[Federal Register Volume 81, Number 156 (Friday, August 12, 2016)]
[Notices]
[Pages 53467-53475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19210]


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COMMODITY FUTURES TRADING COMMISSION


Order Exempting the Federal Reserve Banks From Sections 4d and 22 
of the Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is issuing an order to exempt Federal Reserve Banks 
that provide customer accounts and other services to registered 
derivatives clearing organizations that are designated financial market 
utilities from Sections 4d and 22 of the Commodity Exchange Act 
(``CEA'').

DATES: Effective Date: August 8, 2016.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, [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. Designation of FMUs under Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act
    B. Access to Federal Reserve Bank Accounts and Services
    C. Proposed Order
III. Comment Letters
IV. Findings and Conclusions
V. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost and Benefit Considerations
VI. Order of Exemption

[[Page 53468]]

I. Introduction

    On June 2, 2016, the Commission published in the Federal Register a 
notice and request for public comment regarding a proposed Commission 
order that would exempt, pursuant to Section 4(c) of the CEA,\1\ 
Federal Reserve Banks that provide customer accounts and other services 
to systemically important derivatives clearing organizations 
(``SIDCOs'') \2\ from Sections 4d and 22 of the CEA (the 
``Proposal'').\3\ After consideration of the comments and for the 
reasons set forth in the Proposal and in this release, the Commission 
is issuing an order that exempts, subject to certain conditions, 
Federal Reserve Banks that provide customer accounts and other services 
to designated financial market utilities (``FMUs'') that are registered 
derivatives clearing organizations (``Designated FMUs'') \4\ from 
Sections 4d and 22 of the CEA. The exemption enables Federal Reserve 
Banks to maintain customer accounts for Designated FMUs in accordance 
with the standards set forth in the relevant Federal Reserve Bank 
governing documents, as specified below.
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    \1\ 7 U.S.C. 6(c).
    \2\ Under Commission Regulation 39.2, a SIDCO is defined as a 
financial market utility that is a registered derivatives clearing 
organization under Section 5b of the CEA, which is currently 
designated by the Financial Stability Oversight Council to be 
systemically important, and for which the Commission acts as the 
Supervisory Agency pursuant to Section 803(8) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act. See 17 CFR 39.2. See also 
Section 803(8)(A) of the Dodd-Frank Act, which defines the term 
Supervisory Agency as the Federal agency that has primary 
jurisdiction over a designated financial market utility under 
Federal banking, securities, or commodity futures laws. Section 
803(8)(A) of the Dodd-Frank Act, Pub. L. 111-203, 124 Stat. 1376 
(2010).
    \3\ Notice of Proposed Order and Request for Comment on Proposal 
to Exempt, Pursuant to the Authority in Section 4(c) of the 
Commodity Exchange Act, the Federal Reserve Banks from Sections 4d 
and 22 of the Commodity Exchange Act, 81 FR 35337 (June 2, 2016).
    \4\ For the avoidance of doubt, the term ``Designated FMU'' 
includes the more narrow term ``SIDCO.''
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    II. Background

A. Designation of FMUs Under Title VIII of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act

    Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') was enacted to mitigate risk in the 
financial system and promote financial stability.\5\ Accordingly, 
Section 804 of the Dodd-Frank Act requires the Financial Stability 
Oversight Council (``Council'') to designate those FMUs that the 
Council determines are, or are likely to become, systemically 
important.\6\ An FMU includes ``any person that manages or operates a 
multilateral system for the purpose of transferring, clearing, or 
settling payments, securities, or other financial transactions among 
financial institutions or between financial institutions and the 
person.'' \7\
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    \5\ See Section 802(b) of the Dodd-Frank Act.
    \6\ 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).
    \7\ Section 803(6)(A) of the Dodd-Frank Act.
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    On July 18, 2012, the Council designated eight FMUs as systemically 
important under Title VIII.\8\ Two of these systemically important 
FMUs, Chicago Mercantile Exchange, Inc. (``CME'') and ICE Clear Credit 
LLC (``ICC''), are SIDCOs (and therefore, Designated FMUs). In 
addition, the Options Clearing Corporation (``OCC''), which is a 
registered derivatives clearing organization (``DCO'') but not a SIDCO, 
is a Designated FMU. OCC was designated in its capacity as a securities 
clearing agency; the Securities and Exchange Commission is its 
Supervisory Agency.
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    \8\ 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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B. Access to Federal Reserve Bank Accounts and Services

    Section 806(a) of the Dodd-Frank Act permits the Board to authorize 
a Federal Reserve Bank to establish and maintain an account for a 
Designated FMU and provide to the Designated FMU the services listed in 
Section 11A(b) of the Federal Reserve Act, subject to any applicable 
rules, orders, standards, or guidelines prescribed by the Board.\9\ In 
adopting regulations pursuant to Section 806(a) of the Dodd-Frank Act, 
the Board noted that the ``terms and conditions for access to Federal 
Reserve Bank accounts and services are intended to facilitate the use 
of [Federal] Reserve Bank accounts and services by a designated FMU in 
order to reduce settlement risk and strengthen settlement processes, 
while limiting the risk presented by the designated FMU to the 
[Federal] Reserve Banks.'' \10\ Accordingly, the Board ``expects that 
[Federal] Reserve Banks would provide services that are consistent with 
a designated FMU's need for safe and sound settlement processes under 
account and service agreements generally consistent with the provisions 
of existing [Federal] Reserve Bank operating circulars for such 
services.'' \11\ Highlighting the importance of Federal Reserve Bank 
operating circulars in this regard, the Board further requires that 
designated FMUs be in compliance with existing operating circulars.\12\
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    \9\ 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.
    \10\ Financial Market Utilities (Regulation HH), 78 FR 14024, 
14025 (Mar. 4, 2013).
    \11\ Id.
    \12\ See 12 CFR 234.5(b)(2) (setting forth rules to govern 
Federal Reserve Bank accounts held by designated FMUs).
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C. Proposed Order

    The proposed Commission order would, subject to certain terms and 
conditions, exempt Federal Reserve Banks that provide customer accounts 
and other services to SIDCOs from Sections 4d and 22 of the CEA. In the 
Proposal, the Commission emphasized the importance of protecting 
customers and safeguarding customer funds, and highlighted the critical 
role that SIDCOs play in the financial markets. The Commission 
recognized that the failure of a SIDCO or a disruption to the 
operations of a SIDCO could threaten the stability of the U.S. 
financial system. As a result, the Commission determined that reducing 
SIDCOs' credit and liquidity risks would better protect market 
participants and the public, and would serve to promote the integrity 
of the financial markets. The Commission explained that because Federal 
Reserve Banks are the source of liquidity with regard to U.S. dollar 
deposits, a SIDCO would face much lower credit and liquidity risk with 
a deposit at a Federal Reserve Bank than it would with a deposit at a 
commercial bank.
    With respect to protecting customers and safeguarding customer 
funds, the Commission explained that under Section 4d of the CEA, a 
depository will be held liable for an improper transfer of customer 
funds by an FCM or DCO if it knew or should have known that the 
transfer was improper.\13\ The

