-cash property (see below)
with (commodity broker) may instruct the trustee of the estate to
return their property to them as provided below.
As no customer may obtain more than his or her proportionate
share of the property available to satisfy customer claims, if you
instruct the trustee to return your property to you, you will be
required to pay the estate, as a condition to the return of your
property, an amount determined by the trustee. If your property is
not margining an open contract, this amount will approximate the
difference between the market value of your property and your pro
rata share of the estate, as estimated by the trustee. If your
property is margining an open commodity contract, this amount will
be approximately the full fair market value of the property on the
date of its return.
Kinds of Property to Which This Notice Applies
1. Any security deposited as margin which, as of (date petition
was filed), was securing an open commodity contract and is:
--Registered in your name,
--Not transferrable by delivery, and
--Not a short-term obligation.
2. Any fully-paid, non-exempt security held for your account in
which there were no open commodity contracts as of (date petition
was filed). (Rather than the return, at this time, of the specific
securities you deposited with (commodity broker), you may instead
request now, or at any later time, that the trustee purchase ``like-
kind'' securities of a fair market value which does not exceed your
proportionate share of the estate).
3. Any warehouse receipt, bill of lading or other document of
title deposited as margin which, as of (date petition was filed),
was securing an open commodity contract and--can be identified in
(commodity broker)'s records as being held for your account, and--is
neither in bearer form nor otherwise transferable by delivery.
4. Any warehouse receipt bill of lading or other document of
title, or any commodity received, acquired or held by (commodity
broker) to make or take delivery or exercise from or for your
account and which--can be identified in (commodity broker)'s records
as received from or for your account as held specifically for the
purpose of delivery or exercise.
5. Any cash or other property deposited to make or take delivery
on a commodity contract may be eligible to be returned. The trustee
should be contacted directly for further information if you have
deposited such property with (commodity broker) and desire its
return.
Instructions must be received by (the 5th calendar day after 2d
publication date) or the trustee will liquidate your property. (If
you own such property but fail to provide the trustee with
instructions, you will still have a claim against (commodity broker)
but you will not be able to have your specific property returned to
you).
Note: Prior to receipt of your instructions, circumstances may
require the trustee to liquidate your property, or transfer your
property to another broker if it is margining open commodity
contracts. If your property is transferred and your instructions
were received within the required time, your instructions will be
forwarded to the new broker.
Instructions should be directed to: (Trustee's name, address,
and/or telephone).
Even if you request the return of your property, you must also
pay the trustee the amount he specifies and provide the trustee with
proof of your claim before (the 7th calendar day after 2d
publication date) or your property will be liquidated. (Upon receipt
of customer instructions to return property, the trustee will mail
the sender a form which describes the information he must provide to
substantiate his claim).
Note: The trustee is required to liquidate your property
despite the timely receipt of your instructions, money, and proof of
claim if, for any reason, your property cannot be returned by (close
of business on the 7th business day after 2d publication date).
Bankruptcy Appendix Form 3--Request For Instructions Concerning
Transfer of Your Hedge Contracts Held by (Commodity Broker)
United States Bankruptcy Court ----District of ----------In re
----------, Debtor, No. ----------.
Please take notice: On (date), a petition in bankruptcy was
filed by [against] (commodity broker).
You indicated when your hedge account was opened that the
commodity contracts in your hedge account should not be liquidated
automatically in the event of the bankruptcy of (commodity broker),
and that you wished to provide instructions at this time concerning
their disposition.
Instructions to transfer your commodity contracts and a cash
deposit (as described below) must be received by the trustee by (the
6th calendar day after entry of order for relief) or your commodity
contracts will be liquidated.
If you request the transfer of your commodity contracts, prior
to their transfer, you must pay the trustee in cash an amount
determined by the trustee which will approximate the difference
between the value of the equity margining your commodity contracts
and your pro rata share of the estate plus an amount constituting
security for the nonrecovery of any overpayments. In your
instructions, you should specify the broker to which you wish your
commodity contracts transferred.
Be further advised that prior to receipt of your instructions,
circumstances may, in any event, require the trustee to liquidate or
transfer your commodity contracts. If your commodity contracts are
so transferred and your instructions are received, your instructions
will be forwarded to the new broker.
Note also that the trustee is required to liquidate your
positions despite the timely receipt of your instructions and money
if, for any reason, you have not made arrangements to transfer and/
or your contracts are not transferred by (7 calendar days after
entry of order for relief).
Instructions should be sent to: (Trustee's or designee's name,
address, and/or telephone). [Instructions may also be provided by
phone].
Bankruptcy Appendix Form 4--Proof of Claim
[Note to trustee: As indicated in Sec. 190.02(d), this form is
provided as a guide to the trustee and should be modified as
necessary depending upon the information which the trustee needs at
the time a proof of claim is requested and the time provided for a
response.]
Proof of Claim
United States Bankruptcy Court ----District of ----------In re
----------, Debtor, No. ----------. Return this form by ----------
or your claim will be barred (unless extended, for good cause
only).&
I. [If claimant is an individual claiming for himself] The
undersigned, who is the claimant herein, resides at ----------.
[If claimant is a partnership claiming through a member] The
undersigned, who resides at ----, is a member of ----------, a
partnership, composed of the undersigned and ----------, of --------
--, and doing business at ----, and is duly authorized to make this
proof of claim on behalf of the partnership.
[If claimant is a corporation claiming though a duly authorized
officer] The undersigned, who resides at ---- is the ---------- of
----, a corporation organized under the laws of ---- and doing
business at ----------, and is duly authorized to make this proof of
claim on behalf of the corporation.
[If claim is made by agent] The undersigned, who resides at ----
------, is the agent of ----------, and is duly authorized to make
this proof of claim on behalf of the claimant.
II. The debtor was, at the time of the filing of the petition
initiating this case, and still is, indebted to this claimant for
the total sum of $ ----------.
III. List EACH account on behalf of which a claim is being made
by number and name of account holder[s], and for EACH account,
specify the following information:
a. Whether the account is a futures, foreign futures, leverage,
option (if an option account, specify whether exchange-traded,
dealer or cleared swap), ``delivery'' account, or a cleared swaps
account. A ``delivery'' account is one which contains only documents
of title, commodities, cash, or other property identified to the
claimant and deposited for the purposes of making or taking delivery
on a commodity underlying a commodity contract or for payment of the
strike price upon exercise of an option.
[[Page 33863]]
b. The capacity in which the account is held, as follows (and if
more than one is applicable, so state):
1. [The account is held in the name of the undersigned in his
individual capacity];
2. [The account is held by the undersigned as guardian,
custodian, or conservator for the benefit of a ward or a minor under
the Uniform Gift to Minors Act];
3. [The account is held by the undersigned as executor or
administrator of an estate];
4. [The account is held by the undersigned as trustee for the
trust beneficiary];
5. [The account is held by the undersigned in the name of a
corporation, partnership, or unincorporated association];
6. [The account is held as an omnibus customer account of the
undersigned futures commission merchant];
7. [The account is held by the undersigned as part owner of a
joint account];
8. [The account is held by the undersigned in the name of a plan
which, on the date the petition in bankruptcy was filed, had in
effect a registration statement in accordance with the requirements
of Sec. 1031 of the Employee Retirement Income Security Act of 1974
and the regulations thereunder]; or
9. [The account is held by the undersigned as agent or nominee
for a principal or beneficial owner (and not described above in
items 1-8 of this II, b)].
