[Federal Register Volume 89, Number 2 (Wednesday, January 3, 2024)]
[Proposed Rules]
[Pages 286-307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-28767]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 39

RIN 3038-AF39


Protection of Clearing Member Funds Held by Derivatives Clearing 
Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (CFTC or Commission) 
is proposing regulations to ensure clearing member funds and assets 
receive the proper treatment in the event the derivatives clearing 
organization (DCO) enters bankruptcy by requiring, among other things, 
that clearing member funds be segregated from the DCO's own funds and 
held in a depository that acknowledges in writing that the funds belong 
to clearing members, not the DCO. In addition, the Commission is 
proposing to permit DCOs to hold customer and clearing member funds at 
foreign central banks subject to certain requirements. Finally, the 
Commission is proposing to require DCOs to conduct a daily calculation 
and reconciliation of the amount of funds owed to customers and 
clearing members and the amount actually held for customers and 
clearing members.

DATES: Comments must be received by February 16, 2024.

ADDRESSES: You may submit comments, identified by RIN 3038-AF39, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above. Please submit your comments using only one of these 
methods. Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be

[[Page 287]]

posted as received to https://comments.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 (FOIA), a petition for 
confidential treatment of the exempt information may be submitted 
according to the procedures established in Sec.  145.9 of the 
Commission's regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I (2022), and are accessible on the 
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, [email protected], Division of Clearing and Risk, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581; Theodore Z. Polley, Associate 
Director, 312-596-0551, [email protected]; or Scott Sloan, Special 
Counsel, 312-596-0708, [email protected]; Division of Clearing and Risk, 
Commodity Futures Trading Commission, 77 West Jackson Boulevard, Suite 
800, Chicago, Illinois 60604.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Proprietary Funds

    Section 4d of the Commodity Exchange Act (CEA) and part 1 of the 
Commission's regulations establish a comprehensive regime to safeguard 
the funds belonging to customers of a futures commission merchant 
(FCM).\2\ Commission regulations define a ``customer'' as any person 
who uses an FCM, introducing broker, commodity trading advisor, or 
commodity pool operator as an agent in connection with trading in any 
commodity interest, and therefore, this customer protection regime does 
not apply to the funds of any person who clears trades directly through 
a DCO, who is a ``clearing member.'' \3\ At the most general level, the 
customer protection regime requires FCMs to segregate customer funds 
from their own funds, deposit customer funds under an account name that 
clearly identifies them as customer funds,\4\ and obtain a written 
acknowledgment from each depository that holds customer funds.\5\ These 
acknowledgment letters, which must adhere to specific templates 
contained in the Commission's regulations, require a depository to 
acknowledge, among other things, that the accounts opened by the FCM 
hold funds that belong to the FCM's customers. The customer protection 
regime also establishes accounting and reporting requirements 
applicable to customer funds,\6\ and limits both the types of 
investments that can be made with customer funds \7\ and the type of 
depositories that can hold customer funds.\8\
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    \2\ 7 U.S.C. 6d; 17 CFR 1.20-1.39. See also 17 CFR 22.1-22.17, 
and 30.7 (establishing similar regimes for cleared swaps customer 
collateral and foreign futures customer funds).
    \3\ 17 CFR 1.3.
    \4\ 17 CFR 1.20(a).
    \5\ 17 CFR 1.20, 22.5, and 30.7 (requiring an acknowledgment 
letter for futures customer funds, cleared swaps customer 
collateral, and foreign futures customer funds, respectively).
    \6\ 17 CFR 1.32, 1.33.
    \7\ 17 CFR 1.25.
    \8\ 17 CFR 1.49.
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    Many of the customer protection requirements that apply to FCMs 
also apply to DCOs that receive customer funds from their FCM clearing 
members. DCOs must segregate the customer funds of their FCM clearing 
members from their own funds,\9\ deposit customer funds under an 
account name that identifies the funds as customer funds,\10\ obtain 
acknowledgment letters from depositories,\11\ limit the investment of 
customer funds to instruments listed in Sec.  1.25,\12\ and limit 
depositories for customer funds to those listed in Sec. Sec.  1.20 and 
1.49.\13\ These protections, however, do not extend to clearing members 
of DCOs. Only section 5b(c)(2)(F) of the CEA (Core Principle F) and 
Sec.  39.15 apply to the treatment of clearing members' funds and 
assets held by a DCO in relation to cleared contracts (proprietary 
funds).\14\ These provisions require DCOs to establish standards and 
procedures that are designed to protect and ensure the safety of 
proprietary funds and require DCOs to hold proprietary funds in a 
manner that will minimize the risk of loss or delay in access by the 
DCO to the proprietary funds.\15\ These provisions further require any 
investment of proprietary funds to be in instruments with minimal 
credit, market, and liquidity risks.\16\
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    \9\ 17 CFR 1.20(g)(1); 17 CFR 39.15 (b); 17 CFR 22.3(b)(1).
    \10\ 17 CFR 1.20(g)(1).
    \11\ 17 CFR 1.20(g)(4); 17 CFR 22.5.
    \12\ 17 CFR 39.15(e).
    \13\ 17 CFR 1.20(g)(2), (3); 17 CFR 22.3(b) (cross-referencing 
17 CFR 22.4).
    \14\ This definition of proprietary funds is only for 
explanatory purposes in the background section. As discussed further 
below, the Commission is proposing a definition of ``proprietary 
funds'' that is referred to throughout the remainder of this 
proposed rulemaking.
    \15\ 7 U.S.C. 7a-1(c)(2)(F); 17 CFR 39.15.
    \16\ Id.
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    Section 8a(5) of the CEA grants the Commission authority to adopt 
rules it determines are reasonably necessary to effectuate, among other 
things, the DCO core principles.\17\ The Commission's initial focus in 
implementing Core Principle F was on the custody and safeguarding of 
customer funds, consistent with section 4d of the CEA. This approach 
was largely responsive to the historical prevailing model in which all 
or nearly all clearing members of a DCO are FCMs. However, the 
Commission has since granted registration to a number of DCOs that 
clear directly for market participants without the intermediation of 
FCMs, including, in most cases, market participants who are natural 
persons (i.e., individuals).\18\ Additionally, many DCOs that use the 
traditional FCM clearing model have at least some non-FCM clearing 
members. The Commission therefore is proposing safeguards for 
proprietary funds to provide protections for clearing members 
comparable to those applicable to customers.\19\ The Commission has 
preliminarily determined that each of these additional safeguards is 
reasonably necessary to effectuate DCO Core Principle F.\20\
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    \17\ 7 U.S.C. 12a(5).
    \18\ Currently, CBOE Clear Digital, LLC; CX Clearinghouse, L.P.; 
LedgerX, LLC; and North American Derivatives Exchange Inc. allow 
individuals to be direct clearing members. Further, ICE NGX Canada 
Inc. clears physically delivered energy contracts directly for 
clearing members with a net worth exceeding CAD $5,000,000 or assets 
exceeding CAD $25,000,000.
    \19\ The U.S. Bankruptcy Code requires a bankruptcy trustee to 
distribute clearing members' cash and other assets held by a debtor 
DCO ratably among all clearing members. 11 U.S.C. 766(i)(2); 11 
U.S.C. 761(9)(D), (10), (16). Therefore, the Commission cannot 
effectively create multiple account classes for the clearing members 
of a DCO--e.g., one for FCM proprietary funds and one for non-FCM 
proprietary funds--because the different account classes would not 
be recognized by a bankruptcy court.
    \20\ CEA section 5b(c)(2)(F), 7 U.S.C. 7a-1(c)(2)(F).
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    Specifically, the Commission is proposing to require a DCO to hold 
proprietary funds separately from the DCO's own funds, in accounts that 
are named to clearly identify the funds as belonging to clearing 
members. The

[[Page 288]]

Commission is further proposing to prohibit a DCO or any depository 
from using proprietary funds in any way other than as belonging to the 
clearing member.
    Additionally, the proposed rules include requirements for a DCO to 
review, on a daily basis, the amount of funds owed to each clearing 
member with respect to each of its accounts, both customer (including, 
as relevant, futures and cleared swaps) and proprietary, and to 
reconcile those figures to the amount of funds held in aggregate in 
each such type of account across all of the DCO's depositories.
    The Commission is also proposing to require a DCO to obtain a 
letter from the depository for each account holding proprietary funds 
(proprietary funds letter) acknowledging, among other things, that the 
funds belong to clearing members and cannot be used by the DCO for any 
other purpose. The proposed proprietary funds letter is based on the 
template acknowledgment letter that a DCO is required to use in 
connection with customer funds.\21\
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    \21\ See 17 CFR 1.20 App. B.
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    In addition to preventing the misuse of proprietary funds, the 
proposed requirements would help ensure that proprietary funds are 
appropriately protected in the event of a DCO bankruptcy. The U.S. 
Bankruptcy Code establishes that in the event of a DCO bankruptcy, 
member property, which includes funds held for clearing members' 
proprietary accounts,\22\ is repaid to clearing members pro rata based 
on their claims for such funds, and ahead of most other claims against 
the DCO's estate.\23\ Further, part 190 of the Commission's regulations 
establishes how clearing members' claims against the DCO's estate 
should be determined and how payments should be allocated among 
clearing members.\24\ By requiring proprietary funds to be held 
separately from the DCO's funds and easily identified in a proprietary 
funds letter, the proposed rules will enable a bankruptcy court or 
trustee to more clearly identify these funds as member property. 
Further, the proposed rules will require the DCO to verify, on a 
regular basis, that it is holding the proper amount of proprietary 
funds, thus ensuring that these funds would be available for 
distribution in the event of a DCO bankruptcy.
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    \22\ See 11 U.S.C. 761(16) (defining ``member property'' as 
cash, a security, or other property, or proceeds of such cash, 
security, or property, held by a DCO for a clearing member's 
proprietary account).
    \23\ See 11 U.S.C. 766(i) (providing that member property is 
distributed ratably to clearing members on the basis and to the 
extent of their allowed net equity claims based on their proprietary 
accounts, and in priority to all other claims, except claims related 
to the administration of member property).
    \24\ See 17 CFR 190.00-190.19.
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B. Central Bank Depositories

    The Commission is also proposing requirements specific to obtaining 
written acknowledgments from central banks holding customer or 
proprietary funds.\25\ When the Commission adopted the template 
acknowledgment letter for depositories holding customer funds in 2013, 
it did not require use of the template letter by Federal Reserve Banks, 
due to the ``unique role'' of the U.S. central bank.\26\ The Commission 
also recognized that there may be valid reasons why some foreign 
depositories would require modifications to the letter and stated that, 
in such circumstances, the Commission would consider ``alternative 
approaches'' on a case-by-case basis.\27\
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    \25\ ``Central bank'' is the term used to describe the authority 
responsible for policies that affect a country's supply of money and 
credit. See, e.g., https://www.clevelandfed.org/publications/economic-commentary/2007/ec-20071201-a-brief-history-of-central-banks.
    \26\ Enhancing Protections Afforded Customers and Customer Funds 
Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506, 68535 (Nov. 14, 2013).
    \27\ Id. at 68536.
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    Since then, the Commission's Division of Clearing and Risk (DCR) 
has issued several no-action letters in which the Division confirmed 
that it would not recommend that the Commission take enforcement action 
against a DCO for making certain modifications to the template 
acknowledgment letter in connection with customer accounts maintained 
at a foreign central bank.\28\ To encourage the use of central bank 
accounts, which can provide a superior alternative to holding funds at 
a commercial bank from the perspective of credit and liquidity risk, 
the Commission is proposing to allow a DCO to hold customer and 
proprietary funds at certain central banks without obtaining the 
template acknowledgment letter for customer funds or the proposed 
proprietary funds letter. Instead, a DCO would need to obtain only a 
written acknowledgment that the central bank was informed that the 
funds deposited with the bank are customer or proprietary funds (as 
applicable) held in accordance with section 4d or 5b of the CEA, and 
that the central bank agrees to respond to requests from specified 
Commission staff for information about the account, including the 
account balance (modified written acknowledgments). These proposed 
requirements are based on the requirements the Commission adopted in 
2013 with regard to written acknowledgments from Federal Reserve 
Banks.\29\
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    \28\ See, e.g., CFTC Letter No. 14-124 (Oct. 8, 2014) (related 
to customer accounts held at the Bank of England); CFTC Letter No. 
16-05 (Feb. 1, 2016) (related to customer accounts held at the 
Deutsche Bundesbank).
    \29\ Enhancing Protections Afforded Customers and Customer 
Funds, 78 FR at 68628. In 2016, the Commission issued an order under 
section 4(c) of the CEA conditionally exempting Federal Reserve 
Banks from section 4d of the CEA (Order Exempting the Federal 
Reserve Banks from Sections 4d and 22 of the Commodity Exchange Act, 
81 FR 53467 (Aug. 12, 2016)). The conditions of the order require 
Federal Reserve Banks to keep customer funds segregated and respond 
to information requests from the Commission, making a separate 
written acknowledgment from a Federal Reserve Bank unnecessary. The 
Commission therefore repealed the 2013 provision (then Sec.  
1.20(g)(4)(ii)) concerning written acknowledgments from Federal 
Reserve Banks and adopted current Sec.  1.20(g)(4)(i), which 
excludes Federal Reserve Banks from the written acknowledgment 
requirement.
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    The Commission is proposing to allow use of the modified written 
acknowledgment only by a DCO that holds customer or proprietary funds 
at the central bank of a ``money center country'' as defined in Sec.  
1.49--Canada, France, Germany, Italy, Japan, and the United Kingdom--to 
limit risks to customer and proprietary funds. Along with the United 
States, these countries comprise the Group of Seven (G7). 
Representatives from the G7 countries meet several times each year to 
coordinate their cooperation on issues of economic policy, and the 
United States and its financial regulatory agencies have a history of 
successful cooperation with the respective financial regulatory 
agencies of these countries. When the definition of ``money center 
country'' was first proposed in connection with the adoption of Sec.  
1.49, a commenter suggested that the definition include ``other 
locations with stable currencies and other indicia that customer funds 
will be relatively secure.'' \30\ The Commission rejected this proposal 
as difficult to apply and noted that it would require the Commission to 
expend significant resources to conduct a broad evaluation of, among 
other things, a country's banking, monetary, and economic policies and 
systems.\31\ The Commission believes that limiting the proposed change 
to central banks of money center countries appropriately considers 
security for customer and proprietary funds, flexibility for DCOs, and 
creating a system that is workable in practice.
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    \30\ See Denomination of Customer Funds and Location of 
Depositories, 68 FR at 5546-5547 (Mar. 6, 2003).
    \31\ Id.
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    Further, the Commission is not proposing to require a DCO to obtain 
an

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acknowledgment letter from a Federal Reserve Bank holding proprietary 
funds. This is consistent with Sec.  1.20(g)(4), which states that a 
DCO does not need a written acknowledgment to hold customer funds held 
at a Federal Reserve Bank. Federal Reserve Banks have previously 
expressed an inability to agree to all of the terms in the template 
acknowledgment letter.\32\ Because Federal Reserve Banks are the source 
of liquidity for U.S. dollar deposits, a DCO would face lower credit 
and liquidity risk with a deposit at a Federal Reserve Bank than it 
would with a deposit at a commercial bank. In the context of customer 
funds, the Commission determined that it would not require a written 
acknowledgment from Federal Reserve Banks in order to facilitate use of 
these accounts and help obtain these benefits that ultimately serve 
market participants and the integrity of the financial markets.\33\ The 
Commission believes that the same rationale applies with respect to 
proprietary funds. Further, the Commission has required DCOs with 
access to accounts and services at a Federal Reserve Bank to use such 
accounts and services where practical,\34\ and as a policy matter seeks 
to facilitate use of those accounts.
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    \32\ Enhancing Protections Afforded Customers and Customer 
Funds, 78 FR at 68535.
    \33\ Denomination of Customer Funds and Location of 
Depositories, 68 FR at 53468 (Mar. 6, 2003).
    \34\ 17 CFR 39.33(d)(5).
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II. Definitions--Sec.  39.2

    The Commission is proposing to add in Sec.  39.2 a definition for 
``money center country'' that is identical to the definition currently 
in Sec.  1.49. Under the proposed definition, ``money center country'' 
means Canada, France, Germany, Italy, Japan, and the United Kingdom.
    The Commission is also proposing a definition for ``proprietary 
funds.'' The definition uses language similar to that included in the 
current definitions of ``futures customer funds'' in Sec.  1.3 \35\ and 
``cleared swaps customer collateral'' in Sec.  22.1.\36\ The proposed 
definition includes all money, securities, and property held in a 
proprietary account \37\ on behalf of clearing members used to margin, 
guarantee, or secure futures, foreign futures and swaps contracts, as 
well as option premiums and other funds held in relation to options 
contracts. The proposed definition also includes clearing member 
contributions to a guaranty fund to mutualize the losses resulting from 
a default by a clearing member.\38\
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    \35\ 17 CFR 1.3.
    \36\ 17 CFR 22.1.
    \37\ See 17 CFR 1.3 (defining ``proprietary account'' as a 
commodity futures, commodity options, or swaps trading account, for 
the clearing member itself, or for certain owners and affiliates of 
the clearing member).
    \38\ These guaranty fund contributions include those received 
pursuant to an assessment for additional guaranty fund contributions 
when permitted by a DCO's rules.
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    For the avoidance of doubt, a proprietary account may be the 
``house'' account of a clearing member that is an FCM, where the 
clearing member may also maintain a futures customer and/or cleared 
swaps customer account. The term also would include the account of a 
direct clearing member (that may or may not be a natural person) that 
does not intermediate transactions for anyone else.

