[Federal Register Volume 81, Number 106 (Thursday, June 2, 2016)]
[Notices]
[Pages 35337-35345]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13055]


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COMMODITY FUTURES TRADING COMMISSION


Notice of Proposed Order and Request for Comment on a Proposal To 
Exempt, Pursuant to the Authority in Section 4(c) of the Commodity 
Exchange Act, the Federal Reserve Banks From Sections 4d and 22 of the 
Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed order and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing to permit Federal Reserve Banks to hold 
money, securities, and property deposited into a customer account by a 
systemically important derivatives clearing organization in accordance 
with the standards to which Federal Reserve Banks are held, as 
specified below. Thus, the Commission is proposing to exempt Federal 
Reserve Banks that provide customer accounts and other services to 
systemically important derivatives clearing organizations from Sections 
4d and 22 of the Commodity Exchange Act (``CEA'' or the ``Act'').

DATES: Comments must be received by July 5, 2016.

ADDRESSES: You may submit comments by any of the following methods:
     CFTC Web site: http://comments.cftc.gov. Follow the 
instructions for submitting comments through the Comments Online 
process on the Web site.
     Mail: Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail, above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one of these methods.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the established 
procedures in Sec.  145.9 of the Commission's regulations, 17 CFR 
145.9.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of this action will be retained in the public comment file 
and will be considered as required under the Administrative Procedure 
Act and other applicable laws, and may be accessible under the Freedom 
of Information Act.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, [email protected]; M. Laura Astrada, Associate Director, 
202-418-7622, [email protected]; or Parisa Abadi, Attorney-Advisor, 
202-418-6620, [email protected], in each case, at the Division of 
Clearing and Risk, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581; or Joe 
Opron, Special Counsel, 312-596-0653, [email protected], Division of 
Clearing and Risk, Commodity Futures Trading Commission, 525 West 
Monroe Street, Suite 1100, Chicago, IL 60661.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
II. Background
    A. Customer Protection
    B. Designation of Financial Market Utilities Under Title VIII of 
the Dodd-Frank Act
    C. Access to Federal Reserve Bank Accounts and Services
III. Standards of Depository Liability
    A. Depository Liability Under Section 4d of the CEA
    B. Federal Reserve Bank Liability Under Federal Reserve Bank 
Governing Documents
IV. Features Specific to the Federal Reserve Banks
V. Section 4(c) of the CEA
VI. Proposed Exemption From Sections 4d and 22 of the CEA
VII. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost and Benefit Considerations
VIII. Request for Comment
IX. Proposed Order of Exemption

I. Introduction

    In 2013, in response to significant segregated account shortfalls 
experienced by futures customers, the Commission adopted rules that 
aimed to improve the protection of customer funds.\1\ Recognizing that 
such protection is critical to the sound functioning of the futures and 
swaps markets, the Commission reiterated that money, securities, and 
other property deposited by customers must be carefully safeguarded and 
segregated at all times.
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    \1\ Enhancing Protections Afforded Customers and Customer Funds 
Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506 (Nov. 14, 2013).
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    That same year, the Commission adopted enhanced risk management 
standards \2\ and additional requirements for compliance with the 
derivatives clearing organization (``DCO'') core principles set forth 
in the CEA \3\ for DCOs that are designated as systemically important 
(``SIDCOs'') by the Financial Stability Oversight Council.\4\ The 
Commission adopted these requirements in part because of the critical 
role SIDCOs play in fostering

[[Page 35338]]

financial stability \5\ and because the ``failure of a SIDCO to 
complete core clearing and settlement functions within a rapid period 
could create systemic liquidity and credit dislocations on a global 
scale.'' \6\ Accordingly, these additional requirements were designed 
to promote a SIDCO's financial strength, operational integrity, 
security, and reliability.\7\ By requiring a SIDCO's liquidity 
arrangements to be highly reliable in stressed market conditions, the 
Commission sought to bolster a SIDCO's ability to promptly meet its 
cash obligations to its members in order to help avoid the loss of 
market confidence and cascading defaults.\8\
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    \2\ Enhanced Risk Management Standards for Systemically 
Important Derivatives Clearing Organizations, 78 FR 49663 (Aug. 15, 
2013).
    \3\ See Section 5b(c)(2) of the CEA; see also Derivatives 
Clearing Organizations and International Standards, 78 FR 72476 
(Dec. 2, 2013).
    \4\ Under Commission Regulation 39.2, a SIDCO is defined as a 
financial market utility that is a registered DCO under Section 5b 
of the Act, which has been designated by the Financial Stability 
Oversight Council to be systemically important and for which the 
Commission acts as the Supervisory Agency pursuant to Section 803(8) 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act''). 17 CFR 39.2. ``Supervisory Agency'' is defined 
as the Federal agency that has primary jurisdiction over a 
designated financial market utility under Federal banking, 
securities, or commodity futures laws. Section 803(8)(A) of the 
Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010). The text 
of the Dodd-Frank Act is available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
    \5\ See, e.g., 78 FR at 49672.
    \6\ Id. at 49674.
    \7\ See id. at 49668-49669; see also 78 FR at 72509.
    \8\ See 78 FR at 72509.
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    Title VIII of the Dodd-Frank Act, entitled ``Payment, Clearing, and 
Settlement Supervision Act of 2010,'' \9\ also included provisions 
aimed at safeguarding the U.S. financial system. One example of this is 
Section 806(a), which expressly permits the Board of Governors of the 
Federal Reserve System (``Board'') to authorize a Federal Reserve Bank 
to establish and maintain a deposit account for a SIDCO and provide 
certain services to the SIDCO, subject to any applicable rules, orders, 
standards, or guidelines prescribed by the Board.\10\
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    \9\ Section 801 of the Dodd-Frank Act.
    \10\ See Section 806(a) of the Dodd-Frank Act.
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    The Commission believes that establishing SIDCO segregated customer 
accounts at a Federal Reserve Bank and enabling SIDCOs to access 
related services there would both augment a SIDCO's liquidity 
arrangements and enhance the protection of customer funds.\11\ The 
Commission recognizes, however, that Section 4d of the CEA was not 
developed with a particular focus on the Federal Reserve Banks.\12\ As 
a result, the unique role that the Federal Reserve Banks play in the 
financial system was not expressly taken into account when the 
Commission's standard of liability was developed for depositories. The 
Commission notes that Federal Reserve financial services provided by 
the Federal Reserve Banks are governed by the terms and conditions that 
are set forth in various federal rules, Federal Reserve Board policies, 
and Federal Reserve Bank operating circulars, which have been carefully 
developed over several decades. The Commission further recognizes that 
the Federal Reserve Banks could be exposed to liability under Sections 
4d and 22 \13\ of the CEA, which could have disparate impact on the 
treatment of deposits at the Federal Reserve Banks and ultimately harm 
U.S. taxpayers. Accordingly, to facilitate SIDCOs' use of Federal 
Reserve Banks as depositories for customer funds, the Commission is 
proposing, pursuant to its authority under Section 4(c) of the CEA, to 
exempt Federal Reserve Banks that provide customer accounts and other 
services to SIDCOs from Sections 4d and 22 of the CEA.\14\ The 
exemption would enable the Federal Reserve Banks to maintain SIDCO 
customer accounts in accordance with the standards set forth in the 
relevant Federal Reserve Bank governing documents, as specified below.
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    \11\ See discussion infra Part VI.
    \12\ Section 4d of the CEA permits customer funds to be 
deposited with a bank, trust company, or DCO. 7 U.S.C. 6d.
    \13\ As discussed in further detail below, Section 22 of the CEA 
would typically provide for private rights of action for damages 
against persons who violate Section 4d, or persons who willfully 
aid, abet, counsel, induce, or procure the commission of a violation 
of Section 4d. See discussion supra Part VI.
    \14\ 7 U.S.C. 6(c); 7 U.S.C. 25.
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II. Background