10. [The account is held in any other capacity not described
above in items 1-9 of this II, b. Specify the capacity].
c. The equity, as of the date the petition in bankruptcy was
filed, based on the commodity contracts in the account.
d. Whether the person[s] (including a general partnership,
limited partnership, corporation, or other type of association) on
whose behalf the account is held is one of the following persons OR
whether one of the following persons, alone or jointly, owns 10% or
more of the account:
1. [If the debtor is an individual--
A. Such individual;
B. Relative (as defined below in item 8 of this III,d) of the
debtor or of a general partner of the debtor;
C. Partnership in which the debtor is a general partner;
D. General partner of the debtor; or
E. Corporation of which the debtor is a director, officer, or
person in control];
2. [If the debtor is a partnership--
A. Such partnership;
B. General partner in the debtor;
C. Relative (as defined in item 8 of this III,d) of a general
partner in, general partner of, or person in control of the debtor;
D. Partnership in which the debtor is a general partner;
E. General partner of the debtor; or
F. Person in control of the debtor];
3. [If the debtor is a limited partnership--
A. Such limited partnership;
B. A limited or special partner in such partnership whose duties
include:
i. The management of the partnership business or any part
thereof;
ii. The handling of the trades or customer funds of customers of
such partnership;
iii. The keeping of records pertaining to the trades or customer
funds of customers of such partnership; or
iv. The signing or co-signing of checks or drafts on behalf of
such partnership];
4. [If the debtor is a corporation or association (except a
debtor which is a futures commission merchant and is also a
cooperative association of producers)--
A. Such corporation or association;
B. Director of the debtor;
C. Officer of the debtor;
D. Person in control of the debtor;
E. Partnership in which the debtor is a general partner;
F. General partner of the debtor;
G. Relative (as defined in item 8 of this III,d) of a general
partner, director, officer, or person in control of the debtor;
H. An officer, director or owner of ten percent or more of the
capital stock of such organization];
5. [If the debtor is a futures commission merchant which is a
cooperative association of producers--
Shareholder or member of the debtor which is an officer,
director or manager];
6. [An employee of such individual, partnership, limited
partnership, corporation or association whose duties include:
A. The management of the business of such individual,
partnership, limited partnership, corporation or association or any
part thereof;
B. The handling of the trades or customer funds of customers of
such individual, partnership, limited partnership, corporation or
association;
C. The keeping of records pertaining to the trades or funds of
customers of such individual, partnership, limited partnership,
corporation or association; or
D. The signing or co-signing of checks or drafts on behalf of
such individual, partnership, limited partnership, corporation or
association];
7. [Managing agent of the debtor];
8. [A spouse or minor dependent living in the same household of
ANY OF THE FOREGOING PERSONS, or any other relative, regardless of
residency, (unless previously described in items 1-B, 2-C, or 4-G of
this III, d) defined as an individual related by affinity or
consanguinity within the third degree as determined by the common
law, or individual in a step or adoptive relationship within such
degree];
9. [``Affiliate'' of the debtor, defined as:
A. Entity that directly or indirectly owns, controls, or holds
with power to vote, 20 percent or more of the outstanding voting
securities of the debtor, other than an entity that holds such
securities--
i. In a fiduciary or agency capacity without sole discretionary
power to vote such securities; or
ii. Solely to secure a debt, if such entity has not in fact
exercised such power to vote;
B. Corporation 20 percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held
with power to vote, by the debtor, or by an entity that directly or
indirectly owns, controls, or holds with power to vote, 20 percent
or more of the outstanding voting securities of the debtor, other
than an entity that holds such securities--
i. In a fiduciary or agency capacity without sole discretionary
power to vote such securities; or
ii. Solely to secure a debt, if such entity has not in fact
exercised such power to vote;
C. Person whose business is operated under a lease or operating
agreement by the debtor, or person substantially all of whose
property is operated under an operating agreement with the debtor;
D. Entity that otherwise, directly or indirectly, is controlled
by or is under common control with the debtor];
E. Entity that operates the business or all or substantially all
of the property of the debtor under a lease or operating agreement;
or
F. Entity that otherwise, directly or indirectly, controls the
debtor; or
10. [Any of the persons listed in items 1-7 above of this III, d
if such person is associated with an affiliate (see item 9 above) of
the debtor as if the affiliate were the debtor].
e. Whether the account is a discretionary account. (If it is,
the name in which the ``attorney in fact'' is held).
f. If the account is a joint account, the amount of the
claimant's percentage interest in the account. (Also specify whether
participants in a joint account are claiming separately or jointly).
g. Whether the claimant's positions in security futures products
are held in a futures account or securities account, as those terms
are defined in Sec. 1.3 of this chapter.
IV. Describe all claims against the debtor not based upon a
commodity contract account of the claimant (e.g., if landlord, for
rent; if customer, for misrepresentation or fraud).
V. Describe all claims of the DEBTOR against the CLAIMANT not
already included in the equity of a commodity contract account[s] of
the claimant (see III, c above).
VI. Describe any deposits of money, securities or other property
held by or for the debtor from or for the claimant, and indicate if
any of this property was included in your answer to III, c above.
VII. Of the money, securities, or other property described in VI
above, identify any which consists of the following:
a. With respect to property received, acquired, or held by or
for the account of the debtor from or for the account of the
claimant to margin, guarantee or secure an open commodity contract,
the following:
1. Any security which as of the filing date is:
A. Held for the claimant's account;
B. Registered in the claimant's name;
C. Not transferable by delivery; and
D. Not a short term obligation; or
2. Any warehouse receipt, bill of lading or other document of
title which as of the filing date:
A. Can be identified on the books and records of the debtor as
held for the account of the claimant; and
B. Is not in bearer form and is not otherwise transferable by
delivery.
b. With respect to open commodity contracts, and except as
otherwise provided below in item g of this VII, any such contract
which:
1. As of the date the petition in bankruptcy was filed, is
identified on the books and records of the debtor as held for the
account of the claimant;
[[Page 33864]]
2. Is a bona fide hedging position or transaction as defined in
Rule 1.3 of the Commodity Futures Trading Commission (``CFTC'') or
is a commodity option transaction which has been determined by a
registered entity to be economically appropriate to the reduction of
risks in the conduct and management of a commercial enterprise
pursuant to rules which have been approved by the CFTC pursuant to
section 5c(c) of the Commodity Exchange Act;
3. Is in an account designated in the accounting records of the
debtor as a hedging account.
c. With respect to warehouse receipts, bills of lading or other
documents of title, or physical commodities received, acquired, or
held by or for the account of the debtor for the purpose of making
or taking delivery or exercise from or for the claimant's account,
any such document of title or commodity which as of the filing date
can be identified on the books and records of the debtor as received
from or for the account of the claimant specifically for the purpose
of delivery or exercise.
d. Any cash or other property deposited prior to bankruptcy to
pay for the taking of physical delivery on a long commodity contract
or for payment of the strike price upon exercise of a short put or a
long call option contract on a physical commodity, which cannot be
settled in cash, in excess of the amount necessary to margin such
commodity contract prior to the notice date or exercise date which
cash or other property is identified on the books and records of the
debtor as received from or for the account of the claimant within
three or less days of the notice date or three or less days of the
exercise date specifically for the purpose of payment of the notice
price upon taking delivery or the strike price upon exercise.
e. The cash price tendered for any property deposited prior to
bankruptcy to make physical delivery on a short commodity contract
or for exercise of a long put or a short call option contract on a
physical commodity, which cannot be settled in cash, to the extent
it exceeds the amount necessary to margin such contract prior to the
notice exercise date which property is identified on the books and
records of the debtor as received from or for the account of the
claimant within three or less days of the notice date or of the
exercise date specifically for the purpose of a delivery or
exercise.
f. Fully paid, non-exempt securities identified on the books and
records of the debtor as held by the debtor for or on behalf of the
commodity contract account of the claimant for which, according to
such books and records as of the filing date, no open commodity
contracts were held in the same capacity.
g. Open commodity contracts transferred to another futures
commission merchant by the trustee.
VIII. Specify whether the claimant wishes to receive payment in
kind, to the extent possible, for any claim for securities.