[[Page 53469]]

Commission noted, however, that as this standard of liability was 
developed, the unique nature of the Federal Reserve Banks was not taken 
into account.\14\ The accounts and financial services provided by 
Federal Reserve Banks are governed by account agreements, operating 
circulars issued by Federal Reserve Banks for each service, the Federal 
Reserve Act, and Federal Reserve regulations and policies, and, with 
respect to book-entry securities services, the regulations of the 
domestic issuer of the securities or the issuer's regulator (``Federal 
Reserve Bank Governing Documents'').\15\ In the Proposal, the 
Commission explained that the Federal Reserve Bank Governing Documents 
limit a Federal Reserve Bank's liability in maintaining an account or 
acting on such an instruction to actual damages that are incurred 
solely by the account holder and that are proximately caused by the 
Federal Reserve Bank's failure to exercise ordinary care or act in good 
faith in accordance with the Federal Reserve Bank Governing Documents. 
The Commission found the standard of liability as set forth in the 
Federal Reserve Bank Governing Documents to be appropriate in the 
context of Federal Reserve Banks, as this standard has been developed 
to more appropriately reflect the unique nature of the Federal Reserve 
Banks. Notably, the Commission argued that the Board has prescribed 
detailed rules and standards that govern account services provided to 
SIDCOs by the Federal Reserve Banks, which have been carefully 
developed to provide clarity surrounding the provision of Federal 
Reserve financial services and to promote consistency in the treatment 
of deposit accounts at the Federal Reserve Banks for the benefit of the 
U.S. financial system.\16\
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    \13\ See 81 FR at 35339. Further, the Commission requires a DCO 
to obtain from each depository with which it deposits customer funds 
a written acknowledgment that the customer funds are being held in 
accordance with Section 4d of the CEA to ensure that the depository 
has been informed that the deposited funds are those of customers.
    \14\ See id. at 35340-35342.
    \15\ The operating circulars of the Federal Reserve Banks began 
having uniform terms and conditions across Federal Reserve Bank 
districts as of January 2, 1998.
    \16\ In fact, SIDCOs have established proprietary accounts with 
one or more Federal Reserve Banks that are governed by the Federal 
Reserve Bank Governing Documents.
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    The Commission noted its concern that exposing the Federal Reserve 
Banks to the standard of liability set forth in Section 4d of the CEA, 
as well as to potential third-party claims under Section 22 of the 
CEA,\17\ could disrupt these goals and ultimately harm the U.S. 
financial system and, by extension, U.S. taxpayers. Accordingly, the 
Commission proposed that a Federal Reserve Bank acting as a depository 
for SIDCO customer funds or otherwise providing account services to a 
SIDCO would continue to be held to the standard of liability set forth 
in the Federal Reserve Bank Governing Documents.
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    \17\ In the Proposal, the Commission explained that Section 22 
of the CEA provides for private rights of action for damages against 
persons who violate the CEA, or persons who willfully aid, abet, 
counsel, induce, or procure the commission of a violation of the 
CEA. See 81 FR at 35342; see also 7 U.S.C. 25. The Commission noted 
that under the Federal Reserve Bank Governing Documents, the Federal 
Reserve Banks are currently insulated from third-party claims. While 
the Commission continues to believe that private claims empower 
injured parties to seek compensation for damages where the 
Commission lacks the resources to do so on their behalf, and the 
prospect of such claims serves the public interest in deterring 
misconduct, the Commission has determined that, for the reasons 
discussed herein and in the Proposal, exempting the Federal Reserve 
Banks from liability under Section 22 of the CEA would also serve 
the public interest.
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    However, the Commission reiterated the importance of the 
segregation requirements set forth in Section 4d of the CEA to make 
sure that customer funds are used only for the purpose of margining, 
securing, or guaranteeing their futures contracts and options on 
futures contracts, and cleared swaps. Therefore, as a condition to the 
proposed order, customer funds held at a Federal Reserve Bank would 
continue to be required to be segregated from the funds deposited in 
the SIDCO's proprietary account. In addition, Federal Reserve Banks 
would be required to reply promptly and directly to any request for 
confirmation of account balances or provision of any other information 
regarding or related to the customer account(s) of a SIDCO that are 
established pursuant to the CEA from the director of the Division of 
Clearing and Risk of the Commission, or any successor division, or such 
director's designees.
    The Commission further noted that Title VIII of the Dodd-Frank Act 
permits a Federal Reserve Bank to have access to confidential 
supervisory information with respect to a SIDCO. The Commission 
recognized, however, that the fact that Board supervisory staff may 
have access to confidential supervisory information about a SIDCO could 
create the false perception that Federal Reserve Bank staff responsible 
for managing the SIDCO's account and financial services would gain 
special knowledge about the SIDCO. As a result, the Commission 
recognized that a Federal Reserve Bank acting as a depository for 
customer funds could face greater scrutiny than a commercial bank 
acting as such. Therefore, the proposed order included a statement 
recognizing that, pursuant to the Wall Policy,\18\ information obtained 
by the Board supervisory staff during the course of supervising SIDCOs 
or any counterparty to a SIDCO will not be attributed by the Commission 
to any Federal Reserve Bank providing accounts and financial services 
to SIDCO account holders.
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    \18\ As discussed in greater detail in the Proposal, 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. See 81 FR at 35341; see also 
Federal Reserve's Key Policies for the Provision of Financial 
Services: Standards Related to Priced-Service Activities of the 
Federal Reserve Banks (1984), available at http://www.federalreserve.gov/paymentsystems/pfs_standards.htm.
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III. Public Comments