A. Customer Protection

    The protection of customers--and the safeguarding of money, 
securities, or other property deposited by customers--is a fundamental 
component of the regulatory and oversight framework of the futures and 
swaps markets. Section 4d of the CEA requires a futures commission 
merchant (``FCM'') to segregate from its own assets all money, 
securities, and other property deposited by futures or cleared swaps 
customers to margin, secure, or guarantee futures contracts and options 
on futures contracts traded on designated contract markets, and cleared 
swaps. Section 4d further requires an FCM to treat customer funds as 
belonging to the customer, and prohibits an FCM from using the funds 
deposited by a customer to margin or extend credit to any person other 
than the customer that deposited the funds. Similarly, Section 4d of 
the CEA prohibits a DCO and any depository that has received such funds 
from holding, disposing of, or using such funds as belonging to the 
depositing FCM or any person other than the customers of such FCM.
    The importance of this statutory mandate to protect customer 
funds--to treat them as belonging to customers and not use the funds 
inappropriately--was reinforced in light of the FCM insolvency 
proceedings involving MF Global, Inc. (``MF Global'') and Peregrine 
Financial Group, Inc. (``Peregrine''). In October 2011, MF Global, 
which was dually-registered as an FCM with the Commission and as a 
securities broker-dealer with the U.S. Securities and Exchange 
Commission, was placed into a liquidation proceeding under the 
Securities Investor Protection Act by the Securities Investor 
Protection Corporation. At the time, the trustee appointed to oversee 
the liquidation of MF Global reported a potential $900 million 
shortfall of funds necessary to repay the account balances due to 
customers trading futures on designated contract markets, and an 
approximately $700 million shortfall in funds immediately available to 
repay the account balances of customers trading on foreign futures 
markets. The shortfall in customer segregated accounts was attributed 
by the MF Global trustee to significant transfers of funds out of the 
customer accounts that were used by MF Global, Inc. for various 
purposes other than to meet obligations to or on behalf of 
customers.\15\
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    \15\ See Report of the Trustee's Investigation and 
Recommendations, In. re MF Global, Inc., No. 11-2790 (MG) SIPA 
(Bankr. S.D.N.Y. Jun. 4, 2012). Customer claims were eventually paid 
in full after customer funds were recovered through bankruptcy 
proceedings and the Commission's enforcement action.
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    Shortly thereafter, in 2012, the Commission filed a civil 
injunctive complaint in federal district court against Peregrine and 
its Chief Executive Officer and sole owner, Russell R. Wasendorf, Sr. 
(``Wasendorf''), alleging that Peregrine and Wasendorf misappropriated 
customer funds, violated customer fund segregation laws, and made false 
statements regarding the amount of funds in customer segregated 
accounts in financial statements filed with the Commission. According 
to the complaint, Peregrine falsely represented that it held in excess 
of $220 million of customer funds, when it actually held only 
approximately $5.1 million.\16\ Spurred in part by these shocking 
failures, the Commission promulgated several rules aimed at 
strengthening the protection of customer funds and the U.S. financial 
markets.\17\
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    \16\ See Complaint, U.S. Commodity Futures Trading Commission v. 
Peregrine Financial Group, Inc., and Russell R. Wasendorf, Sr., No. 
12-cv-5383 (N.D. Ill. July 10, 2012).
    \17\ See discussion supra Part I; see also, e.g., Investment of 
Customer Funds and Funds Held in an Account for Foreign Futures and 
Foreign Options Transactions, 76 FR 78776 (Dec. 19, 2011) (revising 
the types of investments that an FCM or DCO could make with customer 
funds under Regulation 1.25 to minimize the exposure of such funds 
to liquidity, credit, and market risks).
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    In an effort to further strengthen customer protection, the 
Commission has also examined the current

[[Page 35339]]

regulatory framework through a series of roundtables and other public 
meetings. The Commission held a public roundtable to solicit input on 
customer protection issues from a broad cross-section of the 
derivatives industry, including market participants, FCMs, DCOs, self-
regulatory organizations, securities regulators, and academics.\18\ The 
Commission also hosted a public meeting of the Technology Advisory 
Committee to discuss potential technological solutions directed at 
enhancing the protection of customer funds.\19\
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    \18\ Further information on the public roundtable, including 
video recordings and transcripts of the discussions, are available 
on the Commission's Web site. See http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff022912 (relating to Feb. 29, 2012); http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff030112 (relating to 
Mar. 1, 2012).
    \19\ Additional information, including documents submitted by 
meeting participants, is available on the Commission's Web site. See 
http://www.cftc.gov/PressRoom/Events/opaevent_tac072612.
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    Customer protection continues to be a bedrock guiding principle for 
the Commission, as the protection of customer funds is paramount to a 
trusted marketplace.