III. Treatment of Funds--Sec.  39.15

A. Holding Customer Funds at Central Banks--Sec.  39.15(b)(3)

    The Commission is proposing to amend Sec.  39.15(b) to allow a DCO 
to hold customer funds at the central bank of a money center country. 
The proposed amendment would supplement the list of permissible 
depositories in Sec.  1.49 and Sec. Sec.  22.4 and 22.9. Currently, 
Sec.  1.49 and Sec.  22.9 limit foreign depositories for customer funds 
to a bank or trust company that has in excess of $1 billion of 
regulatory capital, an FCM, or a DCO. Foreign central banks, as 
independent government entities, are not structured to meet regulatory 
capital requirements and are therefore excluded from holding customer 
funds under Sec.  1.49.
    The Commission believes a DCO holding customer funds at a central 
bank can be a superior alternative to holding commercial bank deposits 
because it limits the DCO's credit and liquidity risks. The Commission 
is therefore proposing new Sec.  39.15(b)(3) to permit a DCO to hold 
customer funds at the central bank of a money center country if the DCO 
obtains a modified written acknowledgment, rather than the template 
acknowledgment letter required by Sec. Sec.  1.20 and 22.5, to which 
some central banks have objected.\39\ The proposed rule would require 
the central bank of a money center country only to acknowledge that it 
was informed that the funds deposited with the bank are customer funds 
held in accordance with section 4d of the CEA and to agree to respond 
to requests from the Commission for information about the account, 
including the account balance. The Commission believes the proposed 
rule would facilitate the holding of customer funds at the central 
banks of money center countries while ensuring appropriate customer 
protections.
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    \39\ See, e.g., CFTC Letter No. 14-124 (Oct. 8, 2014); CFTC 
Letter No. 16-05 (Feb. 1, 2016) (regarding modifications to the 
template acknowledgment letter to enable certain central banks to 
hold customer funds).
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    The Commission believes that central banks are often the safest 
place to deposit customer funds and has provided exemptions from Sec.  
1.49 to permit customer funds to be held at foreign central banks in 
money center countries.\40\ The proposed rule would codify those 
exemptions and permit DCOs to hold customer funds with the central bank 
of a money center country. As previously discussed, the Commission is 
proposing to limit the permissible central bank depositories to those 
of money center countries after considering security for customer 
funds, flexibility for DCOs, and the need to create a system that is 
workable in practice.
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    \40\ See, e.g., CFTC Letter No. 14-124 (Oct. 8, 2014); CFTC 
Letter No. 16-05 (Feb. 1, 2016) (granting exemptive relief from 
Sec.  1.49 to permit certain central banks to act as a depository 
for customer funds).
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B. Permitted Investments--Sec.  39.15(e)

    The Commission is proposing to amend Sec.  39.15(e) to permit a DCO 
to invest proprietary funds only as permitted for investment of 
customer funds under Sec.  1.25. The proposed regulation specifies that 
the DCO would bear any losses from investments, as is the case with 
customer funds.\41\ The list of investments in Sec.  1.25 is a 
conservative list, and the Commission believes it is appropriate for 
all types of clearing members. Currently, permissible investments under 
Sec.  1.25 include, among other investments, general obligations of the 
U.S. government, general obligations of any U.S. state or municipality, 
certificates of deposit, and interests in money market funds.\42\ 
Further, Sec.  1.25 specifies a number of terms and conditions with 
which permitted investments must comply, including limits on the 
features that an investment can contain, concentration limits, and time 
to maturity limits.\43\ Regulation Sec.  1.25 also includes specific 
requirements for investments in money market funds and repurchase 
agreements.\44\ By limiting investments of proprietary funds to 
investments that meet the requirements

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of Sec.  1.25,\45\ the proposed rule will ensure that any investment of 
proprietary funds will have minimal credit, market, and liquidity risk 
as required by Core Principle F.\46\
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    \41\ 17 CFR 1.29(b).
    \42\ 17 CFR 1.25(a); see also Investment of Customer Funds by 
[FCMs] and [DCOs], 88 FR 81236 (Nov. 21, 2023) (proposing, among 
other changes, to add certain foreign sovereign debt and certain 
U.S. Treasury exchange traded funds, both subject to limitations, to 
the list of permitted investments and to limit the types of money 
market funds that are permitted investments).
    \43\ 17 CFR 1.25(b).
    \44\ 17 CFR 1.25(c), (d).
    \45\ Proposed Sec.  39.15(e) cross-references Sec.  1.25, which 
provides that an FCM or DCO may invest ``customer money'' in certain 
instruments. The regulatory text of Sec.  1.25, however, does not 
refer to ``proprietary funds.'' The Commission recently approved 
proposed amendments to Sec.  1.25. Based on comments received on 
those proposed amendments, if appropriate, the Commission may 
consider further amending Sec.  1.25 either in the final rule or as 
a re-proposed rule to ensure that the regulatory text provides 
clarity on the application of Sec.  1.25 to a DCO's investment of 
``proprietary funds,'' as permitted under Sec.  39.15(e).
    \46\ 7 U.S.C. 7a-1(c)(2)(F); 17 CFR 39.15(e).
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C. Additional Protections for Proprietary Funds--Sec.  39.15(f)

    The Commission is proposing new Sec.  39.15(f) to establish 
additional protections for proprietary funds.
1. Segregation of Proprietary Funds--Sec.  39.15(f)(1)
    Proposed Sec.  39.15(f)(1) is based on Sec.  1.20(a) and would 
require a DCO to account for proprietary funds separately from its own 
funds, and to hold proprietary funds in accounts that are named to 
clearly identify the funds being held as belonging to clearing members. 
The Commission believes this would prevent misuse of proprietary funds 
by a DCO, and would help a bankruptcy trustee or judge to easily 
identify the funds that should be treated as member property in the 
unlikely event of a DCO bankruptcy. The proposed rule also would 
require the DCO to, at all times, maintain in the accounts holding 
proprietary funds enough resources to cover the total value of 
proprietary funds owed to its clearing members. The proposed rule would 
prevent a DCO from rehypothecating or otherwise using proprietary funds 
for its own benefit, thus ensuring that the funds are available when 
needed by clearing members or the DCO for permitted uses.
2. Written Acknowledgment from Depositories--Sec.  39.15(f)(2)
    The Commission is proposing to require a DCO to obtain from any 
depository holding proprietary funds a written acknowledgment that the 
funds belong to the DCO's clearing members and cannot be used by the 
DCO for any other purpose. The Commission is proposing a template 
proprietary funds letter that DCOs would be required to use, which 
would be contained in proposed appendix D to part 39. The proposed 
template proprietary funds letter is substantively the same as the 
current template acknowledgment letter for DCO accounts holding futures 
customer funds required by Sec.  1.20, and requires a depository to 
acknowledge, among other things, that the accounts referenced in the 
letter hold funds that belong to the DCO's clearing members, that the 
funds should be accounted for separately from those belonging to the 
DCO, and that the funds cannot be used to cover the DCO's obligations 
to the depository.\47\ Further, the template proprietary funds letter 
would require the depository to respond to a request from the director 
of DCR, or any successor division, or the director's designees, for 
information about the account, including the account balance. Proposed 
Sec.  39.15(f)(2) also includes the same procedural requirements as 
those in Sec.  1.20. Specifically, it would require a DCO to file a 
proprietary funds letter with the Commission within three days of 
opening an account, to update a letter when certain information it 
contains changes, and to maintain a copy of the letter in accordance 
with Sec.  1.31.
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    \47\ See 17 CFR 1.20 App. B.
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    The Commission believes that requiring a proprietary funds letter 
would ensure that a depository holding proprietary funds would know 
that the funds belong to the DCO's clearing members and cannot be used 
by the DCO for any other purpose, which will help prevent the misuse of 
funds by the DCO or an employee of the DCO. Further, having a letter 
for each proprietary funds account would help a bankruptcy court or 
trustee easily identify those funds that constitute member property in 
the event of a DCO bankruptcy.
    The Commission is proposing to exclude accounts at Federal Reserve 
Banks from the requirement to obtain a proprietary funds letter. This 
is consistent with Sec.  1.20(g)(4), which states that a DCO does not 
need a written acknowledgment to hold customer funds at a Federal 
Reserve Bank. As discussed above, the Commission believes that Federal 
Reserve Banks would be unable to sign the template proprietary funds 
letter, and wants to promote the use of Federal Reserve Bank accounts 
by DCOs when possible.
    The Commission is also proposing a simpler written acknowledgment 
requirement for accounts held at the central bank of a money center 
country. Although a DCO holding proprietary funds at the central bank 
of a money center country would have to comply with the same procedural 
requirements applicable to other depositories, it would not have to use 
the template proprietary funds letter. The DCO would only have to 
obtain a written acknowledgment stating that: (1) the central bank was 
informed that the funds deposited with the bank are proprietary funds 
held in accordance with section 5b(c)(2)(F) of the CEA and Commission 
regulations; and (2) the bank agrees to respond to requests from the 
Commission for information about the account, including the account 
balance. As was the case with the acknowledgment letter used for 
accounts holding customer funds, the Commission believes many central 
banks would have issues with the proposed template proprietary funds 
letter. The Commission believes the proposed rule would allow DCOs to 
gain the benefits of holding funds at central banks while adequately 
safeguarding those funds and ensuring that the Commission has the 
information it needs to conduct oversight of DCOs.
3. Commingling of Proprietary Funds--Sec.  39.15(f)(3)
    Proposed Sec.  39.15(f)(3) is based on Sec.  1.20(e) and (g) 
applicable to customer funds, and would permit a DCO to commingle 
proprietary funds from multiple clearing members in a single account at 
a depository, but would not permit a DCO to commingle proprietary funds 
with the DCO's own funds or customer funds. Having a clear separation 
between proprietary funds and a DCO's own funds will make it more 
difficult for funds to be misused, and will provide additional clarity 
in the event of a DCO bankruptcy regarding the funds that should be 
treated as member property rather than part of the debtor's estate. 
Further, the ability to commingle proprietary funds from multiple 
clearing members in one account allows DCOs to limit operational risks 
by simplifying their banking processes and procedures.
4. Use of Proprietary Funds--Sec.  39.15(f)(4)
    Proposed Sec.  39.15(f)(4) is based on Sec.  1.20(f) and would 
require a DCO and any depository holding proprietary funds to treat all 
proprietary funds as belonging to the clearing members of the DCO. The 
Commission believes the proposed rule will help ensure that proprietary 
funds are not rehypothecated or otherwise used by a DCO and are readily 
available if needed either by the clearing member directly, or for a 
permitted clearing member use by the DCO. However, the Commission does 
not intend for this requirement to interfere with or alter DCOs' risk 
management programs. Proposed Sec.  39.15(f)(4)(i)(A) therefore would 
clarify that the proprietary funds of a

[[Page 291]]

clearing member could be used to satisfy obligations of that clearing 
member's customers, to the extent that use is permitted by the DCO's 
rules and the DCO's agreement(s) with the clearing member. In addition, 
proposed Sec.  39.15(f)(4)(i)(B) further would clarify that a DCO use 
contributions of non-defaulting clearing members to a guaranty fund to 
cover losses stemming from a default, to the extent that use is 
permitted by the DCO's rules and its agreement(s) with its clearing 
members. Nothing in the proposed rule would prevent a DCO from holding 
guaranty fund contributions in a separate proprietary funds account 
from proprietary funds held as initial margin.
    Moreover, proposed Sec.  39.15(f)(4)(ii) would provide that a 
depository receiving proprietary funds from a DCO for deposit in a 
segregated account may not hold, dispose of, or use such funds as 
belonging to any person other than the clearing members of the 
depositing DCO. Unlike the DCO, which is responsible for separately 
considering the proprietary funds owed to each individual clearing 
member, a depository is only responsible for considering the 
proprietary funds it has received as belonging to the clearing members 
as a group.

D. Daily Reconciliation--Sec.  39.15(g)

    The Commission is proposing new Sec.  39.15(g), which would require 
a DCO to conduct a daily reconciliation for each type of segregated 
account (futures customer funds, cleared swaps customer collateral, and 
proprietary funds) it holds for its clearing members. This proposal is 
based on the requirement applicable to FCMs in Sec.  1.32. Under 
proposed Sec.  39.15(g), by noon of each business day, the DCO would 
have to perform these reconciliations on balances held as of the close 
of the previous business day. The proposed requirement is intended to 
verify, each business day, that the DCO maintains sufficient funds in 
each relevant account type to cover its aggregate obligations to 
clearing members. The Commission believes that the required daily 
calculation and reconciliation and independent review requirements in 
the proposed rule would help a DCO to identify quickly any misuse or 
loss of proprietary or customer funds.
    Proposed Sec.  39.15(g)(1), (2), and (3) would require a DCO to 
calculate the amount of, respectively, futures customer funds, cleared 
swaps customer collateral, and proprietary funds owed to each clearing 
member. These provisions would further require the DCO to reconcile the 
total amount, aggregated across all clearing members, of each of 
futures customer funds, cleared swaps customer collateral, and 
proprietary funds, with the amount of each respective type of funds 
held in separate accounts across all depositories. This reconciliation 
is intended to confirm, each business day, that the DCO maintains, in 
each type of account, an adequate value of segregated funds to meet its 
obligations to clearing members.
    Requirements for the method of conducting these calculations are 
contained in proposed Sec.  39.15(g)(4). Proposed Sec.  39.15(g)(4)(i) 
would require segregation of duties, consistent with generally accepted 
auditing standards.\48\ Each of the DCO's calculations and 
reconciliations would need to be approved by a person who did not 
prepare the initial calculation or the related reconciliation, and who 
does not report to the person who prepared them.
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    \48\ See Statement on Auditing Standards 145, Appendix C, ] 21 
(``Segregation of duties is intended to reduce the opportunities to 
allow any person to be in a position to both perpetrate and conceal 
errors or fraud in the normal course of the person's duties''). See 
also 17 CFR 1.11(e)(3)(i)(G) (requiring each FCM's Risk Management 
Program to include procedures requiring the appropriate separation 
of duties among individuals responsible for compliance with the Act 
and Commission regulations relating to the protection and financial 
reporting of segregated funds.)
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    Proposed Sec.  39.15(g)(4)(ii)(A) would address the valuation of 
securities in the required calculations of amounts owed and held. 
Securities would have to be valued at their current market value, with 
haircuts applied in accordance with existing Sec.  39.11(d)(1).
    Proposed Sec.  39.15(g)(4)(ii)(B) would address mismatches in 
currencies in the same account type by permitting a deficit in one 
currency to be offset by a surplus in another currency, with conversion 
based on publicly available exchange rates, and with surpluses subject 
to haircuts reasonably determined by the DCO, applied consistently.\49\
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    \49\ For example, one would expect that the haircuts the DCO 
applies to currency mismatches with respect to its obligations to 
clearing members here would be no smaller than the haircuts the DCO 
applies to currency mismatches with respect to collateral posted by 
a clearing member.
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    Proposed Sec.  39.15(g)(4)(ii)(C) would address situations in which 
customer funds of one type are commingled in a different type of 
customer account (e.g., futures customer funds in a cleared swaps 
customer account). In these instances, the proposed rule would require 
DCOs to treat all funds in a futures customer account as futures 
customer funds and all funds in a cleared swaps customer account as 
cleared swaps customer collateral, both in terms of funds owed and 
funds held, for purposes of the calculation and reconciliation required 
by proposed Sec.  39.15(g).
    Proposed Sec.  39.15(g)(4)(iii) would address the process by which 
a DCO would calculate the amounts owed to clearing members for each 
account type by requiring the DCO to apply, for each account type, the 
approach set forth for FCMs in Sec.  1.20(i). This would include 
calculating the net liquidating equity for each clearing member (in 
each account type), taking into account the market value of funds it 
receives from the clearing member, gains and losses on futures 
contracts, options, and swaps (applying this approach to cleared 
swaps), fees lawfully accruing in the normal course of business (which, 
in the case of a DCO, would include transaction fees), and authorized 
distributions or transfers of collateral. In aggregating amounts owed, 
the DCO would not reduce the sum of credit balances owed to clearing 
members with debit balances owed by other clearing members.\50\
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    \50\ See 17 CFR 1.20(i)(4).
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    Finally, proposed Sec.  39.15(g)(5) would require the DCO to 
immediately report to the Commission any discrepancy in any of the 
relevant calculations or any one or more of the reconciliations that 
reveals that the DCO did not, at the close of the previous business 
day, maintain in separate segregated accounts money, securities, and 
property in an amount sufficient in the aggregate to cover the total 
value of funds owed to all clearing members.

