Customer Protection Final Rule

Vol. 78

Thursday,

No. 220

November 14, 2013

Part II

Commodity Futures Trading Commission

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17 CFR Parts 1, 3, 22, et al.
Enhancing Protections Afforded Customers and Customer Funds Held by
Futures Commission Merchants and Derivatives Clearing Organizations;
Final Rule

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 3, 22, 30, and 140
RIN 3038–AD88

Enhancing Protections Afforded
Customers and Customer Funds Held
by Futures Commission Merchants
and Derivatives Clearing Organizations
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:

The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is adopting new regulations
and amending existing regulations to
require enhanced customer protections,
risk management programs, internal
monitoring and controls, capital and
liquidity standards, customer
disclosures, and auditing and
examination programs for futures
commission merchants (‘‘FCMs’’).
The regulations also address certain
related issues concerning derivatives
clearing organizations (‘‘DCOs’’) and
chief compliance officers (‘‘CCOs’’). The
final rules will afford greater assurances
to market participants that: Customer
segregated funds, secured amount
funds, and cleared swaps funds are
protected; customers are provided with
appropriate notice of the risks of futures
trading and of the FCMs with which
they may choose to do business; FCMs
are monitoring and managing risks in a
robust manner; the capital and liquidity
of FCMs are strengthened to safeguard
their continued operations; and the
auditing and examination programs of
the Commission and the self-regulatory
organizations (‘‘SROs’’) are monitoring
the activities of FCMs in a prudent and
thorough manner.
DATES: Effective date: January 13, 2014.
Compliance date: The applicable
compliance dates are discussed in the
section of the release titled ‘‘III.
Compliance Dates.’’
FOR FURTHER INFORMATION CONTACT:
Division of Swap Dealer and
Intermediary Oversight: Gary Barnett,
Director, 202–418–5977, gbarnett@
cftc.gov; Thomas Smith, Deputy
Director, 202–418–5495, tsmith@
cftc.gov;mailto: Jennifer Bauer, Special
Counsel, 202–418–5472, jbauer@
cftc.gov; Joshua Beale, AttorneyAdvisor, 202–418–5446, jbeale@
cftc.gov, Three Lafayette Centre, 1155
21st Street NW., Washington, DC 20581;
Kevin Piccoli, Deputy Director, 646–
746–9834, kpiccoli@cftc.gov, 140
Broadway, 19th Floor, New York, NY
10005; or Mark Bretscher, Special

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SUMMARY:

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Counsel, 312–596–0529, mbretscher@
cftc.gov, 525 W. Monroe Street, Suite
1100, Chicago, IL. 60661. Division of
Clearing and Risk: Ananda
Radhakrishnan, Director, 202–418–
5188, aradhakrishnan@cftc.gov; Robert
B. Wasserman, Chief Counsel, 202–418–
5092, rwasserman@cftc.gov; Phyllis P.
Dietz, Deputy Director, 202–418–5449,
pdietz@cftc.gov; M. Laura Astrada,
Associate Chief Counsel, 202–418–7622,
lastrada@cftc.gov, Eileen Donovan,
Associate Director, 202–418–5096,
edonovan@cftc.gov; Kirsten V. K.
Robbins, Special Counsel, 202–418–
5313, krobbins@cftc.gov; or Shawn R.
Durrani, Attorney-Advisor, 202–418–
5048, sdurrani@cftc.gov, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581.
Office of the Chief Economist:
Stephen Kane, Research Economist,
skane@cftc.gov, 202–418–5911, Three
Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. General Statutory and Current
Regulatory Structure
B. Self-Regulatory Structure
C. Futures Commission Merchant
Insolvencies and Failures of Risk
Management
D. Recent Commission Rulemakings and
Other Initiatives Relating to Customer
Protection
E. The Proposed Amendments
II. Comments on the Notice of Proposed
Rulemaking
A. § 1.10: Financial Reports of Futures
Commission Merchants and Introducing
Brokers
1. Amendments of the Segregation and
Secured Amount Schedules With
Respect to the Reporting of Residual
Interest
2. New Cleared Swaps Segregation
Schedules
3. Amendments to Form 1–FR–FCM
4. FCM Certified Annual Report Deadline
5. Leverage Ratio Calculation
6. Procedural Filing Requirements
B. § 1.11: Risk Management Program for
Futures Commission Merchants
1. Applicability
2. Definitions
3. Approval of Policies and Procedures and
Submission to the Commission
4. Organizational Requirements of the Risk
Management Program
a. Separation of Risk Management Unit
From Business Unit
5. Components of the Risk Management
Program
6. Annual Review, Distribution of Policies
and Procedures and Recordkeeping
7. CCO or CEO Certification
C. § 1.12: Maintenance of Minimum
Financial Requirements by Futures
Commission Merchants and Introducing
Brokers

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1. Timing of Notices
2. Undercapitalized FCMs and IBs
3. Insufficient Segregation of Funds of
Cleared Swaps Customers
4. Investment of Customer Funds in
Contravention of Regulation 1.25
5. Notice of Residual Interest Falling Below
Targeted Level or Undermargined
Amounts
6. Events Causing Material Adverse
Financial Impact or Material Change in
Operations
7. Notice of Correspondence From Other
Regulatory Authorities
8. Filing Process and Content
9. Public Disclosure of Early Warning
Notices
D. § 1.15: Risk Assessment Reporting
Requirement for Futures Commission
Merchants
E. § 1.16: Qualifications and Reports of
Accountants
1. Mandatory PCAOB Registration
Requirement
2. PCAOB Inspection Requirement
3. Remediation of PCAOB Inspection
Findings by the Public Accountant
4. Auditing Standards
5. Review of Public Accountant’s
Qualifications by the FCM’s Governing
Body
6. Electronic Filing of Certified Annual
Reports
F. § 1.17: Minimum Financial
Requirements for Futures Commission
Merchants and Introducing Brokers
1. FCM Cessation of Business and Transfer
of Customer Accounts if Unable To
Demonstrate Adequate Liquidity
2. Reducing Time Period for FCMs To
Incur a Capital Charge for
Undermargined Accounts to One Day
after Margin Calls Are Issued
3. Permit an FCM that is not a BD To
Develop Policies and Procedures To
Determine Creditworthiness
4. Revisions to Definitions in Regulation
1.17(b)
G. § 1.20: Futures Customer Funds To Be
Segregated and Separately Accounted for
1. Identification of Customer Funds and
Due Diligence
2. Permitted Depositories
3. Limitation on the Holding of Futures
Customer Funds Outside of the United
States
4. Acknowledgment Letters
a. Background
b. Technical Changes to the Template
Letters
c. Federal Reserve Banks as Depositories
d. Foreign Depositories
e. Release of Funds Upon Commission
Instruction
f. Read-Only Access and Information
Requests
g. Requirement To File New
Acknowledgment Letters
h. Standard of Liability
i. Liens
j. Examination of Accounts
5. Prohibition Against Commingling
Customer Funds
6. Limitations on the Use of Customer
Funds
7. Segregation Requirements for DCOs

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
8. Immediate Availability of Bank and
Trust Company Deposits
9. Segregated Funds Computation
Requirement
10. Segregation Regimes
H. § 1.22: Use of Futures Customer Funds
I. § 1.23: Interest of Futures Commission
Merchant in Segregated Futures
Customer Funds; Additions and
Withdrawals
J. § 1.25: Investment of Customer Funds
1. General Comments Regarding the
Investment of Customer Funds
2. Reverse Repurchase Agreement
Counterparty Concentration Limits
K. § 1.26: Deposit of Instruments Purchased
With Futures Customer Funds
L. § 1.29: Increment or Interest Resulting
From Investment of Customer Funds
1. FCM’s Responsibility for Losses Incurred
on the Investment of Customer Funds
2. FCM’s Obligation in Event of Bank
Default
M. § 1.30: Loans by Futures Commission
Merchants: Treatment of Proceeds
N. § 1.32: (§ 22.2(g) for Cleared Swaps
Customers and § 30.7(l) for Foreign
Futures and Foreign Options Customers):
Segregated Account: Daily Computation
and Record
O. § 1.52: Self-Regulatory Organization
Adoption and Surveillance of Minimum
Financial Requirements
1. Swap Execution Facilities Excluded
From the Scope of Regulation 1.52
2. Revisions to the Current SRO
Supervisory Program
3. Auditing Standards Utilized in the SRO
Supervisory Program
4. ‘‘Examinations Expert’’ Reports
P. § 1.55: Public disclosures by Futures
Commission Merchants
1. Amendments to the Risk Disclosure
Statement
a. Firm Specific Disclosure Document
i. General Requirements
ii. Specific Disclosure Information
Required (by rule paragraph)
2. Public Availability of FCM Financial
Information
Q. Part 22—Cleared Swaps
R. Amendments to § 1.3: Definitions; and
§ 30.7: Treatment of Foreign Futures or
Foreign Options Secured Amount
1. Elimination of the ‘‘Alternative Method’’
for Calculating the Secured Amount
2. Funds Held in Non-U.S. Depositories
3. Commingling of Positions in Foreign
Futures and Foreign Options Accounts
4. Further Harmonization With Treatment
of Customer Segregated Funds
5. Harmonization With Other Commission
Proposals
S. § 3.3: Chief Compliance Officer Annual
Report
III. Compliance Dates
A. Financial Reports of FCMs: § 1.10
B. Risk Management Program for FCMs:
§ 1.11
C. Qualifications and Reports of
Accountants: § 1.16
D. Minimum Financial Requirements for
FCMs
E. Written Acknowledgment Letters:
§§ 1.20, 1.26, and 30.7
F. Undermargined Amounts: §§ 1.22(c),
30.7(a)

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G. SRO Minimum Financial Surveillance:
§ 1.52
H. Public Disclosures by FCMs: § 1.55
IV. Cost Benefit Considerations
V. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
Appendix 1—Table of Comment Letters
Appendix 2—CFTC Form 1–FR–FCM

I. Background
A. General Statutory and Current
Regulatory Structure
The protection of customers—and the
safeguarding of money, securities or
other property deposited by customers
with an FCM—is a fundamental
component of the Commission’s
disclosure and financial responsibility
framework. Section 4d(a)(2) 1 of the
Commodity Exchange Act (‘‘the Act’’ or
‘‘the CEA’’) 2 requires each FCM to
segregate from its own assets all money,
securities, and other property deposited
by futures customers to margin, secure,
or guarantee futures contracts and
options on futures contracts traded on
designated contract markets.3 Section
4d(a)(2) further requires an FCM to treat
and deal with futures customer funds as
belonging to the futures customer, and
prohibits an FCM from using the funds
deposited by a futures customer to
margin or extend credit to any person
other than the futures customer that
deposited the funds.
Section 4d(f) of the Act, which was
added by section 724(a) of the DoddFrank Wall Street Reform and Consumer
Protection Act (‘‘Dodd-Frank Act’’),4
requires each FCM to segregate from its
own assets all money, securities, and
other property deposited by Cleared
Swaps Customers to margin Cleared
Swaps.5 Section 4d(f) also provides that
17

U.S.C. 6d(a)(2).
U.S.C. 1 et seq.
3 The term ‘‘futures customer’’ is defined in
§ 1.3(iiii) of the Commission’s regulations to
include any person who uses an FCM as an agent
in connection with trading in any contract for the
purchase or sale of a commodity for future delivery
or an option on such contract (excluding any
proprietary accounts under § 1.3(y)). The
Commission adopted the definition of the term
‘‘futures customer’’ on October 16, 2012 as part of
the final rulemaking that amended existing
Commission regulations to incorporate swaps. The
Federal Register release adopting the final rules can
be accessed at http://www.cftc.gov/ucm/groups/
public/@newsroom/documents/file/federal
register101612.pdf. Commission regulations can be
found at 17 CFR Ch. 1.
4 See Dodd-Frank Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
may be accessed at http://www.cftc.gov/
LawRegulation/DoddFrankAct/index.htm.
5 The term ‘‘Cleared Swap’’ is defined in section
1a(7) of the Act as any swap that is, directly or
indirectly, submitted to and cleared by a DCO
registered with the Commission. The term ‘‘Cleared
Swaps Customer’’ is defined in § 22.1 as any person
entering into a Cleared Swap, but excludes: (1) Any
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an FCM shall treat and deal with all
money, securities, and property of any
swaps customer received to margin,
guarantee, or secure a swap cleared by
or through a DCO (including money,
securities, or property accruing to the
swaps customer as the result of such a
swap) as belonging to the swaps
customer. Section 4d(f) further provides
that an FCM shall separately account for
and not commingle with its own funds
any money, securities, and property of
a swaps customer, and shall not use
such swaps customer’s funds to margin,
secure, or guarantee any trades or
contracts of any swaps customer or
person other than the person for whom
the same are held.
The Commission adopted §§ 1.20
through 1.30, and § 1.32, to implement
section 4d(a)(2) of the Act, and adopted
part 22 to implement section 4d(f) of the
Act. The purpose of these regulations is
to safeguard funds deposited by futures
customers and Cleared Swaps
Customers, respectively.
Regulation 1.20 requires each FCM
and DCO to separately account for and
to segregate from its own proprietary
funds all money, securities, or other
property deposited by futures customers
for trading on designated contract
markets. In addition, all futures
customer funds must be separately
accounted for, and may not be
commingled with the money, securities
or property of an FCM or of any other
person, or be used to secure or
guarantee the trades, contracts or
commodity options, or to secure or
extend the credit, of any person other
than the one for whom the same are
held. Regulation 1.20 also provides that
an FCM or DCO may deposit futures
customer funds only with a bank or
trust company, and for FCMs only, a
DCO or another FCM. The funds must
be deposited under an account name
that clearly identifies the funds as
belonging to the futures customers of
the FCM or DCO and further shows that
the funds are segregated as required by
section 4d(a)(2) of the Act and
Commission regulations. FCMs and
DCOs also are required to obtain a
written acknowledgment from a
depository stating that the depository
was informed that the funds deposited
are customer funds being held in
accordance with the Act.
FCMs and DCOs also are restricted in
their use of futures customer funds.
Regulation 1.22 prohibits an FCM from
using, or permitting the use of, the
owner or holder of a Cleared Swaps Proprietary
Account with respect to the Cleared Swaps in such
account; and (2) A clearing member of a DCO with
respect to Cleared Swaps cleared on that DCO.

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futures customer funds of one futures
customer to purchase, margin, or settle
the trades, contracts, or commodity
options of, or to secure or extend the
credit of, any person other than such
futures customer. In addition, § 1.22
provides that futures customer funds
may not be used to carry trades or
positions of the same futures customer
other than in commodities or
commodity options traded through the
facilities of a contract market. Under
§ 1.20, an FCM or DCO may, however,
for convenience, commingle and hold
funds deposited as margin by multiple
futures customers in the same account
or accounts with one of the recognized
depositories. An FCM or DCO also may
invest futures customer funds in certain
permitted investments under § 1.25.
Part 22 of the Commission’s
regulations, which governs Cleared
Swaps, implements section 4d(f) of the
Act and parallels many of the provisions
in part 1 that address the manner in
which, and the responsibilities imposed
upon, an FCM may hold funds for
futures customers trading on designated
contract markets.6 For example, § 22.2
requires an FCM to treat and to deal
with funds deposited by Cleared Swaps
Customers as belonging to such Cleared
Swaps Customers and to hold such
funds separately from the FCM’s own
funds. Regulation 22.4 provides that an
FCM may deposit Cleared Swaps
Customer Collateral with a bank, trust
company, DCO, or another registered
FCM.7 Regulation 22.6 requires that the
account holding the Cleared Swaps
Customers Collateral must clearly
identify the account as an account for
Cleared Swaps Customers of the FCM
engaging in Cleared Swaps and that the
funds maintained in the account are
subject to the segregation provisions of
section 4d(f) of the Act and Commission
regulations.
Regulation 22.2(d) also prohibits an
FCM from using the Cleared Swaps
Customer Collateral of one Cleared
Swaps Customer to purchase, margin, or
settle the Cleared Swaps or any other
trade or contract, or to secure or extend
credit, of any person other than such
Cleared Swaps Customer. Further,
6 The Commission approved the part 22
regulations on January 11, 2012, with an effective
date of April 9, 2012. Compliance with the part 22
regulations was required by November 8, 2012. See
Protection of Cleared Swaps Customer Contracts
and Collateral; Conforming Amendments to the
Commodity Broker Bankruptcy Provisions, 77 FR
6336 (Feb. 7, 2012).
7 The term ‘‘Cleared Swaps Customer Collateral’’
is defined in § 22.2 to mean all money, securities,
or other property (including accruals) received by
an FCM or DCO from, for, or on behalf of a Cleared
Swaps Customer to margin, guarantee, or secure a
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§ 22.2(c) permits an FCM to commingle
the Cleared Swaps Customer Collateral
of multiple Cleared Swaps Customers
into one or more accounts, and
§ 22.2(e)(1) permits an FCM to invest
Cleared Swaps Customer Collateral in
accordance with § 1.25.
In addition to holding funds for
futures customers transacting on
designated contract markets and for
Cleared Swaps Customers engaging in
Cleared Swaps, FCMs also hold funds
for persons trading futures contracts
listed on foreign boards of trade. Section
4(b) of the Act provides that the
Commission may adopt rules and
regulations proscribing fraud and
requiring minimum financial standards,
the disclosure of risk, the filing of
reports, the keeping of books and
records, the safeguarding of the funds
deposited by persons for trading on
foreign markets, and registration with
the Commission by any person located
in the United States (‘‘U.S.’’) who
engages in the offer or sale of any
contract of sale of a commodity for
future delivery that is made subject to
the rules of a board of trade located
outside of the U.S. Pursuant to the
statutory authority of section 4(b), the
Commission adopted part 30 of its
regulations to address foreign futures
and foreign option transactions.
The segregation provisions for funds
deposited by foreign futures or foreign
options customers to margin foreign
futures or foreign options transactions
under part 30, however, are significantly
different from the requirements set forth
in § 1.20 for futures customers trading
on designated contract markets and part
22 for Cleared Swaps Customers
engaging in Cleared Swaps.8 Regulation
30.7 provides that an FCM may deposit
the funds belonging to foreign futures or
foreign options customers in an account
or accounts maintained at a bank or
trust company located in the U.S.; a
bank or trust company located outside
of the U.S. that has in excess of
$1 billion of regulatory capital; an FCM
registered with the Commission; a DCO;
a member of a foreign board of trade; a
foreign clearing organization; or a
depository selected by the member of a
foreign board of trade or foreign clearing
organization. The account with the
depository must be titled to clearly
specify that the account holds funds
8 The term ‘‘foreign futures or foreign options
customer’’ is defined in § 30.1 to mean any person
located in the U.S., its territories or possessions
who trades in foreign futures or foreign options,
with the exception of accounts that are proprietary
accounts under § 1.3. The term ‘‘foreign futures or
foreign option’’ is defined in § 30.1 to generally
mean any futures and/or options transactions
executed on a foreign board of trade.

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belonging to the foreign futures or
foreign options customers of the FCM
that are trading on foreign futures
markets. An FCM also is permitted to
invest the funds deposited by foreign
futures or foreign option customers in
accordance with § 1.25.
However, unlike § 1.20 and part 22,
which require an FCM to hold a
sufficient amount of funds in
segregation to meet the total account
equities of all of the FCM’s futures
customers and Cleared Swaps
Customers ‘‘at all times’’ (i.e., the ‘‘Net
Liquidating Equity Method’’), § 30.7
requires an FCM to maintain in separate
accounts an amount of funds only
sufficient to cover the margin required
on open foreign futures contracts, plus
or minus any unrealized gains or losses
on such open positions, plus any funds
representing premiums payable or
received on foreign options (including
any additional funds necessary to secure
such options, plus or minus any
unrealized gains or losses on such
options) (i.e., the ‘‘Alternative
Method’’). Thus, under the part 30
Alternative Method an FCM is not
required to maintain a sufficient amount
of funds in such separate accounts to
pay the full account balances of all of its
foreign futures or foreign options
customers at all times.
In addition to the segregation
requirements of sections 4d(a)(2) and
4d(f) of the Act, and the secured amount
requirements in part 30 of the
Commission’s regulations, FCMs also
are subject to minimum net capital and
financial reporting requirements that are
intended to ensure that such firms meet
their financial obligations in a regulated
marketplace, including their financial
obligations to customers and DCOs.
Each FCM is required to maintain a
minimum level of ‘‘adjusted net
capital,’’ which is generally defined
under § 1.17 as the firm’s net equity as
computed under generally accepted
accounting principles, less all of the
firm’s liabilities (except for certain
qualifying subordinated debt) and
further excluding all assets that are not
liquid or readily marketable. Regulation
1.17(c)(5) further requires an FCM to
impose capital charges (i.e., deductions)
on certain of its liquid assets to protect
against possible market risks in such
assets.
FCMs also are subject to financial
recordkeeping and reporting
requirements. FCMs that carry customer
accounts are required under § 1.32 to
prepare a schedule each business day
demonstrating their compliance with
the segregation and secured amount
requirements. Regulation 1.32 requires
the calculation to be performed by noon

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each business day, reflecting the
account balances and open positions as
of the close of business on the previous
business day.
Each FCM also is required by § 1.10
to file with the Commission and with its
designated self-regulatory organization
(‘‘DSRO’’) monthly unaudited financial
statements and an annual audited
financial report.9 Regulation 1.12
requires an FCM to file a notice with the
Commission and with the firm’s DSRO
whenever, among other things, the firm:
(1) Fails to maintain compliance with
the Commission’s capital requirements;
(2) fails to hold sufficient funds in
segregated or secured amount accounts
to meet its regulatory requirements; (3)
fails to maintain current books and
records; or (4) experiences a significant
reduction in capital from the previous
month-end. The purpose of the
regulatory notices is to alert the
Commission and the firm’s DSRO as
early as possible to potential financial
issues at the firm that may adversely
impact the ability of the FCM to comply
with its obligations to safeguard
customer funds, or to meet its financial
obligations to other FCMs or DCOs.
The statutory mandate to segregate
customer funds—to treat them as
belonging to the customer and not use
the funds inappropriately—takes on
greater meaning in light of the
devastating events experienced over the
last two years. Those events, which are
discussed in greater detail below,
demonstrate that the risks of
misfeasance and malfeasance, and the
risks of an FCM failing to maintain
sufficient excess funds in segregation: (i)
Put customer funds at risk; and (ii) are
exacerbated by stresses on the business
of the FCM. Many of those risks can be
mitigated significantly by better risk
management systems and controls,
along with an increase in risk-oriented
oversight and examination of the FCMs.
Determining what is a ‘‘sufficient’’
amount of excess funds in segregation
for any particular FCM requires a full
understanding of the business of that
FCM, including a proper analysis of the
factors that affect the actual amount of
segregated funds held by the FCM
relative to the minimum amount of
segregated funds it is required to hold.
Further, appropriate care must be taken
to avoid withdrawing such excess funds
9 The term ‘‘self-regulatory organization’’ is
defined by § 1.3 to mean a contract market, a swap
execution facility, or a registered futures
association. A DSRO is the SRO that is appointed
to be primarily responsible for conducting ongoing
financial surveillance of an FCM that is a member
of two or more SROs under a joint audit agreement
submitted to and approved by the Commission
under § 1.52.

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at times of great stress to cover needs
unrelated to the purposes for which
excess segregated and secured funds are
maintained. In times of stress, excess
funds may look like an easy liquidity
source to help cover other risks of the
business; yet withdrawing such excess
funds makes the funds unavailable
when they may be most needed. The
recent market events illustrate both the
need to: (i) Require that care be taken
about monitoring excess segregated and
secured funds, and the conditions under
and the extent to which such funds may
be withdrawn; and (ii) place appropriate
risk management controls around the
other risks of the business to help
relieve (A) the likelihood of an exigent
event or, (B) if such an event occurs, the
likelihood of a failure to prepare for
such an event, which in either case
could create pressures that result in an
inappropriate withdrawal of customer
funds.
Although the Commission’s existing
regulations provide an essential
foundation to fostering a wellfunctioning marketplace, wherein
customers are protected and
institutional risks are minimized, recent
events have demonstrated that
additional measures are necessary to
effectuate the fundamental purposes of
the statutory provisions discussed
above. Further, concurrently with the
enhanced responsibilities for FCMs that
were proposed by the Commission, the
oversight and examination systems must
be enhanced to mitigate risks and
effectuate the statutory purposes.
B. Self-Regulatory Structure
The Commission’s oversight structure
provides that SROs are the frontline
regulators of FCMs, introducing brokers
(‘‘IBs’’), commodity pool operators, and
commodity trading advisors. In 2000,
Congress affirmed the Commission’s
reliance on SROs by amending section
3 of the Act to state: ‘‘It is the purpose
of this Act to serve the public interests
through a system of effective selfregulation of trading facilities, clearing
systems, market participants and market
professionals under the oversight of the
Commission.’’
As part of its oversight responsibility,
an SRO is required to conduct periodic
examinations of member FCMs’
compliance with Commission and SRO
financial and related reporting
requirements, including the FCMs’
holding of customer funds in segregated
and secured accounts. The Commission
oversees the SROs by examining them
for the performance of their duties. The
Commission recently has moved to
conducting continuous reviews of the
SROs’ FCM examination program that

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includes a process whereby the
Commission selects a small sample of
the SRO’s FCM work papers to review.
In addition, the Commission also
conducts limited-scope reviews of FCMs
in ‘‘for cause’’ situations that are
sometimes referred to as ‘‘audits,’’ but
they are not full-scale audits as
accountants commonly use that term.
In addition, because there are
multiple SROs who share the same
member FCMs, to avoid subjecting
FCMs to duplicative examinations from
SROs, the Commission has a permissive
system that allows the SROs to agree
how to allocate FCMs amongst them. An
SRO who is allocated certain FCMs for
such examination is referred to as the
DSRO of those FCMs.
Under Commission regulations, FCMs
must have their annual financial
statements audited by an independent
certified public accountant following
generally accepted auditing standards as
adopted in the U.S. (‘‘U.S. GAAS’’). As
part of this certified annual report, the
independent accountant also must
conduct appropriate reviews and tests to
identify any material inadequacies in
systems and controls that could violate
the Commission’s capital, segregation or
secured amount requirements. Any such
inadequacies are required to be reported
to the FCM’s DSRO and to the
Commission.
C. Futures Commission Merchant
Insolvencies and Failures of Risk
Management
The recent insolvencies of two FCMs
demonstrate the need for revisions to
the Commission’s customer protection
regime. On October 31, 2011, MF
Global, Inc. (‘‘MFGI’’), which was
dually-registered as an FCM with the
Commission and as a securities brokerdealer (‘‘BD’’) with the U.S. Securities
and Exchange Commission (‘‘SEC’’), was
placed into a liquidation proceeding
under the Securities Investor Protection
Act by the Securities Investor Protection
Corporation (‘‘SIPC’’).
The trustee appointed to oversee the
liquidation of MFGI reported a potential
$900 million shortfall of funds
necessary to repay the account balances
due to customers trading futures on
designated contract markets, and an
approximately $700 million shortfall in
funds immediately available to repay
the account balances of customers
trading on foreign futures markets.10
The shortfall in customer segregated
accounts was attributed by the MFGI
Trustee to significant transfers of funds
10 See Report of the Trustee’s Investigation and
Recommendations, In re MF Global Inc., No. 11–
2790 (MG) SIPA (Bankr. S.D.N.Y. June 4, 2012).

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out of the customer accounts that were
used by MFGI for various purposes
other than to meet obligations to or on
behalf of customers.
In addition, the Commission filed a
civil injunctive complaint in federal
district court on July 10, 2012, against
Peregrine Financial Group, Inc.
(‘‘PFGI’’), a registered FCM and its Chief
Executive Officer (‘‘CEO’’) and sole
owner, Russell R. Wasendorf, Sr.,
alleging that PFGI and Wasendorf, Sr.
committed fraud by misappropriating
customer funds, violated customer fund
segregation laws, and made false
statements regarding the amount of
funds in customer segregated accounts
in financial statements filed with the
Commission. The complaint states that
in July 2012 during an NFA
examination PFGI falsely represented
that it held in excess of $220 million of
customer funds when in fact it held
approximately $5.1 million.11
Recent incidents also have
demonstrated the value of establishing
robust risk management systems within
FCMs and enhanced early warning
systems to detect and address financial
and regulatory issues. In particular,
problems that arise through an FCM’s
non-futures-related business can have a
direct and significant impact on the
FCM’s financial condition, raising
questions as to whether the FCM will be
able to protect customer funds 12 and
maintain the minimum financial
requirements mandated by the Act and
Commission regulations.13
These recent incidents highlighted
weaknesses in the customer protection
regime prescribed in the Commission’s
regulations and through the selfregulatory system. In particular,
questions have arisen on the
requirements surrounding the holding
and investment of customer funds,
including the ability of FCMs to
withdraw funds from futures customer
11 Complaint, U.S. Commodity Futures Trading
Commission v. Peregrine Financial Group, Inc., and
Russell R. Wasendorf, Sr., No. 12–cv–5383 (N.D. Ill.
July 10, 2012). A copy of the Commission’s
complaint has been posted to the Commission’s
Web site.
12 The Commission notes that the definition of
‘‘customer funds’’ in § 1.3(gg) includes funds held
for customers trading on designated contract
markets and customers engaging in cleared swap
transactions. However, as used in this notice, unless
otherwise specified, the term ‘‘customer funds’’ also
includes funds held for customers trading on
foreign markets pursuant to part 30 of the
Commission’s regulations.
13 See, e.g., Edward Krudy, Jed Horowitz and John
McCrank, ‘‘Knight’s Future in Balance After
Trading Disaster,’’ Reuters (Aug. 3, 2012), available
at http://in.reuters.com/article/2012/08/03/
knightcapital-loss-idINL2E8J27QE20120803 (noting
that a software issue caused the firm to incur a $440
million trading loss, which represented much of the
firm’s capital).

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segregated accounts and part 30 secured
accounts. Additionally, the incidents
have underscored the need for
additional safeguards—such as robust
risk management systems, strengthened
early-warning systems surrounding
margin and capital requirements, and
enhanced public disclosures—to
promote the protection of customer
funds and to minimize the systemic risk
posed by certain actions of market
participants. Further questions have
arisen on the system of audits and
examinations of FCMs, and whether the
system functions adequately to monitor
FCMs’ activities, verify segregated funds
and secured amount balances, and
detect fraud.
D. Recent Commission Rulemakings and
Other Initiatives Relating to Customer
Protection
Since late 2011, the Commission has
promulgated rules directly impacting
the protection of customer funds. The
Commission also has studied the
current regulatory framework
surrounding customer protection,
particularly in light of the recent
incidents outlined above, in order to
identify potential enhancements to the
systems and Commission regulations
protecting customer funds. The
Commission’s efforts have been
informed, in part, by efforts undertaken
by industry participants. The proposed
rule amendments were informed by the
efforts detailed below.
In December 2011, the Commission
adopted final rule amendments revising
the types of investments that an FCM or
DCO can make with customer funds
under § 1.25, for the purpose of
affording greater protection for such
funds.14 Among other changes to §§ 1.25
and 30.7, the final rule amendments
removed from the list of permitted
investments: (1) Corporate debt
obligations not guaranteed by the U.S.
Government; (2) foreign sovereign debt;
and (3) in-house and affiliate
transactions.
In adopting the amendments to § 1.25,
the Commission was mindful that
customer segregated funds must be
invested by FCMs and DCOs in a
manner that minimizes their exposure
to credit, liquidity, and market risks
both to preserve their availability to
customers and DCOs, and to enable
investments to be quickly converted to
cash at a predictable value in order to
avoid systemic risk. The amendments
are consistent with the general
prudential standard contained in § 1.25,
14 See Investment of Customer Funds and Funds
Held in an Account for Foreign Futures and Foreign
Options Transactions, 76 FR 78776 (Dec. 19, 2011).

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which provides that all permitted
investments must be ‘‘consistent with
the objectives of preserving principal
and maintaining liquidity.’’
The Commission also approved final
regulations that require DCOs to collect
initial customer margin from FCMs on
a gross basis.15 Under the final
regulations, FCMs are no longer
permitted to offset one customer’s
margin requirement against another
customer’s margin requirements and
deposit only the net margin collateral
with the DCO. As a result of the rule
change, a greater portion of customer
initial margin is posted by FCMs to the
DCOs.
The Commission also approved
regulations that impose requirements on
FCMs and DCOs regarding the treatment
of Cleared Swaps and Cleared Swaps
Customer Collateral.16 Under the
traditional futures model, DCOs hold an
FCM’s futures customers’ funds on an
omnibus basis in a futures customer
account. In the event of a double
default, which is a situation where a
futures customer defaults on its
obligation to its clearing FCM and the
loss is so great that the clearing FCM
defaults on its obligation to the DCO,
the DCO is permitted to use the funds
held in the futures customers’ omnibus
account to cover the loss of the
defaulting futures customer before
applying its own capital or the guaranty
fund contributions of non-defaulting
FCM members.
The Commission approved an
alternative model for Cleared Swaps.
Under the ‘‘LSOC’’ (legal segregation
with operational comingling) model,
DCOs may hold Cleared Swaps
Customer Collateral on an omnibus
basis in a Cleared Swaps Customer
Account.17 However, unlike with the
futures model, following a double
default the DCO would only be
permitted to access the collateral of the
defaulting Cleared Swaps Customers; it
would not be permitted to use the
collateral of non-defaulting Cleared
Swaps Customers to cover a defaulting
Cleared Swaps Customer’s losses.
Pursuant to section 724(c) of the
Dodd-Frank Act, the final rule on
segregation for uncleared swaps,
approved by the Commission on
October 30, 2013, implements the
15 See Commission Regulation 39.12(g)(8)(i) and
Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR 69334 (Nov.
8, 2011).
16 See 77 FR 6336 (Feb. 7, 2012).
17 The term ‘‘Cleared Swaps Customer Account’’
is defined in § 22.1 and generally refers to an
account that an FCM or a DCO maintains at a
permitted depository for the Cleared Swaps (and
related collateral) of Cleared Swaps Customers.