B. Designation of Financial Market Utilities Under Title VIII of the 
Dodd-Frank Act

    Title VIII of the Dodd-Frank Act was enacted to mitigate risk in 
the financial system and promote financial stability.\20\ Accordingly, 
Section 804 of the Dodd-Frank Act requires the Financial Stability 
Oversight Council (``Council'') \21\ to designate those financial 
market utilities (``FMUs'') that the Council determines are, or are 
likely to become, systemically important.\22\ An FMU includes any 
person that manages or operates a multilateral system for the purpose 
of transferring, clearing, or settling payments, securities, or other 
financial transactions among financial institutions or between 
financial institutions and the person.\23\ As noted by the Council, 
FMUs are vital to the nation's financial infrastructure, and ``their 
smooth operation is integral to the soundness of the financial system 
and the overall economy.'' \24\
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    \20\ See Section 802(b) of the Dodd-Frank Act.
    \21\ The Council was established by Section 111 of the Dodd-
Frank Act. In general, the Council is tasked with identifying risks 
to the financial stability of the United States that could arise 
from the material financial distress or failure, or ongoing 
activities, of large, interconnected bank holding companies or 
nonbank financial companies, or that could arise outside the 
financial services marketplace, promoting market discipline, by 
eliminating expectations on the part of shareholders, creditors, and 
counterparties of such companies that the Government will shield 
them from losses in the event of failure, and responding to emerging 
threats to the stability of the United States financial system. 
Section 112(a)(1) of the Dodd-Frank Act.
    \22\ See Section 804(a) of the Dodd-Frank Act. The term 
``systemically important'' means a situation where the failure of or 
a disruption to the functioning of a financial market utility could 
create, or increase, the risk of significant liquidity or credit 
problems spreading among financial institutions or markets and 
thereby threaten the stability of the financial system of the United 
States. Section 803(9) of the Dodd-Frank Act; see also Authority to 
Designate Financial Market Utilities as Systemically Important, 76 
FR 44763, 44774 (July 27, 2011).
    \23\ Section 803(6)(A) of the Dodd-Frank Act.
    \24\ 76 FR at 44763.
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    In determining whether an FMU is systemically important, the 
Council follows a detailed two-stage designation process, using 
statutory considerations \25\ and other metrics to assess, among other 
things, ``whether possible disruptions [to the functioning of an FMU] 
are potentially severe, not necessarily in the sense that they 
themselves might trigger damage to the U.S. economy, but because such 
disruptions might reduce the ability of financial institutions or 
markets to perform their normal intermediation functions.'' \26\ Thus, 
if a systemically important FMU fails to perform, this failure could 
pose significant risk to its participants and to the U.S. financial 
system more broadly. For example, if a systemically important FMU fails 
to complete timely settlement, there could be significant credit and/or 
liquidity problems for its participants and participants' customers. On 
July 18, 2012, the Council designated eight FMUs as systemically 
important under Title VIII.\27\ Two of these designated FMUs, Chicago 
Mercantile Exchange, Inc. and ICE Clear Credit LLC, are SIDCOs.
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    \25\ Under Section 804(a)(2) of the Dodd-Frank Act, in 
determining whether an FMU is or is likely to become systemically 
important, the Council must take into consideration the following: 
(A) The aggregate monetary value of transactions processed by the 
FMU; (B) the aggregate exposure of the FMU to its counterparties; 
(C) the relationship, interdependencies, or other interactions of 
the FMU with other FMUs or payment, clearing, or settlement 
activities; (D) the effect that the failure of or a disruption to 
the FMU would have on critical markets, financial institutions, or 
the broader financial system; and (E) any other factors the Council 
deems appropriate.
    \26\ 76 FR at 44766.
    \27\ See Press Release, Financial Stability Oversight Council, 
Financial Stability Oversight Council Makes First Designations in 
Effort to Protect Against Future Financial Crises (July 18, 2012), 
available at http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
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C. Access to Federal Reserve Bank Accounts and Services

    As noted above, Section 806(a) of the Dodd-Frank Act permits the 
Board to authorize a Federal Reserve Bank to establish and maintain an 
account for a SIDCO and provide to the SIDCO the services listed in 
Section 11A(b) of the Federal Reserve Act, subject to any applicable 
rules, orders, standards, or guidelines prescribed by the Board.\28\ In 
adopting regulations pursuant to Section 806(a) of the Dodd-Frank Act, 
the Board noted that the ``terms and conditions for access to Federal 
Reserve Bank accounts and services are intended to facilitate the use 
of [Federal] Reserve Bank accounts and services by a designated FMU in 
order to reduce settlement risk and strengthen settlement processes, 
while limiting the risk presented by the designated FMU to the 
[Federal] Reserve Banks.'' \29\ Accordingly, the Board ``expects that 
[Federal] Reserve Banks would provide services that are consistent with 
a designated FMU's need for safe and sound settlement processes under 
account and service agreements generally consistent with the provisions 
of existing [Federal] Reserve Bank operating circulars for such 
services.'' \30\ Highlighting the importance of Federal Reserve Bank 
operating circulars in this regard, the Board further requires that 
designated FMUs be in compliance with existing operating circulars.\31\
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    \28\ The services listed in Section 11A(b) of the Federal 
Reserve Act include wire transfers, settlement, and securities 
safekeeping, as well as services regarding currency and coin, check 
clearing and collection, and automated clearing house transactions. 
See 12 U.S.C. 248a(b). Section 806(a) of the Dodd-Frank Act also 
permits the Board to authorize a Federal Reserve Bank to establish 
deposit accounts under the first undesignated paragraph of Section 
13 of the Federal Reserve Act, 12 U.S.C. 342.
    \29\ Financial Market Utilities (Regulation HH), 78 FR 14024, 
14025 (Mar. 4, 2013).
    \30\ Id.
    \31\ See 12 CFR 234.5(b)(2) (setting forth rules to govern 
Federal Reserve Bank accounts held by designated FMUs).
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III. Standards of Depository Liability

A. Depository Liability Under Section 4d of the CEA

    Under Section 4d of the CEA, a depository, which may be a bank, 
trust company, or a DCO, will be held liable for the improper transfers 
of customer funds by an FCM or DCO if it knew or should have known that 
the transfer was improper.\32\ While a depository has no affirmative 
obligation to police or monitor an FCM or DCO account holder's 
compliance with the CEA or Commission regulations, a depository cannot 
ignore signs of wrongdoing.\33\
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    \32\ See CFTC Interpretative Letter No. 79-1, [1977-1980 
Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 20,835 (May 29, 1979). 
Section 4d of the CEA covers customer funds only; it does not relate 
to proprietary funds of clearing members.
    \33\ See 78 FR at 68539.
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    To ensure that a depository that holds customer funds has been 
informed that

[[Page 35340]]

the deposited funds are those of customers being held in accordance 
with Section 4d of the CEA, the Commission requires an FCM or DCO to 
obtain from each depository with which it deposits customer funds a 
written acknowledgment in this regard.\34\ Commission regulations 
require FCMs and DCOs to use a template acknowledgment letter in order 
to promote a uniform understanding among FCMs, DCOs, and depositories 
as to their obligations under the CEA and Commission regulations with 
respect to the proper treatment of customer funds. The template 
acknowledgment letter contains a provision that reflects the 
Commission's expectation that a depository will engage in its customary 
practices and will be held liable for a violation of Section 4d if it 
knew or should have known of the violation.\35\
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    \34\ See 17 CFR 1.20, Appendices A and B.
    \35\ See 78 FR at 68535; see also 17 CFR 1.20(g)(4)(ii).
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    It is important to note that as the aforementioned standard of 
liability was developed, the unique nature of the Federal Reserve Banks 
was not taken into account. Indeed, until recently, there was no 
statutory authority permitting a SIDCO to hold customer funds at a 
Federal Reserve Bank. However, and as discussed below, the standard of 
liability for Federal Reserve Banks acting as depositories has been 
carefully developed by the Board and not the Commission.