E. Exclusions for Foreign Derivatives Clearing Organizations--Sec.  
39.15(h)

    The Commission is not, at this time,\51\ proposing to apply the new 
member property protections in proposed Sec.  39.15(e)(3) (permitted 
investment of proprietary funds), (f) (proprietary funds), and (g)(3) 
(daily reconciliation of proprietary funds) to certain DCOs organized 
outside the United States (foreign DCOs). Specifically, proposed Sec.  
39.15(h) would provide that proposed Sec.  39.15(e)(3), (f) and (g)(3) 
do not apply to a foreign DCO that would, in the event of its 
insolvency, be subject to a foreign proceeding, as defined in the U.S. 
Bankruptcy Code, in the jurisdiction in which it is organized.\52\

[[Page 292]]

Member property held at most foreign DCOs would not be protected under 
part 190 in the event the DCO enters bankruptcy,\53\ and the Commission 
wants to avoid potential conflicts with requirements concerning 
protection of member property under the applicable law in a foreign 
DCO's home jurisdiction.\54\
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    \51\ The Commission may, in light of ongoing and future 
developments with respect to clearing models at such DCOs, including 
with respect to the participation of U.S. market participants 
(particularly such market participants who are natural persons) 
reconsider these decisions (both with respect to part 39 and to part 
190) in a future rulemaking.
    \52\ The U.S. Bankruptcy Code defines ``foreign proceeding'' as 
a collective judicial or administrative proceeding in a foreign 
country, including an interim proceeding, under a law relating to 
insolvency or adjustment of debt in which proceeding the assets and 
affairs of the debtor are subject to control or supervision by a 
foreign court, for the purpose of reorganization or liquidation. 11 
U.S.C. 101(23). Further, the U.S. Bankruptcy Code defines ``foreign 
court'' as a judicial or other authority competent to control or 
supervise a foreign proceeding (emphasis added). 11 U.S.C. 1502(3). 
Because the definition includes non-judicial authorities, a 
resolution proceeding where the assets and affairs of a foreign DCO 
are controlled by a resolution authority would constitute a foreign 
proceeding under 11 U.S.C. 101(23), and thus a DCO that is subject 
to such a resolution proceeding would fall within the exclusion of 
such paragraphs. (See, e.g., In re Tradex Swiss AG, 384 B.R. 34, 42 
(Bankr. D.Mass. 2008) (Swiss Federal Banking Commission ``is an 
administrative agency'' and qualifies as a foreign court under 
1502(3)), In re ENNIA Caribe Holding N.V., 594 B.R. 631, 639-40 & n. 
11(Bankr. S.D.N.Y. 2018) (where the Central Bank of Cura[ccedil]ao 
and St. Maarten, as a regulator, controls the affairs of the foreign 
debtor, an insurance company, it constitutes a foreign court under 
11 U.S.C. 1502(3)).
    \53\ See 17 CFR 190.11(b).
    \54\ As the Commission noted in revising its part 190 bankruptcy 
regulations in 2020, in the context of certain DCOs organized 
outside the United States, the Commission has traditionally focused 
its efforts on the protection of the customers of FCM members of 
such foreign DCOs. Bankruptcy Regulations, 86 FR 19324, 19366 (April 
13, 2021). In promulgating those regulations, the Commission 
attempted to avoid conflicts with insolvency proceedings in the 
jurisdiction where a foreign DCO is organized. Id. Thus, pursuant to 
17 CFR 190.11(b), the Commission's part 190 bankruptcy regulations 
are limited to protecting contracts cleared on behalf of FCM 
customers at such foreign DCOs and the property margining or 
securing such contracts. The foreign DCOs to which this limitation 
applies are those DCOs organized outside the United States that are 
subject to a foreign proceeding, as defined in 11 U.S.C. 101(23), in 
the jurisdiction in which it is organized.
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IV. Reporting--Sec.  39.19

    The Commission is proposing new Sec.  39.19(c)(4)(xxvi) to include, 
together with the other event-specific reporting requirements 
applicable to DCOs, the requirement in proposed Sec.  39.15(g)(5) that 
a DCO report any discrepancies in the amount of proprietary or customer 
funds it holds. The Commission believes that including all reporting 
requirements applicable to DCOs in Sec.  39.19 may assist DCOs in 
tracking their reporting obligations.

V. Request for Comment

    The Commission is requesting comments on all aspects of its 
proposal. Additionally, the Commission specifically requests comment on 
the following:
    Would classification of guaranty fund contributions as proprietary 
funds inhibit DCOs' current guaranty fund programs? The Commission has 
proposed to specifically include guaranty fund deposits in the 
definition of proprietary funds, and does not intend for the inclusion 
to prevent DCOs from continuing to use guaranty funds as one of their 
default resources.
    Should the Commission require DCOs to report to the Commission the 
daily calculations and reconciliations required by proposed Sec.  
39.15(g)?
    Anti-money laundering (AML) and know-your-client (KYC) programs are 
required for many entities registered with the Commission, including 
intermediaries such as FCMs. In the context of intermediated DCOs, FCMs 
perform this critical role of assisting U.S. government agencies in 
detecting and preventing money laundering. However, in the context of 
non-intermediated DCOs, in the absence of an FCM, DCOs may be exploited 
by actors seeking to engage in illegal and illicit activities. How 
might the Commission ensure AML and KYC compliance for DCOs that offer 
direct clearing services (a market structure that would not include 
FCMs or other intermediaries that are typically directed to create Bank 
Secrecy Act compliance programs)? Should DCOs offering direct-to-
customer services to non-eligible contract participants or retail 
customers be required to comply with AML and KYC requirements?
    Should the Commission require any additional written 
acknowledgments (to those contained in proposed Sec.  39.15(b)(3) or 
Sec.  39.15(f)(2)(vi) as applicable) from central banks of money center 
countries in order for a DCO to use them to hold futures customer 
funds, cleared swaps customer collateral, or proprietary funds?

VI. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.\55\ The 
amendments proposed by the Commission will affect only DCOs. The 
Commission has previously established certain definitions of ``small 
entities'' to be used by the Commission in evaluating the impact of its 
regulations on small entities in accordance with the RFA.\56\ The 
Commission has previously determined that DCOs are not small entities 
for the purpose of the RFA.\57\ Accordingly, the Chairman, on behalf of 
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities.
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    \55\ 5 U.S.C. 601 et seq.
    \56\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618 (Apr. 30, 1982).
    \57\ See A New Regulatory Framework for Clearing Organizations 
66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \58\ imposes certain 
requirements on federal agencies, including the Commission, in 
connection with conducting or sponsoring any ``collection of 
information,'' as defined by the PRA. Under the PRA, an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number from the Office of Management and budget (OMB).\59\ The PRA is 
intended, in part, to minimize the paperwork burden created for 
individuals, businesses, and other persons as a result of the 
collection of information by federal agencies, and to ensure the 
greatest possible benefit and utility of information created, 
collected, maintained, used, shared, and disseminated by or for the 
Federal Government.\60\ The PRA applies to all information, regardless 
of form or format, whenever the Federal Government is obtaining, 
causing to be obtained, or soliciting information, and includes 
required 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.\61\
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    \58\ 44 U.S.C. 3501 et seq.
    \59\ See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3).
    \60\ See 44 U.S.C. 3501.
    \61\ See 44 U.S.C. 3502(3).
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    This proposal, if adopted, would result in a collection of 
information within the meaning of the PRA, as discussed below. This 
proposed rulemaking contains collections of information for which the 
Commission has previously received a control number from OMB. The title 
for this existing collection of information is OMB control number 3038-
0076, Requirements for Derivatives Clearing Organizations (``OMB 
Collection 3038-0076'').

[[Page 293]]

    The Commission therefore is submitting this proposal to the OMB for 
its review in accordance with the PRA.\62\ Responses to this collection 
of information would be mandatory. The Commission will protect any 
proprietary information according to the Freedom of Information Act and 
part 145 of the Commission's regulations.\63\ In addition, section 
8(a)(1) of the CEA strictly prohibits the Commission, unless 
specifically authorized by the CEA, from making public any data and 
information that would separately disclose the business transactions or 
market positions of any person and trade secrets or names of 
customers.\64\ Finally, the Commission is also required to protect 
certain information contained in a government system of records 
according to the Privacy Act of 1974.\65\
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    \62\ See 44 U.S.C. 3507(d) 5 CFR 1320.11.
    \63\ See 5 U.S.C. 552; see also 17 CFR part 145 (Commission 
Records and Information).
    \64\ 7 U.S.C. 12(a)(1).
    \65\ 5 U.S.C. 552a.
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1. OMB Collection 3038-0076--Requirements for Derivatives Clearing 
Organizations
    The Commission is proposing a new reporting requirement in Sec.  
39.15(f)(2) to require DCOs based in the United States to obtain a 
template proprietary funds letter from each depository that holds 
proprietary funds and to file that letter with the Commission. The 
template letter and filing requirements are substantially the same as 
the requirement in Sec.  1.20(d) for FCMs to file an acknowledgment 
letter signed by each depository holding customer funds. In OMB control 
number 3038-0024, ``Regulations and Forms Pertaining to Financial 
Integrity of the Market Place; Margin Requirements for SDs/MSPs,'' \66\ 
the Commission estimated that each FCM would file three acknowledgment 
letters a year and that filing each letter would take two hours to 
complete. Because the proposed letter and requirements for DCOs are the 
same as those for FCMs, the Commission believes that the estimates for 
FCMs filing acknowledgment letters are appropriate for DCOs filing 
proprietary funds letters. Therefore, the Commission believes that the 
proposed requirement will require each DCO based in the United States 
to expend six hours per year to comply, resulting in a total burden of 
60 hours for DCOs.
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    \66\ For the previously approved estimates for this collection, 
see ICR Reference No. 202207-3038-001 (conclusion date Aug. 23, 
2022, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202207-3038-001).
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    The aggregate burden estimate for proprietary funds template letter 
reporting in Collection 3038-0076 is as follows:
    Estimated number of respondents: 10.
    Estimated annual reports per respondent: 3.
    Estimated total annual responses: 30.
    Estimated average burden hours per response: 2.
    Estimated annual burden hours per respondent: 6.
    Estimated total annual reporting burden for all respondents: 60.
    Finally, the Commission is proposing Sec.  39.15(g) to require DCOs 
to report in accordance with Sec.  39.19(c)(4) any discrepancies in the 
results of the required daily calculations and reconciliations. This is 
a new reporting requirement and thus the Commission is revising its 
estimate of the burden associated with event-specific reporting under 
Sec.  39.19(c)(4) in Collection 3038-0076. A discrepancy in one of the 
required calculations or reconciliations would mean that the DCO is not 
holding or accounting for the correct amount of either customer or 
proprietary funds, i.e., that it is not meeting regulatory 
requirements. The Commission does not anticipate DCOs will need to file 
this report often, and ideally not at all, such that even one report 
per year would exceed expectations. Nonetheless, to avoid under-
estimating the burden of the proposed regulation, the Commission 
estimates that DCOs will file the required report once per year. The 
Commission believes that each report will take approximately 30 minutes 
to complete. The requirement is for DCOs to file immediately upon 
learning of the discrepancy, which will necessarily limit the amount of 
time available to prepare a report. The current burden estimate in 
Collection 3038-0076 for event specific reporting under Sec.  39.19(c) 
is 14 reports a year per respondent. Therefore, the Commission amending 
Collection 3038-0076 and s estimating that 13 covered DCOs will 
complete an estimated 15 reports per year per respondent, resulting in 
a total burden of seven-and-a-half hours for event-specific reporting.
    The aggregate burden estimate for event-specific reporting under 
Sec.  39.19(c)(4), as amended by the proposal, is updated as follows:
    Estimated number of respondents: 13.
    Estimated annual reports per respondent: 15.
    Estimated total annual responses: 195.
    Estimated average hours per response: 0.5.
    Estimated annual burden hours per respondent: 7.5.
    Estimated total annual burden hours for all respondents: 97.5.
    The Commission's existing recordkeeping rule will require DCOs to 
maintain records of the information generated though compliance with 
the proposed rules.\67\ Specifically, DCOs will need to maintain 
records related to the calculations and reconciliations required under 
proposed Sec.  39.15(g) and the proprietary funds letters required 
under proposed Sec.  39.15(f)(2). The Commission, however, believes 
that the impact of the proposed regulations on the recordkeeping burden 
in Collection 3038-0076 will be negligible. DCOs are already required 
to maintain all information required to be created, generated, or 
reported under part 39.\68\ DCOs regularly maintain records of items 
created through their compliance with the Commission's regulations, and 
the proposed rules will not raise unique recordkeeping challenges or 
burdens. Therefore, the Commission is retaining its existing 
recordkeeping burden estimates for Collection 3038-0076.
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    \67\ See 17 CFR 39.20.
    \68\ Id.
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2. Request for Comment
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission will consider public comments on this proposed collection of 
information in:
    (1) Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    (2) Evaluating the accuracy of the estimated burden of the proposed 
collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
    (3) Enhancing the quality, utility, and clarity of the information 
proposed to be collected; and
    (4) Minimizing the burden of the proposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques, e.g., permitting electronic 
submission of responses.
    The Commission specifically invites public comment on the accuracy 
of its estimates that the proposed regulations will not impose a new 
recordkeeping burden and its determination to retain

[[Page 294]]

its existing burden estimates for recordkeeping for Collection 3038-
0076.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street NW, Washington, DC 
20581, (202) 418-5714 or from https://RegInfo.gov. Organizations and 
individuals desiring to submit comments on the proposed information 
collection requirements should send those comments to:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
     [email protected] (email).
    Please provide the Commission with a copy of submitted comments so 
that all comments can be summarized and addressed in the final 
rulemaking, and please refer to the ADDRESSES section of this 
rulemaking for instructions on submitting comments to the Commission. 
OMB is required to make a decision concerning the proposed information 
collection requirements between 30 and 60 days after publication of 
this release in the Federal Register. Therefore, a comment to OMB is 
best assured of receiving full consideration if OMB receives it within 
30 calendar days of publication of this release. Nothing in the 
foregoing affects the deadline enumerated above for public comment to 
the Commission on the proposed rules.

C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\69\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following 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 considers the costs and 
benefits resulting from its discretionary determinations with respect 
to the section 15(a) factors (collectively referred to herein as 
Section 15(a) factors).
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    \69\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission recognizes that the proposed amendments impose 
costs. The Commission has endeavored to assess the anticipated costs 
and benefits of the proposed amendments in quantitative terms, 
including PRA-related costs, where feasible. In situations where the 
Commission is unable to quantify the costs and benefits, the Commission 
identifies and considers the costs and benefits of the applicable 
proposed amendments in qualitative terms. The lack of data and 
information to estimate those costs is attributable in part to the 
nature of the proposed amendments. Additionally, any initial and 
recurring compliance costs for any particular DCO will depend on the 
size, existing infrastructure, level of clearing activity, practices, 
and cost structure of the DCO.
    The Commission generally requests comment on all aspects of its 
cost-benefit considerations, including the identification and 
assessment of any costs and benefits not discussed herein; data and any 
other information to assist or otherwise inform the Commission's 
ability to quantify or qualitatively describe the costs and benefits of 
the proposed amendments; and substantiating data, statistics, and any 
other information to support positions posited by commenters with 
respect to the Commission's discussion. The Commission welcomes comment 
on such costs, particularly from existing DCOs that can provide 
quantitative cost data based on their respective experiences. 
Commenters may also suggest other alternatives to the proposed 
approach.
    The Commission notes that this consideration is based on its 
understanding that the derivatives market regulated by the Commission 
functions internationally with: (1) transactions that involve entities 
organized in the United States occurring across different international 
jurisdictions; (2) some entities organized outside of the United States 
that are prospective Commission registrants; and (3) some entities that 
typically operate both within and outside the United States and that 
follow substantially similar business practices wherever located. Where 
the Commission does not specifically refer to matters of location, the 
discussion of costs and benefits below refers to the effects of the 
proposed regulations on all relevant derivatives activity, whether 
based on their actual occurrence in the United States or on their 
connection with, or effect on U.S. commerce.\70\
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    \70\ See, e.g. 7 U.S.C. 2(i).
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2. Baseline
    The Commission identifies and considers the benefits and costs of 
the proposed amendments relative to the baseline of the status quo. In 
particular, the baseline for the Commission's consideration of the 
costs and benefits of this proposed rulemaking is the existing 
statutory and regulatory framework applicable to DCOs, including: (1) 
the DCO core principles set forth in section 5b(c)(2) of the CEA; (2) 
the requirements associated with holding clearing member funds for 
positions in futures, foreign futures, and swaps under Sec.  39.15; (3) 
the current DCO reporting requirements under Sec.  39.19; and (4) the 
requirements for obtaining an acknowledgment letter from a foreign 
central bank holding customer funds, but not member funds.
3. Proposed Amendments to Sec.  39.15(b)
a. Summary of Changes
    The Commission is proposing new Sec.  39.15(b)(3), which would 
allow the central banks of money center countries to serve as 
depositories for customer funds. The proposed regulation would further 
allow a DCO holding customer funds at the central bank of a money 
center country to obtain a modified written acknowledgment that is 
shorter and less detailed than the template acknowledgment letter in 
Sec. Sec.  1.20 and 22.4.
b. Benefits
    The Commission believes that central banks are often the best 
option for deposit of customer funds. By using a central bank, DCOs can 
minimize the credit and liquidity risks they face when holding foreign 
currency cash deposits. Many foreign central banks do not fit into any 
of the categories of permissible depositories in Sec.  1.49, and some 
central banks have expressed unwillingness to sign the template 
acknowledgment letter. By permitting DCOs to deposit customer funds at 
the central banks of money center countries and requiring an 
abbreviated written acknowledgment suitable for the central bank 
context, the Commission believes that DCOs will be able to avail 
themselves of the risk management benefits of holding funds at a 
central bank.
c. Costs
    The Commission does not believe the proposed rule will impose costs 
on DCOs. The proposed rule does not require DCOs to hold customer funds 
at any particular central bank and merely enables DCOs to hold funds at 
certain central banks.