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
requirements of section 4s(l) of the CEA
that Swap Dealers (‘‘SDs’’) and Major
Swap Participants (‘‘MSPs’’) notify their
counterparties that such counterparties
have a right to require that any initial
margin which they post to guarantee
uncleared swaps be segregated at an
independent custodian. Where the
counterparty elects segregation for its
initial margin, the account must be held
at a custodian that is independent of
both the counterparty and the SD or
MSP.
The Commission also included
customer protection enhancements in a
final rulemaking for designated contract
markets issued in June 2012. These
enhancements codify into regulations
staff guidance on minimum
requirements for SROs regarding their
financial surveillance of FCMs.18 The
regulations require a DCM to have
arrangements and resources for effective
rule enforcement and trade and
financial surveillance programs,
including the authority to collect
information and examine books and
records of members and market
participants. The regulations also
establish minimum financial standards
for both member FCMs and IBs and nonintermediated market participants. The
Commission expressly noted in the
preamble of the Federal Register release
that ‘‘a DCM’s duty to set financial
standards for its FCM members involves
setting capital requirements, conducting
surveillance of the potential future
exposure of each FCM as compared to
its capital, and taking appropriate action
in light of the results of such
surveillance.’’ 19 Further, the rules
mandate that DCMs adopt rules for the
protection of customer funds, including
the segregation of customer and
proprietary funds, the custody of
customer funds, the investment
standards for customer funds,
intermediary default procedures and
related recordkeeping.
In addition to the rulemaking efforts
outlined above, the Commission sought
additional information through a series
of roundtables and other meetings. On
February 29 and March 1, 2012, the
Commission solicited comments and
held public roundtables to solicit input
on customer protection issues from a
broad cross-section of the futures
industry, including market participants,
FCMs, DCOs, SROs, securities
regulators, foreign clearing
organizations, and academics.20 The
18 See Core Principles and Other Requirements for
Designated Contract Markets, 77 FR 36612 (June 19,
2012).
19 Id. at 36646.
20 Further information on the public roundtable,
including video recordings and transcripts of the

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roundtable focused on issues relating to
the advisability and practicality of
modifying the segregation models for
customer funds; alternative models for
the custody of customer collateral;
enhancing FCM controls over the
disbursement of customer funds;
increasing transparency surrounding an
FCM’s holding and investment of
customer funds; and lessons learned
from recent commodity brokerage
bankruptcy proceedings.
The Commission also hosted a public
meeting of the Technology Advisory
Committee (‘‘TAC’’) on July 26, 2012.21
Panelists and TAC members discussed
potential technological solutions
directed at enhancing the protection of
customer funds by identifying and
exploring technological issues and
possible solutions relating to the ability
of the Commission, SROs and customers
to verify the location and status of funds
held in customer segregated accounts.
Commission staff hosted an additional
roundtable on August 9, 2012, to
discuss SRO requirements for
examinations of FCMs and Commission
oversight of SRO examination programs.
The roundtable also focused on the role
of the independent public accountant in
the FCM examination process, and
proposals addressing various
alternatives to the current system for
segregating customer funds.
The Commission also considered
industry initiatives to enhance customer
protections. On February 29, 2012, the
Futures Industry Association (‘‘FIA’’)
initiated steps to educate customers on
the extent of the protections provided
under the current regulatory structure.
FIA issued a list of Frequently Asked
Questions (‘‘FAQ’’) prepared by
members of the FIA Law and
Compliance Division addressing the
basics of segregation, collateral
management and investments, capital
requirements and other issues for FCMs
and joint FCM/BDs, and clearinghouse
guaranty funds.22 The FAQ is intended
to provide existing and potential
customers with a better understanding
of the risks of engaging in futures
trading and a clear explanation of the
extent of the protections provided to
discussions, have been posted to the Commission’s
Web site. See http://www.cftc.gov/PressRoom/
Events/opaevent_cftcstaff022912 (relating to Feb.
29, 2012); http://www.cftc.gov/PressRoom/Events/
opaevent_cftcstaff030112 (relating to Mar. 1, 2012).
21 Additional information, including documents
submitted by meeting participants, has been posted
to the Commission’s Web site. See http://
www.cftc.gov/PressRoom/Events/opaevent_
tac072612.
22 The FIA’s release addressing FAQs on the
protection of customer funds is accessible on the
FIA’s Web site at http://www.futuresindustry.org/
downloads/PCF-FAQs.PDF.

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customers and their funds under the Act
and Commission regulations.
FIA also issued a series of initial
recommendations for the protection of
customer funds.23 The
recommendations were prepared by the
Financial Management Committee,
whose members include representatives
of FIA member firms, DCOs and
depository institutions. The initial
recommendations address enhanced
disclosure on the protection of customer
funds, reporting on segregated funds
balances by FCMs, FCM internal
controls surrounding the holding and
disbursement of customer funds, and
revisions to part 30 regulations to make
the protections comparable to those
provided for customers trading on
designated contract markets.
On July 13, 2012, the Commission
approved new FCM financial
requirements proposed by the National
Futures Association (‘‘NFA’’).24 The
NFA Financial Requirements Section 16
and its related Interpretive Notice
entitled ‘‘NFA Financial Requirements
Section 16: FCM Financial Practices and
Excess Segregated Funds/Secured
Amount Disbursements’’ (collectively
referred to as ‘‘the Segregated Funds
Provisions’’) were developed in
consultation with Commission staff.
NFA’s Segregated Funds Provisions
require each FCM to: (1) Maintain
written policies and procedures
governing the deposit of the FCM’s
proprietary funds (i.e., excess or
residual funds) in customer segregated
accounts and part 30 secured accounts;
(2) maintain a targeted amount of excess
funds in segregate accounts and part 30
secured accounts; (3) file on a daily
basis the FCM’s segregation and part 30
secured amount computations with
NFA; (4) obtain the approval of senior
management prior to a withdrawal that
is not for the benefit of customers
whenever the withdrawal equals 25
percent or more of the excess segregated
or part 30 secured amount funds; (5) file
a notice with NFA of any withdrawal
that is not for the benefit of customers
whenever the withdrawal equals 25
percent or more of the excess segregated
or part 30 secured amount funds; (6) file
detailed information regarding the
depositories holding customer funds
and the investments made with
customer funds as of the 15th day (or
23 The FIA’s initial recommendations are
accessible on the FIA’s Web site at http://
www.futuresindustry.org/downloads/Initial_
Recommendations_for_Customer_Funds_
Protection.pdf.
24 For more information relating to the new FCM
financial requirements, see http://
www.nfa.futures.org/news/
newsNotice.asp?ArticleID=4072.

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the next business day if the 15th is not
a business day) and the last business
day of each month; and (7) file
additional monthly net capital and
leverage information with NFA.
Significantly, NFA’s Segregated
Funds Provisions also require FCMs to
compute their part 30 secured amount
requirement and compute their targeted
excess part 30 secured funds using the
same Net Liquidating Equity Method
that is required by the Act and
Commission regulations for computing
the segregation requirements for
customers trading on U.S. contract
markets under section 4d of the Act.
FCMs are not permitted under the NFA
rules to use the Alternative Method to
compute the part 30 secured amount
requirement. The failure of an FCM to
maintain its targeted amount of excess
part 30 funds computed using the Net
Liquidating Equity Method may result
in NFA initiating a Membership
Responsibility Action against the firm.
In addition, in setting the target
amount of excess funds, the FCM’s
management must perform a due
diligence inquiry and consider various
factors relating, as applicable, to the
nature of the FCM’s business, including
the type and general creditworthiness of
the FCM’s customers, the trading
activity of the customers, the types and
volatility of the markets and products
traded by the FCM’s customers, and the
FCM’s own liquidity and capital needs.
The FCM’s Board of Directors (or similar
governing body), CEO or Chief Financial
Officer (‘‘CFO’’) must approve in writing
the FCM’s targeted residual amount, any
changes thereto, and any material
changes in the FCM’s written policies
and procedures.
The NFA and CME Group Inc.
(‘‘CME’’) also adopted rules requiring
FCMs to instruct each depository
holding futures customer funds to report
such balances on a daily basis to the
NFA or CME, respectively.25 Initially,
the NFA and CME retained the services
of a third-party vendor which received
account balance information directly
from certain banks, custodians of
securities, and money market funds, and
passed such information on to the NFA
and CME. The CME, however, took over
the role of the third-party vendor
effective October 29, 2013 and receives
account information directly from all
depositories holding futures customer
funds. The CME also provides NFA with
daily account balance information for
the FCMs that NFA is the DSRO. The
25 See NFA Financial Requirements Rules,
Section 4. Financial Requirements and Treatment of
Customer Property, and CME Rule 971, Segregation,
Secured, and Cleared Swaps Customer Account
Requirements.

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same process applies to the FCM’s
customer secured account(s) held for
customers trading on foreign futures
exchanges, and for the FCM’s Cleared
Swaps Customers engaging in Cleared
Swaps.
In addition, NFA and CME expanded
their oversight of FCMs under the
amended rules, by developing programs
that compare the daily balances
reported by the depositories with the
balances reported by the FCMs in their
daily segregation reports. An immediate
alert is generated for any material
discrepancies.
E. The Proposed Amendments
The incidents outlined above,
coupled with the information generated
through the recent efforts undertaken by
the Commission and industry
participants, demonstrate the need for
new rules and amendments to existing
rules. In particular, an examination of
FCM business operations—including
the non-futures business of FCMs—and
the currently regulatory framework,
evince a need for enhanced customer
protections, risk management programs,
disclosure requirements, and auditing
and examination programs. To address
these needs, the Commission issued a
Notice of Proposed Rulemaking
(‘‘NPRM’’) on November 14, 2012 (‘‘the
Proposal’’) containing a series of
amendments to enhance customer
protections.26
The Proposal addressed six main
issues. First, recognizing problems
surrounding the treatment of customer
segregated funds and foreign futures or
foreign options secured amounts, the
Commission proposed to amend several
components of parts 1, 22, and 30 of the
Commission’s regulations to provide
greater certainty to market participants
that the customer funds entrusted to
FCMs will be protected. Second, to
address shortcomings in the risk
management of FCMs, the Commission
proposed a new § 1.11 that establishes
robust risk management programs.
Third, the Commission determined that
the current regulatory framework should
be re-oriented to implement a more riskbased, forward-looking perspective,
affording the Commission and SROs
with read-only access to accounts
holding customer funds and additional
information on depositories and the
customer assets held in such
depositories. Fourth, given the
difficulties that can arise in an FCM’s
business, and the direct and significant
impact on the FCM’s regulatory capital
that can result from such difficulties,
the Commission proposed to amend
26 77

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§ 1.17(a)(4) to ensure that an FCM’s
capital and liquidity are sufficient to
safeguard the continuation of operations
at the FCM. Fifth, to effect the change
in orientation needed in FCM
examinations programs, as well as to
assure quality control over program
contents, administration and oversight,
the Commission proposed to amend
§ 1.52, which, among other things,
addresses the formation of Joint Audit
Committees and the implementation of
Joint Audit Programs. And sixth,
recognizing the need to increase the
information provided to customers
concerning the risks of futures trading
and the FCMs with which they may
choose to conduct business, the
Commission proposed amendments to
§ 1.55 that enhance the disclosures
provided by FCMs.
II. Comments on the Notice of Proposed
Rulemaking
The Proposal, aimed at: (1) Amending
and enhancing its current customer
protection regime; (2) imposing risk
management requirements on FCMs; (3)
requiring additional ‘‘early warning’’
notices from FCMs regarding material
changes in their operations or financial
condition; (4) imposing additional
liquidity requirements for FCMs; (5)
revising the examination process of
FCMs by both the SROs and public
accountants; and (6) requiring
additional disclosures to customers
concerning the risks of futures trading
and the FCMs that hold customer funds.
The Commission extended the initial
60-day comment period for
approximately 30 additional days at the
request of various commenters and in
order to provide interested parties with
an additional opportunity to comment
on the proposal.27 The comment period
closed on February 15, 2013.
During the comment period the
Commission held two public
roundtables to solicit input on issues
related to the proposal from a crosssection of the futures industry,
including market participants, FCMs,
DCOs, SROs, securities regulators,
foreign clearing organizations, and
academics. The Commission received
more than 120 written submissions on
the proposing release from a range of
commenters.28 Commission staff also
met with representatives from at least
eight of the commenters and other
27 78

FR 4093 (Jan. 18, 2013).
written submissions from the public are
available in the comment file on www.cftc.gov.
They include, but are not limited to, those listed in
the table in Appendix 1 to this release. In citing to
the comments received during the discussion of the
comments in this Section, the Commission used the
abbreviations set forth in the table in Appendix 1.
28 The

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members of the public. Commenters
represented a broad spectrum of
industry participants, trade
organizations, law firms, accounting
firms and self-regulatory organizations.
The majority of commenters supported
the overall principles proposed by the
Commission although many raised
concerns or offered suggestions
regarding certain proposal specifics.
The Commission also held a meeting
of the Agricultural Advisory Committee
on July 25, 2013, and included in the
agenda a discussion of the Proposal. The
transcript of the Agricultural Advisory
Committee meeting is included in the
comment file to the Proposal, and the
Commission has considered those
comments in finalizing the regulations.
The Commission has carefully
considered the comments received and
is adopting the Proposal herein subject
to various amendments that address
certain concerns raised or suggestions
made by commenters. Each section of
the final rules, including any relevant
revisions to the corresponding section of
the Proposal, is discussed in greater
detail in the following sections.
A. § 1.10: Financial Reports of Futures
Commission Merchants and Introducing
Brokers
Regulation 1.10 requires each FCM to
file with the Commission and with the
firm’s DSRO an unaudited financial
report each month. The financial report
must be prepared using Form 1–FR–
FCM. An FCM that is dually-registered
as a BD, however, may file a Financial
and Operational Combined Uniform
Single Report under the Securities
Exchange Act of 1934 (‘‘FOCUS
Report’’) in lieu of the Form 1–FR–FCM.
Each FCM also is required to file with
the Commission and with its DSRO an
annual financial report certified by an
independent public accountant.
The unaudited monthly and certified
annual financial reports are required to
contain basic financial statements,
including a statement of financial
condition, a statement of income (loss),
and a statement of changes in
ownership equity. The financial reports
also are required to include additional
schedules designed to address specific
regulatory objectives to demonstrate that
the FCM is in compliance with
minimum capital and customer funds
segregation requirements. These
additional schedules include a
statement of changes in liabilities
subordinated to claims of general
creditors, a statement of the
computation of the minimum capital
requirements (‘‘Capital Computation
Schedule’’), a statement of segregation
requirements and funds in segregation

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for customers trading on U.S.
commodity exchanges (‘‘Segregation
Schedule’’), and a statement of secured
amounts and funds held in separate
accounts for foreign futures and foreign
options customers (‘‘Secured Amount
Schedule’’). In addition, the certified
annual report must contain a
reconciliation of material differences
between the Capital Computation
Schedule, the Segregation Schedule,
and the Secured Amount Schedule
contained in the certified annual report
and the unaudited monthly report for
the FCM’s year-end month.
1. Amendments to the Segregation and
Secured Amount Schedules With
Respect to the Reporting of Residual
Interest
The Segregation Schedule and the
Secured Amount Schedule generally
indicate, respectively, (1) The total
amount of funds held by the FCM in
segregated or secured accounts; (2) the
total amount of funds that the FCM
must hold in segregated or secured
accounts to meet its regulatory
obligations to futures customers and
foreign futures or foreign options
customers; and (3) whether the firm
holds excess segregated or secured
funds in the segregated or secured
accounts as of the reporting date. FCMs
also deposit proprietary funds into
customer segregated and secured
accounts to protect against becoming
undersegregated or undersecured by
failing to hold a sufficient amount of
funds in such accounts to meet the
regulatory requirements. This cushion
of proprietary funds is referred to as the
FCM’s ‘‘residual interest’’ in the
customer segregated and secured
accounts.
The Commission proposed to amend
§ 1.10 to require each FCM to also
disclose in the Segregation Schedule
and in the Secured Amount Schedule its
targeted amount of ‘‘residual interest’’
that the FCM seeks to maintain in
customer segregated accounts and
secured accounts as computed under
§ 1.11.29 As more fully discussed in
section II.B. below, new
§ 1.11(e)(3)(i)(D) requires the senior
management of each FCM that carries
customer funds to perform appropriate
due diligence in setting the amount of
29 The Commission also proposed to revise the
title of the ‘‘Secured Amount Schedule’’ by adding
the term ‘‘30.7 Customer’’ to specify that the
secured amount will include both U.S.-domiciled
and foreign-domiciled customers consistent with
the proposed amendments to part 30 of the
Commission Regulations discussed in Section II.R.
below. No comments were received regarding the
revisions to the title of the ‘‘Secured Amount
Schedule,’’ and the Commission is adopting the
revisions as proposed.

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68513

the residual interest. Such due diligence
must consider the nature of the FCM’s
business including the type and general
creditworthiness of its customer base,
the types of markets and products
traded by the firm’s customers, the
proprietary trading activities of the
FCM, the volatility and liquidity of the
markets and products traded by the
customers and by the FCM, the FCM’s
own liquidity and capital needs,
historical trends in customer segregation
and secured account funds balances,
and historical trends in customer debits
and margin deficits (i.e., undermargined
amounts).30 The FCM also is required to
maintain policies and procedures
establishing the targeted amount of
residual interest that the FCM seeks to
maintain as its residual interest in the
segregated and secured accounts. The
FCM’s due diligence and policies and
procedures must be designed to
reasonably ensure that the FCM
maintains the targeted residual interest
amount and remains in compliance with
its segregation requirements at all
times.31
The disclosure of the targeted amount
of the FCM’s residual interest in
segregated or secured accounts will
allow the Commission and the FCM’s
DSRO to determine whether the FCM
actually maintains funds in segregated
and secured accounts in amounts
sufficient to cover the respective
targeted residual interest amounts. If a
firm does not maintain sufficient funds
to cover the targeted residual interest
amounts, the Commission and/or DSRO
will take appropriate steps to assess
whether the FCM is experiencing
financial issues that may indicate
potential threats to the overall safety of
customer funds. The disclosure of the
amounts of the FCM’s targeted residual
interest also will enhance the
Commission’s and DSROs’ surveillance
of FCMs by providing information that
will allow for the assessment of the size
of the targeted residual interest relative
to both the total funds held in
segregation or secured accounts and to
30 The NPRM explained that a margin deficit
occurs when the value of the customer funds for a
customer’s account is less than the total amount of
collateral required by DCOs for that account’s
contracts. As explained further in the discussion in
sections II.G.9., II.Q., and II.R., the term
‘‘undermargined amount,’’ as defined in
§§ 1.22(c)(1), 22.2(f)(6)(i), and 30.7(f)(1)(ii)(A), is
used in place of the term ‘‘margin deficit’’ in the
final rule.
31 The NFA adopted a similar amendment to its
rules, mandating that FCMs maintain written
policies and procedures identifying a target amount
that the FCM will seek to maintain as its residual
interest in customer segregated and secured
accounts. See NFA Notice I–12–14 (July 18, 2012),
available at http://www.nfa.futures.org/news/
newsNotice.asp?ArticleID=4072.

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the size of the targeted residual interest
maintained by other comparable FCMs.
This information will assist the
Commission and DSROs in the overall
risk assessment of the FCMs, including
the assessment of the potential risk that
a firm may become undersegregated or
undersecured. This additional
information will further enhance the
Commission’s and DSROs’ overall
ability to protect customer funds.
The Commission also proposed to
amend the Segregation Schedule and
the Secured Amount Schedule to
require each FCM filing such schedules
to disclose the sum of the outstanding
margin deficits (i.e., undermargined
amounts) as of the reporting date. The
purpose of this disclosure was to
demonstrate that the FCM’s residual
interest in the segregated and secured
account exceeded the respective
customer margin deficits (i.e.,
undermargined amounts) as proposed in
§§ 1.22 and 1.23.
The Commission has considered the
proposal and has determined not to
amend the Segregation Schedule and
Secured Amount Schedule to require
the disclosure of the undermargined
amounts. As further discussed in
sections II.G.9. and II.R. below, the
Commission is revising the proposed
amendments to § 1.22 that would have
required an FCM to maintain at all times
a residual interest in segregated or
secured accounts in excess of its
undermargined amounts. The final
regulations being adopted in § 1.22,
§ 22.2, and § 30.7 will require
computations as of different points in
time than that of the computations
reflected on the Segregation Schedule
and the Secured Amount Schedule,
which are prepared as of the close of
business each day. The reporting of the
undermargined amount information on
the Segregation and Secured Amount
Schedules would not be accurate as the
firm’s customers may not be
undermargined, or may be less
undermargined, at the time the
undermargined amount calculations are
required to be performed due, for
example, to customers meeting margin
calls.32
32 The Commission notes, however, that it will
receive notice under § 1.12 from an FCM if the firm
maintains residual interest in the segregated or
secured amount accounts that is less than the sum
of the firm’s undermargined amount at the point in
time the FCM is required to maintain such
undermargined amounts under § 1.22, § 22.2, and
§ 30.7. The notice provision will alert the
Commission and the FCM’s DSRO to the fact that
the undermargined amounts exceed the firm’s
residual interest in the accounts, and the
Commission and DSRO can monitor the firm’s
actions to restore its residual interest to a level that
is above the undermargined amounts, or take other
actions as appropriate. See section II.C. below.

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The Commission has considered the
comments and is adopting the
amendments to § 1.10 as proposed, with
the above revisions to the Segregation
Schedule and the Secured Amount
Schedule.
2. New Cleared Swaps Segregation
Schedules
The Commission proposed to amend
§ 1.10(d) and to revise the Form 1–FR–
FCM to adopt a new ‘‘Statement of
Cleared Swap Customer Segregation
Requirements and Funds in Cleared
Swap Customer Accounts Under
Section 4d(f) of the Act’’ (‘‘Cleared
Swaps Segregation Schedule’’).33 The
Commission proposed the Cleared
Swaps Segregation Schedule to further
implement section 724(a) of the DoddFrank Act. Section 724(a) of the DoddFrank Act amended section 4d of the
Act by adding a new paragraph (f) to
require an FCM to separately account
for and segregate from its own assets
Cleared Swaps Customers Collateral
deposited by Cleared Swaps Customers.
Section 4d(f) of the Act also requires
FCMs to treat and deal with all the
Cleared Swaps Customer Collateral
deposited by a Cleared Swaps Customer
as belonging to such customer, and
prohibits an FCM from, with certain
exceptions, using the Cleared Swaps
Customer Collateral to margin, secure or
guarantee the Cleared Swaps of any
person other than the Cleared Swaps
Customer who deposited the Cleared
Swaps Customer Collateral. FCMs
currently prepare a schedule
comparable to the Cleared Swaps
Segregation Schedule for Cleared Swaps
under applicable contract market or
NFA rules, and the Commission’s
proposal would codify existing
practices.
The Commission received one
comment on the proposed Cleared
Swaps Segregation Schedule. The
Students at the SUNY Buffalo Law
School supported the development of
the Cleared Swaps Segregation
33 The Commission previously proposed a
Cleared Swaps Segregation Schedule as part of its
proposed regulations to adopt capital requirements
for swap dealers and major swap participants. See
Capital Requirements of Swap Dealers and Major
Swap Participants, 76 FR 27802 (May 12, 2011).
The Commission re-proposed the schedule as part
of the Proposal in light of the Commission’s
decision to revise the schedule by requiring FCMs
to separately disclose their targeted residual interest
in Cleared Swaps Customer Accounts and the sum
of margin deficits (i.e., undermargined amounts) for
such accounts. The Commission also has adopted
new regulations requiring FCMs to hold in
segregated accounts funds received from customers
engaging in Cleared Swaps to margin, secure or
guarantee their Cleared Swaps in accordance with
section 4d(f) of the Act. See 77 FR 6336 (Feb. 7,
2012).

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Schedule.34 The Commission has
considered the comment and has
determined to adopt the Cleared Swaps
Segregation Schedule as proposed.35
In addition, § 1.10 currently provides
that the Commission will treat the
monthly Form 1–FR–FCM reports, and
monthly FOCUS Reports filed in lieu of
the Forms 1–FR–FCM, as exempt from
mandatory public disclosure for
purposes of the Freedom of Information
Act and the Government in the
Sunshine Act.36 Regulation 1.10(g)(2)
provides, however, that the following
information in Forms 1–FR–FCM, and
the same or equivalent information in
FOCUS Reports filed in lieu of Forms
1–FR–FCM, are publicly available: The
amount of the FCM’s adjusted net
capital; the amount of the FCM’s
minimum net capital requirement under
§ 1.17; and the amount of its adjusted
net capital in excess of its minimum net
capital requirement. In addition,
§ 1.10(g)(2) further provides that the
FCM’s Statement of Financial Condition
in the certified annual financial report
and the Segregation Schedule and
Secured Amount Schedule are public
documents.
The Commission proposed to amend
§ 1.10(g)(2)(ii) to add the Cleared Swaps
Segregation Schedule to the list of
documents that are publicly available.
The only comment that the Commission
received regarding making the Cleared
Swaps Segregation Schedule public was
received from students at the SUNY
Buffalo Law School. The students at the
SUNY Buffalo Law School supported
the development and implementation of
the Cleared Swaps Segregation Schedule
as a regulatory tool for the Commission
to receive additional information and to
provide greater protection to customer
funds.37 The students, however, also
stated that the public disclosure of the
Cleared Swaps Segregation Schedule
and other financial information could
34 SUNY Buffalo Comment Letter at 7 (Mar. 19,
2013).
35 The Commission will revise the Cleared Swaps
Segregation Schedule consistent with the revisions
to the Segregation Schedule and Secured Amount
Schedule discussed in section II.A.1. to remove the
requirement for the firm to disclose the amount of
the margin deficits as of the close of business on
the previous business day. In addition, § 1.10(h)
provides that a dually-registered FCM/BD may file
a FOCUS Report in lieu of the Form 1–FR–FCM
provided that all information that is required to be
included in the Form 1–FR–FCM is included in the
FOCUS Report. Currently, dual-registrant FCM/BDs
include a Segregation Schedule and a Secured
Amount Schedule in the FOCUS Report filings as
supplemental schedules. Dual-registrant FCM/BDs
that have Cleared Swaps Customers will also have
to include a Cleared Swaps Segregation Schedule to
their Focus Report filings.
36 5 U.S.C. 552.
37 SUNY Buffalo Comment Letter at 8 (Mar. 19,
2013).

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cause public panic in certain
situations.38 They cited MFGI and Bear
Stearns as examples of how public
panic can rapidly accelerate a
company’s collapse by exacerbating the
effects of financial injuries that might
otherwise be manageable.39
The Commission notes that the
monthly Segregation Schedules and
Secured Amount Schedules have been
available to the public for many years
and provide important information that
allows customers to monitor the
financial condition of FCMs. As noted
in the Proposal, the Commission
believes that making the Cleared Swaps
Segregation Schedule publicly available
will benefit customers and potential
customers by providing greater
transparency on the status of the
Cleared Swaps Customer Collateral held
by FCMs. This disclosure allows
customers and other members of the
public to review an FCM’s compliance
with its regulatory obligations to
safeguard customer funds. The
disclosure of the Cleared Swaps
Segregation Schedule also will provide
a certain amount of detail as to how the
FCM holds Cleared Swaps Customer
Collateral, which customers and
potential customers will be able to
assess as part of their risk management
process.
The disclosure of the status of an
FCM’s compliance with its obligation to
segregate customer funds, coupled with
the additional firm risk disclosures that
the Commission proposed in § 1.55 (and
is adopting in relevant part herein as
discussed in detail in section II.P.
below), will provide customers with
greater transparency regarding the risks
of entrusting their funds and engaging
in transactions with particular FCMs.
The Commission believes that these
benefits to customers outweigh any
potential adverse market impact which,
in any event, has not been shown to be
an issue based on the Commission’s
experience in making FCMs’
Segregation Schedules and Secured
Amount Schedules publicly available.
The Commission has, therefore,
determined to adopt the amendments to
§ 1.10(g)(2) as proposed.
3. Amendments to Form 1–FR–FCM
The Commission proposed to amend
several statements in the Form
1–FR–FCM. The Commission proposed
to amend the Statement of Financial
Condition by adding a new line item
1.D. Line 1 currently separately details:
(1) The amount of funds that the FCM
holds in segregated accounts for

customers trading on designated
contract markets (Line 1.A.); (2) the
amount of funds held in segregation for
dealer options (Line 1.B.); and (3) the
amount of funds held in secured
accounts for foreign futures and foreign
option customers (Line 1.C.).
Proposed line item 1.D. would set
forth the amount of funds held by the
FCM in segregated accounts for Cleared
Swaps Customers. This amendment is
necessary due to the adoption of the
part 22 regulations, which requires the
segregation of Cleared Swaps Customer
Collateral and the proposed adoption of
the Cleared Swaps Segregation Schedule
as part of the Form 1–FR–FCM.40
The Commission also proposed to
amend the Statement of Financial
Condition by adding a new line item
22.F., which would require the separate
disclosure of the FCM’s liability to
Cleared Swaps Customers. The
proposed amendments to disclosure the
total amount of funds held by the FCM
for Cleared Swaps Customers, and the
FCM’s total obligation to Cleared Swaps
Customers, is consistent with the
reporting required on the Form
1–FR–FCM for customers trading on
designated contract markets.
The Commission also proposed to
revise line item 27.J. of the Statement of
Financial Condition to require an FCM
to disclose separately its obligation to
retail forex customers. Currently, an
FCM’s obligation to retail forex
customers is included with other
miscellaneous liabilities and reported
under current line item 27.J. ‘‘Other.’’
The separate reporting of an FCM’s
retail forex obligation will provide
greater transparency on the Statement of
Financial Condition regarding the firm’s
obligations to its retail counterparties in
off-exchange foreign currency
transactions, and is appropriate given
the Commission’s direct jurisdiction
over such activities when conducted by
an FCM under section 2(c) of the Act.41
NFA filed the only comment
addressing the proposed amendments to
the Statement of Financial Condition.
NFA noted its full support of the
proposed amendments to line item 27.J
of the Statement of Financial Condition
contained in Form 1–FR–FCM, and
further requested that the Commission
consider amending the asset section of
the Statement of Financial Condition of
Form 1–FR–FCM to require an FCM or
Retail Foreign Exchange Dealer
(‘‘RFED’’) to report the total funds on
deposit to cover its obligations to retail
forex customers as required by

Commission Regulation 5.8.42 NFA
stated that this revision would result in
more accurate reporting and is
consistent with the reporting for
customer segregated funds.43
The Commission has considered the
comment and has determined to adopt
the amendments as proposed. The
Commission also is revising the
Statement of Financial Condition in the
Form 1–FR–FCM in response to the
NFA’s comment to include a new line
item to require FCMs and RFEDs to
separately disclose the assets held in
qualifying accounts in excess of the
firms’ obligations to retail forex
customers as required by Commission
Regulation 5.8.
Regulation 5.8 requires each FCM and
RFED offering or engaging in retail forex
transactions to hold, at all times, assets
of the type permissible in § 1.25 in an
amount that exceeds the FCM’s or
RFED’s total obligation to its retail forex
customers at qualifying institutions set
forth in the Regulation. The requirement
of Regulation 5.8 is to ensure the RFED
or FCM holds liquid assets in relation to
the amount of liability to retail forex
customers.44 However, such retail forex
customer funds are not held in
‘‘segregated accounts’’ in manner
comparable to section 4d of the Act,
which are provided with explicit
protections in the event of the
bankruptcy of the FCM. The
Commission is revising the Statement of
Financial Condition of the Form 1–FR–
FCM to require each FCM or RFED to
report on line 19.B. the aggregate
amount of funds held in qualifying
accounts to meet its total obligation to
retail forex customers as required by
§ 5.8. Such disclosure will provide
greater transparency as to the firm’s
compliance with Commission
regulations.
4. FCM Certified Annual Report
Deadline
The Commission proposed to amend
§ 1.10(b)(1)(ii) to require an FCM to
submit its certified annual report to the
Commission and to the firm’s DSRO
within 60 days of its year-end date.
Currently, an FCM is required to submit
the annual certified financial statements
within 90 days of its year-end date,
except for FCMs that also are registered
with the SEC as BDs, which are require
to submit the certified annual report
within 60 days of the year-end date
under both Commission and SEC
regulations. Therefore, the proposal
would impact only FCMs that are not
42 NFA

38 Id.

at 8–9.

