[Federal Register Volume 81, Number 156 (Friday, August 12, 2016)]
[Rules and Regulations]
[Pages 53266-53268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19211]



17 CFR Part 1

RIN 3038-AE48

Written Acknowledgment of Customer Funds From Federal Reserve 

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.


SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is amending its regulations to revise or repeal certain 
provisions related to the requirement that a derivatives clearing 
organization (``DCO'') obtain from a Federal Reserve Bank acting as a 
depository for customer funds a written acknowledgment that the Federal 
Reserve Bank was informed that the customer funds deposited therein are 
those of customers and are being held in accordance with Section 4d of 
the Commodity Exchange Act (``CEA'').

DATES: Effective August 12, 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.

SUPPLEMENTARY INFORMATION: On June 2, 2016, the Commission published 
for public comment in the Federal Register a proposed order that would 
exempt Federal Reserve Banks that provide customer accounts and other 
services to certain designated financial market utilities registered 
with the Commission from Sections 4d and 22 of the CEA.\1\ The proposed 
order would permit Federal Reserve Banks to hold money, securities, and 
property deposited into a customer account by certain designated 
financial market utilities in accordance with the standards to which 
Federal Reserve Banks are held.

    \1\ 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).

    In response to the request for public comment, CME Group Inc. noted 
that the proposed order would be inconsistent with Regulation 
1.20(g)(4)(ii).\2\ Commission Regulation 1.20(g)(4)(ii) requires that a 
DCO obtain from a Federal Reserve Bank acting as a depository for 
customer funds a written acknowledgment that the customer funds 
deposited therein are being held in accordance with Section 4d of the 
CEA; however, pursuant to the terms of the proposed order, the Federal 
Reserve Banks would be exempt from Section 4d. The Commission 
subsequently issued a final exemptive order that is substantively 
similar to the proposed order. In the Federal Register notice issuing 
the final exemptive order, the Commission noted that, in light of the 
comment, it had determined to repeal the written acknowledgment 
requirement with respect to customer accounts held with a Federal 
Reserve Bank \3\ in a separate Federal Register notice. The final 
exemptive order will render these provisions inapplicable, as the 
Federal Reserve Banks will not be held to the requirements of Section 
4d of the CEA. Therefore, the Commission is amending Regulation 1.20 to 
remove the acknowledgment letter requirement for customer funds 
deposited by a DCO with a Federal Reserve Bank. The Commission welcomes 
any comments and/or questions regarding this amendment.

    \2\ 17 CFR 1.20(g)(4)(ii). Regulation 1.20(g)(4)(ii) provides 
that a DCO shall obtain from a Federal Reserve Bank only a written 
acknowledgment 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 
Act 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.
    \3\ Specifically, the Commission is revising paragraphs 
(g)(4)(i) and (g)(4)(ii) of Regulation 1.20, and repealing 
paragraphs (g)(4)(ii)(A) and (g)(4)(ii)(B) of Regulation 1.20.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 1 as follows:


1. The authority citation for part 1 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 

[[Page 53267]]

2. Amend Sec.  1.20 by revising paragraphs (g)(4)(i) and (ii) to read 
as follows:

Sec.  1.20   Futures customer funds to be segregated and separately 
accounted for.

* * * * *
    (g) * * *
    (4) * * *
    (i) A derivatives clearing organization must obtain a written 
acknowledgment from each depository prior to or contemporaneously with 
the opening of a futures customer funds account; provided, however, 
that a derivatives clearing organization is not required to obtain a 
written acknowledgment from a Federal Reserve Bank with which it has 
opened a futures customer funds account.
    (ii) The written acknowledgment must be in the form as set out in 
appendix B to this part.
* * * * *

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

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Written Acknowledgment of Customer Funds From Federal 
Reserve Banks--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 

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, 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

[[Page 53268]]

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 
    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. 2016-19211 Filed 8-11-16; 8:45 am]