[[Page 295]]

d. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.15(b)(3) 
in light of the specific considerations identified in section 15(a) of 
the CEA. The Commission believes the proposed rule would protect market 
participants by allowing their funds to be more easily held at foreign 
central banks. Central banks expose depositors to minimal credit and 
liquidity risks and are safe depositories for assets belonging to 
market participants. Similarly, the proposed rules may improve DCOs' 
risk management because of the low credit and liquidity risks 
associated with holding funds at a central bank. The Commission has 
considered the other Section 15(a) factors and believes that they are 
not implicated by the proposed amendments to Sec.  39.15(b)(3).
4. Proposed Amendments to Sec.  39.15(e)
a. Summary of Changes
    The Commission is proposing rules that would limit the investments 
DCOs can make with proprietary funds to those that are permissible for 
customer funds under Sec.  1.25. The proposed rule also states that 
DCOs would be responsible for investment losses.
b. Benefits
    The proposed rule would limit investments of proprietary funds to 
the safe investments listed in Sec.  1.25. This is the same list of 
investments that can be made with customer funds. The Commission 
believes this proposal would appropriately protect clearing members 
from risk of loss by ensuring that any investment is in instruments 
with minimal credit, market, and liquidity risks.
c. Costs
    The proposed rule may impose some costs on DCOs. Some DCOs may have 
to stop investing proprietary funds in certain instruments that are 
currently permitted and may incur some operational costs in revising 
the investments that are offered to clearing members for their 
proprietary funds. Further, to the extent the permitted investments 
earn less yield than what a DCO currently invests in, the regulation 
would impose costs in the form of lost investment revenue for the DCO 
and clearing member. The total cost of this regulation will depend on a 
number of factors including the number of clearing members of the DCO 
and what, if any, investments the DCO currently makes with proprietary 
funds.
a. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.15(e) in 
light of the specific considerations identified in section 15(a) of the 
CEA. The proposed rule would benefit clearing member market 
participants by ensuring their funds are invested in instruments that 
minimize the risk of loss. While DCOs currently determine what 
investments to make with clearing member funds, the proposed rule 
establishes a list of investments that the Commission believes is 
appropriately conservative for all clearing members. The Commission has 
considered the other Section 15(a) factors and believes that they are 
not implicated by the proposed amendments to Sec.  39.15(e).
5. Proposed Amendments to Sec.  39.15(f)(1)
a. Summary of Changes
    The Commission is proposing new Sec.  39.15(f)(1), which would 
require DCOs to segregate proprietary funds from their own funds, hold 
the funds in accounts clearly labeled as holding proprietary funds, and 
hold at all times an amount sufficient in the aggregate to cover the 
total value of proprietary funds held for all clearing members.
b. Benefits
    The proposed rule would benefit clearing members by helping to 
ensure that proprietary funds on deposit will not be misused. Holding 
proprietary funds in an account that is exclusively for proprietary 
funds and clearly named as being for proprietary funds would make it 
difficult for a DCO or any employee to use the funds for an improper 
purpose without being detected. Further, the requirement that accounts 
hold funds adequate to cover the total value of proprietary funds held 
for all clearing members at all times would prevent a DCO from 
rehypothecating or otherwise using proprietary funds for its own 
benefit, thus ensuring that the funds are available when needed by 
clearing members or the DCO for permitted uses. The proposed rule would 
also ensure funds are readily identifiable in the event of a DCO 
bankruptcy, which would facilitate those funds receiving the 
appropriate preferential treatment.
c. Costs
    The proposed rule might add some costs for DCOs if they need to 
establish new accounts for proprietary funds. DCOs would need to 
establish new procedures for regularly confirming that the accounts 
hold funds adequate to cover the total value of proprietary funds of 
all clearing members. However, as a mitigating factor, the Commission 
believes that most, if not all, DCOs currently hold proprietary funds 
separately from their own, and that most DCOs do not rehypothecate or 
otherwise use funds for their own purposes. In such cases, if there are 
any costs, they would be related to staff time involved with renaming 
current accounts holding proprietary funds. The exact costs will depend 
on a number of factors including how many accounts a DCO maintains for 
proprietary funds.
d. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.15(f)(1) 
in light of the specific considerations identified in section 15(a) of 
the CEA. The Commission believes the proposed rule would benefit market 
participants by helping to ensure their funds are not misused and by 
helping to make sure the funds receive the proper, preferential 
treatment in the event of a DCO bankruptcy. The Commission also 
believes that requiring DCOs to hold the total amount of proprietary 
funds at all times would promote sound risk management because it would 
ensure that the funds are available to the DCO in the event of a 
clearing member default. The Commission has considered the other 
section 15(a) factors and believes that they are not implicated by the 
proposed amendments to Sec.  39.15(f)(1).
6. Proposed Amendments to Sec.  39.15(f)(2)
a. Summary of Changes
    The proposed rule would require DCOs to obtain a proprietary funds 
letter in the form prescribed in the proposed appendix from each 
depository holding proprietary funds. The proposed letter is based on 
the template acknowledgment letter for DCOs required by Sec.  1.20, and 
requires depositories to acknowledge, among other things, that the 
funds belong to clearing members and cannot be used by the DCO for any 
other purpose. The proposed rule would also require a DCO to file the 
letters with the Commission and update the letters when certain 
information changes. The proposed rule would exclude Federal Reserve 
Banks from the requirement to obtain a proprietary funds letter from a 
depository holding proprietary funds. Further, the proposed rule would 
require a simpler written

[[Page 296]]

acknowledgment from the central bank of a money center country that is 
holding proprietary funds than that required of other depositories.
b. Benefits
    The proposed rule would benefit clearing members by ensuring that 
all depositories holding proprietary funds would know that the funds 
belong to clearing members and cannot be used by the DCO for any other 
purpose, which would help prevent the misuse of funds by the DCO or an 
employee of the DCO. Further, having a proprietary funds letter for 
each proprietary funds account would help a bankruptcy court or trustee 
easily identify that the funds are member property in the event of a 
DCO bankruptcy.
c. Costs
    The proposed rule would impose costs on DCOs. DCOs would be 
required to work with depositories to obtain proprietary funds letters 
for existing accounts and to file the letters with the Commission. 
Further, DCOs would need procedures for obtaining a letter for any new 
account and for updating letters as information changes going forward. 
The Commission is attempting to limit the costs of obtaining 
proprietary funds letters by proposing to use a template that is 
substantively the same as the template letter required for customer 
funds and is thus already in use by many DCOs and their depositories. 
The costs each DCO would incur would depend, in large part, on the 
number of depositories the DCO uses to hold proprietary funds. The 
Commission has estimated that the PRA costs for this rule will be $100 
per burden hour. Based on the burden estimate discussed above of six 
hours annually per DCO, the Commission estimates that each DCO will 
spend $600 in PRA costs under this proposed rule.
d. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.15(f)(2) 
in light of the specific considerations identified in section 15(a) of 
the CEA. The Commission believes the proposed rule would benefit market 
participants by ensuring that all depositories holding proprietary 
funds know that the funds belong to clearing members and cannot be used 
by the DCO for any other purpose, thus helping to prevent the misuse of 
funds. Having a proprietary funds letter for each proprietary funds 
account would help easily identify which funds are member property in 
the event of a DCO bankruptcy. Finally, the helping to prevent the 
misuse of proprietary funds would promote sound risk management by 
making it more likely that the funds are available if needed to cover a 
clearing member default. The Commission has considered the other 
section 15(a) factors and believes that they are not implicated by the 
proposed amendments to Sec.  39.15(f)(2).
7. Proposed Amendments to Sec.  39.15(f)(3)
a. Summary of Changes
    Proposed Sec.  39.15(f)(3) would permit DCOs to commingle 
proprietary funds belonging to multiple clearing members in the same 
custodial account. The rule would prohibit a DCO from commingling 
proprietary funds with the DCO's own funds or with FCM customer funds.
b. Benefits
    The Commission believes that permitting DCOs to commingle 
proprietary funds from multiple clearing members in one account would 
allow DCOs to minimize operational risk by simplifying their banking 
processes and procedures. Further, the proposed rule would ensure that 
proprietary funds are held separately from the DCO's funds at the 
depository, making it harder for a DCO or an employee of the DCO to 
misuse the funds without detection.
c. Costs
    The Commission does not believe permitting the commingling of 
multiple clearing members' funds in one account would impose new costs 
on DCOs. Currently, many DCOs hold clearing member funds in a 
commingled account, and the proposed rule would only permit, not 
require, clearing member funds to be commingled. However, the 
Commission recognizes that a DCO that currently commingles clearing 
member funds with other funds would need to segregate such funds and 
establish a separate account for such funds, thereby incurring new 
costs. But because the prohibition on commingling a DCO's funds with 
its clearing members' funds codifies sound participant protection and 
risk management principles that most, if not all, DCOs already apply, 
the Commission does not believe that it would impose significant new 
costs on existing DCOs. Additionally, DCOs are currently prohibited by 
the requirements of section 4d of the Act and the regulations 
thereunder from commingling customer funds with the funds of clearing 
members. The proposed rule would therefore not impose new costs with 
regard to holding clearing member funds and customer funds separately.
d. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.15(f)(3) 
in light of the specific considerations identified in section 15(a) of 
the CEA. The Commission believes that prohibiting a DCO from 
commingling its own funds with proprietary funds would benefit market 
participants by ensuring a clear delineation between the DCO's funds 
and proprietary funds. This delineation would make it more difficult to 
misuse proprietary funds and would make proprietary funds readily 
identifiable in the event of a DCO bankruptcy. Further, the Commission 
believes that the proposed rule would promote sound risk management 
because ensuring that clearing members' funds are held separately from 
the DCO's would make it more difficult for the funds to be misused 
without detection and would therefore make it more likely that the 
funds are available if needed to cover a clearing member default. The 
Commission has considered the other section 15(a) factors and believes 
that they are not implicated by the proposed amendments to Sec.  
39.12(f)(3).
8. Proposed Amendments to Sec.  39.15(f)(4)
a. Summary of Changes
    The proposed rule would prohibit a DCO or any of its depositories 
from using proprietary funds for any reason other than as belonging to 
the DCO's clearing members. The rule would specifically provide that an 
FCM's funds may be used to cover its customers' losses and as part of a 
DCO's mutualized guaranty fund.
b. Benefits
    By eliminating any uses for proprietary funds other than on behalf 
of clearing members, the proposed rule would help ensure that the funds 
are readily available if needed either by the clearing member directly, 
or for a permitted use by the DCO. The clarifications providing that an 
FCM's funds may be used by a DCO to cover the FCM's customers' losses, 
or as part of a clearing member-funded, mutualized guaranty fund, 
ensures that the rule would not hamper DCOs' existing risk management 
programs.
c. Costs
    Because the proposed rule would codify sound participant protection 
and risk management principles, the Commission does not believe that it

[[Page 297]]

would impose significant costs on DCOs. The Commission does not believe 
DCOs are currently using clearing member funds in a manner that is 
inconsistent with this regulation. Further, the proposed rule would not 
require a guaranty fund or any specific type of FCM guarantee of its 
customers' performance, but instead would merely permit what is 
currently common risk management practice among DCOs.
d. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.15(f)(4) 
in light of the specific considerations identified in section 15(a) of 
the CEA. The proposed rule would benefit market participants by helping 
to ensure that their funds are protected and available for their use. 
Additionally, the proposed rule would promote sound risk management by 
helping to ensure that clearing member funds are readily available for 
permitted risk management uses by a DCO, such as in the event of a 
customer shortfall or clearing member default. The Commission has 
considered the other section 15(a) factors and believes that they are 
not implicated by the proposed amendments to Sec.  39.12(f)(3).
9. Proposed Amendments to Sec. Sec.  39.15(g) and 39.19(c)(4)(xxvi)
a. Summary of Changes
    Proposed Sec.  39.15(g) would require DCOs to, on a daily basis, 
calculate the amount of futures customer funds, cleared swaps customer 
collateral, and proprietary funds owed to each clearing member, 
separately for each account class and on a currency by currency basis. 
The proposed rule further would require DCOs to reconcile, separately 
for each account class, the amount of funds owed to all clearing 
members with the amount of funds held in depository accounts for that 
class of funds. Each calculation and reconciliation would have to be 
approved by a person who did not prepare the initial calculation or 
reconciliation. The calculation and reconciliation would have to be 
performed as of the close of each business day and completed by noon on 
the following business day. The proposed rule also would require 
securities to be valued at their current market value, subject to the 
DCO's haircuts, and calculations of the amount owed to be made in a 
manner consistent with the requirements of Sec.  1.20(i). Finally, both 
proposed Sec. Sec.  39.15(g)(5) and 39.19(c)(4)(xxvi) would require 
DCOs to immediately report any discrepancy in the calculation or 
reconciliation to the Commission.
b. Benefits
    By requiring a DCO to verify on a daily basis the amount of futures 
customer funds, cleared swaps customer collateral, and proprietary 
funds it is holding, for each clearing member and across all clearing 
members, the proposed rule would facilitate the prompt discovery of any 
missing futures customer funds, cleared swaps customer collateral, or 
proprietary funds. Additionally, by requiring the daily calculation and 
reconciliation to be approved by an independent employee, the proposed 
rule would help prevent a single bad actor at a DCO from misusing 
futures customer funds, cleared swaps customer collateral, or 
proprietary funds, and from concealing that misuse. The requirement to 
report any discrepancies to the Commission would help ensure that the 
Commission is immediately made aware of potentially missing funds, and 
that it can work with the DCO to resolve the matter.
c. Costs
    The Commission understands that the daily calculation and 
reconciliation would impose costs on DCOs. DCOs would need to develop 
procedures that comply with the timing, valuation, and calculation 
requirements in the proposed rule, to calculate the amount of funds 
owed to each clearing member for each account class and to reconcile 
the amount of funds owed to all clearing members with the amount of 
funds held at depositories for each account class. Further, at least 
two DCO employees would have to be involved in the process of 
performing and approving the calculations and reconciliations each day. 
DCOs would also need to include the new reporting requirement in their 
process and procedures for event-specific reporting to the Commission. 
The Commission has sought to minimize the costs of the proposed 
regulation by only requiring reporting to the Commission of 
discrepancies rather than the filing of daily reports. The exact costs 
would depend on the account class(es) in which a DCO holds funds, and 
the number of clearing members and customer accounts at issue. The 
Commission has estimated that the PRA costs for event specific 
reporting are $79 per hour. Based on the burden estimate discussed 
above of .5 hours annually per DCO, the Commission estimates that each 
DCO will spend $39.50 in PRA costs under this rule.
d. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.15(f)(5) 
in light of the specific considerations identified in section 15(a) of 
the CEA. The proposed rule would benefit market participants by 
enabling any loss or theft of funds to be discovered by the DCO and 
reported to the Commission quickly. The Commission further believes 
that the proposed rule would promote sound risk management by helping 
to ensure that the funds are available if needed by the DCO to cover a 
clearing member or customer default. The Commission has considered the 
other section 15(a) factors and believes that they are not implicated 
by the proposed amendments.
10. Proposed Amendment to Sec.  39.15(h)
a. Summary of Changes
    The proposed rule would exempt foreign DCOs from the requirements 
of proposed Sec.  39.15(e)(3), (f), and (g)(3) because in the event of 
an insolvency, the clearing member funds held by a foreign DCO would 
not be subject to U.S. bankruptcy law.\71\
---------------------------------------------------------------------------

    \71\ See 17 CFR 190.11(b).
---------------------------------------------------------------------------

b. Benefits
    The Commission has determined to seek to avoid conflicts with 
insolvency proceedings in the jurisdiction where a foreign DCO is 
organized. The Commission believes that certainty surrounding which 
insolvency law would apply would benefit the clearing members of 
foreign DCOs.
c. Costs
    The Commission does not believe the rule would impose costs on 
foreign DCOs. The proposed rule is preserving the baseline, that funds 
belonging to a foreign DCO's clearing members will be treated in 
accordance with the insolvency law of the foreign DCO's home 
jurisdiction.
d. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the proposed amendments to Sec.  39.15(h) in 
light of the specific considerations identified in section 15(a) of the 
CEA. The proposed rule would benefit market participants by providing 
certainty regarding which insolvency law would apply to their funds in 
the event a foreign DCO enters an insolvency proceeding. The Commission 
has considered the other section 15(a) factors and believes that

[[Page 298]]

they are not implicated by the proposed amendments.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\72\
---------------------------------------------------------------------------

    \72\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is the promotion of competition. The Commission 
requests comment on whether the proposed amendments implicate any other 
specific public interest to be protected by the antitrust laws. The 
Commission has considered the proposed rulemaking to determine whether 
it is anticompetitive and has identified no anticompetitive effects. 
The Commission requests comment on whether the proposed rulemaking is 
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has determined that the proposed rule 
amendments are not anticompetitive and have no anticompetitive effects, 
the Commission has not identified any less anticompetitive means of 
achieving the purposes of the CEA. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the CEA that would otherwise be served by adopting the 
proposed rule amendments.

List of Subjects in 17 CFR Part 39

    Reporting, Treatment of funds.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 39 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
1. The authority citation for part 39 continues to read as follows:

    Authority: 7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464; 
15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July 
21, 2010, 124 Stat. 1749.

0
2. Amend Sec.  39.2 by adding definitions of the terms ``Money center 
country'' and ``Proprietary funds'' in alphabetical order to read as 
follows:


Sec.  39.2  Definitions.

* * * * *
    Money center country means Canada, France, Germany, Italy, Japan, 
and the United Kingdom.
* * * * *
    Proprietary funds means all money, securities, and property 
received by a derivatives clearing organization from, for, or on behalf 
of, a clearing member and held in a proprietary account, as defined in 
Sec.  1.3 of this chapter:
    (1) To margin, guarantee, or secure contracts for future delivery 
on or subject to the rules of a contract market, derivatives clearing 
organization, or foreign board of trade or a cleared swap contract, and 
all money accruing to a clearing member as the result of such 
contracts;
    (2) In connection with a commodity option transaction on or subject 
to the rules of a contract market, derivatives clearing organization, 
or foreign board of trade:
    (i) To be used as a premium for the purchase of a commodity option 
transaction for a clearing member;
    (ii) As a premium payable to a clearing member;
    (iii) To guarantee or secure performance of a commodity option by a 
clearing member; or
    (iv) Representing accruals (including, for purchasers of a 
commodity option for which the full premium has been paid, the market 
value of such commodity option) to a clearing member;
    (3) That constitutes, if a cleared swap is in the form or nature of 
an option, the settlement value of the option; or
    (4) As a contribution to a guaranty fund to mutualize the losses 
resulting from a default by a clearing member by covering the losses in 
accordance with the derivatives clearing organization's rules and its 
agreement(s) with its clearing members.
* * * * *
0
3. Amend Sec.  39.15 by adding paragraph (b)(3), revising paragraph 
(e), and adding paragraphs (f), (g), and (h) to read as follows:


Sec.  39.15  Treatment of funds.