40 See

77 FR 6336 (Feb. 7, 2012).
41 7 U.S.C. 2(c).

39 Id.

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Comment Letter at 9 (Feb. 15, 2013).

43 Id.
44 See

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dually-registered as BDs and would
align the filing deadlines for both FCMs
and dual registrant FCMs/BDs.
The Commission received one
comment on the proposal. NFA
supported the proposal noting that the
amendment will provide both the
Commission and DSROs with more
timely information for monitoring the
financial condition of an FCM.45 The
Commission considered the comment
received and is adopting the
amendments to § 1.10(b)(1)(ii) as
proposed. The Commission also is
cognizant of the fact that public
accountants are currently engaged in the
audit of FCMs for the year ending
December 31, 2013 and possible for
other year-end dates in 2014.
Accordingly, in order to ensure that the
amendments do not impede
examinations that are currently in
process, the Commission is establishing
a compliance date for FCM annual
audits for years ending June 1, 2014 or
later. This compliance date also will
align the revised reporting deadline
with the auditing amendments to the
auditing standards that public
accountants use in the audit of FCMs
and discussed in section II.E. below.
Compliance dates are discussed further
in section III below.

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5. Leverage Ratio Calculation
The Commission proposed to add a
new requirement in § 1.10(b)(5) to
require each FCM to file with the
Commission on a monthly basis its
balance sheet leverage ratio. Proposed
§ 1.10(b)(5) defined the term ‘‘leverage’’
as an FCM’s total balance sheet assets,
less any instruments guaranteed by the
U.S. Government and held as an asset or
to collateralize an asset (e.g., a reverse
repurchase agreement) divided by the
FCM’s total capital (i.e., the sum of the
FCM’s stockholders’ equity and
subordinated debt). FCMs currently file
the same leverage information with NFA
on a monthly basis using the same
definition of the term ‘‘leverage.’’ The
leverage ratio would provide
information regarding the amount of
assets supported by the FCM’s capital
base, and would allow the Commission
to enhance its oversight of FCMs that
are highly leveraged relative to their
peers or based upon the Commission’s
understanding of the firm’s business
model.
The Commission received three
comments with respect to this proposal.
Commenters were concerned that the
leverage metrics proposed might not
45 NFA

Comment Letter at 9 (Feb. 15, 2013).

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provide meaningful information and/or
that the Commission’s leverage
definition was not consistent with those
of other regulatory authorities. NFA
noted that while the leverage definition
proposed by the Commission is the
same definition as that set forth in NFA
Financial Requirement Section 16, it
may not be the most appropriate
measure.46 NFA noted that it has been
studying an alternative calculation
method and encouraged the
Commission to defer codifying a single
definition until it has the opportunity to
examine NFA’s calculation results.47
NFA also suggested the Commission
consider adopting a requirement that
FCMs report a leverage ratio as defined
by a registered futures association rather
than including a specific definition in
the Commission’s regulations.48
FIA indicated that it supported the
proposed amendment, but stated that it
is essential that the definition of the
term ‘‘leverage’’ be consistent among
regulatory authorities with supervision
over FCMs and encouraged the
Commission to coordinate with the SEC
and the relevant SROs to ensure
consistent treatment across the
industry.49
RJ O’Brien objected to the proposal on
the grounds that the definition of
‘‘leverage’’ in the proposal ‘‘penalizes’’
FCMs that are not dually-registered as
BDs.50 RJ O’Brien stated that an FCMonly entity’s balance sheet is primarily
composed of funds deposited by
customers for trading commodity
interests, and that the leverage ratio
computed under the proposed
regulation does not properly reflect the
risk of the firm’s business.51 RJ O’Brien
recommended that the Commission
work with NFA to develop a more
meaningful metric and further
recommended that the Commission not
permit or require public disclosure of
FCM leverage ratios under the current
methodology because RJ O’Brien
believes it could provide the public
with misleading information.52
The Commission has considered the
comments and has determined to adopt
a final regulation requiring FCMs to
submit to the Commission monthly
balance sheet leverage information. As
noted above, such information will
enhance the Commission’s ability to
conduct financial surveillance of FCMs.
The final regulation, however, will
46 NFA

Comment Letter at 7–8 (Feb. 15, 2013).
47 Id. at 7.
48 Id. at 8.
49 FIA Comment Letter at 12 (Feb. 15, 2013).
50 RJ O’Brien Comment Letter at 8–9 (Feb. 15,
2013)
51 Id.
52 Id.

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define the term ‘‘leverage’’ by
referencing to the rules of a registered
futures association as suggested by NFA.
This revision to the final regulation will
align the Commission’s definition of
leverage with the current NFA
definition of leverage.53
As stated above, in proposing the
requirement for FCMs to report their
monthly leverage ratios, the
Commission intended for FCMs to file
the same leverage information that they
currently file with the NFA. In this
regard, the Commission proposed a
definition of leverage that is identical to
the current NFA definition contained in
its Financial Requirement Section 16.
Such an approach will enhance the
consistency in how the Commission and
the SROs impose leverage reporting
requirements on FCMs and in how
leverage is monitored by the regulators.
Furthermore, in response to RJ O’Brien’s
comment, the Commission intends to
work with NFA and other regulators
going forward on any revisions to the
definition of ‘‘leverage’’ to maintain as
consistent a definition as practicable.
6. Procedural Filing Requirements
The Commission proposed to amend
§ 1.10(c)(2)(i) to require FCMs to
electronically file with the Commission
their monthly unaudited Forms 1–FR–
FCM or FOCUS Reports and their
certified annual financial reports. FCMs
currently file their monthly unaudited
financial statements with the
Commission electronically using the
WinJammer Online Filing System
(‘‘WinJammer’’) and the proposed
amendments merely codify current
practices.54
FCM annual financial reports are filed
in paper form with the Commission.
Under the Commission’s proposal, an
FCM would use the WinJammer system
to electronically file its certified
financial report as a ‘‘PDF’’ document.
No comments were received on the
proposed amendments to § 1.10(c)(2)(i).
The Commission is adopting the
amendments as proposed.
The Commission also is adopting a
proposed technical amendment to
§ 1.10(c)(1) on which no comments were
received. Regulation 1.10(c)(1) provides
that any report or information required
to be provided to the Commission by an
IB or FCM will be considered filed
53 NFA is currently the only registered futures
association.
54 WinJammer is a web-based application
developed and maintained jointly by the Chicago
Mercantile Exchange and the NFA. The WinJammer
system is provided at no cost to FCMs. FCMs
currently use WinJammer to transmit Forms 1–FR–
FCM, FOCUS Reports, and other financial
information and regulatory notices to the
Commission and to the SROs.

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when received by the Commission
Regional office with jurisdiction over
the state in which the FCM has its
principal place of business. The
amendments to § 1.10(c)(1) sets forth the
jurisdiction of each of the Commission’s
three Regional offices under § 140.02,
and is intended to ensure that FCM’s
financial reports are filed expeditiously
with the correct Commission Regional
office.

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B. § 1.11: Risk Management Program for
Futures Commission Merchants
The Commission proposed new § 1.11
to require each FCM that carries
customer accounts to establish a ‘‘Risk
Management Program,’’ as defined in
§ 1.11(c), designed to monitor and
manage the risks associated with the
FCM’s activities as an FCM. Under the
Commission’s proposal, the Risk
Management Program must: (1) consist
of written policies and procedures that
have been approved by the ‘‘governing
body’’ (defined below) of the FCM and
furnished to the Commission; and (2)
establish a risk management unit that is
independent from an FCM’s ‘‘business
unit’’ (defined below) to administer the
Risk Management Program.
NFA, FIA, ICI, CFA, Chris Barnard,
and Paul/Weiss generally supported
proposed § 1.11.55 Advantage stated
‘‘that most aspects of proposed § 1.11
are appropriate and unlikely to be
burdensome as FCMs typically have
most (if not all) of these requirements in
place.’’ 56 Several other commenters
raised issues with specific components
of the proposed regulation, which are
discussed in the sections below. The
Commission has considered the
comments received and is adopting
§ 1.11 as proposed, with the following
observations and clarifications.
1. Applicability
Proposed paragraph (a) of § 1.11
provides that the regulation would only
apply to FCMs that accept money,
securities, or property (or extend credit
in lieu thereof) to margin, guarantee, or
secure any trades or contracts that result
from soliciting or accepting orders for
the purchase or sale of any commodity
interest. FCMs that do not accept or
hold customer funds to margin,
guarantee or secure commodity interests
are generally not operating as FCMs,
and are not subject to § 1.11. To clarify,
the Commission notes that it would
55 NFA Comment Letter at 10 (Feb. 15, 2013); FIA
Comment Letter at 52 (Feb. 15, 2013); ICI Comment
Letter at 7 (Jan. 14, 2013); CFA Comment Letter at
4 (Feb. 13, 2013); Chris Barnard Comment Letter at
2 (Dec. 18, 2012); Paul/Weiss Comment Letter at 2
(Feb. 15, 2013).
56 Advantage Comment Letter at 2 (Feb. 15, 2013).

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expect registered FCMs that do not
accept customer funds to establish a
Risk Management Program that
complies with § 1.11 and file such
program with the Commission and with
the FCMs’ DSROs prior to changing
their business model to begin accepting
customer funds.
The Commission also requested
comment on whether different risk
management requirements for FCMs
should be based upon some measurable
criteria, such as size of the firm, and
whether different elements of § 1.11
should apply to smaller FCMs versus
larger FCMs. Advantage stated that a
one-size fits all approach is less than
optimal, and that the Commission could
establish minimum risk management
standards for specific business lines/
customer type, and then require that
FCMs engaging in those lines of
business/clearing that type of customer
have those programs in place.57
The Commission has considered the
comment and has determined that § 1.11
provides sufficient flexibility for FCMs
to establish a risk management program
that is appropriate to its business
operations. To develop specific
requirements for different business
activities would not be appropriate in
that each FCM may operate in a
different manner. The Commission
believes that each FCM can develop its
own program to meet its business
activities using the general framework
established by § 1.11.
The Commission received no
additional comments on proposed
§ 1.11(a) and is adopting the provision
as proposed.
2. Definitions
The Commission proposed definitions
of the terms ‘‘customer,’’ ‘‘business
unit,’’ ‘‘governing body,’’ ‘‘segregated
funds,’’ and ‘‘senior management’’ in
paragraph (b) of § 1.11. These
definitions are designed to ensure that
there is accountability at the highest
levels for the FCM’s key internal
controls and processes regarding the
FCM’s responsibility to meet its
obligations as a futures market
participant, including acting as an
intermediary for customer transactions,
and its obligation to safeguard customer
funds.
The term ‘‘business unit’’ was
proposed to include generally any
department, division, group or
personnel of an FCM or any affiliate
involved in soliciting orders and
handling customer money, including
segregation functions, and personnel
exercising direct supervisory authority
57 Advantage

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68517

over the performance of such activities.
The definition was intended to
delineate clearly the separation of the
risk management unit required by the
regulation from the other personnel of
an FCM from whom the risk
management must be independent.
The term ‘‘customer’’ was proposed
broadly to include futures customers (as
defined in § 1.3) trading futures
contracts, or options on futures
contracts listed on designated contract
markets, 30.7 customers (as proposed to
be defined in § 30.1) trading futures
contracts or options on futures contracts
listed on foreign contract markets, and
Cleared Swaps Customers (as defined in
§ 22.1) engaging in Cleared Swaps.
The term ‘‘governing body’’ was
proposed to be defined as the sole
proprietor, if the FCM is a sole
proprietorship; a general partner, if the
FCM is a partnership; the board of
directors, if the FCM is a corporation;
and the chief executive officer, chief
financial officer, the manager, the
managing member, or those members
vested with the management authority if
the FCM is a limited liability company
or limited liability partnership. The
term ‘‘senior management’’ was
proposed to mean any officer or officers
specifically granted the authority and
responsibility to fulfill the requirements
of senior management under proposed
§ 1.11 by the governing body.
The term ‘‘segregated funds’’ was
proposed to mean money, securities, or
other property held by an FCM in
separate accounts pursuant to § 1.20 for
futures customers, pursuant to § 22.2 for
Cleared Swaps Customers, and pursuant
to § 30.7 for 30.7 customers. The
proposed definition of ‘‘segregated
funds’’ makes clear that the
requirements of § 1.11 apply to all
customer funds that may be held by an
FCM. The Act and Commission
regulations currently require FCMs to
hold each type of segregated funds in
separate accounts and to segregate such
segregated funds from the FCM’s own
funds and to segregate each class of
segregated funds from each other type,
except if otherwise permitted by
Commission rule, regulation or order.58
The Commission did not receive any
comments regarding the proposed
definitions in § 1.11(b) and is adopting
the amendments as proposed.
3. Approval of Policies and Procedures
and Submission to the Commission
The Commission proposed § 1.11(c) to
require each FCM to establish, maintain,
and enforce a system of risk
management policies and procedures
58 See

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The Commission proposed § 1.11(d),
requiring an FCM to establish a risk
management unit that is independent
from the FCM’s business unit to
administer the Risk Management
Program. As part of the Risk
Management Program, each FCM must
establish and maintain a risk
management unit with sufficient
authority, qualified personnel, and
financial, operational, and other
resources to carry out the Risk
Management Program. The risk
management unit is required to report
directly to senior management.
Several commenters opposed the
separation of the risk management unit
from the business unit. RCG stated that
requiring FCMs to separate the risk
management function from the
‘‘business unit’’ is unnecessary,
counterproductive, and will likely result
in increased risk to the FCM and its

customers.61 RCG argued that the
proposed requirement removes a
valuable, mature talent pool from
participating in risk management, and
the proposal is counterproductive in
that it has the potential of blocking the
flow of historical and financial
information about a customer from the
business side of the FCM to the risk
management side of the FCM,
information that is crucial to evaluating
risk.62
Phillip Futures Inc. stated that the
proposed separation of the business unit
from the risk management unit will lead
to a decrease in the timeliness of
decision making as decisions will have
to be filtered through new supervisory
employees that the proposal will
ultimately create, which will hinder
each FCM’s ability to assess risk.63
Phillip Futures Inc. stated that so long
as internal controls, senior leadership,
and training programs of a firm are
created with the proper checks and
balances which ensure proper
supervision of activities conducted by
the business unit and the risk
management unit, the respective units
need not be independent from each
other.64 Phillip Futures Inc. also
asserted that the separation of duties
required by the regulation would
require it to hire multiple employees
who would have limited job
responsibilities.65
CHS Hedging stated that it would not
be realistic or cost effective for smaller
FCMs to establish an entirely separate
risk management unit, and argued that
if supervisory risk management
personnel report to senior management
separately from the business side to
avoid a conflict of interest, a standalone
unit should not be required.66
RJ O’Brien also argued that requiring
FCMs to create a separate risk
management unit is not operationally or
financially practical for all FCMs,
particularly small to midsized FCMs,
and needlessly increases the costs of
compliance for most firms without
producing significant benefits.67 RJ
O’Brien stated that supervisors at many
small to mid-sized FCMs have the
knowledge and expertise that can be
essential to maintaining a strong risk

59 Because § 1.11 applies to all FCMs that accept
money, securities, or property (or extend credit in
lieu thereof) from customers, it necessarily applies
to any risks generated by the FCMs customers’
trading activities. See, e.g., In re FCStone LLC, CFTC
Docket 13–24, (May 29, 2013), where a customer’s
trading activities and the FCM’s inadequate risk
management practices caused the firm to lose over
$127,000,000.
60 See Franklin Comment Letter at 2 (Feb. 15,
2013); AIMA Comment Letter at 1 and 4 (Feb. 15,
2013); TIAA–CREF Comment Letter at 3 (Feb. 15,
2013).

61 RCG Comment Letter at 5 (Feb. 12, 2013). See
also Phillip Futures Inc. Comment Letter at 2 (Feb.
14, 2013).
62 RCG Comment Letter at 5 (Feb. 12, 2013). See
also Phillip Futures Inc. Comment Letter at 2 (Feb.
14, 2013).
63 Phillip Futures Inc. Comment Letter at 2 (Feb.
14, 2013).
64 Id.
65 Id.
66 CHS Hedging Comment Letter at 3 (Feb. 15,
2013).
67 RJ O’Brien Comment Letter at 9 (Feb. 15, 2013).

designed to monitor and manage the
risks associated with the activities of the
FCM as an FCM.59 The policies and
procedures are collectively referred to as
the FCM’s Risk Management Program.
Under proposed § 1.11, the FCM’s
governing body is required to approve
in writing the FCM’s Risk Management
Program and any material changes to the
Risk Management Program. The FCM
also is required to provide a copy of the
Risk Management Program to the
Commission and to the FCM’s DSRO
upon application for registration or
upon request by the Commission or by
the FCM’s DSRO. The filing of the Risk
Management Program is intended to
allow the Commission and the FCM’s
DSRO to monitor the status of risk
management practices among FCMs.
Several commenters expressed
general support for the requirement that
an FCM implement a risk management
program.60 The Commission received no
other comments on proposed § 1.11(c)
and is adopting the amendments as
proposed.
4. Organizational Requirements of the
Risk Management Program

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management program at their firm,
however, such supervisors also may
have a role in the business unit
activities.68 They proposed that the
Commission revise the proposed
regulation such that supervisors of
business unit personnel are permitted to
be part of the risk management unit
provided that such supervisors are not
compensated in connection with
soliciting or accepting orders for the
purchase or sale of any commodity
interest.69
The Commission notes that, as stated
above, only employees involved in
soliciting orders and handling customer
money (including the segregation
functions), and employees directly
supervising such activities would fall
within the definition of ‘‘business unit’’
under § 1.11(b)(1). Therefore, the
Commission does not agree with the
assertion that a large pool of employees
will be barred from participating in the
risk management unit. Further, the
Commission observes that the
independence of the risk management
unit required by proposed § 1.11 does
not require FCMs to establish
information partitions between the risk
management unit and members of the
business unit, and disagrees with
commenters that such independence
requirement would block the flow of
historical and financial information
about a customer from the business side
of the FCM to the risk management side
of the FCM. In any event, the
Commission believes that the freedom
from conflicts of interests that the
independence of the risk management
unit provides is critically important to
the protection of customer funds in the
custody of the FCM.
The FIA commented that in adopting
the rules governing risk management
programs for SDs and MSPs, the
Commission clarified the interpretation
of certain provisions, and asked that the
Commission confirm that such
clarifications apply equally to the
provisions of § 1.11.70 In general, the
FIA requested the Commission to
confirm, subject to certain exceptions or
requirements, that the requirements of
§ 1.11:
(1) Do not prescribe rigid organization
structures;
(2) do not require an FCM’s risk
management unit to be a formal division
in the FCM’s organizational structure,
provided that the FCM will be able to
identify all personnel responsible for
required risk management activities
68 Id.
69 Id.
70 See

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
even if such personnel fulfill other
functions; and
(3) Allow FCMs to establish dual
reporting lines for risk management
personnel performing functions in
addition to their risk management
duties, provided that § 1.11 would not
permit a member of the risk
management unit to report to any officer
in the business unit for any non-risk
management activity.71
The FIA further commented that the
‘‘policies and procedures’’ approach
provides an adequate amount of
flexibility that will allow the FCMs to
rely upon any existing compliance or
risk management capabilities to meet
the requirements of the rule.72
The Commission generally agrees
with the FIA in that, while the
requirements of § 1.11 represent prudent
risk management practices, they do not
prescribe rigid organizational structures.
The Commission also believes that the
‘‘policies and procedures’’ approach
provides an adequate amount of
flexibility that will allow FCMs to rely
upon any existing compliance or risk
management capabilities to meet the
requirements of the final rule. The
Commission further believes that
nothing in § 1.11 would prevent FCMs
from relying upon existing compliance
and risk management programs to a
significant degree.
As the Commission confirmed in its
final rulemaking discussing § 23.600(b)
regarding the risk management program
for SDs and MSPs, the Commission also
confirms that § 1.11(d) does not require
a registrant’s risk management unit to be
a formal division in the registrant’s
organizational structure, provided that
the FCM will be able to identify all
personnel responsible for required risk
management activities as its ‘‘risk
management unit’’ even if such
personnel fulfill other functions in
addition to their risk management
activities; and permits FCMs to establish
dual reporting lines for risk
management personnel performing
functions in addition to their risk
management duties, but this rule would
not permit a member of the risk
management unit to report to any officer
in the business unit for any non-risk
management activity.73 Such dual
reporting invites conflicts of interest
and would violate § 1.11’s risk
management unit independence
requirement.
The Commission notes that the formal
independence of the risk management
unit from the business unit does not
Comment Letter at 54–55 (Feb. 15, 2013).
at 52.
73 77 FR 20128 (April 3, 2012).

relieve an FCM from the duty to resolve
other conflicts of interest that may have
an adverse effect on the effectiveness of
the FCM’s risk management program.
An FCM’s CCO is required under
§ 3.3(d)(2) to resolve any conflicts of
interest that may arise, in consultation
with the FCM’s board of directors or its
senior officer. Thus, the Commission
would expect an FCM to recognize and
eliminate or appropriately mitigate any
conflict of interest between the FCM’s
business interests and its duty to
establish and maintain an effective risk
management program.
Having considered the comments
regarding § 1.11(d), the Commission is
adopting the provision as proposed.
5. Components of the Risk Management
Program
The Commission’s proposed § 1.11(e)
provides for a non-exclusive list of the
elements that must be a part of the Risk
Management Program of an FCM. Those
elements include: (1) Identifying risks
(including risks posed by affiliates, all
lines of business of the FCM, and all
other trading activity of the FCM) and
setting of risk tolerance limits; (2)
providing periodic risk exposure reports
to senior management and the governing
body; (3) operational risk controls; (4)
capital controls; and (5) establishing a
risk management program that takes
into account risks associated with the
safekeeping and segregation of customer
funds.
Proposed § 1.11(e)(1)(ii) requires the
Risk Management Program to take into
account risks posed by affiliates, all
lines of business of the FCM, and all
other trading activity engaged in by the
FCM. The FIA asked the Commission to
confirm its position that, to the extent
that many FCMs are part of a larger
holding company structure that may
include affiliates that are engaged in a
wide array of business activities, the
Commission understands that, in some
instances, the top level company in the
holding company structure, which has
the benefit of an organization-wide
view, is in the best position to evaluate
the risks that an affiliate of an FCM may
pose to the FCM.74 Therefore, to the
extent an FCM is part of a holding
company within an integrated risk
management program, the FCM may
address affiliate risks and comply with
§ 1.11 through its participation in a
consolidated entity risk management
program provided that such program
does in fact assess the risks posed to the
FCM by its affiliated entities.75

71 FIA
72 Id.

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74 FIA

Comment Letter at 55 (Feb. 15, 2013).

The Commission recognizes that some
FCMs will be part of a larger holding
company structure that may include
affiliates that are engaged in a wide
array of business activities. The
Commission understands with respect
to these entities, that in some instances,
the top level company in the holding
company structure is in the best
position to evaluate the risks that an
affiliate of an FCM may pose to the
enterprise, as it has the benefit of an
organization-wide view and because an
affiliate’s business may be wholly
unrelated to an FCM’s activities.
Therefore, to the extent an FCM is part
of a holding company with an integrated
risk management program, the
Commission would allow an FCM to
address affiliate risks and comply with
§ 1.11(e)(1)(ii) through its participation
in a consolidated entity risk
management program.
In regard to customer funds, the
Commission notes that FCMs are
required by the Act and Commission
regulations to segregate and safeguard
funds deposited by customers for
trading commodity interests. Recent
events have emphasized that it is
essential that FCMs maintain adequate
systems of internal controls, involving
the participation and review of the
firm’s senior management, in order to
properly safeguard customer funds.
Accordingly, § 1.11(e)(3)(i) requires that
the risk management policies and
procedures of an FCM related to the
risks associated with safekeeping and
segregation of customer funds must
include: (1) The evaluation and
monitoring of depositories; 76 (2)
account opening procedures that ensure
the FCM obtains the acknowledgment
required under § 1.20 from the
depository and that the account is
properly titled as belonging to the
customers of the FCM; 77 (3) establishing
76 The evaluation process must include
documented criteria that any depository will be
assessed against in order to qualify to hold funds
belonging to customers. The criteria must address
a depository’s capitalization, creditworthiness,
operational reliability, and access to liquidity. The
criteria must also address risks associated with
concentration of customer funds in any depository
or group of depositories, the availability of deposit
insurance, and the regulation and supervision of
depositories. The evaluation criteria is intended to
ensure that the FCM adopts an evaluation process
which reviews potential depositories against
substantive criteria relevant to the safe custody of
customer funds and that the FCM’s process for
evaluating and selecting depositories can be
reviewed by regulators and auditors. The FCM also
must maintain a documented process addressing
the ongoing monitoring of selected depositories,
including a thorough due diligence review of each
depository at least annually.
77 As required by § 1.20, such account opening
documentation is necessary to ensure that the

75 Id.

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and maintaining an adequate targeted
amount of excess funds in customer
accounts reasonably designed to ensure
the FCM is at all times in compliance
with the segregation requirements for
customer funds under the Act and
Commission regulations, as discussed
further below; (4) controls ensuring that
the withdrawal of cash, securities, or
other property from accounts holding
customer funds not for the benefit of
customers are in compliance with the
Act and Commission regulations; 78 (5)
procedures for assessing the
appropriateness of investing customer
funds in accordance with § 1.25; 79 (6)
the valuation, marketability, and
liquidity of customer funds and
permitted investments made with
customer funds; (7) the appropriate
separation of duties of personnel
responsible for compliance with the Act
and Commission regulations relating to
the protection and financial reporting of
customer funds; 80 (8) procedures for the
timely recording of transactions in the
firm’s books and records; and (9) annual
training of personnel responsible for
compliance with the Act and
Commission regulations relating to the
protection and financial reporting of
customer funds.
Regarding the requirement that FCMs
establish and maintain an adequate
targeted amount of excess funds in
customer accounts, the Commission
notes that FCMs currently deposit
proprietary funds into both customer
segregated accounts and part 30 secured
accounts as a buffer to minimize the
possibility of the firm being in violation
of its segregated and secured fund
obligations at any time. Under the final
rule, the senior management of the FCM
must perform appropriate due diligence
in setting the amount of this buffer and
must consider the nature of the FCM’s
business including the type and general
creditworthiness of its customer base,
the types of markets and products
depositories are aware of their obligations regarding
the accounts and the statutory and regulatory
protections afforded the funds held in the accounts
due to their status as segregated funds.
78 The controls must include the conditions for
pre-approval and the notice to the Commission for
such withdrawals required by § 1.23, § 22.17, or
§ 30.7, discussed below.
79 The FCM’s assessment must take into
consideration the market, credit, counterparty,
operational, and liquidity risks associated with the
investments.
80 The policies and procedures must provide for
the separation of duties among personnel that are
responsible for customer trading activities, and
approving and overseeing cash receipts and
disbursements (including investment and treasury
operations). The policies and procedures must
further require that any movement of funds to
affiliated companies or parties be approved and
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traded by the firm’s customers, the
proprietary trading activities of the
FCM, the volatility and liquidity of the
markets and products traded by the
customers and the FCM, the FCM’s own
liquidity and capital needs, and
historical trends in customer segregation
and secured account funds balances,
customer debits, and margin deficits
(i.e., undermargined amounts). The
FCM also must reassess the adequacy of
the targeted residual interest quarterly.
The Commission believes that each
FCM must set the amount of excess
segregated and secured funds required
utilizing a quantitative and qualitative
analysis that reasonably ensures
compliance at all times with segregated
and secured fund obligations. Such
analysis must take into account the
various factors that could affect
segregated and secured balances, and
must be sufficiently described in writing
to allow the DSRO of the FCM and the
Commission to duplicate the
calculations and test the assumptions.
The analysis must provide a reasonable
level of assurance that the excess is at
an appropriate level for the FCM.81 A
failure to adopt or maintain appropriate
risk management policies and
procedures or to implement, monitor
and enforce controls required by § 1.11
may result in a referral to the
Commission’s Division of Enforcement
for appropriate action.
Proposed § 1.11(e)(3)(i)(G) requires
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, including the
separation of duties among personnel
that are responsible for advising
customers on trading activities,
approving or overseeing cash receipts
and disbursements (including
investment operations), and recording
and reporting financial transactions.
Phillip Futures Inc. stated that such a
separation of duties would require it to
hire multiple employees that would
have limited job responsibilities, and
suggested that as long as internal
controls are adequate and supervisory
personnel are properly registered with
81 Separate from requiring the establishment of a
target for residual interest, the Commission is
further requiring, as discussed in more detail under
sections II.G.9., II.H., and II.I. for §§ 1.20, 1.22, and
1.23, respectively, that residual interest exceed the
sum of outstanding undermargined amounts to
provide a mechanism for ensuring compliance with
the prohibition of the funds of one customer being
used to margin or guarantee the positions of another
customer under the Act and existing regulations.

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the Commission and NFA, the
separation of duties is not necessary.82
Regulation 1.11(e)(3)(i)(I) requires that
the written policies and procedures
include procedures for the reporting of
suspected breaches of the policies and
procedures to the CCO, without fear of
retaliation, and the consequences of
failing to comply with the segregation
requirements of the Act and regulations.
Chris Barnard recommended that the
procedures for reporting breaches
should allow and stress the complete
anonymity of the reporting party
(whistleblower).83 The Commission
takes note of Mr. Barnard’s comments
related to whistleblowers as sound
practices. The Commission notes,
however, that such additional
requirements were not proposed and, in
any event, are outside the scope of this
rulemaking.84
Also, to ensure the effectiveness of a
Risk Management Program, § 1.11(e)(4)
requires that the Risk Management
Program include a supervisory system
that is reasonably designed to ensure
that the risk management policies and
procedures are diligently followed.
The Commission has considered the
comments received on the proposal and,
for the reasons stated above, is adopting
§ 1.11(e) as proposed.
6. Annual Review, Distribution of
Policies and Procedures and
Recordkeeping
The Commission’s proposal also
includes: (1) § 1.11(f) which requires an
annual review and testing of the
adequacy of each FCM’s Risk
Management Program by internal audit
staff or a qualified external, third party
service; (2) § 1.11(g) which requires the
timely distribution of written risk
management policies and procedures to
relevant supervisory personnel; and (3)
§ 1.11(h) which discusses recordkeeping
and availability of records. The
Commission received no comments on
paragraphs (f), (g), and (h) of § 1.11 and
is adopting the paragraphs as proposed.
7. CCO or CEO Certification
Regulation 3.3 requires the CCO or
CEO of an FCM to provide an annual
report to the Commission that must
review each applicable requirement
under the Act and Commission
regulations, and with respect to each
82 Phillip Futures Inc. Comment Letter at 2 (Feb.
14, 2013).
83 Chris Barnard Comment Letter at 2 (Dec. 18,
2012).
84 The Commission further notes that it maintains
a whistleblower program that provides for the
anonymous reporting of violations of the Act and
Commission regulations. See part 165 of the
Commission’s regulations.

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applicable requirement, identify the
policies and procedures that are
reasonably designed to ensure
compliance with the requirement, and
provide an assessment of the
effectiveness of the policies and
procedures.85 The annual report also
must include a certification by the CCO
or CEO that, to the best of his or her
knowledge and reasonable belief, and
under penalty of law, the information
contained in the annual report is
accurate and complete.
The Commission requested comment
on whether the standard for the CCO’s
or CEO’s certification in the annual
report (i.e., based on the CCO’s or CEO’s
knowledge and reasonable belief)
required under § 3.3 is adequate for a
certification of the FCM’s compliance
with policies and procedures for the
safeguarding of customer funds.
Specifically, the Commission requested
comment on whether § 1.11 should
contain a separate CCO or CEO
certification requirement that would
impose a higher duty of strict liability
or some other higher obligation on a
CCO or CEO.
The Commission received three
comments in this regard. NFA and FIA
believed that the ‘‘knowledge and
reasonable belief’’ standard in § 3.3
remains appropriate for a CCO’s/CEO’s
certification regarding an FCM’s
customer funds safeguards.86 That is,
the CCO or CEO should not be liable for
matters that are beyond the CCO’s/
CEO’s knowledge and reasonable belief.
Further, NFA stated that the
Commission should reconsider whether
the CCO’s/CEO’s annual report should
contain a separate certification (with the
‘‘knowledge and reasonable belief
language’’) executed by the FCM’s CEO
or CFO regarding the adequacy of the
FCM’s customer funds safeguards.87
Newedge opposed the imposition of a
strict liability standard on a CCO/CEO
for the annual certifications because the
CCO/CEO is relying on internal
representations from other FCM
employees that are far more expert
regarding these matters.88 Newedge
stated that such a standard would make
85 Such report is mandated by § 3.3 of the
Commission’s regulations; See Swap Dealer and
Major Swap Participant Recordkeeping, Reporting,
and Duties Rules; Futures Commission Merchant
and Introducing Broker Conflicts of Interest Rules;
and Chief Compliance Officer Rules for Swap
Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128, Apr. 3, 2012
(promulgating final rules concerning the CCOs of
FCMs, swap dealers, and major swap participants);
see also § 4d(d) of the Act, 7 U.S.C. 6d(d).
86 FIA Comment Letter at 11 (Feb. 15, 2013); NFA
Comment Letter at 10 (Feb. 15, 2013).
87 NFA Comment Letter at 10 (Feb. 15, 2013).
88 Newedge Comment Letter at 3 (Feb. 15, 2013).