    In response to its request for public comment on the Proposal, the 
Commission received six comment letters.\19\ All six letters expressly 
supported the issuance of an order exempting the Federal Reserve Banks 
from Sections 4d and 22 of the CEA, citing such benefits as mitigating 
systemic risk in the clearing and settlement system, reducing credit 
and liquidity risks for Designated FMUs, and enhancing the protection 
of customer funds.
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    \19\ Letters were submitted by CME, ICC, and OCC (each of which 
is a Designated FMU), Minneapolis Grain Exchange, Inc. (which is a 
DCO), American Council of Life Insurers, and the International Swaps 
and Derivatives Association, Inc. The Commission also received one 
non-substantive comment. All comments referred to herein are 
available on the Commission's Web site, at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1703.
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    Specifically, ICC agreed that holding SIDCO customer funds at a 
Federal Reserve Bank would decrease the SIDCO's credit, liquidity, and 
operational risks. ICC also agreed that ``the existing limitations on 
how Federal Reserve Banks hold assets provide adequate protections to 
account holders,'' and ``such protections are consistent with the 
customer protection initiatives of the CEA.'' \20\ ICC and the 
International Swaps and Derivatives Association, Inc. (``ISDA'') both 
noted that the use of a Federal Reserve Bank as a depository for SIDCO 
customer funds would help to reduce systemic risk by reducing 
interconnectedness in the financial system. ISDA observed that such 
interconnectedness is particularly present when one firm simultaneously 
acts as a custodial bank, settlement bank, and/or clearing member with

[[Page 53470]]

respect to one central counterparty.\21\ ISDA believes that reducing 
this interconnectedness would positively impact SIDCO resilience during 
a market disruption and promote safety and soundness in the cleared 
derivatives markets by decreasing contagion risk. Furthermore, in 
ISDA's view, customer accounts at Federal Reserve Banks would only 
benefit derivatives customers and promote safety and soundness in the 
cleared derivatives markets. ISDA believes that the strict limitations 
on how the Federal Reserve Banks hold deposits adequately protect 
customers without the additional safeguards provided under Sections 4d 
and 22 of the CEA.
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    \20\ ICC Comment Letter at 2 (July 1, 2016).
    \21\ ISDA Comment Letter at 2 (July 5, 2016).
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    The Commission requested comments regarding whether the proposed 
exemption should be expanded to include not just SIDCOs but all 
Designated FMUs (in other words, all registered DCOs that have been 
designated as systemically important by the Council, regardless of 
whether the Commission is the DCO's Supervisory Agency). In response, 
OCC requested that the Commission expand the exemption.\22\ As 
previously noted, OCC is currently designated by the Council to be 
systemically important; however, it is not a SIDCO, as the Securities 
and Exchange Commission is its Supervisory Agency. OCC commented that 
Section 806(a) of the Dodd-Frank Act supports Federal Reserve Banks 
acting as depositories for all Designated FMUs and not just SIDCOs. OCC 
argued that denying it the opportunity to deposit segregated customer 
funds in a Federal Reserve Bank account would undermine one of the 
purposes of Title VIII and would place OCC at an unjustified 
competitive disadvantage with respect to other Designated FMUs. ISDA 
also urged the Commission to expand the exemption to include customer 
accounts at a Federal Reserve Bank established by Designated FMUs given 
the benefits associated with holding customer accounts with a Federal 
Reserve Bank.
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    \22\ OCC Comment Letter at 1 (July 5, 2016).
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    Minneapolis Grain Exchange, Inc. (``MGEX'') requested that the 
Commission expand the exemption to include customer accounts held at 
Federal Reserve Banks by Subpart C DCOs.\23\ MGEX stated that limiting 
access to Federal Reserve Bank services and accounts to SIDCOs creates 
a competitive disadvantage to those DCOs that have not been designated 
as systemically important because such DCOs would not have access to 
these credit and liquidity risk reducing opportunities afforded to 
SIDCOs.\24\ MGEX commented that this disadvantage may be more 
pronounced for Subpart C DCOs because they are held to the same 
standards as SIDCOs but do not have access to accounts at the Federal 
Reserve Banks.\25\ MGEX recognized, however, that this is due to the 
``restrictive wording'' of Section 806(a) of the Dodd-Frank Act, which 
specifically limits access to Federal Reserve Bank accounts to 
Designated FMUs, and the Commission cannot simply grant Subpart C DCOs 
permission to have accounts at a Federal Reserve Bank.\26\ MGEX 
requested that the Commission use alternative language in the exemptive 
order, so as not to be SIDCO-specific, in the event that Federal 
Reserve Banks are subsequently permitted to maintain accounts for 
Subpart C DCOs in the future.
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    \23\ A Subpart C DCO is a DCO registered with the Commission 
pursuant to Section 5b of the CEA that is not a SIDCO and has 
elected to become subject to the requirements of Subpart C of Part 
39 of the Commission's regulations. 17 CFR 39.2. MGEX has made this 
election and is therefore a Subpart C DCO.
    \24\ MGEX Comment Letter at 1 (July 5, 2016).
    \25\ SIDCOs and Subpart C DCOs are required to comply with the 
requirements set forth in Subpart C of Part 39 of the Commission's 
regulations, as well as the requirements applicable to all DCOs, 
which are set forth in Subparts A and B of Part 39. Subpart C, 
together with the provisions in Subparts A and B, establish domestic 
regulations that are consistent with the Principles for Financial 
Market Infrastructures. As a result, SIDCOs and Subpart C DCOs are 
considered qualified central counterparties for purposes of the 
Basel capital requirements for central counterparties. See, e.g., 
Derivatives Clearing Organizations and International Standards, 78 
FR 72476 (Dec. 2, 2013) (discussing the regulatory framework for 
SIDCOs and Subpart C DCOs and providing further background on 
qualified central counterparties).
    \26\ MGEX Comment Letter at 2 (July 5, 2016).
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    CME supported the exemption, but noted that it would be 
inconsistent with Commission Regulation 1.20(g)(4)(ii), which requires 
that a DCO obtain from a Federal Reserve Bank acting as a depository 
for customer funds a written acknowledgment that the customer funds are 
being held in accordance with Section 4d of the CEA.\27\ CME noted, 
however, that pursuant to the terms of the exemptive order, the Federal 
Reserve Banks would be exempt from Section 4d.\28\ CME suggested that 
the exemptive order and Commission Regulation 1.20(g)(4)(ii) be 
harmonized.
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    \27\ 17 CFR 1.20(g)(4)(ii).
    \28\ CME Comment Letter at 3 (July 1, 2016).
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    In addition, CME commented that, as a SIDCO account holder, it 
would need multiple Federal Reserve Bank accounts in order to comply 
with the segregation requirements set forth in the exemptive order.\29\ 
CME stated that, under the Federal Reserve Banks' Operating Circular 1, 
a financial institution may maintain only one Master Account with a 
Federal Reserve Bank, although the Federal Reserve Bank may, in its 
discretion, allow multiple Master Accounts in certain situations. CME 
noted that this may require a Federal Reserve Bank to exercise its 
discretion under its standard policies and operating circulars to 
permit the use of multiple Master Accounts for SIDCO account holders.
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    \29\ As a condition to the exemptive order, the Federal Reserve 
Banks are required to segregate customer funds deposited by a 
Designated FMU from the proprietary funds deposited by a Designated 
FMU.
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    CME also stated that account agreements between the Federal Reserve 
Banks and depository institution account holders typically include 
certain set-off rights and liens in favor of the Federal Reserve Banks. 
In this regard, CME commented that Federal Reserve Bank account 
agreements may need to be tailored in order to provide comfort to SIDCO 
clearing members, and customers of SIDCO clearing members, that their 
margin deposits are ``bankruptcy remote'' from the SIDCO under 
applicable bank capital requirements.\30\ Similarly, American Council 
of Life Insurers (``ACLI'') requested that the Commission clarify ``for 
the benefit of public customers who are the ultimate beneficiaries of 
segregated accounts at commercial or federal banks, that customer 
segregated funds (i.e., initial margin) shall never be used for any 
other purpose under any circumstances, even the most exigent.'' \31\
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    \30\ CME Comment Letter at 4 (July 1, 2016).
    \31\ ACLI Comment Letter at 2 (July 5, 2016).
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IV. Findings and Conclusions