IX. Attach copies of any documents which support the information
provided in this proof of claim, including but not limited to
customer confirmations, account statements, and statements of
purchase or sale.
This proof of claim must be filed with the trustee no later than
------, or your claim will be barred unless an extension has been
granted, available only for good cause.
Return this form to:
(Trustee's name (or designee's) and address)---------------------------
-----------------------------------------------------------------------
Dated:-----------------------------------------------------------------
(Signed)---------------------------------------------------------------
Penalty for Presenting Fraudulent Claim. Fine of not more than
$5,000 or imprisonment for not more than five years or both--Title
18, U.S.C. 152.
(Approved by the Office of Management and Budget under control
number 3038-0021)
14. Revise Appendix B to Part 190 to read as follows:
Appendix B to Part 190--Bankruptcy Forms
Special Bankruptcy Distributions Framework 1--Special Distribution of
Futures Customer Funds When FCM Participated in Cross-Margining
The Commission has established the following distributional
convention with respect to ``futures customer funds'' (as Sec. 1.3
of this chapter defines such term) held by a futures commission
merchant (FCM) that participated in a cross-margining (XM) program
which shall apply if participating market professionals sign an
agreement that makes reference to this distributional rule and the
form of such agreement has been approved by the Commission by rule,
regulation or order:
All futures customer funds held in respect of XM accounts,
regardless of the product that customers holding such accounts are
trading, are required by Commission order to be segregated
separately from all other customer segregated funds. For purposes of
this distributional rule, XM accounts will be deemed to be commodity
interest accounts and securities held in XM accounts will be deemed
to be received by the FCM to margin, guarantee or secure commodity
interest contracts. The maintenance of property in an XM account
will result in subordination of the claim for such property to
certain non-XM customer claims and thereby will operate to cause
such XM claim not to be treated as a customer claim for purposes of
the Securities Investors Protection Act and the XM securities to be
excluded from the securities estate. This creates subclasses of
futures customer accounts, an XM account and a non-XM account (a
person could hold each type of account), and results in two pools of
segregated funds belonging to futures customers: An XM pool and a
non-XM pool. In the event that there is a shortfall in the non-XM
pool of customer class segregated funds and there is no shortfall in
the XM pool of customer segregated funds, all futures customer net
equity claims, whether or not they arise out of the XM subclass of
accounts, will be combined and will be paid pro rata out of the
total pool of available XM and non-XM futures customer funds. In the
event that there is a shortfall in the XM pool of customer
segregated funds and there is no shortfall in the non-XM pool of
customer segregated funds, then futures customer net equity claims
arising from the XM subclass of accounts shall be satisfied first
from the XM pool of customer segregated funds, and futures customer
net equity claims arising from the non-XM subclass of accounts shall
be satisfied first from the non-XM customer segregated funds.
Furthermore, in the event that there is a shortfall in both the non-
XM and XM pools of customer segregated funds: (1) If the non-XM
shortfall as a percentage of the segregation requirement in the non-
XM pool is greater than or equal to the XM shortfall as a percentage
of the segregation requirement in the XM pool, all futures customer
net equity claims will be paid pro rata; and (2) if the XM shortfall
as a percentage of the segregation requirement in the XM pool is
greater than the non-XM shortfall as a percentage of the segregation
requirement of the non-XM pool, non-XM futures customer net equity
claims will be paid pro rata out of the available non-XM segregated
funds, and XM futures customer net equity claims will be paid pro
rata out of the available XM segregated funds. In this way, non-XM
customers will never be adversely affected by an XM shortfall.
The following examples illustrate the operation of this
convention. The examples assume that the FCM has two customers, one
with exclusively XM accounts and one with exclusively non-XM
accounts. However, the examples would apply equally if there were
only one customer, with both an XM account and a non-XM account.
1. Sufficient Funds to Meet Non-XM and XM Customer Claims:
----------------------------------------------------------------------------------------------------------------
Non-XM XM Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation...................................... 150 150 300
4d(a) Segregation requirement................................... 150 150 300
Shortfall (dollars)............................................. 0 0 ..............
Shortfall (percent)............................................. 0 0 ..............
Distribution.................................................... 150 150 300
----------------------------------------------------------------------------------------------------------------
[[Page 33865]]
There are adequate funds available and both the non-XM and the
XM customer claims will be paid in full.
2. Shortfall in Non-XM Only:
----------------------------------------------------------------------------------------------------------------
Non-XM XM Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation...................................... 100 150 250
4d(a) Segregation requirement................................... 150 150 300
Shortfall (dollars)............................................. 50 0 ..............
Shortfall (percent)............................................. 50/150 = 33.3 0 ..............
Pro rata (percent).............................................. 150/300 = 50 150/300 = 50 ..............
Pro rata (dollars).............................................. 125 125 ..............
Distribution.................................................... 125 125 250
----------------------------------------------------------------------------------------------------------------
Due to the non-XM account, there are insufficient funds
available to meet both the non-XM and the XM customer claims in
full. Each customer will receive his pro rata share of the funds
available, or 50% of the $250 available, or $125.
3. Shortfall in XM Only:
----------------------------------------------------------------------------------------------------------------
Non-XM XM Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation...................................... 150 100 250
4d(a) Segregation requirement................................... 150 150 300
Shortfall (dollars)............................................. 0 50 ..............
Shortfall (percent)............................................. 0 50/150 = 33.3 ..............
Pro rata (percent).............................................. 150/300 = 50 150/300 = 50 ..............
Pro rata (dollars).............................................. 125 125 ..............
Distribution.................................................... 150 100 250
----------------------------------------------------------------------------------------------------------------
Due to the XM account, there are insufficient funds available
to meet both the non-XM and the XM customer claims in full.
Accordingly, the XM funds and non-XM funds are treated as separate
pools, and the non-XM customer will be paid in full, receiving $ 150
while the XM customer will receive the remaining $100.
4. Shortfall in Both, With XM Shortfall Exceeding Non-XM
Shortfall:
----------------------------------------------------------------------------------------------------------------
Non-XM XM Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation...................................... 125 100 225
4d(a) Segregation requirement................................... 150 150 300
Shortfall (dollars)............................................. 25 50 ..............
Shortfall (percent)............................................. 25/150 = 16.7 50/150 = 33.3 ..............
Pro rata (percent).............................................. 150/300 = 50 150/300 = 50 ..............
Pro rata (dollars).............................................. 112.50 112.50 ..............
Distribution.................................................... 125 100 225
----------------------------------------------------------------------------------------------------------------
There are insufficient funds available to meet both the non-XM
and the XM customer claims in full, and the XM shortfall exceeds the
non-XM shortfall. The non-XM customer will receive the $125
available with respect to non-XM claims while the XM customer will
receive the $100 available with respect to XM claims.
5. Shortfall in Both, With Non-XM Shortfall Exceeding XM
Shortfall:
----------------------------------------------------------------------------------------------------------------
Non-XM XM Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation...................................... 100 125 225
4d(a) Segregation requirement................................... 150 150 300
Shortfall (dollars)............................................. 50 25 ..............
Shortfall (percent)............................................. 50/150 = 33.3 25/150 = 16.7 ..............
Pro rata (percent).............................................. 150/300 = 50 150/300 = 50 ..............
Pro rata (dollars).............................................. 112.50 112.50 ..............
Distribution.................................................... 112.50 112.50 225
----------------------------------------------------------------------------------------------------------------
There are insufficient funds available to meet both the non-XM
and the XM customer claims in full, and the non-XM shortfall exceeds
the XM shortfall. Each customer will receive 50% of the $225
available, or $112.50.
6. Shortfall in Both, Non-XM Shortfall = XM Shortfall:
----------------------------------------------------------------------------------------------------------------
Non-XM XM Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation...................................... 100 100 200
4d(a) Segregation requirement................................... 150 150 300
Shortfall (dollars)............................................. 50 50 ..............