B. Federal Reserve Bank Liability Under Federal Reserve Bank Governing 
Documents

    The Federal Reserve System, which serves as the nation's central 
bank, was created by an act of Congress in 1913. The Federal Reserve 
System consists of a seven member Board, and twelve Federal Reserve 
Banks. The Federal Reserve Banks operate under the general supervision 
of the Board, although each Bank has a Board of Directors that oversees 
its operations. Federal Reserve Banks generate their own income, which 
is generally from interest earned on U.S. government securities that 
are acquired in the course of Federal Reserve monetary policy actions 
and from the provision of priced services to depository institutions. 
Federal Reserve Banks do not, however, operate for a profit. Indeed, 
each year they return to the U.S. Department of Treasury all earnings 
in excess of Federal Reserve Bank operating and other expenses. Federal 
Reserve Banks are, in essence, the operating arms of the United States' 
central banking system. In addition to their many responsibilities, 
Federal Reserve Banks operate as a bank for depository institutions and 
the U.S. government.\36\
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    \36\ For example, Federal Reserve Banks provide checking 
accounts for the U.S. Department of Treasury, issue and redeem U.S. 
government securities, and act in other ways as a fiscal agent for 
the U.S. government. See Federal Reserve Board, The Structure of the 
Federal Reserve System (Apr. 17, 2009), http://www.federalreserve.gov/pubs/frseries/frseri3.htm.
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    Some of the services provided by Federal Reserve Banks include the 
provision of funds and book-entry securities accounts, as well as 
certain financial services, such as wire transfers, book-entry 
securities transfers, and multilateral settlement services. These 
accounts and services are governed by account agreements, operating 
circulars issued by Federal Reserve Banks for each service, the Federal 
Reserve Act, and Federal Reserve regulations and policies, and, with 
respect to book-entry securities services, the regulations of the 
domestic issuer of the securities or the issuer's regulator (``Federal 
Reserve Bank Governing Documents'').\37\ Additionally, one or more 
Federal Reserve Banks have established proprietary accounts for SIDCOs 
\38\ pursuant to Section 806 of the Dodd-Frank Act. These proprietary 
accounts are also governed by the Federal Reserve Bank Governing 
Documents.
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    \37\ See, e.g., Federal Reserve Bank Operating Circular No. 6 
(governing funds transfers through the Fedwire Funds Service); 
Federal Reserve Bank Operating Circular No. 7 (governing the 
maintenance of and transfer services for book-entry securities 
accounts); 12 CFR part 210, subpart B (governing funds transfers 
through the Fedwire Funds Service); 31 CFR part 357, subpart B 
(setting forth the Department of the Treasury's regulations 
governing book-entry treasury bonds, notes, and bills).
    \38\ A SIDCO's proprietary account holds the proprietary funds 
of its clearing members.
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    The Federal Reserve Banks' standard of liability for the financial 
services it offers to depository institutions has been developed over 
the 100-plus years of Federal Reserve Bank operations, in many cases 
hand-in-hand with the development of federal and state statutory and 
regulatory provisions, as well as common law governing securities 
transfers, funds transfers, and other payment mechanisms. The operating 
circulars of the Federal Reserve Banks began having uniform terms and 
conditions across Federal Reserve Bank districts as of January 2, 1998. 
The 1998 version of the uniform Operating Circular 1 (Account 
Relationships) sets out the Federal Reserve Banks' standard and scope 
of liability that limits a Federal Reserve Bank's liability to only 
damages suffered by the account holder that are caused by the Federal 
Reserve Bank's failure to exercise ordinary care, and does not include 
lost profits, claims by third parties, or consequential or incidental 
damages.\39\
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    \39\ See Federal Reserve Board, Financial Services, https://web.archive.org/web/19990125095428/http:/www.frbservices.org/ (last 
visited Apr. 28, 2016). Prior to 1998, each Federal Reserve Bank had 
its own system with different numbered operating circulars; as a 
result, the circular language was not necessarily uniform.
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    The Commission understands that, in accordance with the Federal 
Reserve Bank Governing Documents, the Federal Reserve Banks are 
authorized to act on the instructions received through the use of 
procedures agreed upon with the account holders, without any liability 
or obligation to inquire as to the legitimacy or accuracy of the 
instruction or the transaction. By agreement with the respective 
account holders, the procedures for accepting an instruction are not 
used to detect an error in the transmission or content of the 
instruction, or compliance by the account holder with its legal 
obligations. In addition to limiting the areas of liability, the 
Commission understands that the Federal Reserve Bank Governing 
Documents limit a Federal Reserve Bank's liability in maintaining an 
account or acting on such an instruction to actual damages that are 
incurred solely by the account holder \40\ and that are proximately 
caused by the Federal Reserve Bank's failure to exercise ordinary care 
or act in good faith in accordance with the Federal Reserve Bank 
Governing Documents.
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    \40\ Under the Federal Reserve Bank Governing Documents, the 
Federal Reserve Banks are not liable to third parties.
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IV. Features Specific to the Federal Reserve Banks

    As noted above, Federal Reserve Banks play a unique role in the 
U.S. banking and payment system as compared to commercial banks and 
other depositories and payment service providers.\41\ The standards set 
forth in the Federal Reserve Bank Governing Documents are reflective of 
this unique role and have been developed over the years to capture the 
distinctive nature of

[[Page 35341]]