    After careful review and consideration of the comments, and for the 
reasons cited herein and set forth in the Proposal, the Commission has 
determined that the requirements of Section 4(c) of the CEA have been 
met with respect to exempting Federal Reserve Banks that provide 
customer accounts and other services to Designated FMUs from Sections 
4d and 22 of the CEA. The Commission is therefore issuing an order 
granting the exemption essentially as proposed. However, the Commission 
is making minor technical clarifications to the language of the order, 
and is expanding the exemption to include those customer accounts that 
are established pursuant to the CEA and that are held at Federal 
Reserve Banks by Designated FMUs. The Commission agrees with OCC and 
ISDA that Section 806(a) of the Dodd-Frank Act supports Federal

[[Page 53471]]

Reserve Banks acting as depositories for all Designated FMUs, not just 
SIDCOs.
    The Commission notes MGEX's request that the Commission expand the 
exemption to include customer accounts held at Federal Reserve Banks by 
any Subpart C DCO. However, the Commission further notes that Subpart C 
DCOs are not currently eligible for Federal Reserve Bank accounts.\32\ 
Accordingly, the Commission is declining to expand the exemption to 
include customer accounts held at Federal Reserve Banks by Subpart C 
DCOs. As MGEX acknowledges, the Commission does not have the authority 
to direct the Federal Reserve Banks to provide accounts and services to 
Subpart C DCOs. If, in the future, a registered DCO that is not a 
Designated FMU is able to establish an account at a Federal Reserve 
Bank, the Commission may reconsider the scope of the exemption at that 
time.
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    \32\ Federal Reserve Banks serve only account holders authorized 
by statute, such as depository institutions and the U.S. government. 
See, e.g., Federal Reserve Bank of Richmond, Consumer Issues and 
Information, available at https://www.richmondfed.org/faqs/consumer/ 
(last visited Feb. 26, 2016) (stating that ``Federal Reserve Banks 
are not authorized to open accounts for individuals[; rather, o]nly 
depository institutions and certain other financial entities may 
open an account at a Federal Reserve Bank''); see also Section 
806(a) of the Dodd-Frank Act (authorizing accounts at a Federal 
Reserve Bank for designated FMUs).
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    In response to CME's comment that the exemption would be 
inconsistent with the acknowledgement letter requirements in Commission 
Regulation 1.20(g)(4)(ii),\33\ the Commission agrees and has determined 
to repeal this requirement \34\ in a separate Federal Register notice. 
The exemptive order will render these provisions inapplicable, as the 
Federal Reserve Banks that provide customer accounts and other services 
to Designated FMUs would be exempt from Section 4d of the CEA.
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    \33\ 17 CFR 1.20(g)(4)(ii). Under Commission Regulation 
1.20(g)(4)(ii), a DCO must obtain from a Federal Reserve Bank acting 
as a depository for customer funds a written acknowledgement that 
(A) The Federal Reserve Bank was informed that the customer funds 
deposited therein are those of customers and are being held in 
accordance with the provisions of section 4d of the CEA and 
Commission regulations thereunder; and (B) The Federal Reserve Bank 
agrees to reply promptly and directly to any request from Commission 
staff for confirmation of account balances or provision of any other 
information regarding or related to an account. Id.
    \34\ Specifically, the Commission is revising paragraphs 
(g)(4)(i) and (g)(4)(ii), and repealing paragraphs (g)(4)(ii)(A) and 
(g)(4)(ii)(B).
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    In addition, CME commented that, as a SIDCO account holder, it 
would need multiple Federal Reserve Bank accounts in order to comply 
with the segregation requirements set forth in the exemptive order.\35\ 
CME noted that obtaining multiple Master Accounts may require a Federal 
Reserve Bank to exercise its discretion under its standard policies and 
operating circulars. The Commission agrees that this issue would appear 
to be within the scope of the Federal Reserve's authority and not the 
Commission's.
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    \35\ As a condition to the exemptive order, the Federal Reserve 
Banks are required to segregate customer funds deposited by a 
Designated FMU from the proprietary funds deposited by a Designated 
FMU.
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    CME also noted that account agreements between the Federal Reserve 
Banks and depository institution account holders typically include 
certain set-off rights and liens in favor of the Federal Reserve Banks. 
CME argued that Federal Reserve Bank account agreements may need to be 
revised to make sure customer margin deposits are ``bankruptcy remote'' 
from the SIDCO under applicable bank capital requirements.\36\ 
Similarly, ACLI argued that the interests of customers in their 
segregated funds should never be subordinated for the benefit of any 
other party. The Commission agrees that a Designated FMU cannot grant 
security interests in, rights of set-off against, or other rights in 
customer collateral. Therefore, the Commission believes that a 
Designated FMU's account agreement must be free from any rights of set-
off or liens on customer funds.
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    \36\ CME Comment Letter at 4 (July 1, 2016).
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    The exemptive order applies to all Federal Reserve Banks that 
provide customer accounts and other services to Designated FMUs. It 
requires that all money, securities, and property deposited into a 
customer account established pursuant to the CEA by a Designated FMU 
with a Federal Reserve Bank must be separately accounted for and not 
commingled with the money, securities, and property deposited into the 
account of any other person, including a proprietary account of the 
Designated FMU depositing such funds.\37\ In addition, Federal Reserve 
Banks must reply promptly and directly to any request for confirmation 
of account balances or provision of any other information regarding or 
related to the customer account(s) of a Designated FMU that are 
established pursuant to the CEA from the director of the Division of 
Clearing and Risk of the Commission, or any successor division, or such 
director's designees.
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    \37\ The Commission is slightly modifying the language from the 
proposed order so that the exemptive order makes clear that customer 
funds deposited by a Designated FMU may not be commingled with funds 
held in any other account at the Federal Reserve Banks, including 
the Designated FMU's proprietary account. This language is included 
in the order because, despite the exemption for the Federal Reserve 
Banks, a Designated FMU is still subject to the requirements of 
Section 4d of the CEA and Commission Regulation 1.20, which require 
a DCO to separately account for and segregate customer funds. 
Specifically, the Commission is changing the phrase ``separately 
accounted for and segregated from'' in the proposed order to 
``separately accounted for and not commingled with'' to more closely 
mirror the language used in Section 4d. For purposes of this 
exemption, customer funds held by the Federal Reserve Banks can meet 
this standard so long as the customer funds are held in a separate 
account and the funds in the customer account are not used to pay or 
secure the obligations arising out of any other account.
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    In light of the foregoing, the Commission believes the exemption 
would promote responsible economic and financial innovation and fair 
competition, and is consistent with the ``public interest,'' as that 
term is used in Section 4(c) of the CEA.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \38\ requires federal 
agencies, in promulgating rules, to consider whether those rules will 
have a significant economic impact on a substantial number of small 
entities and, if so, provide a regulatory flexibility analysis 
respecting the impact. The Commission believes that the exemptive order 
will not have a significant economic impact on a substantial number of 
small entities. The exemption will impact Designated FMUs and Federal 
Reserve Banks. The Commission has previously established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its actions on small entities in accordance 
with the RFA.\39\ The Commission has previously determined that DCOs, 
including Designated FMUs, are not small entities for purposes of the 
RFA.\40\ Similarly, the Commission believes that Federal Reserve Banks 
are not small entities for purposes of the RFA.
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    \38\ 5 U.S.C. 601 et seq.
    \39\ See 47 FR 18618, 18618-21 (Apr. 30, 1982).
    \40\ 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 exemption to have a 
significant impact on a substantial number of small entities. 
Therefore, the Chairman, on behalf of the Commission, hereby certifies, 
pursuant to 5 U.S.C. 605(b), that the exemption would not have a 
significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995 (``PRA'') \41\ 
are,