Shortfall (percent)............................................. 50/150 = 33.3 50/150 = 33.3 ..............
Pro rata (percent).............................................. 150/300 = 50 150/300 = 50 ..............
[[Page 33866]]
Pro rata (dollars).............................................. 100 100 ..............
Distribution.................................................... 100 100 200
----------------------------------------------------------------------------------------------------------------
There are insufficient funds available to meet both the non-XM
and the XM customer claims in full, and the non-XM shortfall equals
the XM shortfall. Each customer will receive 50% of the $200
available, or $100.
These examples illustrate the principle that pro rata
distribution across both accounts is the preferable approach except
when a shortfall in the XM account could harm non-XM customers.
Thus, pro rata distribution occurs in Examples 1, 2, 5 and 6.
Separate treatment of the XM and non-XM accounts occurs in Examples
3 and 4.
Special Bankruptcy Distributions Framework 2--Special Allocation of
Shortfall to Customer Claims When Futures Customer Funds and Cleared
Swaps Customer Collateral Are Held in a Depository Outside of the
United States or in a Foreign Currency
The Commission has established the following allocation
convention with respect to futures customer funds (as Sec. 1.3 of
this chapter defines such term) and Cleared Swaps Customer
Collateral (as Sec. 22.1 of this chapter defines such term)
segregated pursuant to the Act and Commission rules thereunder held
by a futures commission merchant (``FCM'') or derivatives clearing
organization (``DCO'') in a depository outside the United States
(``U.S.'') or in a foreign currency. The maintenance of futures
customer funds or Cleared Swaps Customer Collateral in a depository
outside the U.S. or denominated in a foreign currency will result,
in certain circumstances, in the reduction of customer claims for
such funds. For purposes of this proposed bankruptcy convention,
sovereign action of a foreign government or court would include, but
not be limited to, the application or enforcement of statutes,
rules, regulations, interpretations, advisories, decisions, or
orders, formal or informal, by a Federal, state, or provincial
executive, legislature, judiciary, or government agency. If an FCM
enters into bankruptcy and maintains futures customer funds or
Cleared Swaps Customer Collateral in a depository located in the
U.S. in a currency other than U.S. dollars or in a depository
outside the U.S., the following allocation procedures shall be used
to calculate the claim of each futures customer or Cleared Swaps
Customer (as Sec. 22.1 of this chapter defines such term). The
allocation procedures should be performed separately with respect to
each futures customer or Cleared Swaps Customer.
I. Reduction in Claims for General Shortfall
A. Determination of Losses not Attributable to Sovereign Action
1. Convert the claim of each futures customer or Cleared Swaps
Customer in each currency to U.S. Dollars at the exchange rate in
effect on the Final Net Equity Determination Date, as defined in
Sec. 190.01(s) (the ``Exchange Rate'').
2. Determine the amount of assets available for distribution to
futures customers or Cleared Swaps Customers. In making this
calculation, include futures customer funds and Cleared Swaps
Customer Collateral that would be available for distribution but for
the sovereign action.
3. Convert the amount of futures customer funds and Cleared
Swaps Customer Collateral available for distribution to U.S. Dollars
at the Exchange Rate.
4. Determine the Shortfall Percentage that is not attributable
to sovereign action, as follows:
[GRAPHIC] [TIFF OMITTED] TP09JN11.042
B. Allocation of Losses Not Attributable to Sovereign Action
1. Reduce the claim of each futures customer or Cleared Swaps
Customer by the Shortfall Percentage.
II. Reduction in Claims for Sovereign Loss
A. Determination of Losses Attributable to Sovereign Action
(``Sovereign Loss'')
1. If any portion of the claim of a futures customer or Cleared
Swaps Customer is required to be kept in U.S. dollars in the U.S.,
that portion of the claim is not exposed to Sovereign Loss.
2. If any portion of the claim of a futures customer or Cleared
Swaps Customer is authorized to be kept in only one location and
that location is:
a. The U.S. or a location in which there is no Sovereign Loss,
then that portion of the claim is not exposed to Sovereign Loss.
b. A location in which there is Sovereign Loss, then that entire
portion of the claim is exposed to Sovereign Loss.
3. If any portion of the claim of a futures customer or Cleared
Swaps Customer is authorized to be kept in only one currency and
that currency is:
a. U.S. dollars or a currency in which there is no Sovereign
Loss, then that portion of the claim is not exposed to Sovereign
Loss.
b. A currency in which there is Sovereign Loss, then that entire
portion of the claim is exposed to Sovereign Loss.
4. If any portion of the claim of a futures customer or Cleared
Swaps Customer is authorized to be kept in more than one location
and:
a. There is no Sovereign Loss in any of those locations, then
that portion of the claim is not exposed to Sovereign Loss.
b. There is Sovereign Loss in one of those locations, then that
entire portion of the claim is exposed to Sovereign Loss.
c. There is Sovereign Loss in more than one of those locations,
then an equal share of that portion of the claim will be exposed to
Sovereign Loss in each such location.
5. If any portion of the claim of a futures customer or Cleared
Swaps Customer is authorized to be kept in more than one currency
and:
a. There is no Sovereign Loss in any of those currencies, then
that portion of the claim is not exposed to Sovereign Loss.
b. There is Sovereign Loss in one of those currencies, then that
entire portion of the claim is exposed to Sovereign Loss.
c. There is Sovereign Loss in more than one of those currencies,
then an equal share of that portion of the claim will be exposed to
Sovereign Loss.
B. Calculation of Sovereign Loss
1. The total Sovereign Loss for each location is the difference
between:
a. The total futures customer funds or Cleared Swaps Customer
Collateral deposited in depositories in that location and
b. The amount of futures customer funds or Cleared Swaps
Customer Collateral in that location that is available to be
distributed to futures customers or Cleared Swaps Customers, after
taking into account any sovereign action.
2. The total Sovereign Loss for each currency is the difference
between:
a. The value, in U.S. dollars, of the futures customer funds or
Cleared Swaps Customer Collateral held in that currency on the day
before the sovereign action took place and
b. The value, in U.S. dollars, of the futures customer funds or
Cleared Swaps Customer Collateral held in that currency on the Final
Net Equity Determination Date.
C. Allocation of Sovereign Loss
1. Each portion of the claim of a futures customer or Cleared
Swaps Customer exposed to Sovereign Loss in a location will be
reduced by:
[[Page 33867]]
[GRAPHIC] [TIFF OMITTED] TP09JN11.043
2. Each portion of the claim of a futures customer or Cleared
Swaps Customer exposed to Sovereign Loss in a currency will be
reduced by:
[GRAPHIC] [TIFF OMITTED] TP09JN11.044
3. A portion of the claim of a futures customer or Cleared Swaps
Customer exposed to Sovereign Loss in a location or currency will
not be reduced below zero. (The above calculations might yield a
result below zero where the FCM kept more futures customer funds or
Cleared Swaps Customer Funds in a location or currency than it was
authorized to keep.)
4. Any amount of Sovereign Loss from a location or currency in
excess of the total amount of futures customer funds or Cleared
Swaps Customer Funds authorized to be kept in that location or
currency (calculated in accord with section II.1 above) (``Total
Excess Sovereign Loss'') will be divided among all futures customers
or Cleared Swaps Customer who have authorized funds to be kept
outside the U.S., or in currencies other than U.S. dollars, with
each such futures customer or Cleared Swaps Customer claim reduced
by the following amount:
[GRAPHIC] [TIFF OMITTED] TP09JN11.045
The following examples illustrate the operation of this
convention.
Example 1. No shortfall in any location.
------------------------------------------------------------------------
Location(s) customer
Customer Claim has consented to having
funds held
------------------------------------------------------------------------
A.............................. $50 U.S.
B.............................. [euro]50 U.K.