the Federal Reserve Banks. In addition to the accounts and services 
that Federal Reserve Banks provide to the government and to other 
depository institutions, the Federal Reserve Banks supervise and 
examine member banks for safety and soundness. They also participate in 
the setting of U.S. monetary policy, an activity that is the primary 
responsibility of the Federal Reserve System. Moreover, in an effort to 
reduce U.S. taxpayer burden, Congress requires that the residual 
earnings of each Federal Reserve Bank be distributed to the U.S. 
Treasury's general fund.\42\ In fact, the Federal Reserve Banks have 
sent to the U.S. Treasury approximately $98.7 billion in residual 
earnings in 2014 and about $500 billion on a cumulative basis since 
2008.\43\
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    \41\ Federal Reserve Banks `` `are not operated for the profit 
of shareholders;' rather, they `were created and are operated in 
furtherance of the national fiscal policy.' '' See Starr Int'l Co. 
v. Fed. Reserve Bank of New York, 742 F.3d 37, 40 (2d Cir. 2014) 
(quoting Fed. Reserve Bank of Bos. v. Comm'r of Corps. & Taxation of 
the Commonwealth of Mass., 499 F.2d 60, 62 (1st Cir. 1974)). 
``Because Federal Reserve Banks `conduct important governmental 
functions regarding' matters including the `general fiscal duties of 
the United States,' they are `instrumentalities of the federal 
government.' '' See id. (quoting Fed. Reserve Bank of St. Louis v. 
Metrocentre Improvement Dist. #1, 657 F.2d 183, 185-186 (8th Cir. 
1981)).
    \42\ The current congressional mandate requires that Federal 
Reserve Banks transfer their residual earnings in excess of $10 
billion to the U.S. Treasury. See FAST Act, Pub. L. 114-94, 129 
Stat. 1312 (2015). For prior congressional mandates in this regard, 
see, e.g., District of Columbia Appropriations Act, Pub. L. 106-113, 
113 Stat. 1501 (1999) (requiring that, in fiscal year 2000, Federal 
Reserve Banks transfer their residual earnings in the amount of 
$3,752,000,000 to the U.S. Treasury's general fund); Omnibus Budget 
Reconciliation Act of 1993, Pub. L. 103-66, 107 Stat. 312 (requiring 
that, during fiscal years 1997 and 1998, Federal Reserve Banks 
transfer their residual earnings in excess of 3 percent of the total 
paid-in capital and surplus to the U.S. Treasury's general fund).
    \43\ See Press Release, Board of Governors of the Federal 
Reserve System, Reserve Bank Income and Expense Data and Transfers 
to the Treasury for 2014 (Jan. 9, 2015), available at http://www.federalreserve.gov/newsevents/press/other/20150109a.htm; Annual 
Report, Board of Governors of the Federal Reserve System (2014), 
available at http://www.federalreserve.gov/publications/annual-report/files/2014-annual-report.pdf.
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    Federal Reserve Banks also do not provide financial services to 
businesses generally; rather, they serve only account holders 
authorized by statute, such as depository institutions and the U.S. 
government.\44\ In addition, Federal Reserve Banks may engage in a set 
range of services and only with the respective account holder. As such, 
Federal Reserve Banks do not provide the range of related account 
services that a commercial bank might provide, such as offering 
services to executives of the account holder as an additional incentive 
to do business with the bank. Therefore, the Commission believes that 
the Federal Reserve Banks do not have the potential conflict of 
interest that may arise when a commercial bank provides such services.
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    \44\ See, e.g., Federal Reserve Bank of Richmond, Consumer 
Issues and Information, available at https://www.richmondfed.org/faqs/consumer/ (last visited Feb. 26, 2016) (stating that ``Federal 
Reserve Banks are not authorized to open accounts for individuals[; 
rather, o]nly depository institutions and certain other financial 
entities may open an account at a Federal Reserve Bank''); see also 
Section 806(a) of the Dodd-Frank Act (authorizing accounts at a 
Federal Reserve Bank for designated FMUs).
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    Moreover, Federal Reserve Banks play a distinctive, dual role with 
respect to SIDCOs, as they may be both account service providers and 
participants in the supervision of SIDCOs. Under Title VIII of the 
Dodd-Frank Act, the Board may participate in any Commission examination 
of a SIDCO and otherwise consult and share information with the 
Commission regarding SIDCOs. Federal Reserve Banks may be delegated 
authority to assist the Board in fulfilling this function.\45\
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    \45\ See Federal Reserve Board, The Structure of the Federal 
Reserve System (Apr. 17, 2009), http://www.federalreserve.gov/pubs/frseries/frseri3.htm (noting that some supervisory responsibilities 
are delegated to the Federal Reserve Banks by the Board).
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    Further, Title VIII of the Dodd-Frank Act expressly permits the 
Commission and the Board to provide confidential supervisory 
information to, among others, the Federal Reserve Banks.\46\ Although a 
Federal Reserve Bank may have access to confidential supervisory 
information regarding a particular SIDCO, Board staff has represented 
that it has a long-standing ``Wall Policy'' that generally prohibits, 
subject to the limitations contained therein, the sharing of 
confidential supervisory information with Federal Reserve Bank account 
services staff, and requires that care be exercised to avoid actual or 
apparent conflict between a Federal Reserve Bank's role as a provider 
of financial services and its role as a regulator, supervisor, and 
lender.\47\ The Board has adopted certain standards regarding the 
organization, operations, and business practices of Federal Reserve 
Bank financial services which, among other things, generally prohibit 
Federal Reserve Bank personnel involved in day-to-day monetary policy, 
bank supervision, or the lending function from providing confidential 
information obtained in the course of their duties to Federal Reserve 
Bank personnel involved in day-to-day account services. In addition, 
the Wall Policy would generally prohibit Board supervisory staff from 
sharing any confidential supervisory information they receive about a 
SIDCO with the Federal Reserve Bank staff responsible for managing the 
SIDCO's account and financial services. Accordingly, given the unique 
role that Federal Reserve Banks play in the U.S. financial system, 
Federal Reserve Bank account services staff are unlikely to face 
conflicts of interest that would motivate them to overlook information 
that would otherwise raise suspicion of wrongdoing.
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    \46\ See Section 809(e)(2) of the Dodd-Frank Act.
    \47\ Federal Reserve's Key Policies for the Provision of 
Financial Services: Standards Related to Priced-Service Activities 
of the Federal Reserve Banks (1984), available at http://www.federalreserve.gov/paymentsystems/pfs_standards.htm. The policy 
permits certain limited exceptions in cases where such disclosure 
fulfills an important supervisory objective, preserves the integrity 
of the payment mechanism, or protects the assets of the Federal 
Reserve Banks. In such cases, information will be provided on a 
need-to-know basis and only with the approval of senior management.
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V. Section 4(c) of the CEA

    Section 4(c) of the CEA provides that, in order to promote 
responsible economic or financial innovation and fair competition, the 
Commission, by rule, regulation, or order, after notice and opportunity 
for hearing, may exempt any agreement, contract, or transaction, or 
class thereof, including any person or class of persons offering, 
entering into, rendering advice, or rendering other services with 
respect to, the agreement, contract, or transaction, from the contract 
market designation requirements of Section 4(a) of the CEA, or any 
other provision of the CEA other than certain enumerated provisions, if 
the Commission determines that the exemption would be consistent with 
the public interest.\48\
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    \48\ 7 U.S.C. 6(c).
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VI. Proposed Exemption From Sections 4d and 22 of the CEA

    The Commission proposes to exempt Federal Reserve Banks that 
provide customer accounts and other services to SIDCOs from Sections 4d 
and 22 of the CEA. The Commission further proposes to permit SIDCOs to 
maintain customer accounts with a Federal Reserve Bank pursuant to the 
standard of liability set forth in the Federal Reserve Bank Governing 
Documents. The proposed exemption would, however, require a Federal 
Reserve Bank to segregate customer funds deposited by a SIDCO from the 
proprietary funds deposited by a SIDCO, and to reply to any request 
from Commission staff for confirmation of account balances or for 
provision of any other information regarding the SIDCO account.
    As discussed above, Title VIII of the Dodd-Frank Act supports 
Federal Reserve Banks acting as depositories for SIDCOs. A Federal 
Reserve Bank, in its capacity as an instrument of the U.S. central 
bank, does not present the same types of risks as traditional 
commercial banks. Federal Reserve Banks are an integral part of the 
Federal Reserve System, serving the public interest and helping to 
maintain stability in the U.S. financial markets. Further, deposits at 
a Federal Reserve Bank have the lowest

[[Page 35342]]