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it difficult to recruit qualified persons to
serve as a CCO/CEO.89
In response to these comments, the
Commission is not requiring a separate
CCO/CEO certification requirement
imposing a higher duty of strict liability
or other standard for the segregation of
customer funds. The Commission also is
not imposing a separate certification by
the FCM’s CEO or CFO at this time.
Commission staff will monitor the role
of the CCO/CEO as the regulation is
implemented and propose to the
Commission any amendments to the
CCO’s/CEO’s standard for certifying
compliance as deemed appropriate
based upon staff’s experiences.
C. § 1.12: Maintenance of Minimum
Financial Requirements by Futures
Commission Merchants and Introducing
Brokers
The regulatory notices required under
§ 1.12 are intended to provide the
Commission and SROs with prompt
notice of potential adverse conditions at
FCMs that may indicate a possible
threat to the financial condition of the
firm or to the safety of customer funds
held by the FCM. Regulation 1.12
currently obligates FCMs to provide
notice to the Commission and to the
respective DSROs if certain specified
reportable events occur. Reportable
events include: Failing to maintain the
minimum level of required regulatory
capital (§ 1.12 (a)); failing to maintain
current books and records (§ 1.12(c));
and failing to comply with the
requirements to properly segregate
customer funds (§ 1.12(h)). As discussed
further below, the Commission
proposed to amend § 1.12 to include
several additional reportable events and
to revise the process for submitting
reportable events to the Commission
and DSROs.
1. Timing of Notices
The proposed new reportable events,
discussed individually below, will
require immediate notice to the
Commission and the firm’s DSRO upon
the occurrence of the relevant event.
FIA commented that while it is not
opposed to a requirement for FCMs to
provide prompt notice of a reportable
event, it questioned the need for
‘‘immediate’’ notice as proposed by the
Commission.90 FIA recommended that
if the Commission determined to adopt
the proposed early warning notices that
it allow 24 hours if the event is financial
in nature and 48 hours for businessrelated events in order to afford FCMs
time to determine the cause of the event

and take an appropriate corrective
action.91
The purpose of the ‘‘early warning’’
notice system established under § 1.12
is to provide the Commission and an
FCM’s DSRO with adequate and prompt
notice of a reportable event in order to
allow Commission staff to assess the
situation and to consult with the
registrant and the SROs to determine if
further action is necessary in order to
protect customer funds or to determine
if the FCM can continue to meet its
obligations to the marketplace and
clearing process. The filing of a notice
is often the first step where the
Commission staff is alerted to a
potential issue at a firm. The
Commission also initiates a dialogue
with the firm and the firm’s DSRO, as
necessary, upon receipt of a § 1.12
notice.
Given the critical role that notices
play in the Commission’s and DSRO’s
surveillance of FCMs, the Commission
believes that immediate notice is
necessary when a reportable event is
financial in nature (e.g., the FCM is not
in compliance with the Commission’s
capital or segregation requirements). In
such situations, the firm should file
immediate notice with the Commission.
If a firm needs additional time to assess
the cause of the reportable event, or if
additional time is needed to document
what steps the FCM will take to remedy
the situation causing the reportable
event, it may file an amendment to its
initial notice with the Commission. In
addition, in a situation where the
registrant is reporting that it is
undercapitalized or undersegregated,
the Commission and DSRO will have
initiated an ongoing dialogue whereby
the Commission and the DSRO will be
in frequent communication with the
registrant and will receive updated
information as the registrant becomes
aware of the facts.
Reportable events that are not related
to an FCM’s ability to meet its financial
obligations or not directly related to the
protection of customer funds may not be
subject to the same sense of immediacy
and the Commission is revising its
proposed regulations accordingly. The
revisions to the proposed amendments
are discussed in the appropriate
sections below with the comments
received on the proposed new notice
provisions.
2. Undercapitalized FCMs and IBs
Regulation 1.12(a) requires an FCM or
IB that fails to maintain the minimum
level of adjusted net capital required by
§ 1.17 to provide immediate notice to

89 Id.
90 FIA

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the Commission and to the entity’s
DSRO. The notice must include
additional information to adequately
reflect the FCM’s or IB’s current capital
condition as of any date that the entity
is undercapitalized.
The Commission proposed to amend
§ 1.12(a) to clarify that if the FCM or IB
cannot compute or document its actual
capital at the time it knows that it is
undercapitalized, it must still provide
the written notice required by § 1.12(a)
immediately and may not delay filing
the notice until it has adequate
information to compute its actual level
of adjusted net capital.
NFA commented in support of the
Commission’s proposal noting that in
situations where an FCM is in potential
distress, it may be even more important
for the Commission and the firm’s
DSRO to become immediately aware of
the situation so that the Commission
and DSRO staff can assist in
determining the firm’s current, accurate
financial condition.92 The Commission
agrees that it is imperative that an FCM
or IB provide immediate notice if the
firm is undercapitalized and,
accordingly is adopting the amendment
as proposed.

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3. Insufficient Segregation of Funds of
Cleared Swaps Customers
Regulation 1.12(h) currently requires
an FCM that fails to hold sufficient
funds in segregated accounts to meet its
obligations to futures customers, or that
fails to hold sufficient funds in separate
accounts for foreign futures or foreign
options customers, to provide
immediate notice to the Commission
and to the FCM’s DSRO. The
Commission proposed to amend
paragraph (h) to include an explicit
requirement that an FCM provide
immediate notice to the Commission
and to its DSRO if the FCM fails to hold
sufficient funds in segregated accounts
for Cleared Swaps Customers to meet its
obligation to such customers.93 The
amendment will ensure immediate
notification of a failure to hold
sufficient funds in segregation for
Cleared Swaps Customers so that the
Commission and the firm’s DSRO can
promptly assess the financial condition
of an FCM and determine if there are
threats to the safety of the Cleared
Swaps Customers Collateral held by the
FCM. The amendment also harmonizes
92 NFA

Comment Letter at 10 (Feb. 15, 2013).
November 13, 2012, the
compliance date for certain Commission part 22
regulations, FCMs are required under § 22.2 to hold
a sufficient amount of funds in Cleared Swaps
Customer Accounts to meet the Net Liquidating
Equity of each Cleared Swaps Customer. 77 FR 6336
(Feb. 7, 2012).
93 Commencing

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the notice requirements whenever an
FCM fails to hold in proper segregated
or secured accounts sufficient funds to
meet its total obligations to futures
customers, 30.7 customers, and Cleared
Swaps Customers.
The Commission did not receive any
comments on proposed § 1.12(h). The
Commission is adopting the
amendments to paragraph (h) as
proposed.
4. Investment of Customer Funds in
Contravention of Regulation 1.25
The Commission also proposed to
amend § 1.12 by adding new paragraph
(i) to require an FCM to provide
immediate notice whenever it discovers
or is informed that it has invested funds
held for customers in investments that
are not permitted investments under
§ 1.25, or if the FCM holds permitted
investments in a manner that is not in
compliance with the provisions of
§ 1.25, such as the investment
concentration limitations contained in
§ 1.25(b)(3). The proposal applies to
funds held for futures customers, 30.7
customers, and Cleared Swaps
Customers.
The Commission received no
comments on the proposed amendments
to § 1.12(i). The Commission is adopting
paragraph (i) as proposed.
5. Notice of Residual Interest Falling
Below Targeted Level or Undermargined
Amounts
The Commission proposed to amend
§ 1.12 to provide a new paragraph (j) to
require an FCM to provide immediate
notice to the Commission and to the
firm’s DSRO if the FCM does not hold
an amount of funds in segregated
accounts for futures customers or for
Cleared Swaps Customers, or if the FCM
does not hold sufficient funds in
secured accounts for 30.7 customers,
sufficient to meet the firm’s targeted
residual interest in one or more of these
accounts as computed under proposed
§ 1.11, which is being adopted herein, or
if its residual interest in one or more of
these accounts is less than the sum of
outstanding margin deficits (i.e.,
undermargined amounts) for such
accounts. Regulation 1.11, as adopted
herein, also requires each FCM that
carries customer funds to calculate an
appropriate amount of excess funds (i.e.,
proprietary funds) to hold in segregated
or secured accounts to mitigate the
possibility of the FCM being
undersegregated or undersecured due to
a withdrawal of proprietary funds from
a segregated or secured account.
FIA questioned the necessity of the
proposed provision noting that under
the proposed amendments to § 1.32 each

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FCM holding customer funds is required
to file a report with the Commission on
a daily basis that will disclose if the
FCM’s residual interest has fallen below
the FCM’s targeted amount or if the
residual amount is less than the sum of
the customers’ margin deficits.94 FIA
also noted that under current
regulations an FCM’s residual interest
will frequently fall below its targeted
amount and that if the Commission
adopts its proposed amendments to
§§ 1.20, 22.2 and 30.7 to require an FCM
to use proprietary funds to cover margin
deficits, withdrawals in excess of 25
percent of the firm’s residual interest
will likely be a daily event requiring
daily notices to be filed with the
Commission and with the FCM’s
DSRO.95
One of the primary objectives of the
proposed amendments to § 1.12 is to
ensure that the Commission and DSROs
receive notice of potential financial or
operational issues at an FCM, or of rule
violations by an FCM, in as timely a
manner as possible such that the
Commission and the FCM’s DSRO will
be in a position to assess the issues and
the potential impact on the FCM’s
ability to meet its regulatory obligations
and its ability to safeguard customer
funds. While the proposed amendments
to § 1.32 do require each FCM holding
customer funds to file on a daily basis
a Segregation Schedule, Secured
Amount Schedule, and Cleared Swaps
Segregation Schedule (as appropriate)
that includes information concerning
the amount of the firm’s actual and
targeted residual interests, the notice
required by § 1.12(j) requires the firm to
include a discussion of the cause of the
event, and what steps the firm will take
to increase the residual interest. The
notice will assist the Commission and
the DSROs in determining what, if any,
additional steps may be necessary in
order to mitigate potential market
disruptions if the FCM cannot meet its
regulatory obligations, and will enhance
the overall safety of customer funds. In
addition, the Commission believes that
the filing of a notice by an FCM will
focus greater attention by management
at the firm on the fact that the firm’s
94 FIA Comment Letter at 38 (Feb. 15, 2013). The
Commission is proposing to require each FCM to
file with the Commission and with the firm’s DSRO
a daily: (1) Segregation Schedule (§ 1.32); (2)
Secured Amount Schedule (§ 30.7); and, (3) Cleared
Swaps Segregation Schedule (§ 22.2)). The
Commission proposed to include information
disclosing the FCM’s targeted residual interest and
whether the amount of the actual residual interest
exceeds the targeted residual interest and the total
amount of the FCM’s margin deficiencies in the
Segregation Schedule, Secured Amount Schedule,
and the Cleared Swaps Segregation Schedule.
95 Id.

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actual residual interest is below its
targeted residual interest, which should
result in further reflection by
management on the adequacy of the
target amount and/or any changes in
operations that may be appropriate,
including increasing the firm’s residual
interest or using other sources of
liquidity.
The Commission also notes that an
FCM’s obligation under § 1.12(j) to file
a notice when the firm’s residual
interest is less than the sum of the
undermargined amounts in its customer
accounts is determined at the point in
time that the firm is required to
maintain as residual interest the
undermargined amounts under § 1.22,
§ 22.2, and § 30.7. In addition, the
Commission further notes that the
obligation to file a notice under § 1.12(j)
when the firm’s residual interest is less
than the sum of the undermargined
amounts in its customer accounts
commences as of the respective
compliance dates for § 1.22, § 22.2, and
§ 30.7 established by the Commission
and discussed further in section III
below.
The Commission has considered the
comments and has determined to adopt
new paragraph 1.12(j) as proposed and
as clarified above.
6. Events Causing Material Adverse
Financial Impact or Material Change in
Operations
The Commission proposed new
paragraphs (k) and (l) to § 1.12.
Proposed paragraphs (k) and (l) will
require an FCM to provide notice to the
Commission and to the firm’s DSRO in
the event of a material adverse impact
in the financial condition of the firm or
a material change in the firm’s
operations. Proposed paragraph (k) will
require an FCM to provide immediate
notice if the FCM, its parent, or a
material affiliate, experiences a material
adverse impact to its creditworthiness
or its ability to fund its obligations.
Indications of a material adverse impact
of an FCM’s creditworthiness may
include a bank or other financing entity
withdrawing credit facilities, a credit
rating downgrade, or the FCM being
placed on ‘‘credit watch’’ by a credit
rating agency.
Proposed paragraph (l) will require an
FCM to provide immediate notice of
material changes in the operations of the
firm, including: A change in senior
management; the establishment or
termination of a material line of
business; a material change in the
FCM’s clearing arrangements; or a
material change in the FCM’s credit
arrangements. Paragraph (l) is intended
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of material events, such as the departure
of the FCM’s CCO, CFO, or CEO.
Two comments were received on the
proposal. FIA stated that the proposed
amendments do not provide an FCM
sufficient guidance on the
circumstances that would require notice
and requested that the Commission
define more precisely the events that
would require notice.96 RJ O’Brien
similarly stated its concern that the term
‘‘creditworthiness’’ as used in proposed
Regulation 1.12(k) is ambiguous and
subjective and requires a clearer
definition to afford FCMs the ability to
reasonably ascertain their reporting
duties and obligations.97
FIA also recommended that the
Commission coordinate with the SEC
and the banking regulators to establish
a uniform standard identifying
‘‘material adverse’’ changes or
impacts.98 Finally, FIA noted that it
does not believe that a change in senior
management at an FCM should require
an early warning notice of any kind
because such notice is already provided
to NFA in the ordinary course.99
The Commission has considered the
comments and has determined to adopt
the amendments to § 1.12(k) and (l) as
proposed, with the revision that the
notices required by § 1.12(l) must be
filed promptly, but not later than 24
hours after the event, instead of
immediately. By adopting this revision,
the Commission acknowledges that
immediate notice is not necessary in all
situations.
An FCM should report § 1.12(l)
notices in a punctual or prompt manner,
but may do so without the expediency
required by an immediate notice
provision that is required, for example,
when a firm is undercapitalized or
undersegregated, which may indicate
that immediate Commission or DSRO
action is required to assess the financial
condition of the FCM or the safety of
customer funds. This revision provides
the appropriate balance between the
receipt of timely notices and the ability
of the FCM to document an explanation
of the events that trigger the notice.
As noted above, the Commission
proposed additional notice provisions
under § 1.12 in order to ensure that the
Commission and DSROs receive timely
information regarding certain events
that should be assessed by the
Commission and the DSROs as part of
the overall oversight and risk
assessment of FCMs. Regulation 1.12(k)
96 Id.
97 RJ

O’Brien Comment Letter at 10 (Feb. 15,
2013).
98 FIA Comment Letter at 38 (Feb. 15, 2013).
99 Id.

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will require an FCM to provide notice
if the FCM or its parent or material
affiliate experiences a material adverse
impact to its creditworthiness or its
ability to fund its obligations.
Regulation 1.12(l) will require an FCM
to provide notice if there is a material
change in the firm’s operations, senior
management, clearing arrangements, or
a material line of business.100 The
purpose of paragraphs (k) and (l) is to
provide the Commission and the
relevant DSRO with an opportunity to
initiate a dialogue with the firm
regarding any potential adverse impact
that such a material change may have on
the ability of the FCM to meet its
obligations as a market intermediary
and on the protection of the customer
funds held by the FCM.
The Commission is cognizant of the
commenters’ desire for more precise
guidance on when notices must be filed
under § 1.12(k) and (l). However, FCMs
represent a broad range of entities, with
diverse business models. In this regard,
some FCMs are small operations with a
minimum level of capital, and others are
highly capitalized entities with more
sophisticated operations. Some FCMs
focus on retail and/or agricultural
clients, and others focus exclusively on
institutional clients. Some FCMs are
standalone entities that do not engage in
proprietary or securities trading, and
others are dually-registered with the
SEC as BDs and engage in a significant
amount of securities transactions for
both their proprietary and customer
accounts.
With FCMs covering such a broad and
diverse spectrum of business
organizations and models, the
Commission does not believe that it
would be appropriate to define by
regulation the scenarios that are
material to an FCM and would
automatically require the filing of a
regulatory notice. Instead, the regulation
has been developed to allow each FCM
to assess whether any particular or
unique event is material to the specific
firm. In making this determination, each
FCM should assess the potential impact
that an event may have on the FCM.
This would include whether new lines
of business would result in a significant
increase in the firm’s capital
requirement or otherwise result in a
significant additional financial or
operational risk to the FCM’s existing
business, or whether the change in
credit terms will significantly impact
100 Regulation 1.12(k) and (l) both require an FCM
to report a material change in the firm’s
creditworthiness or its ability to fund its
obligations. Accordingly, the Commission is
removing the reference to the FCM’s credit
arrangements in § 1.12(l).

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the liquidity resources available to the
FCM.
The Commission also considered the
comment that FCMs should not be
required to report to the Commission
changes in senior management as such
information is reported to NFA. The
Commission does not agree with this
comment. As previously noted, the
§ 1.12 notice provisions are intended to
provide the Commission and DSROs
with prompt notice of material events at
FCMs that will allow the Commission
and DSROs to monitor the impact of
such material events on FCMs and to
factor such events into the risk
assessment of the firm as part of their
respective surveillance programs. The
resignation or appointment of a new
chief executive officer or chief risk
officer at an FCM is a material change
at an FCM and is information that
should be reported to enhance the
Commission’s and DSRO’s
understanding of the firm’s operations
and the assessment of risk at the FCM.
7. Notice of Correspondence From Other
Regulatory Authorities
The Commission proposed to add a
new paragraph (m) to § 1.12 to require
an FCM that receives a notice,
examination report, or any other
correspondence from a DSRO, the SEC,
or a securities self-regulatory
organization to immediately file a copy
of such notice, examination report, or
correspondence with the Commission.
The Commission stated in proposing
§ 1.12(m) that the receipt of such
notices, examination reports, or
correspondence is necessary for the
Commission to conduct appropriate
oversight of FCMs.
The Commission received several
comments that expressed a general
concern that the language of the
proposal is overbroad.101 FIA noted that
FCMs receive regular, and often routine,
correspondence from their DSROs and
that the amount of correspondence is
multiplied for FCMs that are also
registered as BDs and receive similar
correspondence from their securities
SROs and the SEC.102 NFA agreed with
the Commission that notices of material
regulatory actions would provide the
Commission and the DSROs with
important information to carry out their
oversight responsibilities, but also
encouraged the Commission to
reconsider the breadth of the
proposal.103 NFA noted that with
101 FIA Comment Letter at 39 (Feb. 15, 2013); TD
Ameritrade Comment Letter at 3 (Feb. 15, 2013);
RCG Comment Letter at 7 (Feb. 12, 2013); CHS
Hedging Comment Letter at 3 (Feb. 15, 2013).
102 FIA Comment Letter at 39 (Feb. 15, 2013).
103 NFA Comment Letter at 10 (Feb. 15, 2013).

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respect to futures examinations reports,
it already files such reports with the
Commission’s Division of Swap Dealer
and Intermediary Oversight.104 NFA
also requested that the Commission
clarify that FCMs would not have to file
notices of public regulatory actions
taken by futures SROs against an FCM
because NFA already provides the
complaint associated with these actions
to the Commission and makes the action
available on NFA’s BASIC system.105
TD Ameritrade recommended that the
Commission limit notification to items
that pertain to financial responsibility
rules.106
The Commission notes that it was not
its intention to require an FCM to file
with the Commission routine or nonmaterial correspondence from regulators
or SROs. Regulation 1.12 in general is
intended to provide the Commission
with information regarding an FCM’s
interaction with its other regulators
regarding the regulators’ examinations
and other material communications
with FCMs. The Commission would use
such information to enhance its
understanding of the firm and its
compliance with regulatory
requirements to assess the operations of
the firm and learn of events that may
present a potential adverse impact on
the firm, including its ability to properly
operate in a regulated environment or
otherwise safeguard customer funds.
The Commission is revising final
§ 1.12(m) to require an FCM to file
notice with the Commission: (1) if the
FCM is informed by the SEC or a SRO
that it is the subject of a formal
investigation; (2) if the FCM is provided
with an examination report issued by
the SEC or a SRO, and the FCM is
required to file a copy of such
examination report with the
Commission; and (3) if the FCM receives
notice of any correspondence from the
SEC or a securities SRO that raises
issues with the adequacy of the FCM’s
capital position, liquidity to meet its
obligations or otherwise operate its
business, or internal controls. The
Commission believes that the revised
regulation will provide the Commission
with information necessary for the
effective oversight of FCMs and will
minimize the notices that dualregistrant FCMs/BDs will have to file
with the Commission.
8. Filing Process and Content
The Commission proposed to amend
the process that an FCM uses to file the
104 Id.

at 11.

105 Id.
106 TD Ameritrade Comment Letter at 3 (Feb. 15,
2013).

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notices required by § 1.12. Currently,
§ 1.12 requires an FCM to provide the
Commission and DSROs with
telephonic and facsimile notice in some
situations, and to provide written notice
by mail in other situations. An FCM also
is permitted, but not required, to file
notices and written reports with the
Commission and with its DSRO using
an electronic filing system in
accordance with instructions issued by,
or approved by, the Commission.
The Commission proposed to amend
§ 1.12(n) to require that all notices and
reports filed by an FCM with the
Commission or with the FCM’s DSRO
must be in writing and submitted using
an electronic filing system.107 Each FCM
currently uses WinJammer to file
regulatory notices with the Commission
and with the firm’s DSRO. The
proposed regulation further provides
that if the FCM cannot file a notice due
to the electronic system being
inoperable, or for any other reason, it
must contact the Commission’s Regional
office with jurisdiction over the firm
and make arrangements for the filing of
the regulatory notices with the
Commission via electronic mail at a
specially designated email address
established by the Commission;
fcmnotices@cftc.gov. The Commission
also proposed to amend § 1.12(n) to
require that each notice filed by an
FCM, IB, or SRO under § 1.12 include a
discussion of what caused the
reportable event, and what steps have
been, or are being taken, to address the
reportable event. Additional
amendments to § 1.12(b), (d), (e), (f) and
(g) were proposed that were necessary
and technical in nature, and primarily
revise internal cross-references to the
filing requirements in § 1.12(n).
The Commission received one
comment on the proposed amendments
to Regulation 1.12(n), specifically with
respect to the requirement that notices
under the regulation include a
discussion of what caused the
reportable event and what steps have
been or will be taken to address the
event.108 CHS Hedging stated its
concern that requiring such a discussion
in the notice is at odds with the
requirement that notices be filed
immediately.109
The Commission has determined to
adopt the amendments to § 1.12(n) and
the technical and related amendments
107 The Commission’s proposed amendment to
require the electronic filing of reports applies to
both registered FCMs and applicants for registration
as FCMs. Applicants for FCM registration currently
file regulatory notices with NFA using WinJammer.
108 CHS Hedging Comment Letter at 3 (Feb. 15,
2013).
109 Id.

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
in § 1.12(b), (d), (e), (f) and (g) as
proposed. In the Commission’s
experience, in many cases an FCM has
sufficient information to provide a
notice of reportable event and the
remedial steps that can be taken to
mitigate future issues upon learning of
the reportable event or very shortly
thereafter. The Commission does not
believe that the requirement to provide
such information is at odds with the
need to provide the information
immediately. In the event that an FCM
does not possess complete information
on what caused the event, or the steps
that have been taken or are being taken
to address the event, it may revise its
notice at a later date when it has more
complete or accurate information. It is
essential, however, that the Commission
receives timely notice of early warning
events, and compliance with the
relevant notice time period should be an
FCM’s first priority. Accordingly, as
noted in the Proposal, even if such
information is not immediately readily
available, the reporting entity may not
delay the reporting of a reportable event.

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9. Public Disclosure of Early Warning
Notices
The Commission requested comment
as to whether reportable events should
be made public by the Commission,
SROs, or FCMs and what the benefits
and/or negative impact from public
disclosure of such events would be. The
Commission received several comments
regarding the public disclosure of
reportable events. Several commenters,
including FHLB, the ICI, ACLI,
BlackRock, and SIFMA believed that the
Commission should mandate public
disclosure of such information.110 Two
commenters, FIA and NFA, believed
that such events should not be made
public.111 NFA did not believe any of
the filings should be public, but
emphasized that those events that are
not subject to a formal public action
particularly should not be subject to
public disclosure.112 FIA was concerned
that without context, public disclosure
of the notices would be subject to
misinterpretation and could create an
adverse market event.113
The Commission has considered the
comments and has determined that
regulatory notices filed under § 1.12
should not be made publicly available.
110 FHLB Comment Letter at 10 (Feb. 15, 2013);
ICI Comment Letter at 7–8 (Jan. 14, 2013); ACLI
Comment Letter at 4 (Feb. 15, 2013); BlackRock
Letter at 3 (Feb. 15, 2013); and SIFMA Comment
Letter at 2 (Feb. 21, 2013).
111 NFA Comment Letter at 11 (Feb. 15, 2013);
FIA Comment Letter at 38 (Feb. 15, 2013).
112 NFA Comment Letter at 11 (Feb. 15, 2013).
113 FIA Comment Letter at 38 (Feb. 15, 2013).

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The notices required under § 1.12
provide a mechanism whereby
Commission and SRO staff are alerted to
potential issues at an FCM. In order to
fully assess the potential impact of a
reportable event, Commission and SRO
staff generally must contact the firm to
obtain additional information, including
up to date information on how the firm
is addressing the matter that caused the
reportable event to develop. If
reportable events were disclosed to the
public, they may not provide complete
or current information. For example, an
FCM may be required to file immediate
notice that it was undersegregated at a
point in time, but the notice may not
contain information that the FCM has
taken corrective action and is no longer
in violation of the segregation
requirements. The Commission also
recognizes that many of the § 1.12
notices are required to be filed as a
result of one-off processing errors or
timing differences that trigger a
reportable event but are immediately
rectified by the FCM and do not indicate
a failure of the FCM’s control system
nor the firm’s ability to effectively
operate as an FCM.
In addition, under § 1.12 FCMs that
are dually registered BDs with the SEC
are required to file with the Commission
copies of certain regulatory notices that
they are required to file with the SEC.
The SEC, however, does not make such
notices public. The Commission
believes it is important to ensure
consistency such that information that a
firm must file with the SEC and that is
otherwise not publicly disclosed is not
made public by the Commission as a
result of the firm also being required to
file a notice with the Commission under
§ 1.12.
D. § 1.15: Risk Assessment Reporting
Requirement for Futures Commission
Merchants
Regulation 1.15 currently requires
each FCM subject to the risk assessment
reporting requirements to file certain
financial reports with the Commission
within 120 days of the firm’s year end.
The risk assessment filings include FCM
organizational charts; financial,
operational, and risk management
policies, procedures, and systems
maintained by the FCM; and, fiscal yearend consolidated and consolidating
financial information for the FCM and
its highest level material affiliate.
The Commission proposed to amend
§ 1.15 to require the financial
information to be filed in electronic
format. The Commission received no
comments on the proposed amendments
to § 1.15. The Commission is adopting
the amendments as proposed. The

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Commission also has revised the final
regulation to provide that the risk
assessment filings should be filed via
transmission using a form of user
authentication assigned in accordance
with procedures established by or
approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission. The Commission will
provide direction regarding how FCMs
should file the risk assessment reports
in a secure manner with the
Commission prior to the effective date
of the regulation.
E. § 1.16: Qualifications and Reports of
Accountants
Regulation 1.16 addresses the
minimum requirements a public
accountant must meet in order to be
recognized by the Commission as
qualified to conduct an examination for
the purpose of expressing an opinion on
the financial statements of an FCM.
Regulation 1.16(b) currently provides
that the Commission will recognize a
person as qualified if such person is
duly registered and in good standing as
a public accountant under the laws of
the place of the accountant’s principal
office or principal residence.
The Commission proposed several
amendments to enhance the
qualifications that a public accountant
must meet in order to conduct an
examination of an FCM. Specifically,
the Commission proposed to require
that the public accountant must: (1) Be
registered with the Public Company
Accounting Oversight Board
(‘‘PCAOB’’); (2) have undergone an
examination by the PCAOB; and, (3)
have remediated to the satisfaction of
the PCAOB any deficiencies identified
during the examination within three
years of the PCAOB issuing its report.
The Commission also sought to
enhance the quality of the public
accountant’s examination of an FCM by
proposing to require that the
examination be conducted in
accordance with U.S. GAAS after full
consideration of the auditing standards
issued by the PCAOB. The Commission
further sought to ensure that the FCM’s
governing body took an active role in
the assessment and appointment of the
public accountant by imposing an
obligation on the governing body to
evaluate, among other things, the
accountant’s experience auditing FCMs;
the adequacy of the accountant’s
knowledge of the Act and Commission
regulations; the depth of the
accountant’s staff; and, the
independence of the accountant.
Additionally, the Commission
proposed technical amendments to

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§ 1.16. The Commission proposed to
amend § 1.16(f)(1)(i)(C) to require each
FCM to submit its certified annual
report to the Commission in an
electronic format. The Commission also
proposed to amend § 1.16(c)(2) to
remove the requirement that the
accountant manually sign the
accountant’s report, which would
facilitate the electronic filing of the
FCM’s certified annual report with the
Commission.
The proposed amendments to § 1.16,
including a discussion of the comments
received, are discussed below.

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1. Mandatory PCAOB Registration
Requirement
Regulation 1.16(b)(1) would continue
to require a public accountant to be
registered and in good standing under
the laws of the place of the accountant’s
principal office or principal residence in
order to be qualified to conduct
examinations of FCMs. The Commission
proposed to enhance the qualifications
of public accountants by further
requiring the public accountant to be
registered with the PCAOB.
The PCAOB is a nonprofit corporation
established by Congress under the
Sarbanes-Oxley Act of 2002 (‘‘SOX’’) to
oversee the audits of public companies
and BDs of securities registered with the
SEC in order to protect investors and the
public interest by promoting
informative, accurate, and independent
audit reports.114 The SEC has oversight
authority over the PCAOB, including
the approval of the PCAOB’s rules,
auditing and other standards, and
budget.115
The Commission received several
comments on the proposed amendments
to Regulation 1.16, which are discussed
below. The commenters, however, did
not oppose the proposed PCAOB
registration requirement. In addition,
the Commission does not anticipate that
the PCAOB registration requirement
will present a significant issue to FCMs
or public accountants. In this regard,
only one public accountant that
currently conducts examinations of
FCMs is not registered with the PCAOB.
PCAOB-registered public accountants
conducted the examinations of 103 of
the 104 registered FCMs based upon a
review of the most current annual
reports submitted by FCMs to the
Commission. Accordingly, after
considering the comments, the
Commission is adopting the PCAOB
registration requirement as proposed.
114 Public Law 107–204, 116 Stat. 745 (July 30,
2002). See also section 101 of SOX.
115 Sections 107 and 109 of SOX.