* * * * *
    (b) * * *
    (3) Central banks. Notwithstanding anything to the contrary in 
Sec. Sec.  1.20, 1.49, 22.4, 22.5, or 22.9 of this chapter, a 
derivatives clearing organization may hold futures customer funds or 
cleared swaps customer collateral at the central bank of a money center 
country if it obtains from the central bank a written acknowledgment 
that:
    (i) The central bank was informed that the customer funds deposited 
therein are those of customers who trade commodities, options, swaps, 
and other products and are being held in accordance with the provisions 
of section 4d of the Act and applicable Commission regulations 
thereunder; and
    (ii) The central bank agrees to reply promptly and directly to any 
request from the director of the Division of Clearing and Risk or the 
director of the Market Participants Division, or any successor 
divisions, or such directors' designees, for confirmation of account 
balances or provision of any other information regarding or related to 
an account.
* * * * *
    (e) Permitted investments. (1) Funds and assets belonging to 
clearing members and their customers that are invested by a derivatives 
clearing organization shall be held in instruments with minimal credit, 
market, and liquidity risks.
    (2) Any investment of customer funds or assets by a derivatives 
clearing organization shall comply with Sec.  1.25 of this chapter.
    (3) A derivatives clearing organization may invest proprietary 
funds only in a manner that would be permitted for customer funds under 
Sec.  1.25 of this chapter. The derivatives clearing organization shall 
bear sole responsibility for any losses resulting from the investment 
of proprietary funds.
    (f) Proprietary funds--(1) Segregation. A derivatives clearing 
organization must separately account for and segregate all proprietary 
funds as belonging to its clearing members. A derivatives clearing 
organization shall deposit proprietary funds under an account name that 
clearly identifies the funds as belonging to clearing members and shows 
that the funds are segregated as required by this part. A derivatives 
clearing organization must at all times maintain in the separate 
segregated account or accounts money, securities and property in an 
amount sufficient in the aggregate to cover the total value of 
proprietary funds owed to all clearing members.
    (2) Written acknowledgment from depositories. (i) A derivatives 
clearing organization must obtain a written acknowledgment from each 
depository prior to or contemporaneously with the opening of an account 
for proprietary funds by the derivatives clearing organization with the 
depositories; provided, however, a derivatives clearing organization is 
not required to obtain a written acknowledgment from a Federal Reserve 
Bank with which it has opened an account for proprietary funds.

[[Page 299]]

    (ii) The written acknowledgment must be in the form as set out in 
Appendix D to this part, except as provided in paragraph (f)(2)(vi) of 
this section.
    (iii) A derivatives clearing organization shall promptly file a 
copy of the written acknowledgment with the Commission in the format 
and manner specified by the Commission no later than three business 
days after the opening of the account or the execution of a new written 
acknowledgment for an existing account, as applicable.
    (iv) A derivatives clearing organization shall obtain a new written 
acknowledgment within 120 days of any changes in the following:
    (A) The name or business address of the derivatives clearing 
organization;
    (B) The name or business address of the depository receiving 
proprietary funds; or
    (C) The account number(s) under which proprietary funds are held.
    (v) A derivatives clearing organization shall maintain each written 
acknowledgment readily accessible in its files in accordance with Sec.  
1.31 of this chapter, for as long as the account remains open, and 
thereafter for the period provided in Sec.  1.31 of this chapter.
    (vi) Notwithstanding paragraph (f)(2)(ii) of this section, a 
derivatives clearing organization may deposit proprietary funds with 
the central bank of a money center country if it obtains from the 
central bank a written acknowledgment that:
    (A) The central bank was informed that the proprietary funds 
deposited therein are those of clearing members who trade commodities, 
options, swaps, and other products and are being held in accordance 
with the provisions of section 5b(c)(2)(F) of the Act and Commission 
regulations thereunder; and
    (B) The central bank agrees to reply promptly and directly to any 
request from the director of the Division of Clearing and Risk, or any 
successor division, or the director's designees, for confirmation of 
account balances or provision of any other information regarding or 
related to an account.
    (3) Commingling. (i) A derivatives clearing organization may for 
convenience commingle the proprietary funds that it receives from, or 
on behalf of, clearing members in a single account or multiple accounts 
with one or more depositories.
    (ii) A derivatives clearing organization shall not commingle 
proprietary funds with the money, securities or property of the 
derivatives clearing organization, or a customer account of a clearing 
member of the derivatives clearing organization, or use proprietary 
funds to secure or guarantee the obligation of, or extend credit to, 
the derivatives clearing organization.
    (4) Limitation on use of proprietary funds. (i) A derivatives 
clearing organization shall not hold, use or dispose of proprietary 
funds except as belonging to the clearing member that deposited the 
proprietary funds. The use of proprietary funds as belonging to 
clearing members may include, but is not limited to:
    (A) A derivatives clearing organization may use the proprietary 
funds belonging to a clearing member to guarantee or cover deficits in 
a customer account of that clearing member in accordance with the 
derivatives clearing organization's rules and its agreement(s) with the 
clearing member; and
    (B) A derivatives clearing organization may use non-defaulting 
clearing members' money, securities, or property that is being held as 
a guaranty fund to mutualize the losses resulting from a default by a 
clearing member to cover such losses in accordance with the derivatives 
clearing organization's rules and its agreement(s) with its clearing 
members.
    (ii) No person, including any derivatives clearing organization or 
any depository, that has received proprietary funds for deposit in a 
segregated account, as provided in this section, may hold, dispose of, 
or use any the funds as belonging to any person other than the clearing 
members of the derivatives clearing organization which deposited the 
funds.
    (g) Daily reconciliation--(1) Futures customer funds. By noon of 
each business day, a derivatives clearing organization that has 
received futures customer funds from its clearing members shall, as of 
the close of the previous business day:
    (i) Calculate the amount of futures customer funds owed to each 
clearing member, on a currency by currency basis; and
    (ii) Reconcile the total amount of futures customer funds owed, on 
a currency by currency basis, aggregated across all clearing members, 
with the amount of futures customer funds held in separate accounts 
across all depositories.
    (2) Cleared swaps customer funds. By noon of each business day, a 
derivatives clearing organization that has received cleared swaps 
customer collateral from its clearing members shall, as of the close of 
the previous business day:
    (i) Calculate the amount of cleared swaps customer collateral owed 
to each clearing member, on a currency by currency basis; and
    (ii) Reconcile the total amount of cleared swaps customer 
collateral owed, aggregated across all clearing members, with the 
amount of cleared swaps customer collateral held in separate accounts 
across all depositories.
    (3) Proprietary funds. By noon of each business day, a derivatives 
clearing organization that has received proprietary funds from its 
clearing members shall, as of the close of the previous business day:
    (i) Calculate the amount of proprietary funds owed to each clearing 
member, on a currency by currency basis; and
    (ii) Reconcile the total amount of proprietary funds owed, 
aggregated across all clearing members, with the amount of proprietary 
funds held in separate accounts across all depositories.
    (4) Calculations. (i) Each calculation and reconciliation required 
by this paragraph (g) must be approved by a person who did not prepare 
the calculation or reconciliation and who does not report to the person 
that prepared the calculation or reconciliation.
    (ii) In performing the calculations required by this paragraph (g):
    (A) Securities shall be valued at their current market value, with 
haircuts applied in accordance with Sec.  39.11(d); and
    (B) A reconciliation deficit in a particular account type in one 
currency may be offset by a surplus in that same account type in 
another currency, based on publicly available exchange rates, with the 
surplus subject to haircuts reasonably determined by the derivatives 
clearing organization, consistently applied.
    (C) Where customer funds, including funds received to margin, 
guarantee, or secure futures, options, foreign futures, foreign 
options, or swaps, are, pursuant to an order of the Commission or a DCO 
rule filed pursuant to paragraph (b)(2)of this section, received for 
the purpose of holding such funds in a futures account, they shall be 
treated as futures customer funds, both for purposes of funds owed and 
funds held. Where such funds are received for the purpose of holding 
such funds in a cleared swaps customer account, they shall be treated 
as cleared swaps customer collateral, both for purposes of funds owed 
and funds held.
    (iii) Calculations of amounts owed in this paragraph (g) shall be 
made consistent with the requirements of Sec.  1.20(i) of this chapter, 
as applied to the accounts of a derivatives clearing organization with 
respect to its members' futures customer, cleared swaps customer, and 
proprietary accounts.

[[Page 300]]

    (5) A derivatives clearing organization shall immediately report to 
the Commission, pursuant to Sec.  39.19, any discrepancies in the 
calculation of the amount of funds held for each clearing member and 
any one or more of the reconciliations that reveals that the 
derivatives clearing organization did not, at the close of the previous 
business day, maintain in separate segregated accounts money, 
securities and property in an amount sufficient in the aggregate to 
cover the total value of funds owed to all clearing members.
    (h) Exclusions for foreign derivatives clearing organizations--
Paragraphs (e)(3), (f) and (g)(3) of this section do not apply to a 
derivatives clearing organization organized outside the United States 
that would, in the event of its insolvency, be subject to a foreign 
proceeding, as defined in 11 U.S.C. 101(23), in the jurisdiction in 
which it is organized.
0
4. In Sec.  39.19, add paragraph (c)(4)(xxvi) to read as follows:


Sec.  39.19  Reporting.

* * * * *
    (c) * * *
    (4) * * *
    (xxvi) Discrepancy in customer or proprietary funds. A derivatives 
clearing organization shall immediately report to the Commission any 
discrepancies in the calculation of the amount of funds held for each 
clearing member and any one or more of the reconciliations required 
pursuant to Sec.  39.15(g) that reveals that the derivatives clearing 
organization did not, at the close of the previous business day, 
maintain in separate segregated accounts money, securities and property 
in an amount sufficient in the aggregate to cover the total value of 
funds owed to all clearing members.
* * * * *
0
5. Add appendix D to part 39 to read as follows:

Appendix D to Part 39--Derivatives Clearing Organization Acknowledgment 
Letter for CFTC Regulation Sec.  39.15 Proprietary Funds Account

[Date]
[Name and Address of Bank or Trust Company]
We refer to the Segregated Account(s) which [Name of Derivatives 
Clearing Organization] (``we'' or ``our'') have opened or will open 
with [Name of Bank or Trust Company] (``you'' or ``your'') entitled:
[Name of Derivatives Clearing Organization] Proprietary Funds 
Account, CFTC Regulation Sec.  39.15 Proprietary Funds Account under 
Section 5b(c)(2)(F) of the Commodity Exchange Act [and, if 
applicable, ``, Abbreviated as [short title reflected in the 
depository's electronic system]'']
Account Number(s): [ ]
(collectively, the ``Account(s)'').

    You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable, 
money, securities and other property (collectively the ``Funds'') of 
clearing members who trade commodities, options, swaps, and other 
products, as required by Commodity Futures Trading Commission 
(``CFTC'') Regulations, including Regulation Sec.  39.15, as 
amended; that the Funds held by you, hereafter deposited in the 
Account(s) or accruing to the credit of the Account(s), will be 
separately accounted for and segregated on your books from our own 
funds and from any other funds or accounts held by us in accordance 
with the provisions of the Commodity Exchange Act, as amended (the 
``Act''), and part 39 of the CFTC's regulations, as amended; and 
that the Funds constitute member property as defined by 11 U.S.C. 
761(16) and CFTC Regulation Sec.  190.01.
    Furthermore, you acknowledge and agree that such Funds may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Funds in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you. This 
prohibition does not affect your right to recover funds advanced in 
the form of cash transfers, lines of credit, repurchase agreements 
or other similar liquidity arrangements you make in lieu of 
liquidating non-cash assets held in the Account(s) or in lieu of 
converting cash held in the Account(s) to cash in a different 
currency.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the director 
of the Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such director's designees, and this letter constitutes 
the authorization and direction of the undersigned on our behalf to 
release the requested information without further notice to or 
consent from us.
    The parties agree that all actions on your part to respond to 
the above information requests will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the director of the Division of Clearing 
and Risk of the CFTC, or any successor divisions, or such director's 
designees, upon which you have relied after having taken measures in 
accordance with your applicable policies and procedures to assure 
that such request was provided to you by an individual authorized to 
make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Funds 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Funds 
maintained in the Account(s), or to impose such charges against us 
or any account maintained by us with you for the purpose of holding 
our own funds. Further, it is understood that amounts represented by 
checks, drafts or other items shall not be considered to be part of 
the Account(s) until finally collected. Accordingly, checks, drafts 
and other items credited to the Account(s) and subsequently 
dishonored or otherwise returned to you or reversed, for any reason, 
and any claims relating thereto, including but not limited to claims 
of alteration or forgery, may be charged back to the Account(s), and 
we shall be responsible to you as a general endorser of all such 
items whether or not actually so endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of proprietary funds; and you shall 
not in any manner not expressly agreed to herein be responsible to 
us for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between

[[Page 301]]

the parties in connection with the Account(s), this letter agreement 
shall govern with respect to matters specific to section 5b(c)(2)(F) 
of the Act and CFTC Regulation Sec.  39.15, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC). We hereby authorize and direct you to provide such 
copy without further notice to or consent from us, no later than 
three business days after opening the Account(s) or revising this 
letter agreement, as applicable.

[Name of Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Bank or Trust Company]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

    Issued in Washington, DC, on December 26, 2023, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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

Appendices to Protection of Clearing Member Funds Held by Derivatives 
Clearing Organizations--Commission Voting Summary, Chairman's 
Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Behnam and Commissioner Johnson voted in 
the affirmative. Commissioner Pham concurred. Commissioners Goldsmith 
Romero and Mersinger voted in the negative.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    I support the issuance and publication of the proposed rule on 
the protection of clearing member funds held by derivatives clearing 
organizations (DCOs). The Commission has longstanding regulations 
that provide comprehensive protections for funds belonging to 
customers of a Futures Commission Merchant (FCM).\1\ Similar 
protections, however, do not exist for funds belonging to clearing 
members of a DCO, whether they are individual market participants or 
FCMs themselves. The proposed rule would implement a regime for the 
protection of clearing member funds largely analogous to the current 
regime applicable to FCM customer funds. Specifically, the proposed 
rule would ensure that clearing member funds and assets receive 
proper treatment if a DCO enters bankruptcy by requiring segregation 
of clearing member funds from the DCO's own funds \2\ and that the 
funds be held in a depository that acknowledges in writing that the 
funds belong to clearing members,\3\ not the DCO. The proposed rule 
would require new regulations regarding the commingling of clearing 
member or proprietary funds; \4\ limitations on the use of these 
funds; \5\ and limit investments of the funds to the investments 
permitted for customer funds under Regulation Sec.  1.25.\6\ In 
addition, the proposed rule would permit DCOs to hold customer and 
clearing member funds at foreign central banks subject to certain 
requirements. Finally, the proposed rule would require DCOs to 
conduct a daily calculation and reconciliation of the amount of 
funds owed to customers and clearing members and the amount actually 
held for customers and clearing members.\7\
---------------------------------------------------------------------------

    \1\ See 7 U.S.C. 6d; 17 CFR 1.20 through 1.39. See also 17 CFR 
22.1 through 22.17, and 30.7 (establishing similar regimes for 
cleared swaps customer collateral and foreign futures customer 
funds, respectively). DCOs that receive customer funds from their 
FCM clearing members must also apply many of these customer 
protection requirements.
    \2\ See also 17 CFR 1.20(a) (requiring FCMs to segregate 
customer funds from their own funds); 17 CFR 1.20(g)(1), 17 CFR 
39.15 (b), 17 CFR 22.3(b)(1) (requiring DCOs to segregate the 
customer funds of their FCM clearing members from their own funds).
    \3\ See also 17 CFR 1.20, 22.5, and 30.7 (requiring an FCM to 
obtain an acknowledgment letter for futures customer funds, cleared 
swaps customer collateral, and foreign futures customer funds, 
respectively); 17 CFR 1.20(g)(4), 17 CFR 22.5 (requiring a DCO to 
obtain an acknowledgment letter from depositories).
    \4\ See also 17 CFR 1.20(e) and (g).
    \5\ See also 17 CFR 1.20(f).
    \6\ 17 CFR 1.25.
    \7\ See also 17 CFR 1.32, 1.33.
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    Commission regulations addressing the custody and safeguarding 
of customer funds have historically responded to the characteristics 
of the prevailing model in which all, or nearly all, clearing 
members of a DCO were FCMs acting as intermediaries. However, as 
noted in the proposed rule, the Commission has granted registration 
to a number of DCOs that clear directly for market participants 
without the intermediation of FCMs.\8\ Additionally, many DCOs that 
use the traditional FCM clearing model have at least some non-FCM 
clearing members. The growth and evolution of the non-intermediated 
clearing model necessitates ensuring that our regulations establish 
a regime for the safeguarding and protection of clearing member 
funds that addresses the issues and risks presented.
---------------------------------------------------------------------------

    \8\ Currently, CBOE Clear Digital, LLC; CX Clearinghouse, L.P.; 
LedgerX, LLC; and North American Derivatives Exchange Inc. allow 
individuals to be direct clearing members. See In the Matter of the 
Application of CBOE Clear Digital, LLC For Registration as a 
Derivatives Clearing Organization (June 5, 2023), available at 
https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizations/39855; In the Matter of the Application of CX 
Clearinghouse, L.P. For Registration as a Derivatives Clearing 
Organization (Aug. 3, 2018), available at https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizations/16767; In 
the Matter of the Application of LedgerX, LLC For Registration as a 
Derivatives Clearing Organization (Sept. 2, 2020), available at 
https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizations/30998; In the Matter of the Application of the 
North American Derivatives Exchange for Registration as a 
Derivatives Clearing Organization (Jan. 17, 2014), available at 
https://www.cftc.gov/IndustryOversight/IndustryFilings/ClearingOrganizations/38.
---------------------------------------------------------------------------

    Lastly, I am pleased that the proposed rule would, in effect, 
codify the no-action and exemptive relief previously given to four 
DCOs \9\ by permitting DCOs to hold customer funds at foreign 
central banks and use a modified acknowledgment letter. The proposed 
rule would also extend these amended provisions to clearing member 
funds. Permitting DCOs to hold customer and clearing member funds at 
a central bank allows them to take advantage of the credit and 
liquidity risk management benefits that central bank accounts 
provide. This is sound policy and risk management.
---------------------------------------------------------------------------

    \9\ See CFTC Letter No. 16-59 (June 21, 2016), available at 
https://www.cftc.gov/csl/16-59/download (granting an exemption to 
the Chicago Mercantile Exchange, Inc (CME) from the requirements of 
Regulation Sec.  1.49(d)(3) to permit CME to hold customer funds at 
the Bank of Canada and permitting the use of a modified 
acknowledgment letter for customer accounts maintained by the CME. 
at the Bank of Canada); CFTC Letter No. 16-05 (Feb. 1, 2016), 
available at https://www.cftc.gov/csl/16-05/download (granting an 
exemption to Eurex Clearing AG (Eurex) from the requirements of 
Regulation Sec.  1.49(d)(3) to permit Eurex to hold customer funds 
at Deutsche Bundesbank and permitting the use of a modified 
acknowledgment letter for customer accounts maintained by Eurex at 
Deutsche Bundesbank); and CFTC Letters No. 14-123 (Oct. 8, 2014), 
available at https://www.cftc.gov/csl/14-123/download and 14-124 
(Oct. 8, 2014), available at https://www.cftc.gov/csl/14-124/download (granting an exemption to ICE Clear Europe Limited and LCH 
Ltd, respectively, from the requirements of Regulation Sec.  
1.49(d)(3) to permit ICE Clear Europe Limited and LCH Ltd to hold 
customer funds at the Bank of England and permitting the use of a 
modified acknowledgment letter for customer accounts maintained by 
ICE Clear Europe Limited and LCH Ltd, respectively, at the Bank of 
England).
---------------------------------------------------------------------------

    I look forward to hearing the public's comments on the proposed 
rule. The 60-day comment period will begin upon the Commission's 
publication of the proposed rule on its website.