C.............................. [euro]50 Germany.
D.............................. [pound]300 U.K.
------------------------------------------------------------------------
Location Actual asset balance
------------------------------------------------------------------------
U.S............................................ $50.
U.K............................................ [pound]300.
U.K............................................ [euro]50.
Germany........................................ [euro]50.
------------------------------------------------------------------------
Note: Conversion Rates: [pound]1 = $1; [pound]1=$1.5.
Convert the claim of each futures customer or Cleared Swaps
Customer in each currency to U.S. Dollars:
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
Customer Claim Conversion rate dollars
----------------------------------------------------------------------------------------------------------------
A.................................................. $50 1.0 $50
B.................................................. [euro]50 1.0 50
C.................................................. [euro]50 1.0 50
D.................................................. [pound]300 1.5 450
------------------------------------------------------------
Total.......................................... .................. .................. 600.00
----------------------------------------------------------------------------------------------------------------
Determine assets available for distribution to futures customers
or Cleared Swaps Customers, converting to U.S. dollars:
[[Page 33868]]
----------------------------------------------------------------------------------------------------------------
Shortfall Actual
Assets in due to shortfall Amount
Location Assets Conversion U.S. sovereign due to actually
rate dollars action sovereign available
percentage action
----------------------------------------------------------------------------------------------------------------
U.S............................... $50 1.0 $50 ........... ........... $50
U.K............................... [pound]300 1.5 450 ........... ........... 450
U.K............................... [euro]50 1.0 50 ........... ........... 50
Germany........................... [euro]50 1.0 50 ........... ........... 50
-----------------------------------------------------------------------------
Total......................... ........... ........... 600.00 ........... 0 600.00
----------------------------------------------------------------------------------------------------------------
There are no shortfalls in funds held in any location.
Accordingly, there will be no reduction of futures customer or
Cleared Swaps Customer claims.
Claims:
----------------------------------------------------------------------------------------------------------------
Claim in
U.S. Allocation
dollars of
after shortfall Claim after
Customer allocated due to all
non- sovereign reductions
sovereign action
shortfall
------------------------------------------------------------------------------
A..................................... $50 $0 $50
B..................................... 50 0 50
C..................................... 50 0 50
D..................................... 450 0 450
Total............................. 600.00 0.00 600.00
----------------------------------------------------------------------------------------------------------------
Example 2. Shortfall in funds held in the U.S.
------------------------------------------------------------------------
Location(s) customer
Customer Claim has consented to having
funds held
------------------------------------------------------------------------
A.............................. $100 U.S.
B.............................. [euro]50 U.K.
C.............................. [euro]100 U.K., Germany, or
Japan.
------------------------------------------------------------------------
Location Actual asset balance
------------------------------------------------------------------------
U.S............................................ $50
U.K............................................ [euro]100
Germany........................................ [euro]50
------------------------------------------------------------------------
Note: Conversion Rates: [euro]1 = $1.
Reduction in Claims for General Shortfall
There is a shortfall in the funds held in the U.S. such that
only \1/2\ of the funds are available. Convert the claim of each
futures customer or Cleared Swaps Customer in each currency to U.S.
Dollars:
Convert each customer's claim in each currency to U.S. Dollars:
----------------------------------------------------------------------------------------------------------------
Customer Claim Conversion rate Claim in US$
----------------------------------------------------------------------------------------------------------------
A.................................................. $100 1.0 $100
B.................................................. [euro]50 1.0 50
C.................................................. [euro]100 1.0 100
------------------------------------------------------------
Total.......................................... .................. .................. 250.00
----------------------------------------------------------------------------------------------------------------
Determine assets available for distribution to futures customers
or Cleared Swaps Customers, converting to U.S. dollars:
----------------------------------------------------------------------------------------------------------------
Shortfall Actual
due to shortfall Amount
Location Assets Conversion Assets in sovereign due to actually
rate U.S. dollars action sovereign available
percentage action
----------------------------------------------------------------------------------------------------------------
U.S............................. $50 1.0 $50.00 ........... ........... $50
U.K............................. [euro]100 1.0 100 ........... ........... 100
Germany......................... [euro]50 1.0 50 ........... ........... 50
-------------------------------------------------------------------------------
[[Page 33869]]
Total....................... ........... ........... 200.00 ........... ........... 200.00
----------------------------------------------------------------------------------------------------------------
Determine the percentage of shortfall that is not attributable
to sovereign action:
Shortfall Percentage = (1-(200/250)) = (1-80%) = 20%.
Reduce each futures customer or Cleared Swaps Customer claim by
the Shortfall Percentage:
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
Customer Claim in US$ Allocated shortfall dollars after
(non-sovereign) allocated shortfall
----------------------------------------------------------------------------------------------------------------
A................................................ $100 $20.00 $80.00
B................................................ 50 10.00 40.00
C................................................ 100 20.00 80.00
--------------------------------------------------------------
Total........................................ 250.00 50.00 200.00
----------------------------------------------------------------------------------------------------------------
Reduction in Claims for Shortfall Due to Sovereign Action
There is no shortfall due to sovereign action. Accordingly, the
futures customer or Cleared Swaps Customer claims will not be
further reduced.
Claims After Reductions
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
dollars after Allocation of Claim after all
Customer allocated non- shortfall due to reductions
sovereign shortfall sovereign action
----------------------------------------------------------------------------------------------------------------
A................................................. $80 .................. $80.00
B................................................. 40 .................. 40.00
C................................................. 80 .................. 80.00
-------------------------------------------------------------
Total......................................... 200.00 0 200.00
----------------------------------------------------------------------------------------------------------------
Example 3. Shortfall in funds held outside the U.S., or in a
currency other than U.S. dollars, not due to sovereign action.
------------------------------------------------------------------------
Location(s) customer
Customer Claim has consented to having
funds held
------------------------------------------------------------------------
A.............................. $150 U.S.
B.............................. [euro]100 U.K.
C.............................. [euro]50 Germany.
D.............................. $100 U.S.
D.............................. [euro]100 U.K. or Germany.
------------------------------------------------------------------------
Location Actual asset balance
------------------------------------------------------------------------
U.S............................................ $250
U.K............................................ [euro]50
Germany........................................ [euro]100
------------------------------------------------------------------------
Note: Conversion Rates: [euro]1 = $1.
Reduction in Claims for General Shortfall
Convert the claim of each futures customer or Cleared Swaps
Customer in each currency to U.S. Dollars:
----------------------------------------------------------------------------------------------------------------
Customer Claim Conversion rate Claim in US$
----------------------------------------------------------------------------------------------------------------
A.................................................. $150 1.0 150
B.................................................. [euro]100 1.0 100
C.................................................. [euro]50 1.0 50
D.................................................. $100 1.0 100
D.................................................. [euro]100 1.0 100
Total.......................................... .................. .................. 500.00
----------------------------------------------------------------------------------------------------------------
[[Page 33870]]
Determine assets available for distribution to futures customers
or Cleared Swaps Customers, converting to U.S. dollars:
----------------------------------------------------------------------------------------------------------------
Shortfall Actual
due to shortfall Amount
Location Assets Conversion Assets in sovereign due to actually
rate U.S. dollars action sovereign available
percentage action
----------------------------------------------------------------------------------------------------------------
U.S............................. $250 1.0 $250 ........... ........... $250
U.K............................. [euro]50 1.0 50 ........... ........... 50
Germany......................... [euro]100 1.0 100 ........... ........... 100
-------------------------------------------------------------------------------
Total....................... ........... ........... 400.00 ........... 0 400.00
----------------------------------------------------------------------------------------------------------------
Determine the percentage of shortfall that is not attributable
to sovereign action:
Shortfall Percentage = (1-400/500) = (1-80%) = 20%.