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2. PCAOB Inspection Requirement
The Commission proposed to amend
§ 1.16(b)(1) to require that a public
accountant must have undergone a
PCAOB examination in order to be
qualified to conduct examinations of
FCMs. Section 104 of SOX requires the
PCAOB to conduct an annual inspection
of each registered public accountant that
regularly provides audit reports for
more than 100 public issuers each
year.116 Section 104 further requires
public accountants that provide audit
reports for 100 or fewer issuers to be
inspected by the PCAOB no less
frequently than once every three
years.117
In addition, the Dodd-Frank Act
amended SOX and vested the PCAOB
with new oversight authority over the
audits of BDs registered with the
SEC.118 The PCAOB was provided with
the authority, subject to SEC approval,
to determine the scope and frequency of
the inspection of public accountants of
BDs. The SEC also approved a PCAOB
temporary rule implementing an
inspection program for BDs.119
Several commenters raised issues
with, or objected to, the proposal. Ernst
& Young requested clarification that the
term ‘‘examination’’ in proposed
§ 1.16(b)(1) referred to the ‘‘inspections’’
that are required under section 104 of
SOX.120 The Commission confirms that
the term ‘‘examination’’ in proposed
§ 1.16 was intended to refer to the
‘‘inspections’’ required under section
104 of the SOX, and has revised the
regulation accordingly.
Several commenters stated that the
proposed inspection requirement would
disqualify public accountants that were
registered with the PCAOB, but had not
yet undergone an inspection.121 These
commenters stated that the proposal
would disqualify accounting firms that
recently registered with the PCAOB, but
due to the triennial inspections
schedule may not be subject to a PCAOB
116 Section

104(b)(1)(A) of SOX.
104(b)(1)(B) of SOX.
118 Section 982 of the Dodd-Frank Act.
119 See Public Company Oversight Board; Order
Approving Proposed Temporary Rule for an Interim
Program of Inspection Related to Audits of Brokers
and Dealers, 76 FR 52996 (Aug. 24, 2011).
120 Section 104 of SOX requires the PCAOB to
conduct a continuing program of inspections to
assess the degree of compliance of each registered
public accounting firm and associated persons of
that firm with the provisions of the SOX, the rules
of the PCAOB, the rules of the SEC, or professional
standards, in connection with its performance of
audits, issuance of audit reports, and related
matters involving public issuers.
121 Center for Audit Quality Comment Letter at 2
(Jan. 14, 2013); Deloitte Comment Letter at 2 (Jan.
14, 2013); Ernst & Young Comment Letter at 2 (Jan.
14, 2013).
117 Section

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inspection for almost three years.122
Commenters also noted that certain
PCAOB registered accounting firms may
audit non-issuer BDs and may be subject
to inspection under the PCAOB’s
temporary or permanent inspection
program, but may not have been
selected yet for inspection by the
PCAOB.123 The AICPA stated that,
while any public accounting firm can
register with the PCAOB, by law only
accountants that audit public issuers or
audit certain non-issuer BDs may be
inspected by the PCAOB.124 KPMG also
stated that the requirement that
accounting firms auditing an FCM must
have undergone an inspection makes
the rules governing the audits of FCMs
more restrictive than the SEC rules
governing the audits of BDs.125 KPMG
suggests that the Commission align the
standards required of auditors of FCMs
and BDs.126
The AICPA also stated that the
Commission should permit a practice
monitoring program (such as the AICPA
peer review program) that evaluates and
opines on an accounting firm’s system
of quality control relevant to the firm’s
non-issuer accounting and auditing
practice as an alternative to the PCAOB
inspection requirement.127 The AICPA
also stated that a robust process, such as
the AICPA’s peer review program,
whereby a team of certified public
accountants conducts a comprehensive
evaluation of a public accountant’s
system of quality control and whose
work is subject to the oversight and
approval by a separate group of certified
public accountants should be required
rather than having one certified public
accountant review another.128
The NFA also supported a temporary
alternative to the PCAOB inspection
requirement in order to ensure that
public accountants that are unable to
obtain a PCAOB inspection within the
time period required by the Commission
will not automatically be prohibited
from conducting FCM examinations.129
NFA recommended that the
Commission specifically designate the
AICPA’s peer review program as the
only peer review program that will be
acceptable to alleviate any uncertainty
as to whether a certified public
122 Id.
123 Center for Audit Quality Comment Letter at 2
(Jan. 14, 2013); Deloitte Comment Letter at 2 (Jan
14, 2013).
124 AICPA Comment Letter at 2 (Feb. 11, 2013).
125 KPMG Comment Letter at 2 (Jan. 11, 2013).
126 Id.
127 AICPA Comment Letter at 3 (Feb 11, 2013).
128 Id.
129 NFA Comment Letter at 11 (Feb. 15, 2013).

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
accountant is ‘‘qualified’’ to conduct the
peer review.130
As noted in the proposal, FCMs are
sophisticated financial market
participants that are entrusted with
more than $182 billion of customers’
funds.131 FCMs intermediate futures
customers activities and guarantee
customers’ financial performance to
DCOs, other FCMs, and foreign brokers.
In addition, FCMs are anticipated to
hold significant amounts of Cleared
Swaps Customer Collateral deposited to
margin, secure or guarantee Cleared
Swaps as more provisions of the DoddFrank Act are implemented. FCMs also
may conduct proprietary futures and
securities transactions, and handle
business for securities customers in
addition to futures customers. The
sophistication of the futures markets
and the Commission’s regulations,
coupled with the critical role played by
FCMs in the futures market (and in the
case of many of the largest FCMs, the
securities markets) necessitates the
engagement of competent and
experienced accountants to conduct the
examinations of FCMs.
The Commission believes that
registration with the PCAOB and being
subject to the PCAOB inspection
program will help to ensure that
accounting firms engaged to conduct
audits of FCMs remain competent and
qualified. The PCAOB inspection
program involves the review of the
accounting firm’s compliance with
PCAOB issued audit, quality control,
independence and ethics standards.
In addition, the purpose of the
PCAOB registration and inspection
requirement in the final rule is not to
ensure that the accounting firm’s audits
of FCMs are subject to inspection by the
PCAOB. The Commission acknowledges
that the PCAOB’s primary jurisdiction
and inspections are directed toward the
audits of public issuers and BDs.
However, the Commission’s objective is
to reasonably ensure the quality and
competence of the public accountants
engaged in the audits of FCMs. The
Commission believes that such quality
and competence may be assessed by the
PCAOB inspecting the accounting firms’
audit process for issuers and BDs, and
is not dependent solely upon the
inspection of the accounting firms’
audits of FCMs.
The Commission further believes that
its proposed PCAOB inspection
requirement is consistent with the SEC’s
audit requirements for BDs. Any auditor
130 Id.
131 The customer funds information is based upon
the 1–FR–FCM reports and FOCUS Reports filed by
FCMs for the month ending April 30, 2013.

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of an SEC-registered BD must register
with the PCAOB and will be subject to
the PCAOB inspection program.
Moreover, the Commission believes
that the imposition of a PCAOB
inspection requirement provides several
benefits over a peer review program.
The PCAOB is an entity that was created
by Congress and charged with
improving audit quality, reducing the
risks of audit failures in the U.S. public
securities markets and promoting public
trust. As previously noted, the PCAOB
is subject to oversight by the SEC, which
approves the PCAOB’s rules, auditing
and other standards, and budget. A peer
review program, while providing many
benefits in the oversight of the
accounting profession, is overseen by
the accounting industry and is not
subject to oversight by a federal
regulator, which the Commission
believes is a key advantage of the
PCAOB in the furtherance of the
protection of customer funds.
The Commission also does not
anticipate a significant impact on
existing FCMs from the imposition of
the PCAOB inspection requirement on
public accountants. As noted above, 103
of the 104 FCMs currently are subject to
examination by public accountants that
are registered with the PCAOB. In
addition, only six of the PCAOBregistered public accountants that
conduct examinations of fourteen FCMs
have not been subject to a PCAOB
inspection at this time. However, all six
of these firms have indicated in their
PCAOB filings that they conduct audits
of BDs and, therefore, will be subject at
a future date to the PCAOB inspection
program for the inspection of
accountants that conduct audits of BDs.
The Commission, based upon the
analysis above and further consideration
of the comments, has determined to
adopt the regulation as proposed. The
Commission recognizes, however, that
the audits of many FCMs with a yearend date of December 31, 2013 or later
have already been initiated.
Accordingly, the Commission has
determined that the PCAOB registration
requirement will apply for audit reports
issued for the year ending June 1, 2014
or later so as not to unnecessarily
interrupt the examinations that
currently are in progress. The
Commission also is adopting a
December 31, 2015 compliance date for
a PCAOB inspection. The deferred
compliance date will provide public
accountants with additional time to
register with, and to be inspected by, the
PCAOB. The compliance dates are
discussed further in section III below.

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3. Remediation of PCAOB Inspection
Findings by the Public Accountant
The Commission proposed in
§ 1.16(b)(1) that any deficiencies noted
during a PCAOB inspection must be
successfully remediated to the
satisfaction of the PCAOB within three
years.
KPMG, the Center for Audit Quality,
Deloitte, the AICPA, and PWC generally
argued that it is not clear how the
requirement that any deficiencies noted
during the PCAOB exam must have
been remediated to the satisfaction of
the PCAOB would work or what it
means.132 The commenters also noted
that the Commission’s proposed
requirement that the public accountant
remediate any deficiencies noted in a
PCAOB inspection report is more
stringent than the SEC’s requirements
for auditors of BDs and public issuers.
KPMG also asked who would make a
determination of remediation as there is
no procedure for the PCAOB to
communicate such determinations to
the public accountant or the public.133
PWC also stated that reliance on the
PCAOB inspection results was
misplaced and that the PCAOB
inspection comments are issued in the
context of a constructive dialogue to
encourage Certified Public Account
(‘‘CPA’’) firms to improve their practices
and procedures.134 PWC further noted
that disciplinary sanctions such as
revocation of the firm’s right to audit a
public company or BD can only be made
in the context of an adjudicative process
in which the firm is afforded procedural
rights.135 Lastly, PWC asserted that the
Commission’s proposal would
disqualify a firm without providing any
of the procedural rights or safeguards
established by SOX.136
The Commission has considered the
comments and recognizes that the
PCAOB inspection process does not
involve a formal process for
communicating that a public accountant
has adequately remediated deficiencies
identified during the PCAOB’s last
inspection. In addition, the Commission
understands that the PCAOB may not
always issue a report at the conclusion
of an inspection, or that the report may
contain both public and non-public
sections.
In light of these comments, the
Commission has determined to revise
132 KPMG Comment Letter at 2–3 (Jan. 11, 2013);
Center for Audit Quality Comment Letter at 2–3
(Jan. 14, 2013); Deloitte Comment Letter at 2–3 (Jan.
14, 2013); AICPA Comment Letter at 2 (Feb. 11,
2013); PWC Comment Letter at 2 (Jan. 15, 2013).
133 KPMG Comment Letter at 2 (Jan. 11, 2013).
134 See PWC Comment Letter at 2 (Jan. 15, 2013).
135 Id.
136 Id.

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the final regulation by removing the
requirement that a public accountant
must remediate any deficiencies
identified during a PCAOB inspection to
the satisfaction of the PCAOB within
three years of the inspection. The
Commission is further revising
§ 1.16(b)(1) to provide that a public
accountant that, as a result of the
PCAOB disciplinary process, is subject
to a sanction that would permanently or
temporarily bar the public accountant
from engaging in the examination of a
public issuer or BD may not conduct the
examination of an FCM. The
Commission notes that the PCAOB has
the authority to initiate a disciplinary
action against a firm and its associated
persons for failing to adequately address
inspection findings or for other
transgressions.
The Commission also is revising
§ 1.16(b)(4) to require the governing
body of the FCM to review and consider
the PCAOB’s inspection reports of the
public accountant as part of the
governing body’s assessment of the
qualifications of the public accountant
to perform an audit of the FCM. The
governing body is in a position to
request information from the public
accountant regarding the PCAOB
inspections and general oversight of the
public accountant and should use such
information in assessing the
competency of the accountant to
conduct an examination of the FCM. An
FCM’s governing body should be
concerned if the PCAOB inspection
reports indicate that the public
accountant has significant deficiencies
and should take such information into
consideration in assessing the
qualifications of the public accountant.
4. Auditing Standards
The Commission proposed to amend
§ 1.16(c)(2) to require that the public
accountant’s report of its examination of
an FCM must state whether the
examination was done in accordance
with generally accepted auditing
standards promulgated by the Auditing
Standards Board of the AICPA (i.e., U.S.
GAAS), after giving full consideration to
the auditing standards issued by the
PCAOB. Commenters raised issues with
the proposal noting that there is no
existing reporting framework that
requires the application of one set of
auditing standards and the
consideration of another set of auditing
standards.137 Deloitte noted that public
accountants may be specifically engaged
137 Ernst & Young Comment Letter at 3 (Jan. 14,
2013); Deloitte Comment Letter at 1 (Jan. 14, 2013);
PWC Comment Letter at 3 (Jan. 15, 2013); AICPA
Comment Letter at 2 (Feb. 11, 2013); and KPMG
Comment Letter at 3 (Jan. 11, 2013).

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to conduct an audit of an entity under
both PCAOB auditing standards and
U.S. GAAS, but that there is no
reporting framework for an audit under
one set of auditing standards, after
giving ‘‘full consideration’’ to a separate
set of auditing standards.138
The Commission has reviewed the
comments and has determined to revise
the final regulation to provide that the
accountant’s report must state whether
the examination of the FCM was
conducted in accordance with the
auditing standards issued by the
PCAOB. The Commission acknowledges
the fact that there is no reporting
framework for public accountants to
report on one set of auditing standards
after giving full consideration to another
set of auditing standards. Also, the
Commission recognizes that the SEC has
recently adopted final regulations to its
Rule 17a–5 to require public
accountants to use PCAOB standards in
the examination of the financial
statements of BDs.139 Therefore, the
Commission’s amendments to
§ 1.16(c)(2) to require public
accountants to use PCAOB standards in
conducting the examination of the
financial statements of an FCM is
consistent with the SEC’s revisions to its
Rule 17a–5. The Commission also is
setting a compliance date for public
accountants to use PCAOB auditing
standards for all FCM examinations
with a year-end date of June 1, 2014 or
later. The extended compliance date
allows FCMs currently subject to an
examination by a public accountant to
complete the examination cycle without
having the public accountant adjust the
examination for the new PCAOB
standards requirement. The June 1, 2014
compliance date also is consistent with
the SEC’s compliance date for revisions
to Rule 17a-5 and, therefore, will allow
FCMs that are dually-registered as
FCMs/BDs to be subject to uniform
CFTC and SEC requirements.140
Compliance dates are discussed further
in section III below.
5. Review of Public Accountant’s
Qualifications by the FCM’s Governing
Body
The Commission proposed to amend
§ 1.16(b) by adding new paragraph (4)
which would require the FCM’s
governing body to ensure that a public
accountant engaged to conduct an
examination of the FCM is duly
qualified to perform the audit. The
proposed new paragraph further
138 Deloitte
139 Broker

Comment Letter at 1 (Jan. 14, 2013).
Dealer Reports, 78 FR 51910 (Aug. 21,

2013).
140 Id.

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provided that the evaluation should
include, among other things, the public
accountant’s experience in auditing
FCMs, the public accountant’s
knowledge of the Act and Commission
regulations, the depth of the public
accountant’s staff, and the public
accountant’s size and geographical
location. The proposed requirements are
intended to ensure that the FCM’s
governing body takes an active role in
the assessment and appointment of the
public accountant.
PWC requested clarification of the
Commission’s expectations for the
criteria that would be expected to be
used by the FCM’s governing body for
determining qualification. PWC stated
that such clarification may be helpful so
that a consistent framework for
determining the qualifications is used
across the industry and FCM governing
bodies.141
The Commission has considered the
comments and has determined to adopt
the amendments as proposed. FCMs
represent a diverse group of entities and
business models. Some FCMs focus
primarily on institutional clients and
engage in securities transactions as their
primary business. Other FCMs focus on
retail customers and engage in no
proprietary or securities transactions.
With such a wide range of business
models, the Commission believes that it
is not practical to provide a uniform set
of criteria that each governing body of
each FCM should use to assess the
qualifications of a public accountant. In
fact, such a standard list would go
against the Commission’s objective of
ensuring that the governing body is
actively reviewing the qualifications of
the public accountant relative to the
FCM’s particular business model. The
requirement is not intended to exclude
regional or smaller public accountants
from being qualified to conduct
examinations, provided that the
governing body is satisfied that the
public accountant has the appropriate
skill, knowledge, and other resources to
effectively conduct an examination, and
is otherwise in compliance with the
qualification requirements in § 1.16.
The Commission also is revising final
§ 1.16(b)(4) in response to the comments
received on proposed § 1.16(b)(1) that
would have required that a public
accountant remediate any findings
issued by the PCAOB in its inspection
report within 3 years of the issuance of
the inspection report. As stated above,
commenters noted that there is no
formal mechanism to assess whether a
public accountant has remediated any
inspection findings to the satisfaction of
141 PWC

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the PCAOB. Accordingly, the
Commission is revising § 1.16(b)(4) to
provide that the governing body of the
FCM should review the inspection
report of the public accountant and
discuss inspection findings as
appropriate with the public accountant.
Such reviews and discussions will
provide additional information to the
governing body that will allow it to
better assess the qualifications of the
public accountant to conduct an audit of
the FCM.
6. Electronic Filing of Certified Annual
Reports
The Commission proposed to amend
§ 1.16(f)(1)(i)(C) to require each FCM to
submit its certified annual report to the
Commission in an electronic format.
The Commission also proposed to
amend § 1.16(c)(2) to remove the
requirement that the accountant
manually sign the account’s report,
which will facilitate the electronic filing
of the FCM’s certified annual report
with the Commission. The Commission
received no comments on the above
amendments and is adopting the
amendments as proposed.
F. § 1.17: Minimum Financial
Requirements for Futures Commission
Merchants and Introducing Brokers

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1. FCM Cessation of Business and
Transfer of Customer Accounts if
Unable To Demonstrate Adequate
Liquidity
Section 4f(b) of the Act provides that
no person may be registered as an FCM
unless it meets the minimum financial
requirements that the Commission has
established as necessary to ensure that
the FCM meets its obligations as a
registrant at all times, which would
include its obligations to customers and
to market participants, including DCOs.
The Commission’s minimum capital
requirements for FCMs are set forth in
§ 1.17 which, among other things,
currently provides that an FCM must
cease operating as an FCM and transfer
its customers’ positions to another FCM
if the FCM is not in compliance or is not
able to demonstrate its compliance with
the minimum capital requirements.
The proposed amendments to § 1.17
authorize the Commission to request
certification in writing from an FCM
that it has sufficient liquidity to
continue operating as a going concern.
If an FCM is not able to immediately
provide the written certification, or is
not able to demonstrate adequate access
to liquidity with verifiable evidence, the
FCM must transfer all customer
accounts and immediately cease doing
business as an FCM.

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The FIA stated that it agreed with the
regulatory purpose underlying this
proposed amendment, but stated that
the Commission should not adopt the
rule before it clearly articulates the
objective standards by which it will
determine that an FCM has ‘‘sufficient
liquidity.’’ 142 Similarly, FCStone
requested clarity with respect to the
exigent circumstances that would give
the Commission authority to require an
FCM to cease operating.143
The Commission understands the
concerns of commenters regarding the
process by which the Commission, or
the Director of the Division of Swap
Dealer and Intermediary Oversight
acting pursuant to delegated authority
under § 140.91(6), could require
immediate cessation of business as an
FCM and the transfer of customer
accounts; however, that same authority
currently exists should a firm fail to
meet its minimum capital requirement.
The Commission believes the ability to
certify, and if requested, demonstrate
with verifiable evidence, access to
sufficient liquidity to operate as a going
concern to meet immediate financial
obligations is a minimum financial
requirement necessary to ensure an
FCM will continue to meet its
obligations as a registrant as set forth
under section 4f(b) of the Act. Further,
the Commission notes that the ‘‘going
concern’’ standard is well defined in
accounting literature and practice, and
generally means an ability to continue
operating in the near term.
The proposed liquidity provision is
intended to cover circumstances that
require immediate attention and would
provide the Commission with a means
of addressing exigent circumstances by
requiring an FCM to produce a written
analysis showing the sources and uses
of funds over a short period of time not
to exceed one week. The purpose of the
provision is to address situations where
an FCM may currently be in compliance
with minimum financial requirements,
but lacks liquidity to meet pending,
non-discretionary obligations such that
the firm’s ability to continue operating
in the near term is in serious jeopardy.
In such a situation, it is expected that
the Commission and the FCM’s DSRO
and applicable DCOs would be in
frequent communication with the firm
to review the FCM’s options and plans
to continue operating as a going concern
and to assess what actions were
necessary to ensure the firm continues
to meet its obligations as a market
intermediary and to protect customer
funds. If an FCM’s management cannot
142 FIA

Comment Letter at 8 (Feb. 15, 2013).
Comment Letter at 4 (Feb. 15, 2013).

143 FCStone

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in good faith certify that the FCM has
sufficient liquidity to permit it to
operate throughout the following week,
then the FCM has failed to meet its
minimum financial requirements
necessary to ensure that the firm will
continue to meet its obligations as a
registrant and the Commission would
have to determine how to minimize the
impact of a potential FCM insolvency or
default.
The Commission has considered the
comments and has determined to adopt
the amendments as proposed.
2. Reducing Time Period for FCMs To
Incur a Capital Charge for
Undermargined Accounts to One Day
After Margin Calls Are Issued
Regulation 1.17 requires an FCM to
incur a charge to capital for customer
and noncustomer accounts that are
undermargined beyond a specified
period of time.144 Regulation
1.17(c)(5)(viii) currently requires an
FCM to reduce its capital (i.e., take a
capital charge) if a customer account is
undermargined for three business days
after the margin call is issued.145
Regulation 1.17(c)(5)(ix) requires an
FCM to take a capital charge for
noncustomer and omnibus accounts that
are undermargined for two business
days after the margin call is issued.
The Commission proposed to amend
§ 1.17(c)(5)(viii) and (ix) to require an
FCM to take capital charges for
undermargined customer, noncustomer,
and omnibus accounts that are
undermargined for more than one
business day after a margin call is
issued. Thus, for example, under the
proposal, if an account carried by an
FCM became undermargined on
Monday, the operation of the regulation
assumes that the FCM would issue a
margin call on Tuesday, and the FCM
would have to incur a capital charge at
the close of business on Wednesday if
the margin call was still outstanding.
Vanguard commented that it
supported the Commission’s proposal,
stating that the accelerated timetable
makes sense given modern trading and
asset transfer timing.146 Vanguard
further stated that each customer must
stand up for its trades and promptly
post margin, and it further stated that it
believes the overall market may be
weakened to the extent an FCM is
144 Noncustomers are defined in § 1.17(b)(4) as
accounts carried by the FCM that are not customer
accounts or proprietary accounts. Noncustomer
accounts are generally accounts carried by an FCM
for affiliates and certain employees of the FCM.
145 For purposes of these Commission regulations,
a margin call is presumed to be issued by the FCM
the day after an account becomes undermargined.
146 Vanguard Comment Letter at 7 (Feb. 22, 2013).

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extending significant amounts of credit
over an extended period to cover a
customer’s margin deficit.147
MFA objected to the proposal noting
that, while in the ordinary course of
business, few margin calls remain
outstanding for more than two business
days, the proposal does recognize the
practical reasons why a margin call may
be outstanding more than 2 business
days after the call issued.148 MFA cited
disputes between an FCM and its
customer as to the appropriate level of
margin, and good faith errors that may
cause a delay beyond 2 days for a
margin call to be met.149 MFA also
stated that an increase in costs resulting
from the regulation will ultimately be
passed on the customers.
The NCBA stated that the proposal
may require market participants to use
wire transfers in lieu of checks, which
will increase the costs and impose a
significant financial burden to the cattle
industry.150 The NCBA also stated that
the proposal will cause customers to
prefund their accounts for anticipated
margin requirements, which will reduce
customers’ capital and impede their
other business operations.151 The NCBA
further noted that the proposal is not
related to the MFGI and PFGI failures,
which were not caused by customers
failing to meet margin calls.152
JSA stated that an effective increase in
a capital charge for undermargined
customer accounts could cause an
increase in requirements for customers
to prefund their accounts, which would
be punitive in a highly competitive
environment that already places
midsized FCMs and FCMs that are not
affiliated with a banking institution at a
disadvantage to larger, more highly
capitalized firms, or FCMs that are
affiliated with banking institutions.153
JSA also stated that if smaller FCMs are
forced out of the market, larger FCMs or
FCMs affiliated with banks may not be
willing to service customers that are
farmers, ranchers, retail, or introduced
brokerage accounts, for which they have
historically shown little interest.154
FIA stated that while institutional and
many commercial market participants
generally meet margin calls by means of
wire transfers, the proposal, creates
Comment Letter at 7 (Feb. 15, 2013).

149 Id.

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155 FIA

Comment Letter at 26 (Feb. 15, 2013).

156 Id.

147 Id.
148 MFA

operational problems because it does
not consider delays arising from
accounts located in other time zones
that cannot settle same day, or ACH
settlements, or the requirement to settle
or convert certain non-U.S. dollar
currencies.155 FIA also stated that a
substantial number of customers that do
not have the resources of large
institutional customers (in particular
members of the agricultural community)
depend on financing from banks to fund
margin requirements, which may
require more than one day to obtain.156
RJ O’Brien stated that it recognized
that the collection of margin is a critical
component of an FCM’s risk
management program, however, it
objected to the proposed amendment.157
RJ O’Brien stated that as the largest
independent FCM serving a client base
that includes a great number of farmers
and ranchers, it is well aware that many
customers that use the markets to hedge
commercial risk still meet margin calls
by check or ACH because of the
impracticality and costliness of wire
transfers in their circumstances.158 RJ
O’Brien stated that in many cases, the
costs of a wire transfer would exceed
the transaction costs paid by the client
to its FCMs, and additionally, that some
customers in the farming and ranching
community finance their margin calls,
which can require additional time to
arrange for delivery of margin call funds
due to routine banking procedures.159
RJ O’Brien also stated that if the
proposal is adopted, FCMs that service
non-institutional clients will struggle to
remain competitive and the proposal
may result in fewer clearing FCMs and
greater systemic risk to the
marketplace.160 RJ O’Brien further
stated that many of the larger FCM/BDs
likely have little interest in servicing
smaller rancher and farmer clients, as
was evidenced in the wake of MFGI’s
failure, and that a loss of such smaller
FCMs will result in fewer options
available to these ranchers, farmers and
other commercial market participants
that wish to hedge their commercial
risks.161
TD Ameritrade stated that it did not
support the proposed amendments to

150 NCBA

Comment Letter at 2 (Feb. 15, 2013).

151 Id.
152 Id. See also JSA Comment Letter at 2 (Feb. 15,
2013) and ICA Comment Letter at 1–2 (Feb. 15,
2013).
153 JSA Comment Letter at 2 (Feb. 15, 2013). See
also Frontier Futures Comment Letter at 2–3 (Feb.
14, 2013).
154 Id.

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157 RJ O’Brien Comment Letter at 3–4 (Feb. 15,
2013).
158 Id. See also RCG Comment Letter at 5 (Feb. 12,
2013). RCG also recommended that the Commission
implement a pilot program that requires FCMs to
provide the Commission with daily undermargined
reports. The Commission does not believe that a
pilot program is necessary for gathering additional
information.
159 Id.
160 Id.
161 Id.

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§ 1.17(c)(5)(viii) and (ix) as it would
impose financial hardships on
customers that the Proposal was
intended to protect.162 TD Ameritrade
stated that a large number of retail
customers do not currently use wire
transfers to meet a margin requirement
in one business day.163 TD Ameritrade
also noted that non-U.S. customer
accounts are faced with time zone
differences and inherent delays in
meeting margin calls.164
Other commenters expressed the
general concern that the proposal will
harm the customers it is meant to
protect by requiring more capital to be
kept in customer accounts, possibly
forcing users to hold funds at FCMs well
in excess of their margin requirements,
or resulting in certain segments of the
market to forego the futures markets to
hedge their commercial operations.165
Those commenters argued that such prefunding could add significant financial
burdens to trading as customers find
themselves having to provide excess
funds to their brokers which could
increase their risk with regard to the
magnitude of funds potentially at risk in
the event of future FCM insolvencies.166
The commenters general expressed
significant concerns that reducing
margin calls to one day will harm many
customers as: (1) Many small
businesses, farmers, cattle producers
and feedlot operators routinely pay by
check and forcing them to use wire
transfers increases their cost of doing
business; (2) clients who make margin
calls by ACH payments instead of wire
transfers because ACH is cheaper,
would no longer be able to do so
because there is a one-day lag in
availability of funds; and (3) foreign
customers would not be able to make
margin calls due to time zone
differences, the time required to convert
certain non-USD currencies, and for
162 TD Ameritrade Comment Letter at 3–4 (Feb.
15, 2013).
163 Id.
164 Id.
165 NPPC Comment Letter at 2 (Feb. 14, 2013);
RCG Comment Letter at 4–5 (Feb. 12, 2013); NGFA
Comment Letter at 3 (Feb. 15, 2013); NEFI/PMAA
Comment Letter at 3 (Jan. 14, 2013); AIM Comment
Letter at 15 (Jan. 24, 2013); Amarillo Comment
Letter at 1 (Feb. 14, 2013); NCFC Comment Letter
at 1 (Feb. 15,2013); NFA Comment Letter at 12–13
(Feb. 15, 2013); FCStone Comment Letter at 3 (Feb.
15, 2013); Advantage Comment Letter at 1–2 (Feb.
15, 2013); AFBF Comment Letter at 2 (Feb. 15,
2013); CCC Comment Letter at 2 (Feb. 15, 2013);
Steve Jones Comment Letter at 1 (Feb. 14, 2013);
ICA Comment letter at 1–2 (Feb. 15, 2013);TCFA
Comment Letter at 1–2 (Feb. 15, 2013); CME
Comment Letter at 5 (Feb. 15, 2013). AIM
resubmitted the comment letters of Premier Metal
Services, NEFI/PMAA, and the ISRI and indicated
its support for the recommendations therein (Jan.
14, 2013).
166 Id.

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
whom banking holidays fall on different
days.167
The CCC stated that the proposed
amendment to the capital rule places an
undue burden on the FCMs, which will
likely result in FCMs demanding that
customers prefund trades to prevent
market calls and potential capital
charges.168 The CCC also stated that the
proposal could result in forced
liquidations of customer positions to
ensure that the FCM does not incur a
capital charge.169
FIA and RJ O’Brien provided
alternatives to the Commission’s
proposal. Both FIA and RJ O’Brien
offered that an FCM be required to take
a capital charge for any customer margin
deficit exceeding $500,000 that is
outstanding for more than one business
day.170 FIA further suggested that if the
customer’s margin deficit is $500,000 or
less, the FCM should take a capital
charge if the margin call is outstanding
two business days or more after the
margin call is issued.171 RJ O’Brien’s
comment letter does not address the
timing of the capital charge for accounts
with a margin deficit of $500,000 or
less.
NFA, FIA, MFA and AIMA stated that
if the Commission adopts the
amendments regarding residual interest
as proposed, then the Commission
should consider whether a capital
charge for undermargined accounts
remains necessary at all because the
FCM will have already accounted for an
undermargined account by maintaining
a residual interest sufficient at all times
to exceed the sum of all margin deficits;
hence the capital charges related to an
undermargined account appear to
impose an additional financial burden
without any necessary financial
protection.172
RJ O’Brien also stated that the
Commission should provide at least a
one-year period of time for any changes
to the timeframe for taking a capital
charge for undermargined accounts to
be effective.173 RJ O’Brien stated that
FCMs will need to educate and develop
systems to assist their clients in meeting
margin calls in an expedited
timeframe.174 Lastly, RJ O’Brien stated
that the Commission should require
167 Id.
168 CCC

Comment Letter at 2–3 (Feb. 15, 2013).

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169 Id.
170 FIA Comment Letter at 27 (Feb. 27, 2013); RJ
O’Brien Comment Letter at 4 (Feb. 15, 2013).
171 FIA Comment Letter at 27 (Feb. 15, 2013).
172 NFA Comment Letter at 13 (Feb. 15, 2013);
FIA Comment Letter at 26 (Feb. 15, 2013); MFA
Comment Letter at 6–7 (Feb. 15, 2013); and AIMA
Comment Letter at 3 (Feb. 15, 2013).
173 RJ O’Brien Comment Letter at 4 (Feb. 15,
2013).
174 Id.

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futures exchanges to increase their
margin requirements to 135% of
maintenance margin to reduce the
number and frequency of margin
calls.175
With respect to the reduction of the
timeframe in § 1.17(c)(5)(viii) for an
FCM to incur a capital charge for
undermargined customer accounts, the
Commission has considered the
comments and has determined to adopt
the amendments as proposed. The
timely collection of margin is a critical
component of an FCM’s risk
management program and is intended to
ensure that an FCM holds sufficient
funds deposited by customers to meet
their potential obligations to a DCO. As
guarantor of the financial performance
of the customer accounts that it carries,
the FCM is financially responsible if the
owner of an account cannot meet its
margin obligations to the FCM and
ultimately to a DCO.
The timeframe for meeting margin
calls currently provided in
§ 1.17(c)(5)(viii) was established in the
1970s when the use of checks and the
mail system were more prevalent for
depositing margin with an FCM.
However, in today’s markets, with the
increasing use of technology, 24-hour-aday trading, and the use of wire
transfers to meet margin obligations, the
Commission believes that the timeframe
for taking a capital charge should be
reduced both to give an incentive to
FCMs to exercise prudent risk
management and to strengthen the
financial protections of FCMs, and to
enhance the safety of the clearing
systems and other customers by
requiring FCMs to reserve capital for
undermargined customer accounts that
fail to meet a margin call on a timely
basis.
Several commenters have stated that
the proposal would harm customers by
increasing costs to customers or by
exposing more of the customers’ funds
to the FCM.176 The Commission notes
that the final regulation provides for at
least two full days from the point in
time that a customer’s account is
undermargined to the time the FCM is
required to incur a capital charge for the
undermargined account. Under the
regulation, if a customer’s account
becomes undermargined at some point
before close of business on Monday, the
FCM will have until the close of
business on Wednesday before it is
required to take a capital charge.
Customers are responsible for
175 Id.
176 See, e.g., NCBA Comment Letter at 2 (Feb. 15,
2013); NGFA Comment Letter at 3–4 (Feb. 15,
2013).