Appendix 3--Statement of Commissioner Kristin N. Johnson

    Trust is the core issue that motivates today's notice of 
proposed rulemaking (Proposed Rule) regarding the protection of 
clearing member funds held by derivatives clearing organizations 
(DCOs) advanced by the Division of Clearing and Risk.
    On March 30, 2022, I commenced service as a Commissioner of the 
Commodity Futures Trading Commission (Commission or CFTC). In a 
hearing before the Senate Agriculture, Nutrition, and Forestry 
Committee a few weeks earlier, I committed to promote the

[[Page 302]]

integrity and stability of our markets and protect customers, 
particularly vulnerable and marginalized individual retail customers 
who participate in our markets. This commitment is among the most 
compelling reasons for my public service.
    Over the last few decades, the Commission has adopted and 
refined protections for customers of intermediaries in our markets, 
namely by imposing rigorous obligations on intermediaries to 
segregate the funds of their customers, designating specific 
authorized depositories, and outlining permitted investments of 
customer funds.
    Over the course of my tenure as a Commissioner, in numerous 
public speeches, statements, and interviews, I have called on the 
Commission to advance parallel customer protections for direct 
participants of non-intermediated clearinghouses registered with the 
Commission as DCOs.\1\
---------------------------------------------------------------------------

    \1\ Kristin N. Johnson, Commissioner, CFTC, Statement on 
Preserving Trust and Preventing the Erosion of Customer Protection 
Regulation (Nov. 3, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnstatement110323; Kristin N. Johnson, 
Commissioner, CFTC, Keynote Address at the World Federation of 
Exchanges Annual Meeting: Creating Rules of the Road for 
(Dis)Intermediated and (De)Centralized Markets (Sept. 21, 2023), 
https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson5; 
Kristin N. Johnson, Commissioner, CFTC, Keynote Address at Salzburg 
Global Finance Forum: Future-Proofing Financial Markets Regulation 
(June 29, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson4; Kristin N. Johnson, Commissioner, CFTC, Statement 
Calling for the CFTC to Initiate A Rulemaking Process for CFTC-
Registered DCOs Engaged in Crypto or Digital Asset Clearing 
Activities (May 30, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement053023; Kristin N. Johnson, 
Commissioner, CFTC, Keynote Address at Digital Assets @Duke 
Conference, Duke's Pratt School of Engineering and Duke Financial 
Economics Center: Mitigating Crypto-Crises: Applying Lessons Learned 
in Governance, Risk Management, and Compliance (Jan. 26, 2023), 
https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson2; 
Kristin N. Johnson, Commissioner, CFTC, Statement in Support of 
Notice of Proposed Amendments to Reporting and Information 
Requirements for Derivatives Clearing Organizations (Nov. 10, 2022), 
https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement111022b.
---------------------------------------------------------------------------

    Today's Proposed Rule takes the first steps to close this gap. I 
support this Proposed Rule that advances the protection of clearing 
member proprietary funds held by a DCO. Specifically, the Proposed 
Rule:
     Requires a DCO to segregate clearing member proprietary 
funds from the DCO's own funds, hold such funds in an account 
labeled as proprietary funds, and obtain a written acknowledgment 
letter from a depository;
     Requires a DCO to treat clearing member proprietary 
funds as belonging to the clearing member while permitting the DCO 
to use clearing member proprietary funds as part of the DCO's 
default waterfall, consistent with the DCO's rules and agreement 
with its clearing members;
     Permits the DCO to commingle proprietary funds of 
multiple clearing members in a single omnibus account for 
convenience while prohibiting the commingling of proprietary funds 
with the DCO's own funds or futures commission merchant (FCM) 
customer funds;
     Permits the DCO to invest clearing member proprietary 
funds in highly liquid financial instruments pursuant to CFTC 
Regulation Sec.  1.25 and requires DCOs to be responsible for 
investment losses; and
     Requires the daily reconciliation of balances of FCM 
customers and clearing members and segregated funds and the 
reporting of any discrepancies.
    In my capacity as a Commissioner at the CFTC, I have strongly 
advocated for the development of these important regulatory 
protections that parallel existing protections in intermediated 
market structures. This Proposed Rule reflects the tremendous 
efforts of coordination among the Division of Clearing and Risk, the 
office of the Chairman, my office, and my fellow Commissioners' 
offices and their staff. Our collective engagement reflects years of 
dialogue with market participants, CFTC staff, other market and 
prudential regulators and engagement with the U.S. Department of the 
Treasury, members of Congress, academics, and public interest 
advocates.
    This Proposed Rule offers a transformational reform that brings 
to markets in which clients may interact directly with a DCO 
foundational protections currently established in CFTC regulations 
and enforced in markets that rely on intermediaries.\2\
---------------------------------------------------------------------------

    \2\ Although the focus of my statement is on direct participants 
in the context of non-intermediated clearing models, the Proposed 
Rule has broader implications. It applies to the proprietary funds 
of FCMs in the context of an intermediated model as well.
---------------------------------------------------------------------------

    In a direct clearing model (non-intermediated market structure), 
clearing members are not customers of intermediaries,\3\ and 
therefore, do not qualify for the regulatory protections available 
under part 1 of the Commission's regulations, including the 
requirement to separately account for and segregate customer funds 
as belonging to customers, deposit customer funds in specific 
locations, obtain written acknowledgment letters from depositories, 
and use customer funds as belonging to such customers.\4\ The 
Proposed Rule reflects the historic development and evolution of 
markets and refers to the assets or funds on deposit from a customer 
of an intermediary as ``customer funds.'' The Proposed Rule adopts 
the term ``clearing member'' to describe those directly interacting 
with the clearinghouse and ``proprietary funds'' to describe 
clearing members' assets or funds on deposit.
---------------------------------------------------------------------------

    \3\ The term ``customer'' is generally reserved for the 
individuals or businesses that rely on an intermediary such as an 
FCM to facilitate a transaction. Where a DCO offers direct services, 
the individuals or businesses engaged with the clearinghouse are 
generally described as ``members.''
    \4\ 17 CFR 1.20.
---------------------------------------------------------------------------

    The Commission acts to ensure parallel protections in the market 
for every asset class, adopting and seeking to implement the 
existing, well-tested, and effective regulatory framework under 
certain provisions of part 1 of the CFTC's regulation to the 
preservation of clearing member proprietary funds. This may be 
increasingly important as the Commission anticipates market 
participants' introduction of novel financial products.
    In adopting the Proposed Rule, the Commission seeks to ensure 
that clearing member proprietary funds are easily identified and 
receive the proper treatment in the event the DCO enters an 
insolvency or bankruptcy proceeding.
    Today, the Commission takes a first step to ensure that there 
are parallel protections for both the ``customers'' of 
intermediaries, and the ``clearing members'' of DCOs who may include 
(in a direct clearing model) individual retail market participants.

Regulatory Gap for Direct Participants in Non-Intermediated Clearing 
Models

    Section 4d of the Commodity Exchange Act (CEA) and parts 1, 22 
and 30 of the Commission's regulations establish a comprehensive 
regime to safeguard the funds belonging to customers of FCMs in the 
context of intermediated DCOs.
    The customer protection regime requires FCMs to segregate 
customer funds from their own funds, deposit customer funds under an 
account name that clearly identifies them as customer funds, and 
obtain a written acknowledgment from each depository that holds 
customer funds. The customer protection regime does not apply to the 
funds of a person that clears trades directly through a DCO and is a 
``clearing member'' because such market participants do not meet the 
legal and regulatory definitions of the term ``customer.''
    Therefore, direct participants that are not ``customers'' of 
intermediaries may not benefit from the Commission's well-
established customer protection regime.
    The Commission seeks to offer parallel customer protections to 
direct participants in non-intermediated DCOs--clearing members--to 
preserve the value of their proprietary funds, mitigate the risk of 
loss, and improve the availability of those funds for return to the 
clearing member should the DCO fail. Section 5b(c)(2)(F) of the CEA 
(Core Principle F) and CFTC Regulation Sec.  39.15 apply to the 
treatment of clearing members' funds and assets held by a DCO.
    CFTC regulations require DCOs to establish standards and 
procedures designed to protect and ensure the safety of proprietary 
funds and require DCOs to hold proprietary funds in a manner that 
will minimize the risk of loss or delay in access by the DCO to the 
proprietary funds. Section 8a(5) of the CEA grants the Commission 
authority to adopt rules it determines are reasonably necessary to 
effectuate the DCO core principles.\5\ The safeguards in this 
Proposed Rule are indeed reasonably necessary to effectuate DCO Core 
Principle F.\6\
---------------------------------------------------------------------------

    \5\ 7 U.S.C. 12a(5).
    \6\ 7 U.S.C. 7a-1(c)(2)(F).
---------------------------------------------------------------------------

    In light of the lack of parallel protections for ``clearing 
members'' who directly interface with DCOs, there is a significant 
gap in the Commission's ability to ensure the protection and 
preservation of funds or assets of direct participants. This 
Proposed Rule closes the gap.

[[Page 303]]

The Collapse of the FTX Complex

    The bankruptcy of FTX illustrates the magnitude of the losses 
that customers may experience in the absence of regulation that 
prohibits commingling of client assets or imposes obligations to 
segregate client assets for the benefit of customers.
    In November 2022, FTX Trading Ltd. d/b/a/FTX.com (FTX), Alameda 
Research LLC (Alameda) and approximately one hundred and thirty FTX-
affiliated entities filed for bankruptcy in the United States. 
Contemporaneous with the bankruptcy filing, the Department of 
Justice (DOJ), Commission, and other federal regulators began to 
investigate claims that FTX employed omnibus accounts that 
commingled customer funds with the FTX enterprise resources, 
allegedly misappropriating more than $10 billion in client 
assets.\7\
---------------------------------------------------------------------------

    \7\ FTX Demonstrates Need for More Oversight: CFTC's Johnson 
(Bloomberg TV Nov. 9, 2022), https://www.bloomberg.com/news/videos/2022-11-09/ftx-demonstrates-need-for-more-oversight-cftc-s-johnson.
---------------------------------------------------------------------------

    The CFTC has alleged that Mr. Bankman-Fried and FTX solicited 
customers on the premise that the FTX platform could be trusted.\8\ 
The CFTC's complaint alleges that despite these statements, FTX 
permitted Alameda to access customer deposits and commingle customer 
assets with Alameda's proprietary assets, which were used for 
Alameda's and its executives' own business operations, personal 
purchases, acquisitions of other businesses, and risky investments.
---------------------------------------------------------------------------

    \8\ See Commodity Futures Trading Commission v. Samuel Bankman-
Fried, FTX Trading Ltd d/b/a FTX.com, and Alameda Research LLC 
(S.D.N.Y. 2022) (Compl.).
---------------------------------------------------------------------------

    While soliciting customers to trust in the integrity of its 
business, FTX is alleged to have siphoned off billions in customer 
deposits.

The Benefits and Limits of Alternatives to Regulation: LedgerX

    LedgerX, a non-intermediated clearinghouse registered with the 
Commission as a DCO and owned by parent company FTX, illustrates the 
importance of the protections advanced in the proposed rulemaking.
    On October 25, 2021, FTX.US acquired LedgerX through a Delaware 
company doing business as West Realm Shires Services Inc. (West 
Realm Shires). When parent company FTX filed a petition seeking 
bankruptcy protection on November 11, 2022, the bankruptcy court 
declared LedgerX a non-debtor entity. LedgerX was one of the few 
assets within the network of FTX-affiliated companies that remained 
solvent.
    In 2017, years before the acquisition by West Realm Shires, 
LedgerX submitted an application with the Commission seeking 
authorization to register as a DCO offering fully-collateralized 
(crypto) derivatives contracts. The Commission's order, amended in 
September 2020, imposed a number of important conditions, including 
a condition requiring LedgerX to ``at all times maintain funds of 
its clearing members separate and distinct from its own funds.'' \9\
---------------------------------------------------------------------------

    \9\ Press Release No. 8230-20, CFTC, CFTC Approves LedgerX, LLC 
to Clear Fully-Collateralized Futures and Options on Futures (Sept. 
2, 2020), https://www.cftc.gov/PressRoom/PressReleases/8230-20.
---------------------------------------------------------------------------

    When FTX filed for bankruptcy protection, the conditions in the 
LedgerX order and Commission staff's enforcement of compliance with 
the conditions contributed significantly to the preservation of 
LedgerX's customer property.\10\ The LedgerX order serves as an 
important precedent for the framework the Commission must consider 
when adopting parallel protections for DCO direct clients, 
particularly retail clients, in the non-intermediated context.
---------------------------------------------------------------------------

    \10\ LedgerX's ``customers'' are clearing members as described 
above and would not otherwise qualify for protections under parts 1 
and 22 of the Commission's regulations.
---------------------------------------------------------------------------

    In 2022, LedgerX applied to amend its order of registration as a 
DCO to allow it to modify its existing non-intermediated model to 
clear margined products for retail participants while continuing 
with a non-intermediated model.
    In May 2022, the Commission held a convening to examine the 
implications of a derivatives clearing market structure that offers 
direct-to-client services. The convening outlined important issues 
addressed in this Proposed Rule.

The Rise of Non-Intermediated DCOs

    DCOs play an increasingly important role in the financial 
markets, though DCOs have been central to facilitating access to the 
derivatives market since the founding of our nation and the futures 
market. The Dodd-Frank Act introduced a framework for the regulation 
of swaps that imposed central clearing and trade execution 
requirements, registration and comprehensive regulation of swap 
dealers, and recordkeeping and real-time reporting requirements.
    The clearing market structure has evolved from a traditional 
clearing model, where an FCM served as an intermediary in 
transactions between a customer and a DCO, to a direct clearing 
model, where the transactions are between the customer and the DCO 
directly.\11\ As I have previously stated:
---------------------------------------------------------------------------

    \11\ Currently, CBOE Clear Digital, LLC, CX Clearinghouse, L.P.; 
LedgerX, LLC, and North American Derivatives Exchange Inc. allow 
individuals to be direct clearing members. Additionally, ICE NGX 
Canada Inc. clears physically delivered energy contracts directly 
for clearing members with a net worth exceeding CAD $5,000,000 or 
assets exceeding CAD $25,000,000.
---------------------------------------------------------------------------

    FCMs solicit and accept orders for derivatives transactions on 
behalf of customers and receive customer funds to margin, guarantee, 
or secure derivatives transactions. FCMs are subject to significant 
regulatory requirements, including customer protection safeguards, 
safety and soundness capital requirements, risk management, 
conflicts of interest requirements, and anti-money laundering and 
know-your-customer programs.\12\
---------------------------------------------------------------------------

    \12\ Kristin N. Johnson, Commissioner, CFTC, Keynote Address at 
the World Federation of Exchanges Annual Meeting: Creating Rules of 
the Road for (Dis)Intermediated and (De)Centralized Markets (Sept. 
21, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson5.
---------------------------------------------------------------------------

    At the core, in a traditional, intermediated model, customer 
protection rules apply to FCMs and require FCMs to segregate 
customer funds, including when such funds are held at a DCO, among 
other safekeeping measures.
    In newly emerging disintermediated market structures, the 
absence of an intermediary creates a gap in the application of the 
CFTC's customer protection rules because key customer protections 
are triggered by the presence of a ``customer,'' as defined by the 
CFTC, and an FCM that facilitates the clearing of a customer's 
derivatives transactions at the DCO.\13\
---------------------------------------------------------------------------

    \13\ See supra note 1.
---------------------------------------------------------------------------

    The Proposed Rule achieves parallel protections by applying key 
aspects of the customer protection regime to proprietary funds of 
clearing members and imposing parallel asset protection requirements 
on DCOs--both in intermediated and non-intermediated clearing 
models.
    In addition, the Proposed Rule contains important requests for 
comments, soliciting feedback and engagement from the industry on a 
number of potential future actions.