Reduce each futures customer or Cleared Swaps Customer by the
shortfall percentage:
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
Allocated dollars after
Customer Claim in US$ shortfall (non- allocated
sovereign) shortfall
----------------------------------------------------------------------------------------------------------------
A.................................................. $150 $30.00 120.00
B.................................................. 100 20.00 80.00
C.................................................. 50 10.00 40.00
D.................................................. 200 40.00 160.00
------------------------------------------------------------
Total.......................................... 500.00 100.00 400.00
----------------------------------------------------------------------------------------------------------------
Reduction in Claims for Shortfall Due to Sovereign Action
There is no shortfall due to sovereign action. Accordingly, the
claims will not be further reduced.
Claims After Reductions
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
dollars after Allocation of
Customer allocated non- shortfall due to Claim after all
sovereign sovereign action reductions
shortfall
----------------------------------------------------------------------------------------------------------------
A................................................... $120.00 .................. $120
B................................................... 80.00 .................. 80
C................................................... 40.00 .................. 40
D................................................... 160.00 0 160
-----------------------------------------------------------
Total........................................... 400.00 0 400
----------------------------------------------------------------------------------------------------------------
Example 4. Shortfall in funds held outside the U.S., or in a
currency other than U.S. dollars, due to sovereign action.
------------------------------------------------------------------------
Location(s) where
Customer Claim customer has consented
to have funds held
------------------------------------------------------------------------
A.............................. $50 U.S.
B.............................. [euro]50 U.K.
C.............................. [euro]50 Germany.
D.............................. $100 U.S.
D.............................. [euro]100 U.K. or Germany.
----------------------------------------
Location Actual asset balance
------------------------------------------------------------------------
U.S............................................ $150
U.K............................................ 100
Germany........................................ 100
------------------------------------------------------------------------
Notice: Conversion Rates: [euro]1 = $1; [yen]1 = $0.01,
[pound]1= $1.5.
Reduction in Claims for General Shortfall
Convert each futures customer or Cleared Swaps Customer claim in
each currency to U.S. Dollars:
[[Page 33871]]
----------------------------------------------------------------------------------------------------------------
Customer Claim Conversion rate Claim in US$
----------------------------------------------------------------------------------------------------------------
A.................................................. $50 1.0 $50
B.................................................. [euro]50 1.0 50
C.................................................. [euro]50 1.0 50
D.................................................. $100 1.0 100
D.................................................. [euro]100 1.0 100
------------------------------------------------------------
Total.......................................... .................. .................. 350.00
----------------------------------------------------------------------------------------------------------------
Determine assets available for distribution to futures customers
or Cleared Swaps Customers, converting to U.S. dollars:
----------------------------------------------------------------------------------------------------------------
Shortfall Actual
due to shortfall Amount
Location Assets Conversion Assets in sovereign due to actually
rate U.S. dollars action sovereign available
percentage action
----------------------------------------------------------------------------------------------------------------
U.S............................ $150 1.0 $150 ........... ............ $150
U.K............................ [euro]100 1.0 100 ........... ............ 100
Germany........................ [euro]100 1.0 100 50% 50 50
--------------------------------------------------------------------------------
Total...................... ........... ........... 350.00 ........... 50.00 300.00
----------------------------------------------------------------------------------------------------------------
Determine the percentage of shortfall that is not attributable
to sovereign action:
Shortfall Percentage = (1-350/350) = (1-100%) = 0%.
Reduce each futures customer or Cleared Swaps Customer claim by
the shortfall percentage:
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
Allocated shortfall dollars after
Customer Claim in US$ (non-sovereign) allocated
shortfall
----------------------------------------------------------------------------------------------------------------
A................................................. $50 0 $50.00
B................................................. 50 0 50.00
C................................................. 50 0 50.00
D................................................. 200 0 200.00
-------------------------------------------------------------
Total......................................... 350.00 0.00 350.00
----------------------------------------------------------------------------------------------------------------
Reduction in Claims for Shortfall Due to Sovereign Action
Due to sovereign action, only \1/2\ of the funds in Germany are
available.
----------------------------------------------------------------------------------------------------------------
Presumed location of funds
Customer --------------------------------------------------------------
U.S. U.K. Germany
----------------------------------------------------------------------------------------------------------------
A................................................ $50 ................... ...................
B................................................ ................... $50 ...................
C................................................ ................... ................... $50
D................................................ 100 ................... 100
--------------------------------------------------------------
Total........................................ 150.00 50.00 150.00
----------------------------------------------------------------------------------------------------------------
Calculation of the allocation of the shortfall due to sovereign
action--Germany ($50 shortfall to be allocated):
----------------------------------------------------------------------------------------------------------------
Allocation share
Customer Allocation share of actual Actual shortfall
shortfall allocated
----------------------------------------------------------------------------------------------------------------
C................................................... $50/$150 33.3% of $50 $16.67
D................................................... $100/$150 66.7% of $50 33.33
-----------------------------------------------------------
Total........................................... .................. .................. 50.00
----------------------------------------------------------------------------------------------------------------
[[Page 33872]]
Claims After Reductions:
----------------------------------------------------------------------------------------------------------------
Claim in U.S. Allocation of
dollars after shortfall due to Claim after all
Customer allocated non- sovereign action reductions
sovereign shortfall from Germany
----------------------------------------------------------------------------------------------------------------
A................................................. $50 .................. $50
B................................................. 50 .................. 50
C................................................. 50 $16.67 33.33
D................................................. 200 33.33 166.67
-------------------------------------------------------------
Total......................................... 350.00 50.00 300.00
----------------------------------------------------------------------------------------------------------------
Example 5. Shortfall in funds held outside the U.S., or in a
currency other than U.S. dollars, due to sovereign action and a
shortfall in funds held in the U.S.
------------------------------------------------------------------------
Location(s) customer
Customer Claim has consented to having
funds held
------------------------------------------------------------------------
A.............................. $100 U.S.
B.............................. [euro]50 U.K.
C.............................. [euro]150 Germany.
D.............................. $100 U.S.
D.............................. [pound]300 U.K.
D.............................. [euro]150 U.K. or Germany.
------------------------------------------------------------------------
Location Actual asset balance
------------------------------------------------------------------------
U.S............................................ $100
U.K............................................ [pound]300
U.K............................................ [euro]200
Germany........................................ [euro]150
------------------------------------------------------------------------
Conversion Rates: [euro]1 = $1; [pound]1 = $1.5.
Reduction in Claims for General Shortfall
Convert each futures customer or Cleared Swaps Customer claim in
each currency to U.S. Dollars:
----------------------------------------------------------------------------------------------------------------
Customer Claim Conversion rate Claim in U.S.$
----------------------------------------------------------------------------------------------------------------
A.................................................. $100 1.0 $100
B.................................................. [euro]50 1.0 50
C.................................................. [euro]150 1.0 150
D.................................................. $100 1.0 100
D.................................................. [pound]300 1.5 450
D.................................................. [euro]150 1.0 150
------------------------------------------------------------
Total.......................................... .................. .................. 1,000.00
----------------------------------------------------------------------------------------------------------------
Determine assets available for distribution to futures customers
or Cleared Swaps.