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monitoring the activity in their account
and should have information that would
allow them to determine that their
trading account is undermargined prior
to the close of business on Monday.
The alternative proposed by FIA and
RJ O’Brien is premised on their belief
that the regulation would not provide an
adequate amount of time for a customer
to meet a margin call before the FCM
would have to take a capital charge for
an undermargined account. As noted
above, the Commission believes that the
regulation, which provides at least two
full business days for a customer to fund
its undermargined account, does
provide an adequate period of time for
margin calls to be met. In situations
involving customers located in foreign
jurisdictions and the associated issues
of time zone differences and differences
in banking holidays, the Commission
believes that the FCM should include
such factors in its risk management
program and operating procedures with
such customers in an effort to ensure
compliance with the regulations.
The Commission believes that the
time period provided in § 1.17(c)(5)(viii)
is adequate in most situations for a
customer to receive and fund a margin
call. The intent of margin is to ensure
that a customer maintains a sufficient
amount of funds in its account to cover
99 percent of the observed market
moves of its portfolio of positions over
a specified period of time. Customers
that maintain fully margined accounts
are exposed to greater risk to the safety
of their funds if other customer accounts
carried by the FCM are undermargined.
In order to provide greater protection to
the customers that are fully margined or
maintain excess margin on deposit, and
to provide greater assurance that the
FCM can continue to meet its financial
obligations to DCOs, the Commission
believes that the FCM should maintain
a sufficient amount of capital to cover
the potential shortfall in undermargined
customers’ accounts.
The Commission also has considered
the comments on the proposed
amendments to § 1.17(c)(5)(ix), which
reduce the timeframe for an FCM to
incur a capital charge on an
undermargined noncustomer or
omnibus account from two days after
the call was issued to one day after the
call was issued. The Commission notes
that the majority of the comments
addressed the undermargined charge on
customer accounts, but considered the
comments generally in reviewing the
proposed amendments to
§ 1.17(c)(5)(ix).
The Commission has considered the
proposal and is adopting the
amendments to § 1.17(c)(5)(ix) as

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proposed. As noted above,
§ 1.17(c)(5)(ix) applies to noncustomers
and omnibus accounts carried by an
FCM. Many of the concerns raised by
the comments regarding the ability to
fund a margin call under
§ 1.17(c)(5)(viii) do not apply to
accounts held by an affiliate or an
omnibus accounts. Such accounts
should pay margin calls promptly and
by wire transfer to reduce the potential
exposure to the FCM resulting from
undermargined accounts.
The Commission also believes that the
amendments to § 1.17(c)(5)(viii) and (ix)
are appropriate even if the Commission
amends its regulations to require an
FCM to maintain residual interest in
segregated accounts in excess of the
undermargined amount of customer
accounts. The purpose of the capital
rule is to ensure that an FCM maintains
sufficient liquid assets to meet its
obligations as a going concern.
Proprietary funds held in segregated
accounts that exceed the total obligation
to customers are included in an FCM’s
capital computation. However, in
situations where the FCM’s residual
interest in segregated accounts is
covering an undermargined customer
account, a capital charge is appropriate
because the FCM’s residual interest is
necessary to cover potential market
losses on the undermargined accounts.
3. Permit an FCM That Is Not a BD To
Develop Policies and Procedures To
Determine Creditworthiness
The Commissions proposed to amend
§ 1.17(c)(v) to permit an FCM that is not
a BD to develop a framework to
establish, maintain and enforce written
policies and procedures for determining
creditworthiness of commercial paper,
convertible debt, and nonconvertible
debt instruments that are readily
marketable. In recommending the
proposal, the Commission noted that the
SEC proposed to permit a BD to
establish written policies and
procedures to assess the credit risk of
commercial paper, convertible debt, and
nonconvertible debt instruments that
are readily marketable.177
Under both the Commission’s
proposal and the SEC’s proposal, an
FCM or BD would assess the security’s
credit risk using the following factors, to
the extent appropriate:
• Credit spreads (i.e., whether it is
possible to demonstrate that a position
in commercial paper, nonconvertible
177 The SEC has proposed rule amendments to
implement the Dodd-Frank Act requirement to
remove references to credit ratings in its regulations
and substitute a standard for creditworthiness
deemed appropriate. See 76 FR 26550 (May 6,
2011).

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debt, and preferred stock is subject to a
minimal amount of credit risk based on
the spread between the security’s yield
and the yield of Treasury or other
securities, or based on credit default
swap spreads that reference the
security);
• Securities-related research (i.e.,
whether providers of securities-related
research believe the issuer of the
security will be able to meet its financial
commitments, generally, or specifically,
with respect to securities held by the
FCM or BD);
• Internal or external credit risk
assessments (i.e., whether credit
assessments developed internally by the
FCM or BD or externally by a credit
rating agency, irrespective of its status
as an NRSRO, express a view as to the
credit risk associated with a particular
security);
• Default statistics (i.e., whether
providers of credit information relating
to securities express a view that specific
securities have a probability of default
consistent with other securities with a
minimal amount of credit risk);
• Inclusion on an index (i.e., whether
a security, or issuer of the security, is
included as a component of a
recognized index of instruments that are
subject to a minimal amount of credit
risk);
• Priorities and enhancements (i.e.,
the extent to which a security is covered
by credit enhancements, such as
overcollateralization and reserve
accounts, or has priority under
applicable bankruptcy or creditors’
rights provisions);
• Price, yield and/or volume (i.e.,
whether the price and yield of a security
or a credit default swap that references
the security are consistent with other
securities that the FCM or BD has
determined are subject to a minimal
amount of credit risk and whether the
price resulted from active trading); and
• Asset class-specific factors (e.g., in
the case of structured finance products,
the quality of the underlying assets).
An FCM that maintains written
policies and procedures and determines
that the credit risk of a security is
minimal is permitted under the
proposal to apply the lesser haircut
requirement currently specified in the
SEC capital rule for commercial paper
(i.e., between zero and 1⁄2 of 1 percent),
nonconvertible debt (i.e., between 2
percent and 9 percent), and preferred
stock (i.e., 10 percent).
The CFA does not believe it is
appropriate for FCMs to use internal
models to determine minimum required
capital.178 The CFA believes that capital

models should be established by the
relevant regulatory agencies for use by
FCMs or BDs.179 It has serious concerns
that internal models used for calculating
minimum capital requirements are
prone to failure in a crisis.180 The CFA
states that the regulatory agency should
provide an objective and clear minimum
risk-based capital baseline.181
As noted above, the SEC has proposed
amendments to its net capital rule to
allow BDs to take a lower net capital
charge on certain securities based on the
BDs’ own determinations that certain
securities have minimal credit risk,
pursuant to the BDs having protocols for
assessing the credit risk and
maintaining appropriate
documentations. If the SEC approves the
proposal, the SEC capital charges would
apply to an FCM that is duallyregistered as an FCM/BD. In the absence
of the Commission adopting a similar
provision, certificates of deposit,
bankers acceptances, commercial paper
and nonconvertible debt securities held
by standalone FCMs that have very low
credit and market risk securities would
be subject to the minimum default
securities haircut of 15 percent.
The Commission proposed that
standalone FCMs be permitted the same
flexibility as FCM/BDs with respect to
taking a lower capital charges for certain
securities that may be determined to
have minimal credit risk. The
Commission also notes that based upon
a review of Forms 1–FR–FCM filed with
the Commission, standalone FCMs
generally have limited investments in
the types of securities that would be
subject to the internal models, and such
haircuts are not material to most
standalone FCM’s adjusted net capital.
The Commission has considered the
proposal and is adopting the
amendments as proposed.
4. Revisions to Definitions in Regulation
1.17(b)
The Commission proposed technical
amendments to certain definitions in
§ 1.17(b)(2) and (7) to reflect proposed
changes the term ‘‘30.7 customer’’ and
to remove surplus language due to other
revisions to the regulations. No
comments were received on these
proposed changes and the Commission
is adopting the proposal as final.
Regulation 1.17(a) requires each FCM,
in computing its minimum capital
requirement, to include 8 percent of the
risk margin required on futures and over
the counter derivative instruments that
the FCM carries in customer and non179 Id.
180 Id.

178 CFA

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customer accounts. Regulation
1.17(b)(9) defines the term ‘‘over the
counter derivative instruments’’ as those
instruments set forth in 12 U.S.C. 4421.
Section 740 of the Dodd-Frank Act,
however, repealed 12 U.S.C. 4421.
The Commission, however, has not
revised its capital requirements and
continues to require FCMs to include
over the counter derivative instruments
that it carries in customer and noncustomer accounts in their minimum
capital computations. The Commission
interprets § 1.17(b)(9) to require an FCM
to include the types of derivative
transactions or instruments that were
previously set forth in 12 U.S.C. 4421 in
its computation of its minimum capital
requirement. The Commission also has
directed staff to develop a rulemaking to
amend Regulation 1.17(b)(9) to account
for the repeal of 12 U.S.C. 4421.

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G. § 1.20: Futures Customer Funds To
Be Segregated and Separately
Accounted for
Regulation 1.20 imposes obligations
on FCMs, DCOs, and other depositories
regarding the holding, and accounting
for, customer funds. The Commission
proposed to reorganize the structure of
§ 1.20 by providing additional
subparagraphs to the existing specific
requirements, and by applying headings
to the regulation to assist in the reading
and understanding of the regulation.
The Commission also proposed new
provisions discussed below to enhance
the protection of customer funds.
1. Identification of Customer Funds and
Due Diligence
The Commission proposed to amend
§ 1.20(a) to more clearly define the
requirements regarding how FCMs must
hold customer funds. Proposed
paragraph (a) of § 1.20 requires an FCM
to separately account for all futures
customer funds and to segregate futures
customer funds from its own funds. The
proposed amendments further provide
that an FCM shall deposit customer
funds with a depository under an
account name that clearly identifies the
funds as futures customer funds and
shows that the funds are segregated as
required by the Act and Commission
regulations. Proposed paragraph (a) also
provides that an FCM must perform due
diligence of each depository holding
customer segregated funds (including
depositories affiliated with the FCM), as
required by new § 1.11, and to update
its due diligence on at least an annual
basis.
Proposed paragraph (a) also provides
that an FCM must maintain at all times
in the separate account or accounts
funds in an amount at least sufficient in

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the aggregate to cover its total
obligations to all futures customers.
Proposed paragraph (a) further provides
that an FCM computes its ‘‘total
obligations’’ to futures customers as the
aggregate amount of funds necessary to
cover the Net Liquidating Equities of all
futures customers as set forth in
paragraph § 1.20(i).
The Commission stated in the
Proposal that it is not sufficient for an
FCM to be in compliance with its
segregation requirement at the end of a
business day, but fail to hold sufficient
funds in segregation to meet the Net
Liquidating Equities of each of its
customers on an intra-day basis. This
provision explicitly clarifies the
Commission’s long-standing
interpretation of existing statutory and
regulatory requirements on how FCMs
must hold customer funds. Section
4d(a)(2) of the Act requires an FCM to
treat and deal with all money,
securities, and property received by the
FCM to margin, guarantee, or secure the
trades or contracts of any customer of
the FCM, or accruing to such customer
as the result of such trades or contracts,
as belonging to such customer. Section
4d(a)(2) further provides that funds
belonging to a customer must be
separately accounted for by the FCM
and may not be commingled with the
funds of the FCM or be used to margin
or guarantee the trades or contracts, or
extend the credit, of any customer or
person other than the customer for
whom the FCM holds the funds. The
separate treatment of customer funds is
further set forth in § 1.22 which
provides that no FCM shall use, or
permit the use of, the funds of one
customer to purchase, margin, or settle
the trades, contracts, or commodity
options of, or to secure or extend the
credit of, any person other than such
customer. Therefore, the current
statutory and regulatory regime requires
an FCM to maintain at all times a
sufficient amount of funds in
segregation to cover the full amount of
the firm’s obligations to its customers
(i.e., the aggregate Net Liquidating
Equity of each customer) to prevent the
FCM from using the funds of one
customer to margin or guarantee the
commodity interests of other customers,
or to extend credit to other customers.
In its letter, the FIA stated that ‘‘[t]he
Commission has stated, and [FIA]
agrees, that FCMs are required to
comply with the segregation provisions
of the Act at all times.’’ 182 FIA further
182 FIA Comment Letter at 2 (Jun 20, 2013). In
addition, FIA expressed its agreement with the
existing requirement for an FCM to maintain
sufficient funds in segregation at all times to cover
its total obligation to its customers.

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68533

cited to a Commission 1998 rulemaking
where the Commission stated the
segregation rules require compliance at
all times.183 If an FCM is not in
compliance with its obligation to
maintain a sufficient amount of funds in
segregation to meet the Net Liquidating
Equities of all of its customer on an
intra-day basis, the FCM would be using
the funds of one customer to margin
positions of another customer, or to
cover the losses of another customer in
violation of section 4d of the Act and
Commission regulations.
The Commission did not receive any
comments on revised paragraph (a) and
is adopting the amendments as
proposed.
2. Permitted Depositories
Proposed paragraph (b) of § 1.20 lists
the permitted depositories for futures
customer funds as any bank, trust
company, DCO, or another FCM, subject
to compliance with the FCM’s risk
management policies and procedures
required in new § 1.11. The Commission
did not propose changes to the list of
permitted depositories for FCMs. The
Commission did not receive any
comments on paragraph (b) and is
adopting the amendments as proposed.
3. Limitation on the Holding of Futures
Customer Funds Outside of the United
States
Proposed paragraph (c) of § 1.20
provides that an FCM may hold futures
customer funds in depositories outside
of the U.S. only in accordance with the
current provisions of § 1.49. The
Commission received no comments on
paragraph (c) and is adopting the
amendments as proposed.
4. Acknowledgment Letters
a. Background
Proposed paragraph (d) of § 1.20
would require an FCM to obtain a
written acknowledgment from each
bank, trust company, DCO, or FCM with
which the FCM opens an account to
hold futures customer funds, with the
exception of a DCO that has
Commission-approved rules providing
for the segregation of such funds.
Similarly, proposed § 1.20(g)(4) would
require a DCO to obtain a written
acknowledgment from each depository
prior to or contemporaneously with the
opening of a futures customer funds
account. Paragraphs (d) and (g) further
enumerate requirements for
acknowledgment letters, expanding
upon the requirements set forth in
current § 1.20. Proposed § 1.26, which
would require an FCM or DCO that
183 Id.

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invests customer funds in instruments
described in § 1.25 to obtain an
acknowledgment letter from the
depository holding such instruments,184
and proposed § 30.7(c)(2), which would
require an FCM to obtain an
acknowledgment letter from each
depository with which it opens an
account to hold funds on behalf of its
foreign futures and foreign options
customers, are consistent with proposed
§ 1.20(a) and (g)(4). The Commission
proposed to repeal and replace
§ 30.7(c)(2), but retain the requirement
to obtain an acknowledgment letter in
proposed § 30.7(d).
The Commission has proposed
amendments to the acknowledgment
letter requirements in §§ 1.20, 1.26, and
30.7 in three separate notices of
proposed rulemaking, the first being
published on February 20, 2009 (the
‘‘Original Proposal’’).185 The Original
Proposal set out specific representations
that would have been required to be
included in all acknowledgment letters
in order to reaffirm and to clarify the
obligations that depositories incur when
accepting customer funds.
In light of the comments on the
Original Proposal, in 2010 the
Commission re-proposed the
amendments with several changes made
in response to comments (the ‘‘First
Revised Proposal’’).186 As part of the
First Revised Proposal, the Commission
proposed the required use of standard
template acknowledgment letters, which
were included as Appendix A to each of
§§ 1.20 and 1.26, and Appendix E to
part 30 of the Commission’s regulations
(referred to herein as the ‘‘Template
Letters’’).
The Commission received nine
comment letters on the First Revised
Proposal. In general, the commenters
were supportive of the First Revised
Proposal and, in particular, were very
supportive of requiring the use of
Template Letters. It was noted by
certain commenters that use of a
standard letter would simplify the
process of obtaining an
acknowledgment letter. In addition,
commenters were in agreement that
uniformity of acknowledgment letters
would provide consistency and greater
legal certainty across the commodities
and banking industries.
The Commission proposed further
refinements to the acknowledgment
letter requirements in 2012 to address
184 Section 22.5 applies the written
acknowledgment requirements of §§ 1.20 and 1.26
to FCMs and DCOs in connection with depositing
Cleared Swaps Customer Collateral in an account at
a permitted depository.
185 74 FR 7838 (Feb. 20, 2009).
186 75 FR 47738 (Aug. 9, 2010).

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several issues that had arisen in the
context of the MFGI and PFGI failures
and their adverse impact on customers
of those FCMs (‘‘Second Revised
Proposal’’).187 In the Second Revised
Proposal, the Commission also
addressed comments it had received in
response to the First Revised Proposal
and incorporated related changes to the
Template Letters.
The Commission received 15
comment letters related to the Template
Letters in response to the Second
Revised Proposal.188 Again, the
commenters were generally supportive
of the Commission’s proposal and, in
particular, were supportive of the
mandatory use of Template Letters. The
Depository Bank Group commented that
the Template Letters will help
‘‘facilitate a more efficient process for
the establishment and maintenance of
customer segregated accounts’’ and
clarify the rights and responsibilities of
depositories.189 Eurex noted that it
appreciated the ‘‘potential convenience’’
and increased certainty and
transparency afforded by the Template
Letters.190 CME supported the
Commission’s efforts to ‘‘strengthen and
standardize’’ the Template Letters.191
While many of the comments were
supportive of the Template Letters,
FCStone expressed the view that
‘‘prescriptive rules’’ could drive
participants out of the futures
industry.192 MGEX commented that the
required use of a Template Letter
appeared to be a ‘‘dramatic shift’’ from
the current requirements and
questioned whether depositories would
be willing to sign the Template Letter
due to the ‘‘access and timing
information requirements.’’ 193 RCG
stated that early indications were that
many depositories ‘‘with extensive
experience servicing FCMs’’ are
unwilling to sign the Template Letter
and expressed concern that if such
depositories refuse to sign, customer
funds will become concentrated with
depositories ‘‘less experienced in
carrying FCM accounts.’’ 194
Regulation 1.20 in its current form
already requires FCMs and DCOs to
obtain acknowledgment letters, and the
187 77

FR 67866 (Nov. 14, 2012).
were submitted by Schwartz & Ballen,
FIA, LCH.Clearnet, MGEX, the Federal Reserve
Banks, NYPC, CME, the Depository Bank Group,
Eurex, RJ O’Brien, RCG, NFA, FCStone, ICI, and
Katten-FIA.
189 Depository Bank Group Comment Letter at 2
(Feb. 15, 2013).
190 Eurex Comment Letter at 1 (Aug. 1, 2013).
191 CME Comment Letter at 7 (Feb. 15, 2013).
192 FCStone Comment Letter at 5 (Feb. 15, 2013).
193 MGEX Comment Letter at 3 (Feb. 18, 2013).
194 RCG Comment Letter at 7 (Feb. 12, 2013).
188 Letters

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Commission believes that use of a
standardized Template Letter will
reduce negotiation costs, create
efficiencies for Commission registrants
as well as non-registrant depositories,
provide greater legal certainty as to the
rights and obligations of parties under
the Act and CFTC regulations, and
facilitate consistent treatment of
customer funds across FCMs, DCOs, and
depositories. In addition, the use of a
standardized letter is the approach that
has been proposed by the Financial
Conduct Authority (‘‘FCA’’) in the
United Kingdom (‘‘U.K.’’).195
The Commission has taken into
consideration the comments and
recommendations provided by FCMs,
DCOs, and depositories, and it believes
the final rules and Template Letters
largely address the concerns they have
expressed. The Commission’s response
to comments on the major issues raised
by commenters is discussed by subject
matter, below.
b. Technical Changes to the Template
Letters
Proposed paragraphs (d)(2) and
(g)(4)(ii) of § 1.20 would require FCMs
and DCOs, respectively, to use the
Template Letter set forth in Appendix A
to § 1.20 when opening a customer
segregated account with a depository. In
response to the comments, and in
recognition of the different functions
FCMs and DCOs perform in relation to
customer funds, the Commission has
determined to finalize different versions
of the Template Letters for FCMs and
DCOs. The Template Letter specific to
FCMs is being adopted as Appendix A
to § 1.20, and the Template Letter for
DCOs is being adopted as Appendix B
to § 1.20. Paragraph (g)(4)(ii) has been
revised to require DCOs to use the
Template Letter in Appendix B.
Another change concerns the full
account name as it appears in the
Template Letter. Proposed § 1.20(a) and
(g)(1) provides in part that customer
funds shall be deposited ‘‘under an
account name that clearly identifies
them as futures customer funds and
shows that such funds are segregated as
required by sections 4d(a) and 4d(b) of
the Act and [part 1 of the Commission’s
regulations].’’ Schwartz & Ballen noted
that operational constraints limit the
number of characters available for
account names, and requested
additional flexibility with regard to
account titles ‘‘so long as the accounts
are clearly identified as custodial
195 See Financial Conduct Authority, ‘‘Review of
the client assets regime for investment business,’’
Consultation Paper CP13/5 (July 2013).

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
accounts held for the benefit of the
FCM’s customers.’’ 196
The Commission has modified the
Template Letters to accommodate a
depository’s account titling
conventions. The Commission will
permit a depository to abbreviate the
account name when the full name as set
forth in the Template Letter is too long
for a depository’s operational system to
include all characters, provided that (i)
the Template Letter includes both the
full and abbreviated account name(s)
and (ii) the abbreviated account name
clearly identifies the account as a
Commission-regulated segregated/
secured account that holds customer
funds (e.g., ‘‘segregated’’ may be
shortened to ‘‘seg;’’ ‘‘customer’’ may be
shortened to ‘‘cust;’’ ‘‘account’’ to
‘‘acct;’’ etc.).
FIA recommended several
modifications to the Template Letters,
including the addition of a clause to
address banking practices used to
provide third-party access to account
information. As a result, the
Commission has added the following
language to the FCM Template Letter
(and similar language to the other
Template Letters): ‘‘The parties agree
that all actions on your part to respond
to the above information and access
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
or access request, in order to provide for
the secure transmission and delivery of
the requested information or access to
the appropriate recipient(s).’’
In addition, the proposed Template
Letters, as well as proposed §§ 1.20(d)(4)
and (g)(4)(iv) and 30.7(d)(4), would
require the depository to agree to
provide a copy of the executed
acknowledgment letter to the
Commission at a specific email address.
The email address has been deleted
from the Template Letters, and the
depository is now required to provide a
copy to the Commission via electronic
means in a format and manner
determined by the Commission. The
rule text has been revised accordingly
(and § 1.20(g)(4)(iv) has been
renumbered as § 1.20(g)(4)(iii)).
Finally, the Commission has made
minor technical revisions to the
Template Letters in the form of
grammatical and stylistic changes to
196 Schwartz & Ballen Comment Letter at 8 (Feb.
15, 2013).

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clarify meaning and provide consistency
among the letters.
c. Federal Reserve Banks as Depositories
Pursuant to § 806(a) of the DoddFrank Act, the Board of Governors of the
Federal Reserve System (the ‘‘Board’’)
may authorize a Federal Reserve Bank to
establish and maintain an account for
systemically important DCOs
(‘‘SIDCOs’’) that have been designated
by the Financial Stability Oversight
Council (‘‘FSOC’’) as systemically
important financial market utilities
(‘‘Designated FMUs’’).197 In their
comment letter, the Federal Reserve
Banks stated: ‘‘Absent clarification, the
[Federal] Reserve Banks must assume
that we would be treated as depository
institutions under the proposed rules if
we were to hold Designated FMU
customer funds.’’ The Federal Reserve
Banks commented that they do not
believe that they can accept all of the
terms of the Template Letters given the
‘‘unique nature of the [Federal] Reserve
Banks and of Designated FMUs.’’ 198
The Federal Reserve Banks raised
specific concerns with two terms of the
Template Letters: (1) The provision
authorizing the Commission to order the
immediate release of customer funds;
and (2) the provision that allows a
depository to presume legality for any
withdrawal of customer funds, provided
the depository has no knowledge of, or
could not reasonably know of, any
violation of the law. The Federal
Reserve Banks suggested that under
‘‘exceptional circumstances, such as a
prospective insolvency of the SIDCO
that threatens customer funds,’’ a
Commission-authorized withdrawal
would need to be considered in the
context of a larger coordinated effort,
which would include FSOC.199 The
Federal Reserve Banks further asserted
that, due to their dual roles as both
supervisory bodies and providers of
financial services, coupled with the
Board prohibition on sharing
supervisory information with personnel
performing financial services, the
standard of liability leaves them in the
‘‘untenable position of not being able to
rely on the presumption of legality.’’ 200
The Commission is adopting, as
proposed, § 1.20(g)(2), which confirms
that the Federal Reserve Banks are
depositories for purposes of section 4d
of the Act and Commission regulations
thereunder. Accordingly, a Federal
197 Section 806(a) of the Dodd-Frank Act; see also
Federal Reserve Banks Comment Letter at 1 (Feb.
22, 2013).
198 Federal Reserve Banks Comment Letter at 2
(Feb. 22, 2013).
199 Id. at 1.
200 Id. at 2.

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68535

Reserve Bank would be required to
execute a written acknowledgment
when it accepts customer funds from a
SIDCO or other DCO for which it holds
customer funds. However, the
Commission recognizes the unique role
of the Federal Reserve Bank and is
therefore modifying proposed
§ 1.20(g)(4)(ii) to provide an exception
for Federal Reserve Banks from the
requirement that depositories accepting
customer funds from DCOs execute the
Template Letter in Appendix B to
§ 1.20. Rather, a Federal Reserve Bank
will be required only to execute a
written acknowledgment that: (1) It 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 Commission
regulations thereunder; and (2) it agrees
to reply promptly and directly to any
request from the director of the Division
of Clearing and Risk or the director of
the Division of Swap Dealer and
Intermediary Oversight, 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.
The Commission is modifying
proposed § 1.20(g)(2) from ‘‘A [DCO]
may deposit futures customer funds
with a bank or trust company, which
shall include a Federal Reserve Bank
with respect to deposits of a
systemically important [DCO]’’ to ‘‘A
[DCO] may deposit futures customer
funds with a bank or trust company,
which may include a Federal Reserve
Bank with respect to deposits of a [DCO]
that is designated by the Financial
Stability Oversight Council to be
systemically important.’’ Changing the
phrase ‘‘which shall include a Federal
Reserve Bank’’ to ‘‘which may include
a Federal Reserve Bank,’’ avoids
possible ambiguity as to whether the
DCO is required to deposit futures
customer funds with a Federal Reserve
Bank. By revising the description of the
DCO, the Commission has effectively
captured any DCO, such as one that is
also registered with the SEC as a
clearing agency and has been designated
to be systemically important in that
capacity, which could hold customer
funds at a Federal Reserve Bank.201
201 For example, The Options Clearing
Corporation is a registered DCO that has been
designated as ‘‘systemically important’’ but is not
a SIDCO as defined in § 39.2 of the Commission’s
regulations. A Federal Reserve Bank would be
required to segregate customer funds and provide
an acknowledgment letter under § 1.20 with respect

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d. Foreign Depositories
In its comment letter, Eurex
questioned whether foreign depositories
could fully comply with the proposed
regulations and execute the Template
Letters, noting the probability of ‘‘strong
resistance’’ by foreign depositories to
providing the Commission with readonly electronic access to account
information.202 Eurex pointed to the
‘‘detailed nature of the representations’’
in the Template Letters and further
expressed its belief that foreign
depositories would not be permitted to
legally execute the Template Letters.203
Eurex recommended that the
Commission consider alternative
methods for achieving the goal of the
Template Letters, such as authorizing
Commission staff to ‘‘accept alternate
language’’ from foreign depositories.204
FIA commented that it had not
discussed the Template Letters with
foreign depositories and thus did not
know whether the Template Letters
would ‘‘cause concern’’ under a foreign
jurisdiction’s laws.205
The Commission appreciates these
perspectives related to foreign
depositories, but notes that the
comments are of a general nature and do
not provide any specific examples to
support the commenters’ assertions. The
Commission did not receive a comment
letter from any foreign depository
holding customer funds.
As noted above, the FCA recently
proposed the use of template
acknowledgment letters for purposes of
satisfying FCA acknowledgment letter
requirements. The proposed letters are
similar in many respects to the
Template Letters the Commission is
adopting herein, and FCA regulations
would require both U.K. and non-U.K.
depositories to execute the template
acknowledgment letters.
The Commission recognizes that there
may be valid reasons why some foreign
depositories would require
modifications to the Template Letters.
In such circumstances, the Commission
would consider alternative approaches,
including no-action relief, on a case-bycase basis.
e. Release of Funds Upon Commission
Instruction
As proposed, the Template Letters
would require a depository to release
funds immediately upon instruction
to any customer account subject to section 4d of the
Act and opened by The Options Clearing
Corporation in its capacity as a DCO.
202 Eurex Comment Letter at 1 (Aug. 1, 2013).
203 Id. at 2.
204 Id.
205 FIA Comment Letter at 40 (Feb. 15, 2013).

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from the director of the Division of
Clearing and Risk, the director of the
Division of Swap Dealer and
Intermediary Oversight, or any
successor divisions, or such directors’
designees. The purpose of this provision
was to enable the Commission to
expeditiously carry out measures to
protect customer funds in exceptional
circumstances, such as the imminent
bankruptcy of an FCM. Commenters
expressed concerns about this
requirement, citing liability that might
arise from a depository acting or failing
to act ‘‘immediately,’’ 206 and the need
for the depository to implement proper
security and authorization procedures
in connection with acting upon
instructions from the Commission rather
than the account holder.207
With respect to DCOs in particular,
NYPC pointed out that a DCO normally
holds customer funds in a segregated
account without further subdivision by
customer or clearing member and, as a
result, a DCO would effectuate a transfer
of customer funds from a defaulting
clearing member to a non-defaulting
clearing member by book entry on the
DCO’s books and records.208 NYPC
noted that no transfer of funds may be
required if the DCO holds the funds at
the same depository.
The Depository Bank Group
commented that the term
‘‘immediately’’ may subject a depository
to potential claims by FCMs, DCOs or
the Commission in the event of a delay
in the transfer of customer funds, even
if such delay is the result of reasonable
actions or events beyond the control of
the depository.209 As previously noted,
the Federal Reserve Banks commented
that during such ‘‘exceptional
circumstances’’ in which instructions to
transfer funds from a SIDCO’s account
would likely be made, the FSOC would
be involved.210 The Depository Bank
Group, FIA, and Schwartz & Ballen all
commented that the proposal is
‘‘inconsistent’’ with a depository’s
security policies and procedures.211
CME requested that the Commission
clarify the exceptional circumstances
that would give rise to the
Commission’s request for an immediate
release of customer funds and the
Bank Group Comment Letter at 10.
at 11; Schwartz & Ballen Comment Letter
at 2 (Feb. 15, 2013); Katten-FIA Comment Letter at
2 (Aug. 2, 2013).
208 NYPC Comment Letter at 2 (Feb. 15, 2013).
209 Depository Bank Group Comment Letter at 10
(Feb. 15, 2013).
210 Federal Reserve Banks Comment Letter at 1
(Feb. 22, 2013).
211 Id. at 11; Katten-FIA Comment Letter at 2
(Aug. 2, 2013); and Schwartz & Ballen Comment
Letter at 5 (Feb. 15, 2013).

impact such an instruction could have
on the timely payment of obligations to
a DCO.212
After considering the concerns raised
by the commenters, the Commission has
determined not to require depositories
to agree to release or transfer customer
funds upon its instruction. The
Commission notes that in exceptional
circumstances such as the imminent
bankruptcy of an FCM, Commission
staff would be in regular
communication with the FCM, its
DSRO, DCOs, and depositories in an
effort to protect customer funds.
f. Read-Only Access and Information
Requests
Proposed paragraphs (d)(3) and
(g)(4)(iii) of § 1.20, proposed
§ 30.7(d)(3), and the proposed Template
Letters, including the Template Letters
for § 1.26 investments in money market
mutual funds, would require
depositories to provide the Commission
with 24-hour, read-only electronic
access to accounts holding customer
funds. The Commission received eight
comment letters on this requirement.
As a preliminary matter, FIA noted
that significant time for development
would be necessary to implement such
a requirement.213 Schwartz & Ballen
observed that the read-only access
approach conflicts with bank
procedures used to provide account
information to third parties, which
typically involve allowing the customer
to grant access to a third party, rather
than the bank doing so.214 The
Depository Bank Group and FIA also
pointed out that Commission staff
would be required to comply with the
depository’s security policies and
procedures.215 The Depository Bank
Group recommended that the Template
Letters expressly authorize the
depository to provide access to the
Commission and suggested language
that could be incorporated into the
Template Letters.216 RJ O’Brien agreed
with the Depository Bank Group’s
position on read-only access.217
FCStone noted that time differences
and geographic locations may make it
difficult for foreign commodity brokers
to satisfy the 24-hour-a-day requirement
and respond promptly to requests made

206 Depository
207 Id.

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212 CME

Comment Letter at 7 (Feb. 15, 2013).
Comment Letter at 40 (Feb. 15, 2013).
214 Schwartz & Ballen Comment Letter at 4 (Feb.
15, 2013).
215 Depository Bank Group Comment Letter at 13
(Feb. 15, 2013); Katten-FIA Comment Letter at 2
(Aug. 2, 2013).
216 Depository Bank Group Comment Letter at 13
(Feb. 15, 2013).
217 RJ O’Brien Comment Letter at 11 (Feb. 15,
2013).
213 FIA

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
by the Commission.218 The Depository
Bank Group commented that often a
bank denies access during routine
maintenance to technology systems, and
asked that the Commission remove the
‘‘24-hour’’ requirement.219
NYPC commented that, because DCOs
hold customer funds on behalf of all
their clearing members in omnibus
accounts that are not further subdivided
by each customer, the account
information to which the Commission
would have access at a DCO’s
depository ‘‘would not provide the level
of detail that would permit
reconciliation between either the DCO’s
FCM clearing members or those clearing
members’ underlying customers.’’ 220 In
addition, Schwartz & Ballen contended
that the requirement would not achieve
the Commission’s goal of quickly
identifying discrepancies between FCMreported balances and balances at a
depository because the depository
typically posts all credits and debits
after the close of business.221
LCH.Clearnet recommended that the
Commission consider ‘‘alternative
approaches’’ for routine access to
account balance information at
depositories holding customer funds.
For central banks, LCH.Clearnet
suggested that the Commission should
accept confirmation of balance
information directly from the central
bank in a form acceptable to the central
bank, but it did not explain why central
banks should be treated differently than
other depositories. For other
depositories, LCH.Clearnet believes the
Commission should consider ‘‘following
the lead of the [NFA].’’ 222
NFA pointed out that its board of
directors had adopted a financial
requirements rule in August 2012.223
NFA explained that instead of adopting
a read-only access provision of its own
in this rule, it instead chose to use, in
conjunction with CME, an automated
daily segregation confirmation system to
monitor customer segregated and
secured amount accounts and their
balances.224 NFA requested that the
Commission rescind its proposed readonly access requirement.225
With the goal of achieving the highest
degree of customer protection, the
Commission has determined to adopt,
218 FCStone

Comment Letter at 5 (Feb. 15, 2013).
Bank Group Comment Letter at 13
(Feb. 15, 2013).
220 NYPC Comment Letter at 2 (Feb. 15, 2013).
221 Schwartz & Ballen Comment Letter at 4 (Feb.
15, 2013).
222 LCH.Clearnet Comment Letter at 3 (Jan. 25,
2013).
223 NFA Comment Letter at 6 (Feb. 15, 2013).
224 Id.
225 Id. at 7.