Future Rulemaking: Anti-Money Laundering Requirements for DCOs

    Anti-money laundering (AML) regulations ensure that all 
transactions in our markets are subject to identification 
verification standards and prevent illicit activity in our markets.
    It is imperative that the Commission continue to engage with the 
U.S. Department of Treasury to ensure that AML regulations apply to 
all applicable market structures involving activities that create 
obligations to comply with AML regulations.
    The Proposed Rule includes a request for comment that asks how 
might the Commission ensure AML and KYC compliance for DCOs that 
offer direct clearing services (a market structure that would not 
include FCMs or other intermediaries that are typically directed to 
create Bank Secrecy Act compliance programs)? Should DCOs offering 
direct-to-customer services to non-eligible contract participants or 
retail customers be required to comply with AML and KYC 
requirements?
    Following consultation with the U.S. Department of Treasury, the 
Commission may need to engage in a formal rulemaking that imposes 
AML requirements on DCOs.\14\
---------------------------------------------------------------------------

    \14\ I note that the Commission has negotiated the inclusion of 
AML requirements in the registration order for several DCOs, 
including CBOE Clear Digital, LLC and LedgerX LLC. I commend DCOs 
that have implemented these conditions.
---------------------------------------------------------------------------

Technical Clarifications in CFTC Regulation 1.25

    The Proposed Rule allows DCOs to invest proprietary funds in 
permitted investments pursuant to CFTC Regulation Sec.  1.25. The 
drafting cross-refers to CFTC Regulation Sec.  1.25, but the 
Commission is currently engaged in a proposed rulemaking that amends 
CFTC Regulation Sec.  1.25. My supporting statements to amendments 
to CFTC Regulation Sec.  1.25 note that it is imperative that the 
Commission consider an equivalent application of CFTC Regulation

[[Page 304]]

Sec.  1.25 in the context of a DCO's investment of the member 
property of retail customers.\15\
---------------------------------------------------------------------------

    \15\ Kristin N. Johnson, Commissioner, CFTC, Statement on 
Preserving Trust and Preventing the Erosion of Customer Protection 
Regulation (Nov. 3, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnstatement110323.
---------------------------------------------------------------------------

    Comments to the Proposed Rule should indicate how best to ensure 
equivalence.\16\
---------------------------------------------------------------------------

    \16\ In footnote 45 in the Proposed Rule, the Commission notes: 
Proposed Sec.  39.15(e) cross-references Sec.  1.25, which provides 
that an FCM or DCO may invest ``customer money'' in certain 
instruments. The regulatory text of Sec.  1.25, however, does not 
refer to ``proprietary funds.'' The Commission recently approved 
proposed amendments to Sec.  1.25. Based on comments received on 
those proposed amendments, if appropriate, the Commission may 
consider further amending Sec.  1.25 either in the final rule or as 
a re-proposed rule to ensure that the regulatory text provides 
clarity on the application of Sec.  1.25 to a DCO's investment of 
``proprietary funds,'' as permitted under Sec.  39.15(e).
---------------------------------------------------------------------------

Periodic Reporting of Daily Reconciliations

    The Proposed Rule requires a DCO to notify the CFTC of 
discrepancies in its daily calculations. The Commission exercises 
direct oversight with respect to DCOs, meaning DCOs are not 
supervised by self-regulatory organizations (SRO) or designated 
self-regulatory organizations (DSRO). The Commission performs the 
examination functions. DCOs may benefit from a similar oversight as 
FCMs, which involves a regular reporting of reconciliation and not 
just the reporting of discrepancies.\17\ DCOs are subject to robust 
Commission regulations, examinations, and oversight. It will be 
important to receive comments from all stakeholders regarding the 
reporting of DCO reconciliations.
---------------------------------------------------------------------------

    \17\ See supra note 15.
---------------------------------------------------------------------------

Conclusion

    It is my hope that this Proposed Rule will move forward so that 
we can begin to introduce greater protections for clearing members, 
including retail customers. I thank the Division of Clearing and 
Risk--Clark Hutchinson, Eileen Donovan, Theodore Polley, and Scott 
Sloan--for their tremendous efforts in advancing this very 
important, significant, and transformative Proposed Rule.

Appendix 4--Dissenting Statement of Commissioner Christy Goldsmith 
Romero

    This week, the Commission in a split vote, on which I dissented, 
approved the first proposed rule related to FTX's bespoke direct-to-
retail market structure. That structure removed the intermediary 
(known as a futures commission merchant or FCM) where the CFTC's 
customer protection and anti-money laundering regimes sit. I believe 
that before my tenure, the Commission made a mistake in approving 
two clearinghouses (LedgerX owned by FTX before FTX's bankruptcy, 
and Nadex, which is now Crypto.com) for this direct-to-retail market 
structure before analyzing and addressing the risks of a lack of AML 
requirements, customer protections, and other checks and balances.
    After FTX's bankruptcy, the CFTC is now trying to remedy the 
consequences of its mistake, one of which is that retail 
participants do not have customer protections under this model 
because they lose their status as ``customers,'' instead becoming 
``clearing members.'' In the open meeting, the CFTC staff said that 
the proposed rule was an attempt to provide parallel protections to 
those individuals who we would normally consider to be 
``customers,'' but who now are ``members.'' But it fails to provide 
parallel protections to retail participants. The proposed rule 
attempts to port over to this direct-to-retail model one protection 
(segregation of funds, which I support) without the other 
protections, or checks and balances present in an intermediated 
model with an FCM.
    I do not know if it is even possible for the CFTC to give 
parallel protections to retail participants under a direct-to-retail 
model, because the Commodity Exchange Act and Commission rules 
contemplate the presence of an FCM. Additionally, anti-money 
laundering controls sit with the FCM, and clearinghouses have no AML 
requirements. AML is a critical guardrail for national security and 
customer protection. The Financial Stability Oversight Council's 
(FSOC) 2023 Annual Report says, ``Crypto-assets remain susceptible 
to misuse by terrorist organizations and other sanctioned 
individuals' efforts to move funds in support of illicit 
activities.'' \1\
---------------------------------------------------------------------------

    \1\ See Financial Stability Oversight Council, Annual Report 
2023, https://home.treasury.gov/system/files/261/FSOC2023AnnualReport.pdf, (December 14, 2023).
---------------------------------------------------------------------------

    I do not believe that the rule, which was rushed in three weeks 
at the end of the year, is sufficient to remedy that earlier 
mistake. The rule would benefit from more time than three weeks.\2\ 
We should step back and assess the impact of changing the tried and 
true market structure by removing the FCM. Without addressing a 
number of serious issues, the rule may give a false sense of 
security about the safety of a direct-to-retail model, while hiding 
the threats. The CFTC staff in the open meeting said that there are 
a number of applications pending for this model and they expect 
more. Without an assessment, we may just move risk around the 
system, while creating an illusion of safety.
---------------------------------------------------------------------------

    \2\ Commissioners received it late Wednesday, the day before 
Thanksgiving, three weeks before the meeting, with no prior 
engagement with Commissioners on the content of the rule. Because, 
it raised serious questions, I asked that it be pulled from the 
meeting and that Commissioners would have more time. My request was 
denied with no reason given.
---------------------------------------------------------------------------

    Such an assessment would implement a recommendation from the 
FSOC. In its October 2022 Report on Digital Asset Financial 
Stability Risks and Regulation, the FSOC recommended that member 
agencies (including the CFTC) ``assess the impact of vertical 
integration (i.e., direct access to markets by retail customers) on 
conflicts of interest and market volatility, and whether vertically 
integrated market structures can or should be accommodated under 
existing laws and regulations.'' The CFTC has not conducted this 
analysis, leaving the CFTC out of step with FSOC's recommendation.
    I invite the public to watch this week's CFTC public meeting, 
which showed that there are serious issues that the CFTC should 
assess and address before accommodating this crypto industry 
model.\3\ The first is whether the CFTC can impose AML requirements 
on clearinghouses to prevent retail funds from being commingled with 
funds belonging to terrorists, cyber criminals and drug cartels--a 
question on which the CFTC is in the middle of its analysis.\4\ This 
rule also does not require disclosures to inform retail participants 
that they are giving up customer protections and bankruptcy customer 
priority, instead taking the status of ``clearing members,'' similar 
to the roles and duties that normally falls to an FCM such as a 
large bank.\5\ The rule also would not limit clearinghouses to 
depositing these ``member'' funds in only banks or trusts, as FCMs 
are required, which would allow the clearinghouse to deposit funds 
with an unregulated affiliate.\6\
---------------------------------------------------------------------------

    \3\ See CFTC to Hold and Open Commission Meeting on December 13, 
https://www.youtube.com/watch?v=zANNkH5STzk, (December 13, 2023) at 
2:12:00.
    \4\ See Id. at 3:07:40-3:08:40; 3:16:52-3:17:40.
    \5\ See Id. at 2:37:45-2:39:10.
    \6\ See Id. at 2:44:20-2:44:55.
---------------------------------------------------------------------------

    Instead of learning the lessons of FTX, I worry that rushing to 
approve this proposal leaves the Commission out of step with other 
federal financial regulators that are asking whether a direct-to-
retail model can or should be accommodated under current law, and 
assessing its implications. I also worry that this proposed rule 
will form the basis for the CFTC to approve more crypto companies 
for this direct-to-retail model under the false impression that this 
model is safe. I am concerned about rushing this rule through at the 
end of the year in three weeks' time, when these are critical post-
FTX issues. I must dissent.

The CFTC's Laws and Regulations Protect Customers and Guard Against 
Illicit Finance Through a Market Structure That Has Stood the Test of 
Time

    Clearinghouses play an important public interest role--they are 
critical market infrastructure intended to foster financial 
stability, trust, and confidence in U.S. markets. Dodd-Frank Act 
reforms increased central clearing, thereby increasing financial 
stability. Those reforms also concentrated risk in clearinghouses. 
With that concentrated risk, it is critical that the Commission 
maintain vigilance in its oversight over clearinghouses to identify 
and monitor risk and promote financial stability. This is most 
important for the CFTC's monitoring of systemic risk.
    FCMs also play an important role. First, they stand as a shock 
absorber, providing additional financial support to the 
clearinghouse to safeguard the financial system. Second, because 
they are customer-facing, they are responsible for providing 
customer protections. The customer protection regime under the 
Commodity Exchange Act and CFTC rules are found in

[[Page 305]]

requirements for FCMs. In its October 2022 report, the FSOC 
discussed: \7\
---------------------------------------------------------------------------

    \7\ See Financial Stability Oversight Council, Report on Digital 
Asset Financial Stability Risks and Regulation, https://home.treasury.gov/news/press-releases/jy0986, (October 3, 2022).
---------------------------------------------------------------------------

    The current framework of markets regulation is generally 
structured around the requirement or presumption that markets are 
accessed by retail customers through intermediaries such as broker-
dealers or future commission merchants (FCMs). Those intermediaries 
perform many important functions, such as processing transactions, 
acting as agent and obtaining best execution for customers, 
extending credit, managing custody of customer assets, ensuring 
compliance with federal regulations, and guaranteeing performance of 
contracts. As a result of the special role these intermediaries play 
in traditional market structures, they are subject to unique 
regulations often focused on customer protections, such as 
regulations around conflicts of interest, suitability, best 
execution, segregation of funds, disclosures, and fitness standards 
for employees.
    Upending this traditional market structure, without analysis, 
can have unintended consequences.

There Are No Customers or Customer Protections in a Direct-to-Retail 
Model

    The CFTC does not require disclosures to retail participants 
about the consequences of participating in this model. In the 
direct-to-retail model, customers lose their status as 
``customers,'' thereby losing all of the customer protections in the 
CFTC's regulatory framework, and instead take the status of 
``clearing members,'' raising a host of issues. It is unlikely that 
retail customers know and understand that they gave up all of their 
customer protections. It is also unlikely that retail customers know 
and understand that in the event of a bankruptcy, they lose their 
``customer'' priority in a distribution. It is also a question 
whether these retail customers would have to take on the FCM's shock 
absorbing role.
    When FTX's application for authority to issue margined crypto 
products \8\ was pending before us, on May 25, 2022, the CFTC held a 
roundtable on the disintermediated model. We heard then and later 
received comments from many stakeholders expressing serious concerns 
over this model.
---------------------------------------------------------------------------

    \8\ The CFTC conditioned LedgerX's registration on the trades 
being fully collateralized. FTX applied to eliminate this condition 
to issue margined products directly to customers. I was not in favor 
of FTX's application, and signaled that weeks before FTX's failure. 
See CFTC Commissioner Christy Goldsmith Romero, Financial Stability 
Risks of Crypto Assets: Remarks before the International Swaps and 
Derivatives Association's Crypto Forum 2022, https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero3, (Oct. 26, 2022).
---------------------------------------------------------------------------

    The FSOC also expressed concerns over direct-to-retail models, 
warning in its October 2022 report:
    Financial stability implications may arise from vertically 
integrated platforms' approaches to managing risk . . . Direct 
exposure by retail investors to rapid liquidations of this kind also 
raises investor and consumer protection issues. Platforms dealing 
directly with retail investors would need to ensure the provision of 
adequate disclosures, responsibilities otherwise taken on by 
intermediaries. The vertically integrated model presents conflict of 
interest. . . .\9\
---------------------------------------------------------------------------

    \9\ See Financial Stability Oversight Council, Report on Digital 
Asset Financial Stability Risks and Regulation, https://home.treasury.gov/news/press-releases/jy0986, (October 3, 2022).
---------------------------------------------------------------------------

    The CFTC has not conducted the assessment that FSOC recommended 
more than one year ago. It is an open question of whether the CFTC 
should accommodate these direct-to-retail models given how much is 
lost, including the loss of the CFTC's customer protection regime 
and AML regime.

This Rushed Proposed Rule Does Not Replace Customer Protections, AML, 
and Other Checks and Balances, Lost by Removing the FCM

    The CFTC has had a year to learn the lessons from FTX's 
application and assess direct-to-retail models as FSOC recommended. 
I am strongly in favor of strengthening customer protections, 
particularly for retail, including banning commingling of customer 
funds,\10\ but this proposal is not about ``customer'' funds. In a 
direct-to-retail model, legally, there are no customers. I am not in 
favor of retail losing their status as customers and losing customer 
protections.\11\ The proposed rule would be the first post-FTX rule 
on this model, but it was rushed and as a result, lacks sufficient 
analysis.
---------------------------------------------------------------------------

    \10\ See CFTC Commissioner Christy Goldsmith Romero, Crypto's 
Crisis of Trust: Lessons Learned from the FTX's Collapse, https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero5#_ftnref10, (Jan 
18, 2023) (I warned in the aftermath of FTX's collapse about how 
commingling presents ``a significant threat to customers that can 
leave customers in a musical chairs dilemma.'')
    \11\ All participants, retail or institutional, are considered 
clearinghouse members. This is not some technical, legalistic 
distinction. Our laws will treat those retail participants the same 
as the largest financial institution.
---------------------------------------------------------------------------

    The question raised by the FSOC of whether we should accommodate 
this market structure from crypto is a critical one to answer. The 
deliberations at last week's open meeting confirmed that it may not 
be possible to give retail participants the same protections in a 
disintermediated model as in the intermediated model. And just last 
week, the FSOC Annual Report again warned about the vulnerabilities 
arising from collapsing regulatory functions into a single entity, 
including ``conflicts of interest, inappropriate use of clients' 
funds, and market manipulation.'' \12\
---------------------------------------------------------------------------

    \12\ See Financial Stability Oversight Council, Annual Report 
2023, https://home.treasury.gov/system/files/261/FSOC2023AnnualReport.pdf, (December 14, 2023).
---------------------------------------------------------------------------

    This rule would not resolve the FSOC's concerns. It does not 
contain the assessment needed as to risk and what regulatory 
requirements would be required in a direct-to-retail model to meet a 
``same risk, same regulatory outcome approach'' that makes up for 
the checks and balances lost from removing the FCM. That would 
require establishing the basic foundation of customer protections 
and guardrails (including against illicit finance). Without that 
analysis, this proposal puts the CFTC out of step with other federal 
financial regulators.

The Direct to Retail Model Raises Many Questions the CFTC Has Not 
Adequately Considered

    My concerns about a direct-to-retail model include:
    1. Losing status of ``customer'': Regular people lose their 
protections as ``customer'' under the law in the direct-to-retail 
model. Instead, they are treated as clearinghouse ``members,'' a 
role that traditionally has been reserved for FCMs, which include 
the largest financial institutions. The regular person trading in 
bitcoin futures or event contracts is not the same as J.P. Morgan or 
Wells Fargo. Clearing members have obligations to the clearinghouse 
to stave off clearinghouse failure. This presumably would also be 
the case for retail acting as members. I have serious concerns about 
whether retail participants understand what they are giving up and 
that this is the role they are taking on. The CFTC should consider 
requiring plain English disclosures delivered in a manner that 
actually informs people of their rights and risks, as opposed to a 
click-wrap agreement or lengthy legal document.
    2. No AML/CTF/KYC: Because the Commodity Exchange Act envisions 
the presence of an FCM that has significant responsibilities, 
including anti-money laundering/Know Your Customer requirements, 
clearinghouses do not have currently have any obligation to 
implement Anti-Money Laundering, Countering Terrorist Financing or 
Know Your Customer safeguards, opening up our market to illicit 
finance. The Commission staff are still analyzing what safeguards 
the CFTC can require.
    3. No requirements to deposit funds in a regulated entity: FCMs 
are required to hold customer funds at a bank, trust or a CFTC-
regulated entity. That requirement is absent for member funds and is 
not added in this rule, allowing clearinghouses to place the funds 
anywhere, even an affiliate. That means that FTX's registered 
clearinghouse LedgerX could have deposited retail ``member'' funds 
with Alameda, the trading firm involved in the loss of billions of 
customer funds.
    4. No checks and balances: FCMs who interface with customers 
have regulatory requirements for customer protections, and have 
incentives to monitor the clearinghouse to make sure it is not 
misusing customer funds. This role sits empty in a direct-to-retail 
model.
    5. No customer bankruptcy priority: In the case of the 
clearinghouse bankruptcy under this model, the bankruptcy code would 
not consider retail participants to be ``customers,'' and they would 
not receive the customer priority in any distribution.