Customers, converting to U.S. dollars:
----------------------------------------------------------------------------------------------------------------
Shortfall Actual
due to shortfall Amount
Location Assets Conversion Assets in sovereign due to actually
rate U.S. dollars action sovereign available
percentage action
----------------------------------------------------------------------------------------------------------------
U.S............................ $100 1.0 $100 ........... ............ $100
U.K............................ [pound]300 1.5 450 ........... ............ 450
U.K............................ [euro]200 1.0 200 ........... ............ 200
Germany........................ [euro]150 1.0 150 100% $150 0
--------------------------------------------------------------------------------
Total...................... ........... ........... 900.00 ........... 150.00 750.00
----------------------------------------------------------------------------------------------------------------
Determine the percentage of shortfall that is not attributable
to sovereign action:
Shortfall Percentage = (1 - 900/1000) = (1 - 90%) = 10%. Reduce
each futures customer or Cleared Swaps Customer claim by the
shortfall percentage:
[[Page 33873]]
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
Allocated dollars after
Customer Claim in U.S.$ shortfall (non- allocated
sovereign) shortfall
----------------------------------------------------------------------------------------------------------------
A.................................................. $100 $10.00 $90.00
B.................................................. 50 5.00 45.00
C.................................................. 150 15.00 135.00
D.................................................. 700 70.00 63.00
------------------------------------------------------------
Total.......................................... 1,000.00 100.00 900.00
----------------------------------------------------------------------------------------------------------------
Reduction in Claims for Shortfall Due to Sovereign Action
Due to sovereign action, none of the money in Germany is
available.
----------------------------------------------------------------------------------------------------------------
Presumed location of funds
Customer --------------------------------------------------------------
U.S. U.K. Germany
----------------------------------------------------------------------------------------------------------------
A................................................ $100 ................... ...................
B................................................ ................... $50 ...................
C................................................ ................... ................... $150
D................................................ 100 450 150
--------------------------------------------------------------
Total........................................ 200.00 500.00 300.00
----------------------------------------------------------------------------------------------------------------
Calculation of the allocation of the shortfall due to sovereign
action Germany ($150 shortfall to be allocated):
----------------------------------------------------------------------------------------------------------------
Allocation share of Actual shortfall
Customer Allocation share actual shortfall allocated
----------------------------------------------------------------------------------------------------------------
C..................................... $150/$300................ 50% of $150............. $75
D..................................... 150/300.................. 50% of $150............. 75
-------------------------------------------------------------------------
Total............................. ......................... ........................ 150.00
----------------------------------------------------------------------------------------------------------------
Claims After Reductions
----------------------------------------------------------------------------------------------------------------
Claim in U.S. Allocation of
dollars after shortfall due to Claim after all
Customer allocated non- sovereign action reductions
sovereign shortfall from Germany
----------------------------------------------------------------------------------------------------------------
A................................................ $90 ................... $90
B................................................ 45 ................... 45
C................................................ 135 $75 60
D................................................ 630 75 555
--------------------------------------------------------------
Total........................................ 900.00 150.00 750.00
----------------------------------------------------------------------------------------------------------------
Example 6. Shortfall in funds held outside the U.S., or in a
currency other than U.S. dollars, due to sovereign action, shortfall
in funds held outside the U.S., or in a currency other than U.S.
dollars, not due to sovereign action, and a shortfall in funds held
in the U.S.
------------------------------------------------------------------------
Location(s) customer
Customer Claim has consented to having
funds held
------------------------------------------------------------------------
A.............................. $50 U.S.
B.............................. [euro]50 U.K.
C.............................. $20 U.S.
C.............................. [euro]50 Germany.
D.............................. $100 U.S.
D.............................. [pound]300 U.K.
D.............................. [euro]100 U.K., Germany, or
Japan.
E.............................. $80 U.S.
E.............................. [yen]10,000 Japan.
------------------------------------------------------------------------
[[Page 33874]]
Location Actual asset balance
------------------------------------------------------------------------
U.S............................................ $200
U.K............................................ [pound]200
U.K............................................ [euro]100
Germany........................................ [euro]50
Japan.......................................... [yen]10,000
------------------------------------------------------------------------
Conversion Rates: [pound]1 = $1; [yen]1=$0.01, [pound]1=$1.5.
Reduction in Claims for General Shortfall
Convert each futures customer or Cleared Swaps Customer claim in
each currency to U.S. Dollars:
----------------------------------------------------------------------------------------------------------------
Customer Claim Conversion rate Claim in U.S.$
----------------------------------------------------------------------------------------------------------------
A................................................. $50 1.0 $50
B................................................. [euro]50 1.0 50
C................................................. $20 1.0 20
C................................................. [euro]50 1.0 50
D................................................. $100 1.0 100
D................................................. [euro]300 1.5 450
D................................................. [pound]100 1.0 100
E................................................. $80 1.0 80
E................................................. [yen]10,000 0.01 100
-------------------------------------------------------------
Total......................................... .................. ................... 1,000.00
----------------------------------------------------------------------------------------------------------------
Determine assets available for distribution to futures customers
or Cleared Swaps Customers, converting to U.S. dollars:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Shortfall due Actual
Conversion Assets in U.S. to sovereign shortfall due Amount
Location Assets rate dollars action to sovereign actually
percentage action available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S..................................................... $200 1.0 $200 .............. .............. $200
U.K..................................................... [pound]200 1.5 300 .............. .............. 300
U.K..................................................... [euro]100 1.0 100 .............. .............. 100
Germany................................................. [euro]50 1.0 50 100% $50 0
Japan................................................... [yen]10,000 0.01 100 50% 50 50
-----------------------------------------------------------------------------------------------
Total............................................... .............. .............. 750 .............. 100.00 650.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
Determine the percentage of shortfall that is not attributable
to sovereign action:
Shortfall Percentage = (1-750/1000) = (1-75%) = 25%.
Reduce each futures customer or Cleared Swaps Customer claim by
the shortfall percentage:
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
Allocated dollars after
Customer Claim in U.S.$ shortfall (non- allocated
sovereign) shortfall
----------------------------------------------------------------------------------------------------------------
A.................................................. $50 $12.50 $37.50
B.................................................. 50 12.50 37.50
C.................................................. 70 17.50 52.50
D.................................................. 650 162.50 487.50
E.................................................. 180 45.00 135.00
------------------------------------------------------------
Total.......................................... 1,000.00 250.00 750.00
----------------------------------------------------------------------------------------------------------------
Reduction in Claims for Shortfall Due to Sovereign Action
Due to sovereign action, none of the money in Germany and only
\1/2\ of the funds in Japan are available.
[[Page 33875]]
----------------------------------------------------------------------------------------------------------------
Presumed location of funds
Customer ---------------------------------------------------------------
U.S. U.K. Germany Japan
----------------------------------------------------------------------------------------------------------------
A............................................... $50 .............. .............. ..............
B............................................... .............. $50 .............. ..............
C............................................... 20 .............. $50 ..............
D............................................... 100 450 50 $50
E............................................... 80 .............. .............. 100
---------------------------------------------------------------
Total....................................... 250.00 500.00 100.00 150.00
----------------------------------------------------------------------------------------------------------------
Calculation of the allocation of the shortfall due to sovereign
action--Germany ($50 shortfall to be allocated):
----------------------------------------------------------------------------------------------------------------
Allocation share
Customer allocation Allocation share of actual Actual shortfall
shortfall allocated
----------------------------------------------------------------------------------------------------------------
C................................................... $50/$100 50% of $50 $25
D................................................... 50/100 50% of 50 25
-----------------------------------------------------------
Total........................................... .................. .................. 50
----------------------------------------------------------------------------------------------------------------
Japan ($50 shortfall to be allocated):
----------------------------------------------------------------------------------------------------------------
Actual
Customer Allocation share Allocation share of actual shortfall
shortfall allocated
----------------------------------------------------------------------------------------------------------------
D....................................... $50/$150.................. 33.3% of $50.............. $16.67
E....................................... 100/150................... 66.6% of 50............... 33.33
-----------------------------------------------------------------------
Total............................... .......................... .......................... 50.00
----------------------------------------------------------------------------------------------------------------
Claims After Reductions
----------------------------------------------------------------------------------------------------------------
Claim in US Allocation of Allocation of
dollars after shortfall due shortfall due
Customer allocated non- to sovereign to sovereign Claim after
sovereign action from action from all reductions
shortfall Germany Japan
----------------------------------------------------------------------------------------------------------------
A............................................... $37.50 .............. .............. 37.50
B............................................... 37.50 .............. .............. 37.50
C............................................... 52.50 $25 .............. 27.50
D............................................... 487.50 25 16.67 445.83
E............................................... 135.00 .............. 33.33 101.67
---------------------------------------------------------------
Total....................................... 750.00 50.00 50.00 650.00
----------------------------------------------------------------------------------------------------------------
Example 7. Shortfall in funds held outside the U.S., or in a
currency other than U.S. dollars, due to sovereign action, where the
FCM kept more funds than permitted in such location or currency.