[[Page 53472]]

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.
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    \41\ 44 U.S.C. 3501 et seq.
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C. Cost and Benefit Considerations

1. Summary of Comments on the Costs and Benefits of the Proposed Order
    The Commission requested comments on the costs and benefits 
associated with the proposed order. The Commission requested but 
received no comments providing data or other information to enable the 
Commission to better quantify the expected costs and benefits 
attributable to this exemption. In terms of qualitative cost and 
benefit comments, OCC stated that Section 806(a) of the Dodd-Frank Act 
supports Federal Reserve Banks acting as depositories for all 
Designated FMUs and not just SIDCOs. OCC commented that limiting the 
exemption to SIDCO customer accounts would place OCC at a competitive 
disadvantage because, although OCC is a Designated FMU, it is not a 
SIDCO. In addition, OCC argued that denying OCC the opportunity to 
deposit customer funds at a Federal Reserve Bank would undermine the 
purpose of Title VIII of the Dodd-Frank Act.
    MGEX also supported the proposed exemption, but noted that DCOs 
that are not designated as systemically important would not have the 
same access to the credit and liquidity risk reducing opportunities 
afforded to SIDCOs with access to Federal Reserve Bank accounts. MGEX 
stated that limiting access to Federal Reserve Bank accounts to SIDCOs 
would create a competitive disadvantage to those DCOs that are not 
designated as systemically important, particularly Subpart C DCOs. MGEX 
recognized that the Commission cannot grant Subpart C DCOs permission 
to have accounts at a Federal Reserve Bank. However, MGEX argued that 
the Commission should expand the exemption to cover customer accounts 
maintained by Federal Reserve Banks for Subpart C DCOs in the event 
that Federal Reserve Banks are subsequently permitted to maintain 
accounts for Subpart C DCOs.
    ICC commented that accounts at Federal Reserve Banks would reduce 
credit, operational, and liquidity risks that are associated with 
traditional deposit accounts. ISDA and ICC further noted that such 
accounts may reduce interconnectedness in the cleared derivatives 
market. CME commented that migrating a portion of the eligible assets 
it has on deposit from clearing members to a Federal Reserve Bank may 
have a number of positive effects on its clearing members and their 
customers. ACLI stated that the proposed order would reduce overall 
systemic risk that could arise from liquidity and other risks on 
commercial banks where SIDCOs currently deposit their customer funds.
    In the discussion that follows, the Commission considers the costs 
and benefits of the exemptive order to the public and market 
participants. It also considers the costs and benefits of the exemption 
in light of the public interest factors enumerated in Section 15(a) of 
the CEA.
2. Costs
    This order is exemptive and provides the Federal Reserve Banks 
relief from certain of the requirements in the CEA and attendant 
Commission regulations. As with any exemptive rule or order, the 
exemption in the order is permissive, meaning that the Federal Reserve 
Banks are not required to rely on it. In addition, Designated FMUs are 
not required to deposit customer funds with a Federal Reserve Bank. 
Accordingly, the Commission assumes that interested parties would rely 
on the exemption only if the anticipated benefits warrant the costs of 
the exemption.
    The exemptive order would exempt the Federal Reserve Banks from 
Sections 4d and 22 of the CEA. All of the commenters generally 
supported issuing this exemption. However, two commenters raised the 
possibility that the proposed order could place them at a competitive 
disadvantage. First, as discussed above, OCC argued that, under Title 
VIII of the Dodd-Frank Act, a Federal Reserve Bank may be permitted to 
maintain an account for a Designated FMU. OCC argued that, as a result, 
it would be placed at a competitive disadvantage with respect to 
SIDCOs. The Commission agrees that Title VIII of the Dodd-Frank Act 
permits Federal Reserve Banks to maintain accounts for, and provide 
services to, Designated FMUs, and not just SIDCOs. Accordingly, and as 
discussed above, the Commission has determined to expand the exemption 
to include customer accounts held at Federal Reserve Banks by 
Designated FMUs generally, for purposes of consistency with Title VIII.
    Second, MGEX argued that it would be placed at a competitive 
disadvantage with respect to SIDCOs because, as a Subpart C DCO, MGEX 
is held to the same standards as SIDCOs under the Commission's 
regulations, but is not afforded the same opportunity to hold customer 
accounts at a Federal Reserve Bank. The Commission has declined to 
expand the exemption to include customer accounts held at Federal 
Reserve Banks by Subpart C DCOs. Under Title VIII, the Board may 
authorize a Federal Reserve Bank to maintain accounts only for 
Designated FMUs. As MGEX recognizes, the Commission does not have the 
authority to authorize a Federal Reserve Bank to maintain accounts for 
Subpart C DCOs. Accordingly, the competitive disadvantage identified by 
MGEX cannot be remedied by the Commission by expanding the scope of the 
exemption. Moreover, the Commission does not believe it would be 
appropriate to expand the scope of the exemption based on the 
theoretical possibility that Federal Reserve Banks may one day be 
permitted to provide accounts to Subpart C DCOs. In the event that a 
Federal Reserve Bank is authorized to maintain an account for other 
registered DCOs, the Commission may reconsider the scope of the 
exemptive relief at that time.
3. Benefits
    The exemption will benefit market participants by facilitating 
Designated FMUs' use of Federal Reserve Banks as depositories for 
customer funds. Whereas commercial banks present credit and liquidity 
risks to a Designated FMU, its FCM clearing members, and the FCMs' 
customers, the Federal Reserve Banks are substantially insulated from 
such risks. As discussed in greater detail above, Title VIII of the 
Dodd-Frank Act was enacted to mitigate systemic risk in the financial 
system and to promote financial stability, in part, through an enhanced 
supervisory framework for Designated FMUs. In addition to this 
framework, Title VIII, and more specifically, Section 806(a) of the 
Dodd-Frank Act, permits the Board to authorize a Federal Reserve Bank 
to establish and maintain an account for a