credit risk. The Board and, through their role in the Federal Reserve 
System, Federal Reserve Banks are also the source of liquidity with 
regard to U.S. dollar deposits. A SIDCO would, therefore, face much 
lower credit and liquidity risk with a deposit at a Federal Reserve 
Bank than it would with a deposit at a commercial bank.
    Moreover, customer funds held at a Federal Reserve Bank would not 
be exposed to the risks associated with a commercial bank insolvency. 
As a result, the Commission believes that customer funds would be 
protected in an account held by a Federal Reserve Bank and would 
continue to be required to be segregated from the funds deposited in 
the SIDCO's proprietary account. The Commission notes that the standard 
of liability as set forth in the Federal Reserve Bank Governing 
Documents appears to be appropriate in the context of Federal Reserve 
Banks because this standard has been developed over the years to more 
appropriately reflect the unique nature of the Federal Reserve Banks. 
At this time, the Commission does not have any reason to believe that 
holding a Federal Reserve Bank to this standard would have the 
potential to harm futures and cleared swaps customers.
    The Federal Reserve Banks would also be exempt from liability under 
Section 22 of the CEA. Section 22 of the CEA provides for private 
rights of action for damages against persons who violate the CEA, or 
persons who willfully aid, abet, counsel, induce, or procure the 
commission of a violation of the CEA.\49\ The proposed exemption would 
preclude a third party from succeeding in a private right of action 
under Section 22 for a violation of Section 4d.\50\ The Commission 
believes that an exemption from Section 22 is appropriate because, for 
those requirements from which the Federal Reserve Banks are exempt, it 
follows that there should be no claim under Section 22 of the CEA with 
respect to those requirements. The Commission further notes that under 
the Federal Reserve Bank Governing Documents, the Federal Reserve Banks 
are currently insulated from third-party claims. While the Commission 
continues to believe that private claims empower injured parties to 
seek compensation for damages where the Commission lacks the resources 
to do so on their behalf, and the prospect of such claims serves the 
public interest in deterring misconduct, the Commission believes that, 
for the reasons discussed herein, exempting the Federal Reserve Banks 
from liability under Section 22 of the CEA would also serve the public 
interest.
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    \49\ 7 U.S.C. 25. By enacting Section 22, Congress provided 
private rights of action as a means for addressing violations of the 
Act as an alternative or supplement to Commission enforcement 
action. Specifically, Congress found that private damages actions 
are ``critical to protecting the public and fundamental to 
maintaining the credibility of the futures market.'' H.R. Rep. No. 
97-565, at 57 (1982).
    \50\ Cf. Effective Date for Swap Regulation, 76 FR 42508, 42517 
(July 19, 2011) (stating that ``exemptive relief would, in effect, 
preclude a person from succeeding in a private right of action under 
CEA section 22(a)''). However, for the avoidance of doubt, the 
Commission believes that an express exemption from Section 22 of the 
CEA for the Federal Reserve Banks is appropriate.
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    Federal Reserve Banks were created and are operated in furtherance 
of the national interest; they are not for-profit enterprises. 
Moreover, as discussed above, Federal Reserve Banks return all earnings 
in excess of operating and other expenses to the U.S. Treasury. All 
such amounts transferred to the U.S. Treasury's general fund inure to 
the benefit of U.S. taxpayers. In this case, private claims against a 
Federal Reserve Bank would reduce the amount of excess earnings that 
could be returned to the U.S. Treasury. In the Commission's view, the 
benefits afforded customers by holding SIDCO customer funds at a 
Federal Reserve Bank exceed the benefits of preserving the ability to 
bring any private claims under Section 22 of the CEA.
    Furthermore, the Commission recognizes that Title VIII of the Dodd-
Frank Act permits a Federal Reserve Bank to have access to confidential 
supervisory information. Specifically, Section 809(e)(2) provides that 
the Board of Governors or any Supervisory Agency may provide 
confidential supervisory information and other information obtained 
under Title VIII to each other and to the Federal Reserve Banks, State 
financial institution supervisory agencies, and foreign financial 
supervisors, provided, however, that no person or entity receiving 
information pursuant to this section may disseminate such information 
to entities or persons other than those listed in this paragraph 
without complying with applicable law, including section 8 of the CEA 
(7 U.S.C. 12). By permitting the Federal Reserve Banks to receive 
confidential supervisory information, Congress recognized the unique 
role of Federal Reserve Banks in the U.S. financial system, as 
distinguished from the role of commercial banks and other depository 
institutions. The Commission further recognizes, however, that the fact 
that Board supervisory staff may have access to confidential 
supervisory information about a SIDCO could create the false perception 
that Federal Reserve Bank staff responsible for managing the SIDCO's 
account and financial services would gain special knowledge about the 
SIDCO. Accordingly, and notwithstanding the Wall Policy described 
above, the Commission recognizes that a Federal Reserve Bank acting as 
a depository for customer funds could face greater scrutiny than a 
commercial bank acting as such. As a result, the proposed exemption 
would specify that: (1) Pursuant to the Wall Policy, information 
obtained by the Board supervisory staff during the course of 
supervising SIDCOs or any counterparty to a SIDCO will not be 
attributed by the Commission to any Federal Reserve Bank providing 
accounts and financial services to SIDCO account holders; and (2) a 
Federal Reserve Bank acting as a depository for SIDCO customer funds or 
otherwise providing account services to a SIDCO would continue to be 
held to the standard of liability set forth in the Federal Reserve Bank 
Governing Documents.
    Finally, the unique role that the Federal Reserve Banks play in the 
Federal Reserve System was not expressly taken into account when the 
Commission's standard of liability was developed for depositories. In 
fact, as described above, it was the Dodd-Frank Act that, for the first 
time, authorized designated FMUs (including SIDCOs) that are not banks 
or trust companies to open deposit accounts with a Federal Reserve 
Bank. However, while the Federal Reserve Banks may establish deposit 
accounts for SIDCOs, such accounts are subject to any applicable rules, 
orders, standards, or guidelines prescribed by the Board.\51\ The 
Commission notes that the Board has prescribed detailed rules and 
standards that govern account services provided to SIDCOs by the 
Federal Reserve Banks.\52\ These rules and standards have been 
carefully developed to provide clarity surrounding the provision of 
Federal Reserve financial services and to promote consistency in the 
treatment of deposit accounts at the Federal Reserve Banks for the 
benefit of the U.S. financial system. The Commission is concerned that 
exposing the Federal Reserve Banks to the standard of liability set 
forth in Section 4d of the CEA, as well as to potential third-party 
claims under Section 22 of the CEA, could disrupt these goals and 
ultimately

[[Page 35343]]

harm the U.S. financial system and, by extension, U.S. taxpayers.
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    \51\ See Section 806(a) of the Dodd-Frank Act.
    \52\ See 12 CFR 234.5 (setting forth the conditions and 
requirements for Federal Reserve Banks to open and maintain accounts 
for and provide financial services to designated FMUs); see also 
discussion supra Part III.B (discussing the Federal Reserve Bank 
Governing Documents).
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    For the reasons discussed above, the Commission believes that the 
proposed exemption would promote the safeguarding of futures and 
cleared swaps customer funds in a manner that would also benefit U.S. 
taxpayers. In light of the foregoing, the Commission believes the 
proposed exemption would promote responsible economic and financial 
innovation and fair competition, and would be consistent with the 
``public interest,'' as that term is used in Section 4(c) of the CEA.

VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \53\ requires that 
agencies consider whether the proposed exemption will have a 
significant economic impact on a substantial number of small entities 
and, if so, provide a regulatory flexibility analysis respecting the 
impact. The Commission believes that the proposed exemption will not 
have a significant economic impact on a substantial number of small 
entities. The exemption proposed by the Commission will impact SIDCOs 
and Federal Reserve Banks. The Commission has previously established 
certain definitions of ``small entities'' to be used by the Commission 
in evaluating the impact of its actions on small entities in accordance 
with the RFA.\54\ The Commission has previously determined that DCOs, 
including SIDCOs, are not small entities for purposes of the RFA.\55\ 
Similarly, the Commission believes that Federal Reserve Banks are not 
small entities for purposes of the RFA.
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    \53\ 5 U.S.C. 601 et seq.
    \54\ See 47 FR 18618, 18618-21 (Apr. 30, 1982).
    \55\ See New Regulatory Framework for Clearing Organizations, 66 
FR 45604, 45609 (Aug. 29, 2001).
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    Accordingly, the Commission does not expect the proposed exemption 
to have a significant impact on a substantial number of small entities. 
Therefore, the Chairman, on behalf of the Commission, hereby certifies, 
pursuant to 5 U.S.C. 605(b), that the proposed exemption would not have 
a significant economic impact on a substantial number of small 
entities. The Commission invites the public to comment on whether the 
entities covered by this proposed exemption should be considered small 
entities for purposes of the RFA, and, if so, whether there is a 
significant impact on a substantial number of small entities.

B. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995 (``PRA'') \56\ 
are, among other things, to minimize the paperwork burden to the 
private sector, ensure that any collection of information by a 
government agency is put to the greatest possible uses, and minimize 
duplicative information collections across the government. The PRA 
applies to all information, ``regardless of form or format,'' whenever 
the government is ``obtaining, causing to be obtained [or] soliciting'' 
information, and requires ``disclosure to third parties or the public, 
of facts or opinions,'' when the information collection calls for 
``answers to identical questions posed to, or identical reporting or 
recordkeeping requirements imposed on, ten or more persons.'' The PRA 
would not apply in this case given that the exemption would not impose 
any new recordkeeping or information collection requirements, or other 
collections of information on ten or more persons that require approval 
of the Office of Management and Budget.
---------------------------------------------------------------------------

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

C. Cost and Benefit Considerations

1. Costs
    The proposed exemption would exempt the Federal Reserve Banks from 
Sections 4d and 22 of the CEA. The Commission recognizes that such 
relief could represent a cost to a SIDCO, its FCM clearing members, and 
the FCMs' customers in the event of a loss of the deposited customer 
funds. For instance, if customer funds were lost due to the fault of a 
Federal Reserve Bank, the SIDCO, FCM clearing member, or customer would 
not have a cause of action under the CEA. Rather, as discussed above, 
the Federal Reserve Banks would be held to the standard of liability 
set forth in the Federal Reserve Bank Governing Documents.\57\ This 
cost, however, will never be realized if an incident does not occur. 
Therefore, given the resilience of the Federal Reserve Banks and the 
standards set forth in the Federal Reserve Bank Governing Documents, 
the Commission estimates that the circumstances that may give rise to 
such costs would be remote. Similarly, as discussed above, while the 
Commission continues to believe that private claims empower injured 
parties to seek compensation for damages where the Commission lacks the 
resources to do so on their behalf, and the prospect of such claims 
serves the public interest in deterring misconduct, the Commission 
believes that, for the reasons discussed herein, exempting the Federal 
Reserve Banks from liability under Section 22 of the CEA would also 
serve the public interest. The Commission further believes that the 
condition in the proposed exemption that would require Federal Reserve 
Banks to segregate customer funds deposited by a SIDCO from the 
proprietary funds deposited by a SIDCO and the benefits of facilitating 
SIDCOs' use of these accounts mitigate any costs that would flow from 
the loss of protection under Section 4d of the CEA.
---------------------------------------------------------------------------

    \57\ For a more detailed discussion of the standard of liability 
set forth in the Federal Reserve Bank Governing Documents, see 
discussion supra Part IV.
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    As described above, the Commission has reinforced and enhanced the 
provisions of Section 4d of the CEA in order to further protect 
customer funds, and this proposal represents a limited exception to 
those provisions.
2. Benefits
    The proposed exemption would benefit market participants by 
permitting SIDCOs to deposit customer funds at the Federal Reserve 
Banks. Whereas commercial banks present credit and liquidity risks to a 
SIDCO, its FCM clearing members, and the FCMs' customers, the Federal 
Reserve Banks are substantially insulated from such risks. As discussed 
in greater detail above, Title VIII of the Dodd-Frank Act was enacted 
to mitigate systemic risk in the financial system and to promote 
financial stability, in part, through an enhanced supervisory framework 
for SIDCOs. In addition to this framework, Title VIII, and more 
specifically, Section 806(a) of the Dodd-Frank Act, permits the Board 
to authorize a Federal Reserve Bank to establish and maintain an 
account for a SIDCO and provide to the SIDCO certain financial 
services. By enacting Title VIII in general, and Section 806(a) in 
particular, Congress recognized the importance of reducing systemic 
risk and providing SIDCOs with a potential safeguard during an 
extraordinary liquidity event. The proposed exemption would therefore 
help promote Congress's goal of better preparing the U.S. financial 
system for potential future liquidity events. A SIDCO's access to 
Federal Reserve Bank deposit accounts is also consistent with the 
international standards set forth in the Principles for Financial 
Market Infrastructures (``PFMIs''), which acknowledge the protections 
afforded by central banks from such credit and liquidity risks.\58\
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    \58\ See, e.g., CPSS-IOSCO, PFMIs, ] 3.9.3 (noting that 
``[c]entral banks have the lowest credit risk and are the source of 
liquidity with regard to their currency of issue''); see also PFMIs, 
Key Consideration 8 (specifying that a financial market 
infrastructure ``with access to central bank accounts, payment 
services, or securities services should use these services, where 
practical, to enhance its management of liquidity risk'').

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[[Page 35344]]

    Moreover, the Federal Reserve Banks' standard of liability, as set 
forth in the Federal Reserve Bank Governing Documents, is better suited 
for the Federal Reserve Banks than Section 4d of the CEA, which was 
designed to govern customer funds deposited with a commercial bank, 
trust company, or DCO. Unlike commercial banks, Federal Reserve Banks 
do not operate for profit and serve only account holders authorized by 
statute, such as depository institutions and the U.S. government. 
Indeed, each year they return to the U.S. Department of Treasury all 
earnings in excess of Federal Reserve Bank operating and other 
expenses, such as litigation expenses. By exempting the Federal Reserve 
Banks from certain potential enforcement actions and private suits, the 
proposed exemption would reduce the Federal Reserve Banks' exposure to 
litigation. Because the Federal Reserve Banks return their earnings to 
the U.S. Department of Treasury's general fund, U.S. taxpayers may 
benefit from the proposed exemption. Therefore, the Commission believes 
that it is appropriate to apply the Federal Reserve Bank's standard of 
liability in order to facilitate the use of these accounts.
3. Section 15(a) Factors
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its action before issuing an order under the 
CEA.\59\ By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of an order or to determine whether the 
benefits of the order outweigh its costs. Rather, Section 15(a) simply 
requires the Commission to ``consider the costs and benefits'' of its 
action.
---------------------------------------------------------------------------

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

    Section 15(a) of the CEA further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness, and financial integrity of futures 
markets; (3) price discovery; (4) sound risk management practices; and 
(5) other public interest considerations. The Commission may in its 
discretion give greater weight to any one of the five enumerated areas 
and could in its discretion determine that, notwithstanding its costs, 
a particular order is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the CEA.
a. Protection of Market Participants and the Public
    The proposed exemption would serve to facilitate SIDCOs' use of 
Federal Reserve Banks as depositories for customer funds. As the 
Federal Reserve System is the nation's central bank, such accounts 
would provide SIDCOs with the lowest possible credit risk in the event 
of a market disruption. Moreover, as Federal Reserve Banks are the 
source of liquidity with regard to U.S. dollar deposits, SIDCOs with 
access to a deposit account at a Federal Reserve Bank would also be 
better equipped to handle a liquidity event. As SIDCOs have been so 
designated because of their importance to the broader financial system, 
reducing these risks would protect market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity
    A temporary or permanent disruption to the operations of a SIDCO 
could cause wide-spread and significant damage to the financial 
integrity of derivatives markets as a whole. Therefore, by facilitating 
a SIDCO's use of Federal Reserve Banks as depositories for customer 
funds, the proposed exemption would reduce liquidity and credit risk to 
the SIDCO, which would, in turn, promote the financial integrity of the 
derivatives markets.
    The Commission does not anticipate the proposed exemption to have a 
significant impact on the efficiency and competitiveness of the 
derivatives markets.
c. Price Discovery
    The Commission does not anticipate the proposed exemption to have 
an impact on the price discovery process.
d. Sound Risk Management Practices
    The Commission believes that establishing SIDCO segregated customer 
accounts and enabling SIDCOs to access related services at a Federal 
Reserve Bank would improve a SIDCO's ability to manage liquidity risk 
and protect customer funds. Additionally, the Commission believes that 
the availability of a Federal Reserve Bank account could allow a SIDCO 
to reduce its concentration risk by adding an additional creditworthy 
depository in which to diversify funds. Accordingly, the proposed 
exemption promotes sound risk management practices.
    The Commission further notes that, notwithstanding the proposed 
exemption from Section 4d of the CEA, the Federal Reserve Banks would 
still be required to segregate customer funds deposited by a SIDCO from 
the proprietary funds deposited by a SIDCO and adhere to the 
longstanding standards of liability that govern the Federal Reserve 
Banks.
e. Other Public Interest Considerations
    The Commission believes that facilitating a SIDCO's access to 
Federal Reserve Bank accounts will promote the public interest by 
bolstering a SIDCO's ability to conduct settlements with a high degree 
of confidence under a wide range of stress scenarios, thereby 
increasing the likelihood of the SIDCO being able to provide its 
customers with access to their funds in times of market distress.