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with certain modifications, the
requirement that a depository agree to
provide the Commission with read-only
access to accounts maintained by an
FCM. Regulations 1.20(d)(3) and
30.7(d)(3) require the depository to
agree to provide the Commission with
‘‘the technological connectivity, which
may include provision of hardware,
software, and related technology and
protocol support, to facilitate direct,
read-only electronic access to
transaction and account balance
information.’’ In the Template Letters,
the parties further acknowledge and
agree that the connectivity has either
been provided (in the case of a new
letter that covers existing accounts) or
will be provided promptly following the
opening of the account(s) (with respect
to new accounts). However, the
Commission is not requiring read-only
electronic access for an FCM’s DSRO, as
proposed. The Commission was advised
by the DSROs that they intend to rely
on the NFA and CME automated daily
segregation confirmation system.
The Commission does not anticipate
that its staff would access FCM accounts
on a regular basis to monitor account
activity; rather, staff would make use of
the read-only access only when
necessary to obtain account balances
and other information that staff could
not obtain via the NFA and CME
automated daily segregation
confirmation system, or otherwise
directly from the depositories, as
discussed below. In this regard, the
CME and NFA will provide the
Commission on a daily basis with the
account balances reported to them by
each depository holding customer
funds, under the CME and NFA’s daily
confirmation process. In addition, as
discussed in section N below, each FCM
that completes a daily Segregation
Schedule, Secured Amount Schedule,
and/or Cleared Swaps Segregation
Schedule will be required to file such
schedules with the Commission on a
daily basis. The Commission anticipates
that the combination of receipt of daily
account balances reported by
depositories and the Commission’s
ability to confirm account balances and
transactions directly with depositories
will diminish the need to rely upon
direct electronic access to account
information at depositories.
With respect to depositories holding
customer funds in accounts maintained
by a DCO, the Commission has decided
not to adopt the electronic access
requirement. Given that DCOs hold
omnibus customer accounts that are not
subdivided by clearing member or
individual customer, read-only access to
a DCO’s customer account would not

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68537

provide the kind of information that
would identify inaccuracies in FCM
reporting. Accordingly, proposed
§ 1.20(g)(4)(iii), which would require a
DCO to deposit futures customer funds
only with a depository that provides
read-only access to the Commission, is
not being adopted, and the remaining
subparagraphs of § 1.20(g)(4) are
renumbered accordingly.
The Commission also is adopting
§§ 1.20(d)(6), 1.20(g)(4)(iv), and
30.7(d)(6), which require an FCM or
DCO to deposit customer funds only
with a depository that agrees to reply
promptly and directly to any request
from the director of the Division of
Swap Dealer and Intermediary
Oversight, the director of the Division of
Clearing and Risk, or any successor
divisions, or such directors’
designees,226 (or, in the case of an FCM,
an appropriate officer, agent or
employee of the FCM’s DSRO), for
confirmation of account balances or
provision of any other information
regarding or related to an account,
without further notice to or consent
from the FCM or DCO.227 For DCOs, the
Commission believes that this ability, in
addition to the daily reporting of
various accounts by customer origin
pursuant to § 39.19(c)(1), will enable it
to verify DCO account balances with a
depository as necessary.
226 Proposed §§ 1.20(d)(5) and (g)(4)(v) and
30.7(d)(5) would require the depository to reply
promptly and directly to ‘‘the Commission’s’’
requests, and the authority to make such requests
was delegated to the director of the Division of
Swap Dealer and Intermediary Oversight and the
director of the Division of Clearing and Risk under
proposed § 140.91(a)(7) and (11). The proposed
Template Letters would require the depository to
agree ‘‘to respond promptly and directly to requests
for confirmation of account balances and other
account information from an appropriate officer,
agent, or employee of the CFTC’’ and ‘‘immediately
upon instruction by the director of the Division of
Swap Dealer and Intermediary Oversight of the
CFTC or the director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or
such directors’ designees . . . provide any and all
information regarding or related to the Funds or the
Accounts as shall be specified in such instruction
and as directed in such instruction.’’ The
Commission is revising the rule text and the
Template Letters so that all such requests will come
from the director of the Division of Swap Dealer
and Intermediary Oversight or the director of the
Division of Clearing and Risk, or any successor
divisions, or such directors’ designees.
227 To assist a depository in verifying authority
and authenticating identity in connection with a
request for information or electronic access, the
Commission intends to post on its Web site an upto-date list of names (including title and contact
information) of the directors of the Division of
Swap Dealer and Intermediary Oversight and the
Division of Clearing and Risk, or any successor
divisions, and the directors’ designees, if any, for
the relevant purpose.

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g. Requirement To File New
Acknowledgment Letters
Proposed paragraphs (d)(7) and
(g)(4)(vii) of § 1.20 and proposed
§ 30.7(d)(7) would require FCMs and
DCOs to file amended acknowledgment
letters with the Commission upon a
change to a depository’s name or other
information specified in the regulation.
The Commission received three
comments on this requirement.
Schwartz & Ballen recommended that
the Commission remove this
requirement from the Template Letters
and instead include ‘‘binding effect’’
language to ensure that the
counterparties remain subject to the
terms of the acknowledgment letter even
if a party’s name has changed.228
LCH.Clearnet recommended a sixmonth timeframe after the publication
of these rules by which DCOs and FCMs
must obtain acknowledgment letters.229
NYPC commented that the proposed
requirements impose ‘‘an onerous
periodic validation process with
depositories’’ and, given this, it
suggested that depositories provide
written notice to a DCO of a name or
address change no later than 30 days
after any such change in order to permit
a DCO to execute a new Template
Letter.230
The Commission believes that
acknowledgment letters should be as
current and up-to-date as possible in
order to maintain the clear legal status
of the customer account, which will
better protect customers in the event of
an FCM failure. Accordingly, the
Commission is adopting (renumbered)
§§ 1.20(d)(8) and (g)(4)(vi) and 30.7(d)(8)
as proposed, except that instead of
providing for an ‘‘amended’’ letter, the
regulation requires that a ‘‘new’’ letter
be executed. The purpose of this
technical change is to avoid problems in
locating the accounts covered by a
single letter that has been amended
multiple times to reflect various
changes. The Commission expects that a
depository would notify account
holders of a name change as a matter of
practice and does not believe that it is
too burdensome to expect a DCO or
FCM to be aware of such changes. Any
new acknowledgment letter reflecting a
change enumerated in the regulation
must be executed within 120 days of
such changes, and then filed with the
Commission within three business days
of executing the new letter.
228 Schwartz

& Ballen Comment Letter at 7 (Feb.

15, 2013).
229 LCH.Clearnet Comment Letter at 4 (Jan. 25,
2013).
230 NYPC Comment Letter at 4 (Feb. 15, 2013).

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The Commission also is adopting
(renumbered) §§ 1.20(d)(7) and (g)(4)(v)
and 30.7(d)(7), which require an FCM or
DCO to submit a copy of the
acknowledgment letter to the
Commission within three business days
of the opening of an account or
obtaining a new acknowledgment letter
for an existing account; and
§§ 1.20(d)(4) and (g)(4)(iii) and
30.7(d)(4), which require an FCM or
DCO to deposit customer funds only
with a depository that agrees to provide
a copy of the acknowledgment letter to
the Commission (and, in the case of an
FCM, the FCM’s DSRO) within the same
time frame.231 The Commission is,
however, giving FCMs, DCOs, and
depositories 180 days from the effective
date of the final rules to replace existing
acknowledgment letters with new ones
that conform to the Template Letters.
As an additional matter, the
Commission advises that it expects an
FCM or DCO to follow customary
authorization verification and signature
authentication policies and procedures
to ensure that an acknowledgment letter
is executed by an individual authorized
to bind the depository to the terms of
the letter, and that the signature that
appears on the letter is authentic. For
example, an FCM or DCO may request
from the depository a list of authorized
signatories, a duly executed power of
attorney, or other such documentation.
h. Standard of Liability
The proposed Template Letters would
provide that a depository ‘‘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 [the depository has] no
notice of or actual knowledge of, or
could not reasonably know of, a
violation of the Act or other provision
of law by [the FCM or DCO]; and [the
depository] shall not in any manner not
expressly agreed to [in the letter] be
responsible for ensuring compliance by
[the FCM or DCO] with the provisions
of the Act and CFTC regulations.’’
The Depository Bank Group
commented that this ‘‘standard of
liability’’ provision would impose a
burden beyond that currently expected
of depository institutions.232 In this
regard, the Depository Bank Group
asserted that the phrase ‘‘violation of the
Act or other provision of law’’
231 The acknowledgment letter must be executed
upon the opening of the account, regardless of
when customer funds are deposited in the account.
232 Depository Bank Group Comment Letter at 3
(Feb. 15, 2013). See also RJ O’Brien Comment Letter
at 11 (Feb. 15, 2013).

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encompasses much more than section
4d of the Act and would effectively
require that the depository monitor and
ensure the FCM’s or DCO’s compliance
with all other laws, even those
unrelated to the deposit of customer
funds.233 The Depository Bank Group
further contended that the proposed
standard, ‘‘could not reasonably know
of a violation’’ would likely be read to
require depositories to ‘‘perform some
undefined level of diligence’’ which
would be highly problematic.234 The
Depository Bank Group also stated that
this requirement would likely delay
transfers or withdrawals, and result in
depositories passing on related costs to
FCMs and DCOs and, in turn, to their
clients, although the Depository Bank
Group did not quantify the costs.235 FIA
similarly expressed concern that the
requirement could cause delays and
increased costs, again, without
providing specific details and
quantifying costs.236
Schwartz & Ballen asserted that banks
have no ability to determine what uses
an FCM is making of funds it withdraws
from the account.237 As noted above, the
Federal Reserve Banks, which may act
as depositories for Designated FMUs,
commented that the ‘‘actual knowledge’’
standard, which typically imputes
knowledge to a legal person as a whole,
is not feasible for them because of the
Board policy to not share supervisory
information with Federal Reserve Bank
personnel performing financial services.
In response to concerns expressed by
commenters, the Commission clarifies
that it does not intend to use the
Template Letters as means to expand
the scope of a depository’s liability to
FCM or DCO account holders, or to alter
the responsibility that an FCM or DCO
bears for its own compliance with the
customer funds segregation
requirements under the Act and
Commission regulations. The use of
standardized acknowledgment letters is
intended to promote a uniform
understanding among FCMs, DCOs, and
depositories as to their obligations
under the Act and Commission
regulations with respect to the proper
treatment of customer funds. In light of
the public comments, the Commission
is revising the language in the Template
233 Depository Bank Group Comment Letter at 5
(Feb. 15, 2013). See also Katten-FIA Comment
Letter at 2 (Aug. 2, 2013); Schwartz & Ballen
Comment Letter at 6 (Feb. 15, 2013); and CME
Comment Letter at 7 (Feb. 15, 2013).
234 Depository Bank Group Comment Letter at 3
(Feb. 15, 2013).
235 Id. at 5.
236 FIA Comment Letter at 40 (Feb. 15, 2013).
237 Schwartz & Ballen Comment Letter at 6 (Feb.
15, 2013).

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
Letters to more precisely articulate the
intended scope of the depository’s
responsibility.
The provision, as adopted, reads as
follows: ‘‘You [the depository] 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 CFTC regulations
that relates to the segregation of
customer funds; and you shall not in
any manner not expressly agreed to [in
the letter] be responsible to us [the FCM
or DCO] for ensuring compliance by us
with the 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.’’ Changes from the
proposed language are discussed below.
The Depository Bank Group
recommended inserting the phrase ‘‘in
the ordinary course of your business as
a depository,’’ and the Commission has
accepted this recommendation to clarify
the context in which the presumption of
the FCM’s or DCO’s compliance is
effective. As proposed, the presumption
would be effective so long as the
depository has ‘‘no notice of or actual
knowledge of, or could not reasonably
know of, a violation.’’ Given the
concerns expressed by commenters as to
the implications of the ‘‘reasonably
know’’ standard, the Commission has
determined to eliminate that clause in
the final Template Letters.
In considering the various
circumstances in which the conclusive
presumptions would no longer be
effective, the Commission has
determined that the proposed reference
to notice or actual knowledge of a
‘‘violation,’’ does not adequately capture
all of the relevant circumstances. This is
because the depository might receive
information that calls into question the
conduct of the FCM or DCO account
holder, but it might not be apparent
whether or not the activity rises to the
level of being an actual violation of the
law. Indeed, some actions will not be
deemed to be ‘‘violations’’ until a
judicial decision is rendered. As a
result, the Commission has revised the
language to refer to a ‘‘potential
violation’’ so as not to inadvertently
exclude circumstances which would
warrant further inquiry by a depository.
The Commission agrees that the broad
reference to ‘‘the Act and CFTC
regulations’’ should be narrowed with

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respect to the description of the
potential violation. Therefore, the
Commission is adopting the Depository
Bank Group’s suggestions that the
reference to the violation specify that it
is limited to ‘‘any provision of the Act
or the CFTC regulations that relates to
the segregation of customer funds.’’ The
Commission has made a similar change
in the 30.7 Template Letters, referring to
‘‘any provision of the Act or Part 30 of
the CFTC regulations that relates to the
holding of customer funds.’’ This more
precisely identifies the legal
requirements that are the subject of the
parties’ obligations and the
acknowledgment letter as a whole.
As an additional matter, the
Commission has added to the standard
of liability provision the following
proviso: ‘‘however, the aforementioned
presumption does not affect any
obligation you may otherwise have
under the Act or CFTC regulations.’’
This statement affirms the depository’s
understanding that its statutory and
regulatory obligations with respect to
the customer funds on deposit are not
limited by the presumption upon which
it relies in its dealings with FCM or
DCO account holders.
The Commission notes that a
depository’s obligation to comply with
the segregation requirements under
section 4d of the Act is explicitly
imposed upon depositories by section
4d(b) of the Act,238 and legal precedent
has established a standard of liability to
which the Commission holds
depositories and which is not
dependent upon affirmation in the
Template Letters. The Commission
reaffirms its long-held position that the
depository will be held liable for the
improper transfers of customer funds by
an FCM or DCO if it knew or should
have known that the transfer was
improper.239
The Commission recognizes that a
depository’s treatment of customer
funds may be limited in particular
circumstances on the basis of what it
knows or reasonably should know of a
238 Section 4d(b) of the Act explicitly provides
that it is unlawful for any clearing agency of a
contract market and any depository that has
received customer funds to hold, dispose of, or use
any such funds as belonging to the depositing FCM
or any person other than the customers of such
FCM. See also section 4d(f)(6) of the Act (applying
the same requirement to Cleared Swaps Customer
Collateral).
239 See, e.g., CFTC Interpretative Ltr. No. 79–1,
[1977–1980 Transfer Binder] Comm. Fut. L. Rep.
(CCH) ¶20,835 (May 29, 1979) at page 2. As long
ago as 1979, the Commission found that ‘‘if a bank,
with prior notice, permits or acquiesces in the
withdraw [sic] or use of customers’ funds by a
futures commission merchant for an unlawful
purpose, the bank would violate or be aiding and
abetting a violation of the Act.’’

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violation of the Act that would preclude
it from obtaining rights to such funds
superior to those of one or more
customers of the defaulting FCM.240
Such a violation could occur, for
example, in circumstances in which the
depository received particular margin
funds with actual knowledge, or in
circumstances in which it is reasonable
to conclude that the depository should
have known, that the depositing FCM or
DCO has breached its duty under
section 4d. The depository’s
participation in such use of customer
funds could subject it to liability for
violating section 4d or aiding and
abetting a violation of the Act under
section 13(a) of the Act (7 U.S.C.
13c).241
The Commission emphasizes that
while the depository has no affirmative
obligation to police or monitor an FCM
or DCO account holder’s compliance
with the Act or Commission regulations,
the depository cannot ignore signs of
wrongdoing. Should a depository know
or suspect that funds held in a customer
account have been improperly
withdrawn or otherwise improperly
used in violation of section 4d of the
Act or the Commission’s regulations
related to segregation of customer funds,
the Commission expects the depository
to immediately report its concern to the
Division of Swap Dealer and
Intermediary Oversight, the Division of
Clearing and Risk, the Division of
Enforcement, or the Commission’s
Whistleblower Office.242
i. Liens
The proposed Template Letters would
include the following language:
‘‘Furthermore, [the depository]
240 See CFTC Interpretative Ltr. No. 86–9, [1986–
1987 Transfer Binder] Comm. Fut. L. Rep. (CCH)
¶23,015 (April 21, 1986) (limiting a bank’s
treatment of customer margin funds ‘‘in particular
circumstances by reason of what it knows or
reasonably should know of a violation of the Act
or other provision of law that would preclude it
from obtaining rights to such funds superior to
those of one or more customers of the defaulting
FCM.’’).
241 Id. See also CFTC Interpretative Statement.
No. 85–3 [1984–1986 Transfer Binder] Comm. Fut.
L. Rep. (CCH) ¶22,703 (Aug. 12, 1985). A DCO’s
rights with respect to the use of customer margin
funds may be limited in particular circumstances by
reason of the clearing organization’s knowledge of
or participation in a violation of the Act or other
provision of law that precludes it from obtaining
rights to such funds superior to those of one or
more customers of the defaulting clearing member.
The letter provides that a DCO could be subject to
aiding and abetting liability under section 13(a) of
the Act if the DCO knowingly participates in a
violation of the Act.
242 See CFTC Interpretative Ltr. No. 79–1 (stating
‘‘if a bank subsequently becomes aware of an
unauthorized withdrawal or use of customers’
funds by an FCM, we would expect the bank to
notify the Commission immediately’’).

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acknowledge[s] and agree[s] that such
Funds may not be used by [the
depository] or by [the FCM or DCO] to
secure or guarantee any obligations that
[the FCM or DCO] might owe to [the
depository], nor may they be used by
[the FCM or DCO] to secure credit from
[the depository]. [The depository]
further acknowledge[s] and agree[s] 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 [the FCM or
DCO] may now or in the future have
owing to [the depository]. This
prohibition does not affect [the
depository’s] right to recover funds
advanced in the form of cash transfers
[the depository] make[s] in lieu of
liquidating non-cash assets held in the
Account(s) for purposes of variation
settlement or posting initial (original)
margin.’’ This language is consistent
with section 4d(b) of the Act, which
states: ‘‘It shall be unlawful for any
person, including but not limited to . . .
any depository, that has received any
money, securities, or property for
deposit in a separate account as
provided in [section 4d(a)(2) of the Act],
to hold, dispose of, or use any such
money, securities, or property as
belonging to the depositing [FCM] or
any person other than the customers of
such [FCM].’’
Schwartz & Ballen asserted that
because many FCMs hold only cash
assets in the accounts, the language in
the letter should be expanded to permit
banks to recover funds they advance
that result in overdrafts in the
accounts.243 Schwartz & Ballen further
stated that the failure to permit banks to
recover such advances whether or not
there are non-cash assets in the account
will likely lead to banks incurring
losses.244 FCStone elaborated on this
issue, explaining that a customer
receives a margin call through an
account statement, which is transmitted
overnight, and the customer wires funds
the following day.245 The DCO,
however, automatically drafts the funds
from the FCM’s account at 9:00 a.m. on
the basis of a depository’s intraday
daylight overdraft.246 Without granting a
depository a lien on customer funds,
FCStone stated that an FCM would be
required to ‘‘front’’ all funds for
customers until the customer has wired
funds to the FCM.247 FCStone
contended that a change of this sort
243 Schwartz

& Ballen Comment Letter at 6–7
(Feb. 15, 2013).
244 Id.
245 FCStone Comment Letter at 4.
246 Id.
247 Id. at 5.

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could ‘‘threaten the continued
operations of small to mid-sized FCMs
not affiliated with banks’’ and cause a
substantial liquidity strain.248 The
Depository Bank Group additionally
warned that a depository may not be
willing to provide intraday advances to
the customer segregated account
without the right to take a lien on the
account or the right to set off between
multiple customer segregated accounts
and would, therefore, not be in a
position to provide liquidity.249 As a
result, an FCM or DCO would likely
need to maintain a buffer of its own
funds in the segregated customer
accounts to fully pre-fund transactions
related to such accounts.250 The
Depository Bank Group contended that
the impact on small- to mid-sized FCMs
would be that of a lesser ability to enter
into ‘‘everyday transactions’’ for the
customer segregated account, which
could result in exclusion from the
industry.251 The Depository Bank Group
cited as support a comment letter that
staff of the Federal Reserve Bank of
Chicago submitted in 2010.252
The Commission recognizes that a
depository may not want to provide
unsecured overdraft coverage. However,
a depository taking a lien on a customer
account to facilitate intraday payments
presents a serious problem if an FCM’s
customer does not satisfy a margin call
and the FCM, in turn, cannot cover the
call and becomes insolvent before the
depository can be repaid.
The Commission interprets the
requirements of section 4d of the Act to
prohibit a lien on customer funds to
satisfy an intraday extension of credit to
an FCM to meet margin requirements at
a DCO. As an alternative to taking a lien
on the customer account, the depository
could take a lien on a proprietary
account held by the FCM at the
depository, or the FCM could add its
own funds to the segregated account or
collect more margin from its customers
in order to provide a more substantial
financial cushion. It is not the
Commission’s intention to disadvantage
mid-size and smaller FCMs in applying
this standard across all FCMs, regardless
of size.
The Commission notes that no
commenter has proffered information or
data that would indicate intraday
advances are a commonplace, routine
occurrence. Indeed, it may be cause for
248 Id.
249 Depository Bank Group Comment Letter at 7
(Feb. 15, 2013).
250 Id.
251 Id.
252 Comment letter from David A. Marshall,
Federal Reserve Bank of Chicago, dated September
8, 2010.

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concern if a large number of FCMs
cannot meet intraday margin calls for
customer accounts on a regular basis.
Without expressing a view of the
Commission’s position concerning
section 4d of the Act, FIA recommended
expanding the circumstances in which a
depository could impose a lien with
respect to customer funds.253 FIA
recommended revising the language to
read: ‘‘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 except to recover from the
Account(s) (or from any other CFTC
Regulation 1.20 Customer Segregated
Account(s) we have with you), Funds
you may advance from time to time to
facilitate transactions by or on behalf of,
or on account of, or otherwise for the
benefit of, the Account(s) or our
customers whose Funds are held in the
Account(s).’’ 254 The Commission
confirms that a depository can possess
a lien across multiple accounts of the
same FCM as long as the accounts are
of the same account class (i.e., 4d(a)
cash and custodial accounts). However,
the Commission believes FIA’s
suggested modification is overbroad and
has the potential to be interpreted to
permit a depository’s imposition of a
lien in a greater number of
circumstances than section 4d of the Act
allows.
NYPC urged the Commission to
clarify that DCOs have the right to
transform non-cash customer funds into
cash to satisfy liquidity needs related to
the customer account of a defaulting
FCM clearing member not only through
the sale of such assets, but also through
the use of liquidity arrangements, such
as lines of credit and repurchase
agreements.255 NYPC recommended
that the Commission modify the last
sentence in the ‘‘lien’’ paragraph as
follows: ‘‘The prohibitions contained in
this paragraph do not affect your right
to recover funds advanced by you in the
form of cash transfers, lines of credit,
repurchase agreements or other similar
liquidity arrangements in lieu of the
liquidation of non-cash assets held in
the Account(s) for purposes of variation
settlement or posting initial (original)
margin with respect to the Account(s).’’
The Commission recognizes that
liquidity arrangements are an important
aspect of a DCO’s default management
plan and agrees that the use of lines of
253 Katten-FIA Comment Letter at 2 (Aug. 2,
2013).
254 Id.
255 NYPC Comment Letter at 3 (Feb. 15, 2013).

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credit or repurchase agreements are
acceptable alternatives to the
liquidation of non-cash assets held in a
customer account. As a result, the
Commission has determined to modify
the sentence in a manner similar to that
recommended by NYPC.
In response to the other comments,
the Commission notes that it has always
interpreted and applied section 4d of
the Act in a manner consistent with the
language in the proposed Template
Letters. With respect to a depository’s
right of setoff against a customer
account, the Commission has long
recognized only one very limited
circumstance. CFTC Interpretative
Letter No. 86–9 allows, with certain
limitations,256 a bank’s right of setoff
against a customer cash account that
does not have sufficient available
balances to meet a margin call, where
there exists an affiliated custodial
account that contains securities
purchased with funds from the
customer cash account.257 In this case,
there is no extension of credit because
the accounts, when aggregated, have
enough assets to support the cash
advance.
The Depository Bank Group raised a
question about similar circumstances in
which a depository might set off
amounts owed to a customer segregated
account holding U.S. dollars, with
amounts held in foreign currency in
another customer segregated account.258
To the extent that a depository advances
cash in lieu of exchanging foreign
currency held in a related 4d account,
the same rationale that serves as the
basis for CFTC Interpretative Letter No.
86–9 would apply, i.e., the advancement
of funds does not represent an extension
of credit secured by customer funds.
The Commission confirms that a
depository holding customer funds in
one segregated account may set off
amounts withdrawn from another
account in cases where the depository
advances funds in lieu of converting
cash in one currency to cash in a
different currency.
The Template Letters provide for a
depository’s right of setoff against the
customer account consistent with
Interpretative Letter No. 86–9. The
Commission believes that expanding the
256 See CFTC Interpretative Ltr. No. 86–9, [1986–
1987 Transfer Binder] Comm. Fut. L. Rep. (CCH)
¶23,015 (April 21, 1986) (limiting a bank’s
treatment of customer margin funds ‘‘in particular
circumstances by reason of what it knows or
reasonably should know of a violation of the Act
or other provision of law that would preclude it
from obtaining rights to such funds superior to
those of one or more customers of the defaulting
FCM.’’).
257 Id.
258 Id. at 8.

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scope of a depository’s right of setoff to
support extensions of credit to an FCM
would violate the requirements of
section 4d of the Act and notes that
none of the commenters provided a
legal analysis that would refute this
position.
The Commission recognizes, however,
that there may be situations similar to
those specifically enumerated in the
proposed Template Letters for which an
advancement of cash and the related
imposition of a lien in lieu of
liquidating non-cash assets or
converting cash in one currency to cash
in a different currency may be
permissible. To accommodate this, the
Commission is revising the language to
remove the concluding clause, ‘‘for the
purposes of variation settlement or
posting initial (original) margin.’’ This
change preserves the intended meaning
and purpose of the provision without
unintentionally limiting its application
in other similar circumstances.
Accordingly, the Commission is
adopting the proposed ‘‘lien’’ language
of the Template Letters, modified to
include a reference to the depository’s
right to recover funds related to certain
liquidity arrangements and to eliminate
specific examples of circumstances in
which imposition of a lien would be
permissible. FCMs, DCOs, and
depositories are reminded that any
permissible advancement of cash and
related imposition of a lien on a
customer account must be properly
documented and recorded in
compliance with all applicable
recordkeeping requirements.
j. Examination of Accounts
As proposed, the Template Letters for
both FCMs and DCOs would require a
depository to agree that accounts
holding customer segregated funds
could be ‘‘examined at any reasonable
time’’ by the Commission or, as
applicable, an FCM’s DSRO, and they
further provide that the
acknowledgment letter ‘‘constitutes the
authorization and direction of the
undersigned to permit any such
examination or audit to take place.’’
Schwartz & Ballen commented that the
provision should also provide for the
Commission or DSRO to give the
depository advance notice before being
permitted to examine FCM accounts.259
The Commission is not including this
recommended precondition because an
examination of this type is likely to be
conducted only in response to exigent
circumstances and the ‘‘reasonable
time’’ provision is sufficient evidence of
259 Schwartz & Ballen Comment Letter at 7 (Feb.
15, 2013).

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68541

the Commission’s intent to proceed in a
commercially reasonable manner under
the particular circumstances.
The Commission is retaining the
examination provision in the FCM
Template Letters but is not including it
in the DCO Template Letters. Consistent
with the Commission’s determination
regarding electronic access to DCO
account information, the Commission
believes that authorization to examine a
DCO’s customer segregated account at a
depository is not necessary because of
the Commission’s ability to obtain
account information directly from the
depository upon request, and directly
from the DCO through daily reporting
under § 39.19(c)(1).
As a technical matter, the
Commission is eliminating use of the
term ‘‘audit’’ to clarify that the
examination will be targeted and is not
intended to be an audit, as that term is
used in the field of accounting.
5. Prohibition against Commingling
Customer Funds
The Commission proposed to amend
§ 1.20(e) to explicitly address the
commingling of customer funds.
Proposed § 1.20(e)(1) provides that an
FCM may, for convenience, commingle
the funds that it receives from, or on
behalf of, multiple futures customers in
a single account or multiple accounts
with one or more of the permitted
depositories set forth in § 1.20(b).
Proposed § 1.20(e)(2) prohibits an
FCM from commingling futures
customers funds with any proprietary
funds of the FCM, or with any
proprietary account of the FCM.
Proposed § 1.20(e)(2), however, provides
that the prohibition on the commingling
of futures customer funds and the
FCM’s proprietary funds does not
prohibit an FCM from depositing
proprietary funds into segregated
accounts in accordance with proposed
§ 1.23 as a buffer to prevent the firm
from becoming undersegregated due to
normal business activities, such as daily
margin payments by the FCM to a DCO.
Proposed § 1.20(e)(3) further prohibits
an FCM from commingling futures
customer funds with funds deposited by
30.7 customers for trading foreign
futures or foreign option positions in
accordance with part 30 of the
Commission’s regulations, or with
Cleared Swaps Customer Collateral
deposited by Cleared Swaps Customers
for Cleared Swaps under part 22 of the
Commission’s regulations. Proposed
§ 1.20(e)(3) permits, however, the
commingling of futures customer funds
with 30.7 customer funds and/or
Cleared Swaps Customer funds if
expressly permitted by a Commission

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regulation or order, or by a DCO rule
approved in accordance with
§ 39.15(b)(2) of the regulations.260
Similarly, a proposed amendment to
§ 30.7 would prohibit an FCM from
commingling funds required to be
deposited in a foreign futures and
foreign options secured amount account
with funds required to be deposited in
a customer segregated account or
cleared swaps customer account.261
The Commission received one
comment on the proposed amendments
to § 1.20(e). FIA stated that it fully
supported the proposed amendments,
which implement the segregation
provisions of section 4d(a) and 4d(f) of
the Act.262
FIA further requested that the
Commission confirm that the proposed
amendments would not prohibit a
customer that engages in futures
transactions on a designated contract
market, foreign futures or options
transactions on foreign boards of trade,
and Cleared Swaps through a single
FCM, from meeting its margin
obligations for the three different
segregation accounts by making a single
payment to the FCM.263 FIA states that
such practice is common in the industry
today, reduces the FCM’s credit risk, is
operationally more efficient for both the
FCM and its customers, and indirectly
reduces customer settlement risk.264
The Commission confirms, subject to
the following conditions, that a receipt
of funds from a customer that wishes to
meet its multiple margin obligations by
making a single deposit payment to the
FCM is not prohibited by § 1.20. The
FCM, however, must initially receive
the customer’s funds into the customer’s
section 4d(a)(2) segregation account.
The funds may not be directly deposited
into the customer’s § 30.7 secured
account or Cleared Swaps Segregation
Account, as such accounts may present
different risks than the section 4d(a)(2)
account, and the Commission would
like to standardize operationally the
practice of how customer funds are
received by FCMs by authorizing one
approach that would be applicable to all
customers to minimize the possibility of
transactional errors.
In addition, the FCM must
simultaneously record the book entry
credit to the customer’s § 30.7 secured
account and the customer’s Cleared
Swaps Account (as applicable) as
directed by the customer upon the
260 Regulation 22.2(c)(2) regarding cleared swaps
customer accounts already prohibits commingling.
261 Proposed § 30.7(e)(3).
262 FIA Comment Letter at 36 (Feb. 15, 2013).
263 Id.
264 Id.