[[Page 53473]]

Designated FMU and provide to the Designated FMU certain financial 
services. By enacting Title VIII in general, and Section 806(a) in 
particular, Congress recognized the importance of reducing systemic 
risk and providing Designated FMUs with a potential safeguard during an 
extraordinary liquidity event. The exemption would therefore help 
promote Congress' goal of better preparing the U.S. financial system 
for potential future liquidity events.\42\ Commenters generally agreed 
that the exemption would benefit market participants by enhancing the 
protection of customer funds. Commenters noted that accounts at Federal 
Reserve Banks would decrease a SIDCO's credit, liquidity and 
operational risk, and reduce interconnectedness in the cleared 
derivatives market.
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    \42\ A Designated FMU's access to Federal Reserve Bank deposit 
accounts is also consistent with the international standards set 
forth in the Principles for Financial Market Infrastructures, which 
acknowledge the protections afforded by central banks from such 
credit and liquidity risks. See, e.g., CPSS-IOSCO, Principles for 
Financial Market Infrastructures, ] 3.9.3 (noting that ``[c]entral 
banks have the lowest credit risk and are the source of liquidity 
with regard to their currency of issue''); see also Principles for 
Financial Market Infrastructures, Key Consideration 8 (specifying 
that a financial market infrastructure ``with access to central bank 
accounts, payment services, or securities services should use these 
services, where practical, to enhance its management of liquidity 
risk'').
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    Moreover, the Federal Reserve Banks' standard of liability, as set 
forth in the Federal Reserve Bank Governing Documents, is better suited 
for the Federal Reserve Banks than Section 4d of the CEA, which was 
designed to govern customer funds deposited with a commercial bank, 
trust company, or DCO. Unlike commercial banks, Federal Reserve Banks 
do not operate for profit and serve only account holders authorized by 
statute, such as depository institutions and the U.S. government. 
Indeed, each year they return to the U.S. Department of Treasury all 
earnings in excess of Federal Reserve Bank operating and other 
expenses, such as litigation expenses. By exempting the Federal Reserve 
Banks from certain potential enforcement actions and private suits, the 
exemption would reduce the Federal Reserve Banks' exposure to 
litigation. Because the Federal Reserve Banks return their earnings to 
the U.S. Department of Treasury's general fund, U.S. taxpayers could 
benefit from the exemption. Therefore, the Commission believes that it 
is appropriate to apply the Federal Reserve Banks' standard of 
liability in order to facilitate the use of these accounts.
4. Section 15(a) Factors
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its action before issuing an order under the 
CEA.\43\ By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of an order or to determine whether the 
benefits of the order outweigh its costs. Rather, Section 15(a) simply 
requires the Commission to ``consider the costs and benefits'' of its 
action.
---------------------------------------------------------------------------

    \43\ 7 U.S.C. 19(a).
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    Section 15(a) of the CEA further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness, and financial integrity of futures 
markets; (3) price discovery; (4) sound risk management practices; and 
(5) other public interest considerations. The Commission may in its 
discretion give greater weight to any one of the five enumerated areas 
and could in its discretion determine that, notwithstanding its costs, 
a particular order is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the CEA.
a. Protection of Market Participants and the Public
    The exemption would serve to facilitate Designated FMUs' use of 
Federal Reserve Banks as depositories for customer funds. Because the 
Federal Reserve System is the nation's central bank, such accounts 
would provide Designated FMUs with the lowest possible credit risk in 
the event of a market disruption. Moreover, as Federal Reserve Banks 
are the source of liquidity with regard to U.S. dollar deposits, 
Designated FMUs with access to a deposit account at a Federal Reserve 
Bank would also be better equipped to handle a liquidity event. Since 
Designated FMUs have been so designated because of their importance to 
the broader financial system, reducing these risks would protect market 
participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity
    A temporary or permanent disruption to the operations of a 
Designated FMU could cause widespread and significant damage to the 
financial integrity of derivatives markets as a whole. Therefore, by 
facilitating a Designated FMU's use of Federal Reserve Banks as 
depositories for customer funds, the exemption would reduce liquidity 
and credit risk to the Designated FMU, which would, in turn, promote 
the financial integrity of the derivatives markets.
    As noted above, two commenters raised concerns that the exemptive 
order may result in a competitive disadvantage. The Commission has 
addressed the concern of one commenter (OCC) by expanding the exemption 
to include customer accounts held at Federal Reserve Banks by 
Designated FMUs generally. On the other hand, the Commission does not 
have the authority to take action to address the concerns of the other 
commenter (MGEX).
    The Commission does not anticipate the exemption will have a 
significant impact on the efficiency of the derivatives markets.
c. Price Discovery
    The Commission does not anticipate the exemption will have an 
impact on the price discovery process.
d. Sound Risk Management Practices
    The Commission believes that establishing segregated customer 
accounts for Designated FMUs and enabling Designated FMUs to access 
related services at a Federal Reserve Bank would improve a Designated 
FMU's ability to manage liquidity risk and protect customer funds. 
Additionally, the Commission believes that the availability of a 
Federal Reserve Bank account could allow a Designated FMU to reduce its 
concentration risk by adding an additional creditworthy depository in 
which to diversify funds. Accordingly, the exemption promotes sound 
risk management practices.
    The Commission further notes that, notwithstanding the exemption 
from Section 4d of the CEA, the Federal Reserve Banks are still 
required to segregate customer funds deposited by a Designated FMU from 
the proprietary funds deposited by a Designated FMU and to adhere to 
the longstanding standards of liability that govern the Federal Reserve 
Banks.
e. Other Public Interest Considerations
    The Commission believes that facilitating a Designated FMU's access 
to Federal Reserve Bank accounts will promote the public interest by 
bolstering a Designated FMU's ability to conduct settlements with a 
high degree of confidence under a wide range of stress scenarios, 
thereby increasing the likelihood of the Designated FMU being able to 
provide its customers with access to their funds in times of market 
distress.