VIII. Request for Comment

    The Commission requests comment on all aspects of the proposed 
exemption, including, without limitation, the Commission's 
determination that the proposed exemption is consistent with the public 
interest, and the Commission's consideration of the costs and benefits 
of the proposed exemption.
    The Commission requests comment regarding whether the proposed 
exemption should be expanded to include those customer accounts that 
are established pursuant to the CEA and that are held at Federal 
Reserve Banks by designated FMUs for which the Commission is not the 
Supervisory Agency.

IX. Proposed Order of Exemption

    After considering the above factors, the Commission proposes to 
issue the following:

Proposed Order

    Pursuant to Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act''), the Commodity Futures 
Trading Commission (``Commission'') is the supervisory agency for 
certain derivatives clearing organizations (``DCOs'') that have been 
designated by the Financial Stability Oversight Council as 
systemically important. Under Section 806(a) of the Dodd-Frank Act, 
the Board of Governors (``Board'') of the Federal Reserve System is 
permitted to authorize a Federal Reserve Bank to establish and 
maintain a deposit account for a systemically important DCO 
(``SIDCO'') and provide certain services to the SIDCO, subject to 
any applicable rules, orders, standards, or guidelines prescribed by 
the Board.
    DCOs, including SIDCOs, are required to hold funds belonging to 
customers of their clearing members in accounts subject to

[[Page 35345]]

Section 4d of the Commodity Exchange Act (``CEA''). In addition, 
Section 22 of the CEA would typically provide for private rights of 
action for damages against persons who violate Section 4d, or 
persons who willfully aid, abet, counsel, induce, or procure the 
commission of a violation of Section 4d. However, the Commission 
understands that deposit accounts maintained by any Federal Reserve 
Bank would also be governed by applicable account agreements, 
operating circulars issued by Federal Reserve Banks for each 
service, the Federal Reserve Act, and Federal Reserve regulations 
and policies, and, with respect to book-entry securities services, 
the regulations of the domestic issuer of the securities or the 
issuer's regulator (``Federal Reserve Bank Governing Documents''). 
The Federal Reserve Bank Governing Documents, as may be amended from 
time to time, include, but are not limited to, Federal Reserve Bank 
Operating Circular No. 6 (governing funds transfers through the 
Fedwire Funds Service); Federal Reserve Bank Operating Circular No. 
7 (governing the maintenance of and transfer services for book-entry 
securities accounts); 12 CFR part 210, subpart B (governing funds 
transfers through the Fedwire Funds Service); and 31 CFR part 357, 
subpart B (setting forth the U.S. Department of the Treasury's 
regulations governing book-entry treasury bonds, notes, and bills).
    The Commission understands that under the Federal Reserve Bank 
Governing Documents, a Federal Reserve Bank has no requirement or 
obligation to inquire as to the legitimacy or accuracy of the 
instructions, or the transactions related to those instructions, or 
compliance by the SIDCO with its obligations under the CEA. To the 
extent that liability may accrue under the Federal Reserve Bank 
Governing Documents, the Commission understands that the Federal 
Reserve Bank may be held liable only for actual damages that are (i) 
incurred solely by the SIDCO account holder, and (ii) proximately 
caused by the Federal Reserve Bank's failure to exercise ordinary 
care or act in good faith in accordance with the Federal Reserve 
Bank Governing Documents. The Commission proposes to exempt the 
Federal Reserve Banks in order to facilitate Federal Reserve Banks' 
ability to accept SIDCO customer accounts.
    Therefore, it is ordered, pursuant to Section 4(c) of the CEA, 7 
U.S.C. 6(c), that the Federal Reserve Banks are granted an exemption 
from Sections 4d and 22 of the CEA, subject to the terms and 
conditions specified herein:
    1. Segregation. Money, securities, and property deposited into a 
customer account established pursuant to the CEA by a SIDCO with a 
Federal Reserve Bank shall be separately accounted for and 
segregated from the money, securities, and property deposited into a 
proprietary account of the SIDCO depositing such funds and from the 
money, securities, and property deposited into the account of any 
person other than the customers for whom the money, securities, or 
property is held.
    2. Information Requests. Federal Reserve Banks must reply 
promptly and directly to any request for confirmation of account 
balances or provision of any other information regarding or related 
to the SIDCO customer account(s) that are established pursuant to 
the CEA from the director of the Division of Clearing and Risk of 
the Commission, or any successor division, or such director's 
designees.
    3. Applicability to Federal Reserve Banks. Subject to the 
conditions contained herein, the order applies to all Federal 
Reserve Banks that provide customer accounts and other services to 
SIDCOs. In addition, pursuant to the Federal Reserve's Key Policies 
for the Provision of Financial Services: Standards Related to 
Priced-Service Activities of the Federal Reserve Banks, information 
obtained by the Board of Governors of the Federal Reserve System or 
its designees during the course of supervising SIDCOs, pursuant to 
Title VIII of the Dodd-Frank Act, or any counterparty to a SIDCO 
under any authority, shall not be attributed by the Commission to 
any Federal Reserve Bank providing accounts and financial services 
to SIDCO account holders.
    4. Reservation of Rights. This order is based upon the analysis 
set forth above. Any material change in law or circumstances 
pursuant to which this order is granted might require the Commission 
to reconsider its finding that the exemption contained herein is 
appropriate and/or consistent with the public interest and purposes 
of the CEA. Further, the Commission reserves the right, in its 
discretion, to revisit any of the terms and conditions of the relief 
provided herein, including but not limited to, making a 
determination that certain entities described herein should be 
subject to the Commission's full jurisdiction, and to condition, 
suspend, terminate, or otherwise modify or restrict the exemption 
granted in this order, as appropriate, upon its own motion.

    Issued in Washington, DC, on May 27, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

Appendix to Notice of Proposed Order and Request for Comment on a 
Proposal To Exempt, Pursuant to the Authority in Section 4(c) of the 
Commodity Exchange Act, the Federal Reserve Banks From Sections 4d and 
22 of the Commodity Exchange Act--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

[FR Doc. 2016-13055 Filed 6-1-16; 8:45 am]
 BILLING CODE 6351-01-P