More Time Is Needed To Analyze New AML Requirements for Clearinghouses

    I want to call special attention to the proposal's lack of anti-
money laundering (AML) and know your customer (KYC) requirements for 
clearinghouses. Without

[[Page 306]]

these protections, retail funds may be at serious risk of seizure if 
they are commingled with funds of terrorist organizations, drug 
cartels, or other illicit actors. It is well known that 
cryptocurrency transactions are used to finance cybercrime, 
terrorism, sanctions avoidance, and the drug trade.\13\ News reports 
suggest that Hamas used cryptocurrency to receive significant 
funding preceding its October 7th attacks.\14\
---------------------------------------------------------------------------

    \13\ See Attorney General, U.S. Department of Justice, The Role 
of Law Enforcement in Detecting, Investigating, and Prosecuting 
Criminal Activity Related to Digital Assets, https://www.justice.gov/d9/2022-12/The%20Report%20of%20the%20Attorney%20General%20Pursuant%20to%20Section.pdf, (Sept. 6, 2022).
    \14\ Wall Street Journal, ``Hamas Needed a New Way to Get Money 
From Iran. It Turned to Crypto,'' https://www.wsj.com/world/middle-east/hamas-needed-a-new-way-to-get-money-from-iran-it-turned-to-crypto-739619aa?mg=prod/com-wsj, (Nov. 12, 2023). The CFTC has 
brought enforcement actions against two spot crypto exchanges, 
BitMEX and Binance, for failing to follow AML controls. Our action 
against Binance found that instead of implementing those controls, 
Binance turned a blind eye and even advised users to circumvent the 
superficial controls it claimed to have.
---------------------------------------------------------------------------

    FCMs have regulatory responsibilities to implement AML and KYC 
procedures, to perform standardized diligence, to verify customer 
identify and to assess whether customers may be known or suspected 
terrorists or sanctioned individuals. That AML/CTF/KYC 
responsibility puts them at the front lines of combating illicit 
finance. The legal requirement also means the CFTC and the National 
Futures Association can examine how FCMs are implementing required 
anti-money laundering controls. That makes it more likely we will 
identify material weaknesses before an FCM becomes a conduit for 
illicit funds. Reporting requirements also may make it easier for 
law enforcement to identify suspicious patterns and investigate 
them.
    The proposed rule would not impose any AML responsibilities for 
clearinghouses. Under the proposal, retail participants could have 
their funds commingled with those deposited by terrorist or 
cybercriminals, including state-sponsored cybercrime gangs. In a 
seizure, the FBI, other law enforcement or Treasury would seize all 
of the funds. I would consider that a very serious risk to member 
funds, one that the proposal does not address.
    At the open meeting, when I asked whether the CFTC could impose 
AML requirements on clearinghouses, the CFTC's General Counsel said 
that they had not completed their analysis, but had not foreclosed 
the possibility that the CFTC has authority to impose AML 
requirements on clearinghouses and that ``it has some promise.'' 
\15\ The proposed rule contained no analysis of this issue. That was 
one of the reasons why I asked that this proposed rule be pulled off 
of the meeting, so that the CFTC could continue to work on that 
analysis and include AML requirements. My request was denied. At the 
open meeting, the Office of the General Counsel said that while the 
analysis was ongoing, ``it was decided on a policy basis that we 
save that for another day.'' \16\ That was not a policy decision 
made by a majority of the Commission as that was never before us.
---------------------------------------------------------------------------

    \15\ CFTC to Hold and Open Commission Meeting on December 13, 
https://www.youtube.com/watch?v=zANNkH5STzk, (December 13, 2023) at 
3:16:20-3:17:50.
    \16\ Id.
---------------------------------------------------------------------------

More Analysis Is Needed To Determine Whether Other Customer Protections 
and Other Checks and Balances Can Be Provided to Clearinghouses in the 
Direct-to-Retail Model

    This proposal would impose some safeguards for member funds held 
at a disintermediated clearinghouse by banning commingling and 
imposing certain limits on how funds can be used.\17\ But it is 
narrowly targeted, and serious gaps remain, leaving the proposed 
requirements far from the same regulatory outcome as the traditional 
model.
---------------------------------------------------------------------------

    \17\ It would require direct clearing customer funds to be held 
in a separate account from the clearinghouse's funds, in an account 
identifying them as belonging to the customers. Those funds could 
only be used on behalf of the customer, not on behalf of the company 
or its affiliates. The funds would need to be accounted for daily, 
and reconciled with the total amount the clearinghouse owes its 
customers. It would also limit what clearinghouses can invest those 
funds in, with the same limits that apply to brokers today under 
Commission Regulation Sec.  1.25. These protections are largely in 
line with the representations made by FTX about LedgerX's rules in 
its application.
---------------------------------------------------------------------------

Location of Deposits

    FCMs and clearinghouses in the traditional model are only 
permitted to deposit customer funds with regulated entities--a bank 
or trust, a clearinghouse, or another FCM--giving the CFTC 
visibility into customer funds, and layering customer protections. 
This proposal would not have the same limitation because these would 
not be ``customer'' funds. This proposed rule could benefit from 
adding in the same requirement. Otherwise, member funds could be 
deposited with an unregulated entity, including an unregulated 
affiliate with conflicts of interest, that introduces more risk, 
leaving the CFTC blind to risk.\18\ At the meeting, the Commission 
heard from staff that they were concerned about whether the current 
requirement for where FCM's can deposit funds provided sufficient 
protections for customers.\19\ The proposal does not have any 
analysis of these concerns, likely because it was rushed.
---------------------------------------------------------------------------

    \18\ See Commissioner Christy Goldsmith Romero, Crypto's Crisis 
of Trust: Lessons Learned from the FTX's Collapse, https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero5#_ftnref10, (Jan 
18, 2023).
    \19\ CFTC to Hold and Open Commission Meeting on December 13, 
https://www.youtube.com/watch?v=zANNkH5STzk, (December 13, 2023) at 
2:42:40-2:46:08.
---------------------------------------------------------------------------

Oversight From Checks and Balances

    The proposal also does not replicate another important guardrail 
of traditional market structure: checks and balances. Separate 
clearinghouses and brokers (FCMs) create natural bumper guards not 
present in the direct-to-retail model. However, the proposed rule 
contains no analysis of the impacts of moving forward with this non-
traditional model. Instead, at the open meeting, comments were made 
to the effect about how certain companies have determined that they 
prefer this market structure, and the staff expect there to be more 
applications for this model. It is concerning to me that this rushed 
rule may be used to facilitate expanding the use of this model, 
which is not responsible without further assessment as FSOC 
recommended.

Bankruptcy Priority for Customers

    The failures of FTX and Celsius show bankruptcy priority is a 
serious issue, especially in the retail space. Retail participants 
do not have the same ability as institutions to withstand losses or 
delay. Existing bankruptcy law assumes a traditional market 
structure.\20\ Customers take priority over FCMs in 
distributions.\21\ Retail participants in a disintermediated 
clearing model may not realize that they are losing bankruptcy 
priority as customers because the CFTC requires no disclosures. This 
loss of priority is not discussed in the proposal. We should 
consider requiring clear disclosures.
---------------------------------------------------------------------------

    \20\ Called ``customer funds other than member property.'' See 
CFTC, Bankruptcy Regulations, 86 FR 19324 at 19365 (April 13, 2021).
    \21\ Id. at 19378. There are also rules allocating customer 
property among account classes.
---------------------------------------------------------------------------

Conclusion

    It is not responsible to rush our first post-FTX rule on direct-
to-retail models in three weeks at the end of the year, without 
conducting the necessary assessment of the impact of this model as 
FSOC recommended more than one year ago. I asked for this proposed 
rule to be pulled off this open meeting. I am concerned about the 
lack of that assessment, including but not limited to specific 
analysis of: (1) whether the CFTC should require disclosures to 
inform retail participants that they are losing their customer 
status in this direct-to-retail model, disclosures that describes 
their rights and risks; (2) whether it is possible to take a same 
risk, same regulatory outcome approach on issues such as where funds 
can be deposited and other concerns raised in comments to the FTX 
application about these models; and (3) whether the CFTC can require 
clearinghouses to conduct AML/CTF/KYC. Although there are some 
existing retail participants currently in this model, at the open 
meeting, the staff said that they were already ensuring that the two 
crypto direct-to-retail clearing houses were taking steps aligned 
with the proposed rule.
    Thirteen months after the collapse of FTX, I am glad that we are 
starting to address the direct-to-retail model as I have serious 
concerns about it, and remain concerned about any expansion of that 
model. However, the risks to retail, financial stability, market 
integrity and our national security, are too great to rush this in 
three weeks without analysis as FSOC recommended. Therefore, I must 
dissent.

Appendix 5--Concurring Statement of Commissioner Caroline D. Pham

    I concur on the Notice of Proposed Rulemaking on Protection of 
Clearing

[[Page 307]]

Member Funds Held by Derivatives Clearing Organizations (DCOs) 
(Proposed Amendments to Clearing Member Funds Requirements or 
Proposal) because it seeks to protect the proprietary funds of 
futures commission merchants (FCMs), and I understand that it 
essentially codifies the existing good practices most of the CFTC's 
registered DCOs already follow. However, with respect to retail 
participants, I believe that the Commission should consider whether 
there should be a new registration category for direct clearing 
retail DCOs. I also renew my call for an Office of the Retail 
Advocate. Both of these steps would better ensure customer 
protection in our regulated markets.
    I would like to thank Scott Sloan, Tad Polley, Eileen Donovan, 
and Clark Hutchison in the Division of Clearing and Risk for their 
work on the Proposal. I appreciate the time staff took to answer my 
questions.

Existing Protections for Both House Accounts and Customer Funds Have 
Worked Well for Decades Without Issues

    First, to be clear, the Commission already has extensive rules 
in place for protecting FCM customer funds.\1\ Arguably, it is one 
thing the CFTC is best-known for. For these FCM customers, FCMs must 
segregate customer funds from their own funds, deposit customer 
funds under an account name that clearly identifies them as customer 
funds, and obtain a written acknowledgment from each depository that 
holds customer funds.\2\ This customer protection regime also 
establishes accounting and reporting requirements applicable to 
customer funds, and limits both the types of investments that can be 
made with customer funds and the type of depositories that can hold 
customer funds.\3\
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    \1\ Commodity Exchange Act (CEA) section 4d, 7 U.S.C. 6d, and 
Regulations Sec. Sec.  1.20 through 1.39, 17 CFR 1.20 through 1.39 
(futures customer funds), 22.1-22.17, 17 CFR 22.1 through 22.17 
(cleared swaps customer collateral) and 30.7, 17 CFR 30.7 (foreign 
futures) establish a comprehensive customer protection regime to 
safeguard the funds belonging to customers of FCMs.
    \2\ See 17 CFR 1.20, 22.5, and 30.7. The acknowledgment letters 
must adhere to specific templates in the Commission's regulations, 
and require a depository to acknowledge, among other things, that 
the accounts opened by the FCM hold funds that belong to the FCM's 
customers.
    \3\ See 17 CFR 1.32, 1.33, 1.25, and 1.49.
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    With respect to clearing member proprietary funds or house 
accounts,\4\ consistent with our system of self-regulation set forth 
in the Commodity Exchange Act, DCOs have to establish standards and 
procedures designed to protect and ensure the safety of proprietary 
funds, and hold them in a manner that will minimize the risk of loss 
or delay in access by the DCO to the funds.\5\ DCOs also have to 
invest clearing member proprietary funds in instruments with minimal 
credit, market, and liquidity risks.\6\
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    \4\ Regulation Sec.  1.3, 17 CFR 1.3, defines a ``customer'' as 
``any person who uses [an FCM], introducing broker, [CTA or CPO] as 
an agent in connection with trading in any commodity interest.'' 
DCOs have to apply many of the customer protection requirements that 
apply to FCMs to the customer funds DCOs receive from FCM clearing 
members. DCOs must segregate the customer funds of their FCM 
clearing members from their own funds, deposit customer funds under 
an account name that identifies the funds as customer funds, obtain 
acknowledgment letters from depositories, limit the investment of 
customer funds to instruments listed in Regulation Sec.  1.25, and 
limit depositories for customer funds to those listed in Regulations 
Sec. Sec.  1.20 and 1.49. See 17 CFR 1.20(g)(1), 39.15 (b), 
22.3(b)(1), 1.20(g)(1) and (g)(4), and 22.5. However, these 
protections do not apply to DCO clearing members (i.e., those that 
are not FCMs).
    \5\ See CEA section 5b(c)(2)(F), 7 U.S.C. 7a-1(c)(2)(F) (Core 
Principle F), and 17 CFR 39.15.
    \6\ Id.
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    Today, the Commission is proposing new regulations for the 
protection of clearing member funds, based largely on the customer 
segregation requirements for FCMs and DCOs in Regulation Sec.  
1.20.\7\ The Proposal explains that new safeguards are needed for 
the direct participants at DCOs because (1) the Commission has 
registered a number of DCOs that clear directly for market 
participants without the involvement of FCMs (i.e., these DCOs are 
only clearing for individuals), and (2) many DCOs that use the 
traditional FCM clearing model have at least some non-FCM clearing 
members.
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    \7\ For instance, the Commission is proposing to require a DCO 
to hold proprietary funds separately from the DCO's own funds, in 
accounts that are named to clearly identify the funds as belonging 
to clearing members, to prohibit a DCO or any depository from using 
proprietary funds in any way other than as belonging to the clearing 
member, to have DCOs review, on a daily basis, the amount of funds 
owed to each clearing member with respect to each of its accounts, 
both customer (including, as relevant, futures and cleared swaps) 
and proprietary, and to reconcile those figures to the amount of 
funds held in aggregate in each such type of account across all of 
the DCO's depositories, and, to have DCOs obtain proprietary funds 
acknowledgment letters.
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    While I appreciate the intent of today's Proposal, with respect 
to DCOs that have FCMs as clearing members, I believe we must be 
careful in changing a regulatory framework that has served our 
markets without any real issues for decades. I believe that the 
Commission must have had a good reason when it originally 
distinguished between house accounts and customer funds. There have 
been a lot of spectres raised today that have nothing to do with our 
actual regulated markets. Speaking from a practical perspective, I 
worry that ``if it ain't broke, don't fix it.'' For example, we 
should recognize that DCOs might have operational reasons for the 
accounts distinction in our current rules. I encourage the public to 
comment on whether the Proposal is workable for DCOs in that regard.

There Should Be a New Registration Category for Direct Clearing Retail 
DCOs and an Office of the Retail Advocate To Ensure Customer Protection

    I share the concerns where DCOs clear directly for retail 
participants without FCMs. I would go further and state that I am 
concerned that the Proposal's targeted approach may miss larger 
issues. When a DCO faces direct retail participants that our rules 
categorize as clearing members, we effectively allow a model that 
eliminates intermediaries and the protections that they provide for 
customers. Intermediaries perform critical functions, and that is 
why markets all over the world require registered brokers and 
stringent protections for customers.
    If the Commission anticipates this type of DCO clearing model to 
proliferate, we should step back and consider all issues that these 
direct clearing retail DCOs raise.\8\ These types of concerns around 
retail participants are why I have proposed that the Commission 
needs an Office of the Retail Advocate.\9\ I continue to believe 
that having an Office of the Retail Advocate is a tried-and-true way 
to advance customer protection, and may be especially effective in 
the area raised by today's Proposal.
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    \8\ The Commission provided exemptions from the current 
regulations for these DCOs in 2020. See Derivatives Clearing 
Organization General Provisions and Core Principles, 85 FR 4800 
(Jan. 27, 2020). However, I am suggesting a more holistic assessment 
of these DCOs and their clearing members.
    \9\ Keynote Address by Commissioner Caroline D. Pham at CordaCon 
2022 (Sept. 27, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opapham5.
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    For example, perhaps there should be a distinct registration 
category and requirements for direct clearing retail DCOs because 
they raise singular issues, risks, and concerns--foremost, who 
provides retail customer protection when there are no brokers or 
intermediaries.
    Frankly, I dislike a model where DCOs have clearing members that 
are retail. To achieve the same market structure outcome, I think it 
is better that a DCO has an affiliated FCM that only provides 
services for its retail participants on an affiliated DCM and DCO 
and would provide customer protections required under our rules. 
This would, therefore, not disrupt our existing regulatory framework 
and the current scope and application of the Bank Secrecy Act.\10\
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    \10\ 31 U.S.C. 5311 et seq.
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Conclusion

    I believe the Commission should further study the direct 
clearing model for retail participants, together with the increase 
in retail binary option contracts. I hope that my proposal for an 
Office of the Retail Advocate comes to fruition, and that this is 
one of the first issues that we tackle.
    Again, I thank staff for the hard work on the Proposal. I look 
forward to the public's comments on the Proposed Amendments to 
Clearing Member Funds Requirements. Thank you.

[FR Doc. 2023-28767 Filed 1-2-24; 8:45 am]
BILLING CODE 6351-01-P