[[Page 53474]]

VI. Order of Exemption

    After considering the above factors and the comment letters 
received in response to the request for comments, the Commission has 
determined to issue the following:
Order
    Pursuant to Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act''), the Financial Stability 
Oversight Council (``Council'') is required to designate those 
financial market utilities (``FMUs'') that the Council determines are, 
or are likely to become, systemically important. A derivatives clearing 
organization registered with the Commodity Futures Trading Commission 
(``Commission'') and designated by the Council as systemically 
important is referred to herein as a ``Designated FMU''. Under Section 
806(a) of the Dodd-Frank Act, the Board of Governors (``Board'') of the 
Federal Reserve System is permitted to authorize a Federal Reserve Bank 
to establish and maintain a deposit account for, among others, a 
Designated FMU and provide certain services to the Designated FMU, 
subject to any applicable rules, orders, standards, or guidelines 
prescribed by the Board.
    Designated FMUs are required to hold funds belonging to customers 
of their clearing members in accounts subject to Section 4d of the 
Commodity Exchange Act (``CEA''). In addition, Section 22 of the CEA 
would provide for private rights of action for damages against persons 
who violate Section 4d, or persons who willfully aid, abet, counsel, 
induce, or procure the commission of a violation of Section 4d. 
However, the Commission understands that deposit accounts maintained by 
any Federal Reserve Bank would be governed by applicable account 
agreements, operating circulars issued by Federal Reserve Banks for 
each service, the Federal Reserve Act, and Federal Reserve regulations 
and policies, and, with respect to book-entry securities services, the 
regulations of the domestic issuer of the securities or the issuer's 
regulator (``Federal Reserve Bank Governing Documents''). The Federal 
Reserve Bank Governing Documents, as may be amended from time to time, 
include, but are not limited to, Federal Reserve Bank Operating 
Circular No. 6 (governing funds transfers through the Fedwire Funds 
Service); Federal Reserve Bank Operating Circular No. 7 (governing the 
maintenance of and transfer services for book-entry securities 
accounts); 12 CFR part 210, subpart B (governing funds transfers 
through the Fedwire Funds Service); and 31 CFR part 357, subpart B 
(setting forth the U.S. Department of the Treasury's regulations 
governing 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 Designated FMU with its obligations under the CEA. To 
the extent that liability may accrue under the Federal Reserve Bank 
Governing Documents, the Commission understands that the Federal 
Reserve Bank may be held liable only for actual damages that are (i) 
incurred solely by the Designated FMU account holder, and (ii) 
proximately caused by the Federal Reserve Bank's failure to exercise 
ordinary care or act in good faith in accordance with the Federal 
Reserve Bank Governing Documents. The Commission is issuing an 
exemption to the Federal Reserve Banks in order to facilitate Federal 
Reserve Banks' ability to establish customer accounts for Designated 
FMUs.
    Therefore, it is ordered, pursuant to Section 4(c) of the CEA, 7 
U.S.C. 6(c), that the Federal Reserve Banks are granted an exemption 
from Sections 4d and 22 of the CEA, subject to the terms and conditions 
specified herein:
    1. Segregation. Money, securities, and property deposited into a 
customer account established pursuant to the CEA by a Designated FMU 
with a Federal Reserve Bank shall be separately accounted for and not 
commingled with the money, securities, and property deposited into the 
account of any other person, including a proprietary account of the 
Designated FMU depositing such funds.
    2. Information Requests. Federal Reserve Banks must reply promptly 
and directly to any request for confirmation of account balances or 
provision of any other information regarding or related to the customer 
account(s) of a Designated FMU that are established pursuant to the CEA 
from the director of the Division of Clearing and Risk of the 
Commission, or any successor division, or such director's designees.
    3. Applicability to Federal Reserve Banks. Subject to the 
conditions contained herein, the order applies to all Federal Reserve 
Banks that provide customer accounts and other services to Designated 
FMUs. In addition, pursuant to the Federal Reserve's Key Policies for 
the Provision of Financial Services: Standards Related to Priced-
Service Activities of the Federal Reserve Banks, information obtained 
by the Board of Governors of the Federal Reserve System or its 
designees during the course of supervising Designated FMUs, pursuant to 
Title VIII of the Dodd-Frank Act, or any counterparty to a Designated 
FMU under any authority, shall not be attributed by the Commission to 
any Federal Reserve Bank providing accounts and financial services to 
Designated FMU account holders.
    4. Reservation of Rights. This order is based upon the analysis set 
forth above. Any material change in law or circumstances pursuant to 
which this order is granted might require the Commission to reconsider 
its finding that the exemption contained herein is appropriate and/or 
consistent with the public interest and purposes of the CEA. Further, 
the Commission reserves the right, in its discretion, to revisit any of 
the terms and conditions of the relief provided herein, including but 
not limited to, making a determination that certain entities described 
herein should be subject to the Commission's full jurisdiction, and to 
condition, suspend, terminate, or otherwise modify or restrict the 
exemption granted in this order, as appropriate, upon its own motion.

    Issued in Washington, DC, on August 8, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

Appendices to Order Exempting the Federal Reserve Banks From Sections 
4d and 22 of the Commodity Exchange Act--Commission Voting Summary, 
Chairman's Statement, and Commissioner's Statement

Appendix 1--Commission Voting Summary

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

Appendix 2--Statement of Chairman Timothy G. Massad

    Today, the Commission continues its work to ensure the 
resiliency of clearinghouses and protect customers in our markets. 
To provide the necessary context for these efforts, it is useful to 
look back at recent history.
    Most participants in our markets will recall what happened at 
the beginning of the financial crisis in September 2008, when the 
Reserve Fund--a money market fund--``broke the buck'' following the 
bankruptcy of Lehman Brothers. Redemptions were suspended and 
investors were not able to make withdrawals. As a result, many 
futures commission merchants (FCMs) were not able to access customer 
funds invested in the Reserve Fund. Absent relief by the CFTC, many 
would have been undercapitalized,