------------------------------------------------------------------------
Location(s) customer
Customer Claim has consented to having
funds held
------------------------------------------------------------------------
A.............................. $50 U.S.
B.............................. 50 U.S.
B.............................. [euro]50 U.K.
C.............................. [euro]50 Germany.
D.............................. 100 U.S.
D.............................. [euro]100 U.K. or Germany.
E.............................. 50 U.S.
E.............................. [euro]50 U.K.
------------------------------------------------------------------------
Location Actual asset balance
------------------------------------------------------------------------
U.S............................................ $250
U.K............................................ [euro]50
Germany........................................ [euro]200
------------------------------------------------------------------------
[[Page 33876]]
Conversion Rates: 1 = $1.
Reduction in Claims for General Shortfall
Convert each futures customer or Cleared Swaps Customer claim in
each currency to U.S. dollars:
------------------------------------------------------------------------
Conversion Claim in
Customer Claim rate U.S.$
------------------------------------------------------------------------
A............................... $50 1.0 50
B............................... 50 1.0 50
B............................... [euro]50 1.0 50
C............................... [euro]50 1.0 50
D............................... [euro]100 1.0 100
D............................... [euro]100 1.0 100
E............................... 50 1.0 50
E............................... [euro]50 1.0 50
---------------------------------------
Total....................... ........... ........... 500.00
------------------------------------------------------------------------
Determine assets available for distribution to futures customers
or Cleared Swaps Customers, converting to U.S. dollars:
----------------------------------------------------------------------------------------------------------------
Shortfall Actual
due to shortfall Amount
Location Assets Conversion Assets in sovereign due to actually
rate U.S. dollars action sovereign available
percentage action
----------------------------------------------------------------------------------------------------------------
U.S............................. $250 1.0 $250 ........... ........... $250
U.K............................. [euro]50 1.0 50 ........... ........... 50
Germany......................... [euro]200 1.0 200 100% 200 0
-------------------------------------------------------------------------------
Total....................... ........... ........... 500.00 ........... 200 300.00
----------------------------------------------------------------------------------------------------------------
Determine the percentage of shortfall that is not attributable
to sovereign action.
Shortfall Percentage = (1 - 500/500) = (1 - 100%) = 0%.
Reduce each futures customer or Cleared Swaps Customer claim by
the shortfall percentage:
----------------------------------------------------------------------------------------------------------------
Claim in U.S.
Allocated dollars after
Customer Claim in U.S.$ shortfall (non- allocated
sovereign) shortfall
----------------------------------------------------------------------------------------------------------------
A...................................................... $50 $0 $50.00
B...................................................... 100 0 100.00
C...................................................... 50 0 50.00
D...................................................... 200 0 200.00
E...................................................... 100 0 100.00
--------------------------------------------------------
Total.............................................. 500.00 0.00 500.00
----------------------------------------------------------------------------------------------------------------
Reduction in Claims for Shortfall Due to Sovereign Action
Due to sovereign action, none of the money in Germany is
available.
------------------------------------------------------------------------
Presumed location of funds
Customer -----------------------------------------
U.S. U.K. Germany
------------------------------------------------------------------------
A............................. $50 ............ ............
B............................. 50 50 ............
C............................. ............ ............ 50
D............................. 100 ............ 100
E............................. 50 50 ............
-----------------------------------------
Total..................... 250.00 100.00 150.00
------------------------------------------------------------------------
[[Page 33877]]
Calculation of the allocation of the shortfall due to sovereign
action--Germany ($200 shortfall to be allocated):
----------------------------------------------------------------------------------------------------------------
Allocation share
Customer Allocation share of actual Actual shortfall
shortfall allocated
----------------------------------------------------------------------------------------------------------------
C........................................................ $50/$150 33.3% of $200 $66.67
D........................................................ $100/$150 66.7% of $200 133.33
------------------------------------------------------
Total................................................ ................ ................ 200.000
----------------------------------------------------------------------------------------------------------------
This would result in the claims of customers C and D being
reduced below zero.
Accordingly, the claims of customer C and D will only be reduced
to zero, or $50 for C and $100 for D. This results in a Total Excess
Shortfall of $50.
----------------------------------------------------------------------------------------------------------------
Allocation of Allocation of
Actual shortfall shortfall for shortfall for Total excess
customer C customer D shortfall
----------------------------------------------------------------------------------------------------------------
$200................................................... $50 $100 $50
----------------------------------------------------------------------------------------------------------------
This shortfall will be divided among the remaining futures
customers or Cleared Swaps Customers who have authorized funds to be
held outside the U.S. or in a currency other than U.S. dollars.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation share
Total claims of (column B-C/
customers Portion of claim column B Total-- Allocation share Actual total
Customer permitting funds required to be in all customer of actual total excess shortfall
to be held outside the U.S. claims in U.S.) excess shortfall allocated
the U.S.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B...................................................... $100 $50 $50/$200 25% of $50 $12.50
C...................................................... 50 0 (\1\) ................. 0
D...................................................... 200 100 100/200 50% of $50 25
E...................................................... 100 50 50/100 25% of $50 12.50
------------------------------------------------------------------------------------------------
Total.............................................. 450.00 ................. ................. ................. 50.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Claim already reduced to $0.
Claims After Reductions
--------------------------------------------------------------------------------------------------------------------------------------------------------
Claim in U.S.
dollars after Allocation of Allocation of
Customer allocated non- shortfall due to total excess Claim after all
sovereign sovereign action shortfall reductions
shortfall Germany
--------------------------------------------------------------------------------------------------------------------------------------
A..................................................... $50 .................. .................. $50.00
B..................................................... 100 .................. 12.50 87.50
C..................................................... 50 50 .................. 0
D..................................................... 200 100 25 75.00
E..................................................... 100 .................. 12.50 87.50
-------------------------------------------------------------------------------------------------
Total............................................. 500.00 150.00 50.00 300.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
Issued in Washington, DC, on April 27, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions--Commission Voting Summary and Statements of Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Dunn, Chilton
and O'Malia voted in the affirmative; Commissioner Sommers voted in
the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the proposed rule on protection of cleared swaps
customer contracts and collateral and the associated conforming
amendments. The proposal carries out the Dodd-Frank Act's mandate
that futures commission merchants (FCMs) and derivatives clearing
organizations (DCOs) segregate customer collateral supporting
cleared swaps. FCMs and DCOs must hold customer collateral in an
account that is separate from that belonging to the FCMs or DCOs.
Under the Dodd-Frank Act, an FCM or DCO must not use the
collateral of one swaps customer to cover the obligations of another
swaps customer or itself. Under the proposed rule, in the event that
an FCM defaults simultaneously with one or more of its cleared swaps
customers, the DCO may access the collateral of the FCM's defaulting
cleared swaps customers to cure the default, but not the collateral
of the FCM's non-defaulting cleared swaps customers. The
[[Page 33878]]
proposal also asks a variety of questions regarding alternative
means of implementing protection of customer collateral.
This proposed rulemaking benefited from public input received
during the CFTC staff roundtable on segregation and in other
meetings and from the 32 comments received in response the
Commission's advanced notice of proposed rulemaking. I look forward
to further hearing from the public on this proposed rulemaking.
[FR Doc. 2011-10737 Filed 6-2-11; 11:15 am]
BILLING CODE 6351-01-P