[[Page 53475]]

potentially ending up in bankruptcy. In addition, clearinghouses 
could not liquidate investments in the Reserve Fund. And there could 
have easily been a widespread run on money market funds, but for the 
emergency actions taken by the U.S. government.
    As a result of the crisis, as well as the collapse of MF Global, 
the CFTC and our self-regulatory organizations took a number of 
actions to better protect customer funds. We required customer funds 
to be strictly segregated and limited the ways they can be invested. 
We enhanced accounting and auditing procedures at FCMs, including by 
requiring daily verification from depositories of the amounts 
deposited by FCMs.
    Today, CFTC rules require that customer funds be invested in 
highly liquid assets and be convertible into cash within one 
business day without a material discount in value. Our rules also 
require that clearinghouses invest initial margin deposits in a 
manner that allows them to promptly liquidate any such investment.
    Over the last few years, the Securities and Exchange Commission 
(SEC) has also taken action in response to the lessons of the 
financial crisis, by adopting a number of measures to address the 
potential vulnerabilities of money market funds. One such recent 
reform, which takes effect in October of this year, sets forth the 
circumstances where prime money market funds are permitted, or in 
some circumstances required, to suspend redemptions in order to 
prevent the risk of investor runs.
    While we recognize the benefit of the SEC's new rule in 
preventing investor runs, a suspension of redemptions by a money 
market fund would mean investments in such funds are not accessible 
and cannot be promptly liquidated. Such an event could result in 
customers, FCMs, and clearinghouses being unable to access the funds 
necessary to satisfy margin obligations.
    Therefore, CFTC staff is today providing guidance making clear 
that Commission rules prohibit a clearing member from investing 
customer funds, or a clearinghouse from investing amounts deposited 
as initial margin, in such money market funds.
    Some industry participants have suggested we should interpret or 
revise our rules to permit investments of at least some customer 
monies in such money market funds unless and until redemptions are 
suspended. We have declined to do so, as it would be too late to 
protect customers at that point. Moreover, there are alternatives to 
prime funds, including certain government money markets funds or 
Treasury securities. In fact, investments in prime money market 
funds represent a relatively small portion of the total customer 
funds on deposit and the total initial margin deposits at 
clearinghouses. Some of our clearinghouses and FCMs do not have any 
investments in prime funds.
    Staff has been careful not to be overly restrictive, and 
therefore has issued no-action relief to allow FCMs to invest 
certain ``excess'' proprietary funds held in customer accounts in 
these money market funds. That is, our existing rules require FCMs 
to deposit their own funds (i.e., targeted residual interest) into 
customer accounts to make sure that there are sufficient funds in 
the segregated customer accounts to cover all obligations due to 
customers. FCMs frequently deposit an amount of their own funds that 
is in excess of the targeted residual interest amount required under 
our rules, and that excess amount can be withdrawn at any time. 
Indeed, if an FCM should default, customers--and the system as a 
whole--are better off if excess funds are on deposit, and we do not 
wish to incentivize FCMs to withdraw such excess funds from the 
segregated account. Therefore, the no action relief makes clear that 
FCMs can continue to invest their own funds in excess of their 
targeted residual interest in such money market funds, even though 
they cannot invest the customer funds--or any proprietary funds they 
are required to deposit--in this manner.
    Finally, the Commission is taking action today that will further 
ensure the safety of customer funds. We are issuing an order that 
will help make it possible for systemically important clearinghouses 
to deposit customer funds at Federal Reserve Banks. Our order makes 
clear that a Federal Reserve Bank that opens such an account would 
be subject to the same standards of liability that generally apply 
to it as a depository, rather than any potentially conflicting 
standard under the commodity laws.
    Although Federal Reserve accounts for customer funds held by 
systemically important clearinghouses do not exist today, they are 
allowed under the Dodd-Frank Act, and we have been working with the 
Board of Governors to facilitate them. The two clearinghouses 
designated as systemically important in our markets have been 
approved to open Federal Reserve Bank accounts for their proprietary 
funds. We hope that with today's action, accounts for customer funds 
can be opened soon. Doing so will help protect customer funds and 
enhance the resiliency of clearinghouses.
    I thank the dedicated CFTC staff and my fellow Commissioners for 
their work on these matters.

Appendix 3--Concurring Statement of Commissioner Sharon Y. Bowen

    I am pleased to concur with the two Commission actions: The 
``Order Exempting the Federal Reserve Banks from Sections 4d and 22 
of the Commodity Exchange Act'' and ``Written Acknowledgment of 
Customer Funds from Federal Reserve Banks.'' I have long believed 
that, in order to protect customer funds, we need to keep that money 
at our central bank. In the event of a major market event, I, and I 
believe the rest of the American people, would feel much better 
knowing that investors' money is at the Federal Reserve instead of 
at multiple central counterparties. I am glad that our agency and 
the Federal Reserve have come to an agreement on an effective way to 
accomplish this.
    I am similarly pleased with the Division of Clearing and Risk's 
(DCR) ``Staff Interpretation Regarding CFTC Part 39 In Light Of 
Revised SEC Rule 2a-7,'' which clearly outlines the staff's 
understanding that, given the limitations that the Securities and 
Exchange Commission (SEC) has imposed on redemptions for prime money 
market funds, that they are no longer considered Rule 1.25 assets. 
This is the correct interpretation. The key feature in a Rule 1.25 
asset is that it must be available quickly in times of crisis or 
illiquidity. And we know that funds are more likely to close the 
gates on redemptions when market dislocation happens. That is just 
the time when futures commission merchants (FCMs) and customers 
would need access to their money, and a multi-day delay can mean 
catastrophe for some businesses.
    For that very reason, I have concerns about the Division of Swap 
Dealer and Intermediary Oversight's (DSIO) ``No-Action Relief With 
Respect to CFTC Regulation 1.25 Regarding Money Market Funds.'' 
While the 4(c) exemption and the DCR interpretation are clearly 
customer protection initiatives, the DSIO no action letter is not. 
This no action letter would allow FCMs to keep money in segregated 
customer accounts that actually would not be readily available in a 
crisis. Thus, while it may appear that an FCM had considerable funds 
available to settle customer accounts during a market dislocation, 
in fact that would be only be an illusion; a portion of those funds 
could be locked down behind the prime money market funds' gates and 
therefore not actually be available when needed.
    I do not think that the staff of the Commission should be 
supporting this kind of ``window dressing''--giving the impression 
of greater security than there actually is. If the funds are not 
suitable investments for customer funds, then they are not suitable 
for the additional capital that the FCMs put in those accounts to 
protect against potential shortfalls. Having lived through 
bankruptcies, such as MF Global and Peregrine, I have a healthy 
respect for the importance of having strong clearing members with a 
large cushion of funds that can be accessed when needed. This no 
action letter undermines that effort. Given the importance of this 
topic to the general public, we should at least have asked for 
comments or even held a roundtable before making this change. I 
therefore hope to reexamine this subject in the near future.

[FR Doc. 2016-19210 Filed 8-11-16; 8:45 am]
 BILLING CODE 6351-01-P