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receipt and recording of the cash into
the customer’s 4d(a)(2) segregation
account. Also, the FCM must ensure at
the time the book entry credit is made
to the customer’s account, that the
credit does not result in the FCM having
obligations to 30.7 customers or Cleared
Swaps Customers that are in excess of
the total assets held in such accounts for
such customers. Failure of the FCM to
hold a sufficient amount of excess funds
in the 30.7 customer accounts and
Cleared Swaps Customer Accounts at
any time to meet its obligations to such
customers would be a violation of the
Act and the Commission’s regulations.
Furthermore, if the FCM permits
customers to use one wire transfer to
fund more than one account class, the
FCM’s policy and procedures for
assessing the appropriate amount of
targeted residual interest required under
§ 1.11 must take this practice into
consideration and should include
appropriate adjustments and estimates
to reflect this practice. Finally, the
Commission hereby clarifies that all
prior guidance concerning the receipt of
customer deposits at branch locations or
otherwise deposited into the FCM’s
proprietary accounts, regardless of
excess funds held in segregation, is
repealed and withdrawn and such
practice is not permitted under § 1.20 as
adopted.265
The Commission adopts the
amendment as proposed.
6. Limitations on the Use of Customer
Funds
Proposed § 1.20(f) requires FCMs to
treat and deal with the funds of a
futures customer as belonging to such
futures customer. In addition, the
Commission proposed to prohibit an
FCM from using, or permitting the use
of, the funds of futures customer for any
person other than for futures customers,
subject to certain limited exceptions.
Proposed § 1.20(f) also states that an
FCM may obligate futures customers’
funds to a DCO or another FCM solely
to purchase, margin, or guarantee
futures and options positions of futures
customers, and that no person,
including any DCO or any depository,
that has received futures customer funds
for deposit in a segregated account, may
hold, dispose of, or use any such funds
265 Previous guidance permitted a branch office of
an FCM to deposit customer funds into an
unsegregated bank account if the main office of the
FCM on the same day deposited the same amount
of its funds into a segregated bank account, and
kept records fully explaining the transactions. See
Commodity Exchange Authority Administrative
Determination No. 203 (December 1, 1966). See also
CFTC Interpretative Letter No. 90–7 (Secured
Amount Account for Foreign Futures and Options,
May 1, 1990). This practice is now prohibited.

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as belonging to any person other than
the futures customers of the FCM that
deposited such funds.
The Commission did not receive any
comments regarding proposed § 1.20(f).
However, as discussed above, the FIA
stated that it agrees that FCMs are
required to comply with the segregation
provisions of the Act at all times, and
expressed general support for the
Commissions efforts to implement the
Act’s segregation provision.266 The
Commission notes that the language in
proposed § 1.20(f) largely mirrors the
language set forth in current § 1.20,
which language was, and continues to
be, intended to further implement the
segregation provisions of the Act.267
Thus, the Commission is adopting the
provision as proposed.
7. Segregation Requirements for DCOs
Proposed § 1.20(g) provides
segregation requirements applicable to
DCOs, as opposed to FCMs. Proposed
paragraph (g)(2) lists the permitted
depositories for futures funds received
by a DCO as any bank or trust company,
and clarifies that the term ‘‘bank’’
includes a Federal Reserve Bank. The
necessity for this proposed amendment
is highlighted by section 806(a) of the
Dodd-Frank Act, which provides that a
Federal Reserve Bank may establish and
maintain a deposit account for a
‘‘financial market utility’’ (in the present
case, a DCO) that has been designated as
systemically important by the Financial
Stability Oversight Council. Proposed
paragraph (g)(3) requires DCOs to
comply with the provisions of § 1.49
with respect to holding segregated funds
outside the U.S. Regulation 1.20(g)(5)
prohibits a DCO from commingling
futures customer funds with the DCO’s
proprietary funds or with any
proprietary account of any of its clearing
members, and prohibits the DCO from
commingling funds held for futures
customers with funds deposited by
clearing members on behalf of their
266 FIA Comment Letter at 2 (June 20, 2013). See
also section II.G.1. above for a further discussion of
an FCM’s obligation to be in compliance with its
segregation obligation at all times.
267 Accordingly, relevant prior Commission
orders and guidance will continue to apply to
§ 1.20(f). For example, in In re JPMorgan Chase
Bank CFTC 12–17 (April 4, 2012), the Commission
simultaneously initiated and settled an action
against a depository for violating § 1.20(a) and (c)
because it unlawfully used customer funds as
belonging to someone other than the customers of
an FCM. Specifically, the Commission found that a
depository’s intra-day extension of credit to an FCM
(Lehman Brothers) based upon customer funds the
FCM had deposited with a bank (JPMorgan Chase)
violated § 1.20(a) and (c). Regulation 1.20(f) would
continue to prohibit such use of customer funds, as
well as any other type of disposal, holding or use
the Commission has previously identified as
unlawful.

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Cleared Swaps Customers. DCOs would
be permitted to commingle the funds of
multiple futures customers in a single
account or accounts for operational
convenience. The Commission adopts
the amendment as proposed.

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8. Immediate Availability of Bank and
Trust Company Deposits
The Commission proposed a
paragraph (h) to § 1.20 to require that all
futures customer funds deposited with a
bank or trust company must be
deposited in accounts that do not
impose any restrictions on the ability of
the FCM or DCO to withdraw such
funds upon demand. An FCM or DCO
may not deposit customer funds in any
account with a bank or trust company
that does not, by the terms of the
account or operation of banking law,
provide for the immediate availability of
such deposits upon the demand of the
FCM or DCO.
Paragraph (h) codifies a long-standing
interpretation of the Commission’s
Division of Swap Dealer and
Intermediary Oversight and predecessor
divisions derived from an
Administration Determination by the
Commission’s predecessor, the
Commodity Exchange Authority of the
U.S. Department of Agriculture.268 The
requirement, as proposed, is a practical
necessity to the effective functioning of
FCMs and futures markets. In this
regard, customer funds deposited with a
bank must be maintained in accounts
that allow for the immediate availability
of the funds in order for the FCM to be
assured of meeting its obligation to
make any necessary transfers of
customer funds to a DCO or to return
funds to customers upon their request.
The Commission is adopting paragraph
(h) as proposed.269
268 See Administrative Determination No. 29 of
the Commodity Exchange Authority dated Sept. 28,
1937 stating, ‘‘the deposits, by a futures commission
merchant, of customers’ funds * * * under
conditions whereby such funds would not be
subject to withdrawal upon demand would be
repugnant to the spirit and purposes of the
Commodity Exchange Act. All funds deposited in
a bank should in all cases be subject to withdrawal
on demand.’’
269 CIEBA noted it is comment letter that industry
groups are involved in various initiatives to provide
customers with the option for full physical
segregation of margin collateral, and requested
confirmation that § 1.20(h) would not prohibit the
use of a full segregation model if developed. See
CIEBA Comment Letter at 4 (Feb. 20, 2013). The
Commission encourages industry groups to
continue to assess alternatives to the current
segregation structure in an effort to provide greater
protection of customer funds and to ensure the
effective operation of the clearing and settlement
functions. Regulation 1.20(h) is intended to prohibit
situations where an FCM or DCO deposits customer
funds into an account that by law or operation
limits or potentially limits the FCM’s or DCO’s
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9. Segregated Funds Computation
Requirement
The Commission proposed to add a
new paragraph (i), which mirrored the
requirements recently adopted in part
22 for Cleared Swaps Customers.
Proposed paragraph (i) was designed to
implement, with increased detail, the
Net Liquidating Equity Method of
calculating segregation requirements. A
customer may have positive Net
Liquidating Equity (i.e., a credit
balance) in his or her account, requiring
segregation of his or her funds, but may
have insufficient Net Liquidating Equity
to cover the margin required for that
customer’s open positions.
Accordingly, the Commission
proposed to require an FCM to record in
the accounts of its futures customers the
amount of margin required for each
customers’ open positions, and to
calculate margin deficits (i.e.,
undermargined amounts) for each of its
customers. Moreover, the Commission
proposed to require that an FCM
maintain residual interest in segregated
accounts in an amount that exceeds the
sum of all futures customers’ margin
deficits (‘‘the Proposed Residual Interest
Requirement’’).270
In addition, the Commission proposed
an amendment to § 1.22.271 Regulation
1.22 is a longstanding regulation272 and
currently provides that an FCM may not
use the cash, securities or other property
deposited by one futures customer to
purchase, margin or settle the trades,
contracts, or other positions of another
futures customer, or to extend credit to
any other person.273 This ‘‘requirement
is designed not only to prevent
disparate treatment of customers by an
FCM, but also to insure that there will
be sufficient money in segregation to
pay all customer claims if the FCM
becomes insolvent.’’ 274 Regulation 1.22
further provides that an FCM may not
use the funds deposited by a futures
customer to carry trades or positions,
unless the trades or positions are traded
through a DCM.275
The Commission proposed an
amendment to § 1.22 to clarify that it is
the use intended (i.e., as performance bond). The
Commission would consider any future
amendments to § 1.20(h) based upon the
developments of alternative segregation modes.
270 See discussion in note 30 above. Therefore,
under the Proposed Residual Interest Requirement
an FCM would have to maintain at all times in
segregated account a sufficient amount of funds to
cover the Net Liquidating Equities of each customer
and a sufficient amount of residual interest to cover
the undermargined amounts of each customer.
271 77 FR 67886.
272 See, e.g., 13 FR, 7820, 7837 (Dec. 18, 1948).
273 17 CFR 1.22.
274 46 FR 11668, 11669 (Feb. 10, 1981).
275 17 CFR 1.22.

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not permissible for an FCM to be
undersegregated at any point in time
during the day. As stated in the
Proposal, section 4d(a)(2) expressly
requires an FCM to segregate futures
customers’ funds from its own funds,
and prohibits an FCM from using the
funds of one customer to margin or
extend credit to any other futures
customer or person.276 Moreover, to
review compliance with these proposed
requirements, the Commission proposed
that the sum of all margin deficits (i.e.,
undermargined amounts) be reported on
the Segregation Schedule (as discussed
previously in section II.A. with respect
to amendments to § 1.10) and on the
daily segregation calculation.277
The Commission requested comment
on all aspects of the Proposed Residual
Interest Requirement, including the
costs and benefits of this proposed
regulation.278
276 77

FR 67886.

277 Id.
278 See 77 FR 67882, 67916. The Commission also
specifically requested comments on the following:
Whether the Proposed Residual Interest
Requirement would serve to increase the
protections to customer funds in the event of an
FCM bankruptcy? To what extent would the
Proposed Residual Interest Requirement increase
costs to FCMs and/or futures customers? To what
extent would the Proposed Residual Interest
Requirement benefit futures customers and/or
FCMs? To what extent would the Proposed
Residual Interest Requirement increase or mitigated
market risk? To what extent would the Proposed
Residual Interest Requirement lead to FCMs
requiring customers to provide margin for their
trades before placing them? To what extent is the
Proposed Residual Interest Requirement likely to
lead to a re-allocation of costs from customers with
excess margin to undermargined customers? For
purposes of margin deficit calculations, whether the
Commission should address issues surrounding the
timing of when an FCM must have sufficient funds
in the futures customer account to cover all margin
deficits? If so, how should the Commission address
such issues? See 77 FR at 67882.
With regards to the costs and benefits, the
Commission asked the following questions:
Whether FCMs typically maintain residual interest
in their customer segregated account that is greater
than the sum of their customer margin deficits, and
data from which the Commission may quantify the
average difference between the amount of residual
interest an FCM maintains in customer segregated
accounts and the sum of customer margin deficit.
How much additional residual interest would FCMs
need to hold in their customer segregated accounts
in order to comply with the Proposed Residual
Interest Requirement? What is the opportunity cost
to FCMs associated with increasing the amount of
capital FCMs place in residual interest, and data
that would allow the Commission to replicate and
verify the calculated estimates provided.
Information regarding the additional amount of
capital that FCMs would likely maintain in their
customer segregated accounts, if any, to comply
with the Proposed Residual Interest Requirement.
What is the average cost of capital for an FCM? See
77 FR at 67916.
The Commission also specifically requested that
commenters provide data and calculations that
would allow the Commission to replicate and verify
the cost of capital that commenters estimate. See id.

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The Commission has received and has
considered a wide variety of public
comments regarding the Proposed
Residual Interest Requirement,
including comments from panelists
made during public roundtables and
written submissions from commenters.
Several commenters supported the
Commission’s Proposed Residual
Interest Requirement. CIEBA stated that
it strongly supported the Proposed
Residual Interest Requirement, arguing
that the proposed regulations are
consistent with Congressional intent
and the Commission’s historical
interpretations of the Act and sound
economic and systemic risk policy.
Highlighting section 4d(a)(2) of the Act
and its directive that FCMs ‘‘keep
collateral and funds of each individual
customer distinct from that of customers
and the FCM,’’ CIEBA argued that
‘‘permitting FCMs to use customer
funds to cover margin deficits of a
different customer and thereby
subsidize the FCM’s obligations would’’
contravene well established statutory
policy.279 In addition, CIEBA noted that
the Dodd-Frank Act was adopted to
increase regulatory protections for
customers.280 CIEBA also noted several
benefits resulting from the Proposed
Residual Interest Requirement,
including the reduction of systemic risk,
competitive benefits for those FCMs that
do not use customer excess to meet the
obligations of other clients, and the
enhancement of customer protection in
the event of an FCM bankruptcy.281 ICI
also stated that it supported the
Proposed Residual Interest Requirement
on the basis that it would provide
additional protections to customer
funds.282 SIFMA asserted that it
strongly supported the Proposed
Residual Interest Requirement because
it preserves the sanctity of each
customer’s margin account by
maintaining segregation between
customer margin accounts through the
incorporation of appropriate safeguards
to protect customer funds.283 SIFMA
stated that the proposal, ‘‘in effect, shifts
the costs and burdens of a margin
shortfall from customers with excess
margin to customers with deficits,
279 CIEBA

Comment Letter at 2 (Feb. 20, 2013).

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at 3. On this point, CIEBA further noted
that allowing an FCM to use customer excess to
support other customer’s positions could lead to
improper or complex recordkeeping, which can, in
turn, jeopardize the ability of a trustee to facilitate
the return of customer funds and the porting of
positions to a solvent FCM.
282 ICI Comment Letter at 3 (Jan. 14, 2013). See
also Franklin Comment Letter at 2 (Feb. 15, 2013)
(writing in support of the positions taken in the ICI
Comment Letter).
283 SIFMA Comment Letter at 2 (Feb. 21, 2013).

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284 Id.
285 Paul/Weiss

280 Id.
281 Id.

where it properly belongs.’’ 284 Paul/
Weiss supported the Proposed Residual
Interest Requirement ‘‘[i]n
principle.’’ 285 Vanguard stated that it
was ‘‘particularly supportive’’ of the
Proposed Residual Interest
Requirement.286 Noting that while an
FCM would either have to have its
customers pre-fund margin
requirements for pending trades or
‘‘lend’’ such customers margin ahead of
a margin transfer, Vanguard argued that
the ‘‘proposed changes correctly shift
the risk to customers in deficit and away
from any excess margin transferred by
other customers.’’ 287 Vanguard also
argued that, in its opinion, comments at
the public roundtable that ‘‘suggested
same-day margin transfers were overly
complicated to achieve and the
accelerated capital charge would
therefore impose significant added costs
to an FCM and, by extension, to its
customers,’’ seem overstated
particularly because same-day margin
transfer is ‘‘the norm in the OTC swap
market.’’ 288 In fact, Vanguard stated that
‘‘same-day margin transfer is required in
Vanguard’s futures and options
agreements, consistent with the longstanding market practice.’’ 289 Vanguard
encouraged the Commission to avoid
weakening customer protection, ‘‘at
least a weakening beyond the need to
maintain segregation on no less than a
once-a-day basis, with the possibility for
clearing house initiated intra-day calls
(and corresponding segregation
maintenance) as needed in periods of
market stress.’’ 290 CFA also supported
the Proposed Residual Interest
Requirement, asserting its belief ‘‘that
no futures customer should be undersegregated at any time during the day
for any reason.’’ 291
A number of commenters opposed the
Proposed Residual Interest Requirement
on the basis that the requirement
appeared wholly unrelated to the MFGI
and PFGI bankruptcies,292 with other
commenters observing that the Proposed
Residual Interest Requirement is
unnecessary to achieve the regulatory
goals, including assuring compliance
Comment Letter at 3 (Feb. 15,

2013).
286 Vanguard Comment Letter at 7 (Feb. 22, 2013).
287 Id.
288 Id.
289 Id.
290 Id. at 7–8.
291 CFA Comment Letter at 5–6 (Feb. 13, 2013).
292 See, e.g., CHS Hedging Comment Letter at 1
(Feb. 15, 2013); NFA Comment Letter at 12 (Feb. 15,
2013); JSA Comment Letter at 2 (Feb. 15, 2013);
Paragon Comment Letter at 1 (Feb. 15, 2013); NIBA
Comment Letter at 2 (Feb. 15, 2013); ICA Comment
Letter at 1 (Feb. 15, 2013).

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with section 4d of the Act, in light of
other Commission regulations.293
In addition, several commenters
commented on the lack of feasibility of
the proposal, interpreting the ‘‘at all
times’’ language to require FCMs to
continuously calculate the sum of their
customers’ margin deficits, and to
continuously act on those calculations.
For example, RCG stated that it would
be virtually impossible for FCMs to
satisfy the Proposed Residual Interest
Requirement because an accurate
assessment of aggregate customer
margin deficiencies would be difficult
given that (1) ‘‘the underlying markets
operate on a 24-hour basis and customer
fund transfers occur repeatedly
throughout each business day,’’ and (2)
‘‘omnibus account offsets are not
provided to clearing FCMs until the end
of the trading day or, in some instances,
the next business day.’’ 294 MGEX also
argued that ‘‘at all times’’ requirement
in the Proposed Residual Interest
Requirement may be impracticable as it
is a constantly moving target,295 and TD
Ameritrade argued that because the firm
calculates margin calls after it receives
its nightly downloads, ‘‘it would be
difficult, if not impossible, to assess
customer margin deficiencies at any
moment in time, because the markets
have not closed and the margin
requirements are not always known.’’ 296
In addition, CME stated that there does
not appear to be a system that currently
exists or that could be constructed in
the near future that will permit FCMs to
accurately calculate customer margin
deficiencies, at all times.297 CMC
asserted that the ‘‘at all times’’ portion
of the Proposed Residual Interest
Requirement would ‘‘create liquidity
issues and increase costs for FCMs and
end users,’’ possibly ‘‘limit the number
and type of transactions FCMs clear, the
number of customers they service and
the amount of financing they provide,’’
and ‘‘require executing FCMs to collect
collateral for give-ups so that customer
positions are fully margined in the event
a trade is rejected by a clearing
293 See, e.g., FIA Comment Letter at 18–21 (Feb.
15, 2013). See also FIA Comment Letter at 2–5 (June
20, 2013).
294 RCG Comment Letter at 3 (Feb. 12, 2013).
295 See MGEX Comment Letter at 2 (Feb. 18,
2013). See also NPPC Comment Letter at 2 (Feb. 15,
2013) (stating that the ‘‘at all times’’ portion of the
Proposed Residual Interest Requirement is
‘‘burdensome’’, and that changing margin
procedures ‘‘to anticipate future market movements,
pre-fund margin calls, [or] make margin call
deposits throughout the day based on current
market movements is impractical.’’).
296 TD Ameritrade Comment Letter at 4–5 (Feb.
15, 2013).
297 See CME Comment Letter at 5 (Feb. 15, 2013).

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
FCM,’’ 298 which ‘‘may force many end
users to decrease or discontinue hedging
and risk management practices.’’ 299
Advantage opposed the Proposed
Residual Interest Requirement asserting
that it was ‘‘extremely prejudicial to
small and midsize firms and their
customers.’’ 300 Advantage also stated
that the Proposed Residual Interest
Requirement would result in FCMs
more quickly liquidating customer
positions during extreme market moves,
which would make markets more
volatile.301 Advantage also maintained
that calculations of margin for omnibus
accounts cannot be determined prior to
the receipt of offsets, which may not be
obtained until late in the day, thereby
adversely impacting an FCM’s ability to
assess customer margin deficiencies.302
FIA and LCH.Clearnet opposed the
Proposed Residual Interest
Requirement, and focused particularly
on the ‘‘at all times’’ portion of the
requirement.303 FIA stated that the
Proposed Residual Interest Requirement
may force a number of small to midsized FCMs out of the market, which
will decrease access to the futures
markets and increase costs for IBs,
hedgers, and small traders.304 In
addition, FIA argued that the Proposed
Residual Interest Requirement would
significantly impair the price discovery
and risk management purposes of the
market.305 Moreover, FIA stated that the
Proposed Residual Interest Requirement
‘‘would impose a tremendous
operational and financial burden on the
industry, requiring the development and
implementation of entirely new systems
to assure compliance’’ with the ‘‘at all
times’’ portion of the requirement.306
FIA also averred that the ‘‘provisions of
section 4d of the Act prohibiting an
FCM from using the fund of one
customer ‘to margin or guarantee the
trades or contracts, or to secure or
extend the credit, of any customer or
person other than the one for whom the
same are held,’ has been the lynchpin of
customer funds protection since the
Commodity Exchange Act was enacted
in 1936.’’ 307 In addition, FIA stated that
they were not aware that the
Commission has interpreted the statute
298 CMC

Comment Letter at 2 (Feb. 15, 2013).

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299 Id.
300 Advantage Comment Letter at 8 (Feb. 15,
2013).
301 See id. at 7–8.
302 See id. at 7.
303 See FIA Comment Letter at 4–5, 12–26 (Feb.
15, 2013); LCH.Clearnet Comment Letter at 4–5 (Jan.
25, 2013).
304 See FIA Comment Letter at 17 (Feb. 15, 2013).
305 See id. at 4, 17.
306 Id. at 4. See also id. at 13.
307 FIA Comment Letter at 2 (June 20, 2013).

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to require the real time calculation of
margin deficits.308
Several commenters requested that
the Commission refrain from adopting
the Proposed Residual Interest
Requirement until it conducted further
analysis with the industry regarding the
costs and benefits of such proposal,309
with others stating that the Proposed
Residual Interest Requirement would
mark a significant departure from
current market practice and could have
a material adverse impact on the
liquidity and smooth functioning of the
futures and swaps markets.310
In addition, the Commission received
several specific comments on the
potential costs and benefits of the
Proposed Residual Interest
Requirement. The Congressional
Committees requested that the
Commission consider the benefits in
light of ‘‘both the costs to America’s
farmers and ranchers and the potential
impact on consolidation in the FCM
industry,’’ and in particular the
‘‘consequences of changing the manner
or frequency in which ‘residual
interest’—the capital an FCM must hold
to cover customer positions—is
calculated.’’ 311
FIA noted that FCMs would look to
avoid the need to use their own
resources by seeking to make sure that
their customers would not be
undermargined, and that this process
would involve the FCM collecting
greater amounts of collateral from each
customer.312 FIA averred that collecting
greater amounts of collateral from
customers would be contrary to the
desire of the market to reduce the
amount of funds maintained with FCMs
following the failures of MFGI and
PFGI.313 Moreover, FIA estimated that
compliance with the Proposed Residual
308 Id.
309 See, e.g., AIMA Comment Letter at 3 (Feb. 15,
2013); CCC Comment Letter at 2–3 (Feb. 15, 2013);
CHS Hedging Comment Letter at 2–3 (Feb. 15,
2013); CME Comment at 5–7 (Feb. 15, 2013); AFBF
Comment Letter at 2 (Feb. 15, 2013); Jefferies
Comment Letter at 9 (Feb. 15, 2013); JSA Comment
Letter at 1–2 (Feb. 15, 2013); NCBA Comment Letter
at 2 (Feb. 15, 2013); NGFA Comment Letter at 5
(Feb. 15, 2013); NIBA Comment Letter at 1–2 (Feb.
15, 2013); TCFA Comment Letter at 2 (Feb. 15,
2013); AFMP Group Comment Letter at 1–2 (Sept.
18, 2013).
310 See, e.g., MGEX Comment Letter at 2 (Feb. 18,
2013); AIMA Comment Letter at 2 (Feb. 15, 2013);
CMC Comment Letter at 2 (Feb. 15, 2013); AFMP
Group Comment Letter at 1–2 (Sept. 18, 2013); Rice
Dairy LLC Comment Letter at 1 (Feb. 13, 2013).
311 Congressional Committees Comment Letter at
1 (Sept. 25, 2013).
312 FIA Comment Letter at 17 (Feb. 15, 2013).
313 Id. at 17. See also AFMP Group Comment
Letter at 1 (Sept. 18, 2013) (arguing that ‘‘[m]uch
more customer money—maybe twice as much—will
be at risk in the event of another FCM
insolvency.’’).

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68545

Interest Requirement would require
FCMs or their customers to contribute
significantly in excess of $100 billion
into customer funds accounts beyond
the sum required to meet initial margin
requirements, and that the annual
financing costs for these increases will
range from $810 million to $8.125
billion.314
MFA asserted that applying the
Proposed Residual Interest Requirement
continuously to FCMs ‘‘could
significantly increase the operational
burdens and costs on FCMs and their
customers,’’ and that ‘‘any pre-funding
obligation is an unacceptable imposition
on customers’’ because ‘‘[i]t would
create margin inefficiencies by causing
customers to reserve assets to pre-fund
their obligations . . . , and thus, reduce
the amount of assets that customers
have to use for investment or other
purposes.’’ 315 FHLB cautioned that
‘‘[w]hile it cannot be disputed that a
residual interest buffer should lower the
risk that an FCM will fall out of
compliance with its segregation
requirements, there will likely be a real
economic cost associated with
maintaining whatever residual interest
buffers is established by an FCM’’ and
that ‘‘the prospects of funding an
additional residual interest buffer may
discourage FCMs from appropriately
demanding collateral from customers in
excess of DCO requirements.’’ 316 FHLB
further noted that the ‘‘funds
maintained by an FCM as residual
interest can reasonably be expected to
earn less than the FCM’s unrestricted
funds,’’ thus, the proposal ‘‘represents a
real cost to FCMs’’ that will be passed
on to customers.317 Jefferies stated that
the Proposed Residual Interest
Requirement will result in more assets
being held at FCMs’ custodial facilities
at a time when ‘‘the Commission has
been enacting changes that have been
shifting capital away from FCMs
towards DCO facilities. . . .’’ 318
Newedge also stated that the Proposed
Residual Interest Requirement ‘‘will
result in many FCMs requiring
customers to pre-fund and over-margin
their positions, which will increase
314 FIA

Comment Letter at 16 (Feb. 15, 2013).
Comment Letter at 8 (Feb. 15, 2013).
316 FHLB Comment Letter at 3–4 (Feb. 15, 2013).
317 Id. at 4 n.5.
318 Jefferies Comment Letter at 7 (Feb. 15, 2013).
See also CCC Comment Letter at 2 (Feb. 15, 2013)
(arguing that ‘‘the practical effect’’ of the Proposed
Residual Interest Requirement ‘‘is that FCMs would
require commodity customers to contribute
significantly more property to their FCM in order
to meet new margin requirements far in excess of
exchange margin requirements,’’ and expressing
concern over any requirement that would require
customers ‘‘to contribute even more capital to a
system [CCC] believe[s] is flawed.’’)
315 MFA

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their exposure to FCMs’’ and ‘‘have a
significant impact on customers’ own
liquidity.’’ 319
Steve Jones expressed the view that
‘‘[w]ith more funds on deposit, a corrupt
FCM CEO (or other staff with access to
the funds) will simply be more tempted
to ‘misappropriate’ the funds.320 In
addition, Jefferies stated that requiring
an FCM to maintain this level of
residual interest ‘‘at all times’’ ‘‘would
impose tremendous financial and
operational difficulties’’ on FCMs,
which would result in tremendous
increases to necessary liquidity, and
‘‘negatively impact competitiveness
within the industry. . . .’’ 321 Jefferies
further stated that the Proposed
Residual Interest Requirement would
impose heavy costs, and that, under the
proposal, Jefferies would be required to
increase its residual interest by $15
million (non-peak) or $30 million
(peak), respectively.322 Jefferies also
stated that the industry would be
required to increase its residual interest
by $49 billion (non-peak) or $83 billion
(peak) at a cost of approximately $2
billion (non-peak) or $5 billion (peak),
respectively.323
ISDA asserted that the Proposed
Residual Interest Requirement will
make customers ‘‘self-guaranteeing’’ and
diminish reliance on the FCM, and that,
while this would diminish overall risk
of FCM default, it comes at a very
significant cost to market participants,
market volumes and liquidity.324 ISDA
estimated the funding needed to comply
with ‘‘at all times’’ portion of the
Proposed Residual Interest Requirement
to be $73.2 billion, with a long term
impact of $335 billion.325 CHS Hedging
argued that the Proposed Residual
Interest Requirement ‘‘would
substantially increase the amount of
capital an FCM would need on hand at
all times.’’ 326 Further, CHS Hedging
stated that ‘‘[i]n the current economic
environment, the difference between the
cost of capital and the return an FCM
could reasonably expect through
investment of funds in a compliant and
prudent manner would result in a
material effect on the business of all
FCMs.’’ 327 CHS Hedging also stated that
FCMs ‘‘could require that customers
319 Newedge

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320 Steve

Comment Letter at 2 (Feb. 15, 2013).
Jones Comment Letter at 1 (Feb. 15,

2013).
321 Jefferies Comment Letter at 7 (Feb. 15, 2013).
322 Id. at 8.
323 Id.
324 ISDA Comment Letter at 3 (Feb. 15, 2013). See
also ISDA Comment Letter at 2–3 (May 8, 2013).
325 ISDA Comment Letter at 4–5 (Feb. 15, 2013).
326 CHS Hedging Comment Letter at 2 (Feb. 15,
2013).
327 Id.

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pre-fund their accounts in anticipation
of adverse market movement,’’ which
‘‘would likely result in hardship with
regard to working capital and may
encourage customers to seek alternative
methods to hedge their risk. . . .’’ 328
CHS Hedging is also of the view that
‘‘pre-funding accounts concentrates
additional funds at FCMs, which seems
to contradict the spirit of the’’ customer
protection rules.329
Other commenters argued that the
Proposed Residual Interest Requirement
would be more burdensome on smaller
FCMs and customers. Some commenters
stated that forcing FCMs to ask
customers to pre-fund positions will
cause many futures industry
participants, including agricultural
producers and other customers to suffer
a financial burden by tying up capital
that is better used in other areas, such
as the operation of the feedlot, stocker
operation or cow/calf operation,330 with
two commenters asserting that increased
costs associated with the use of wire
transfers, rather than checks, would
have a similar impact.331 Moreover,
NCFC stated that in addition to
increased costs for hedgers, the
Proposed Residual Interest Requirement
‘‘would be more burdensome to firms
like farmer cooperative-owned FCMs’’
because they ‘‘are largely homogenous,
with virtually all of their commercial
customers going deficit at the same
time.’’ 332 NCFC also asserted that ‘‘[t]o
require all deficits to be covered
immediately would be overly stringent
on these FCMs given the low-risk profile
of their customers as hedgers,’’ 333 while
NIBA noted that the Proposed Residual
Interest Requirement ‘‘will actually
limit or deny market access to many
customers’’ (such as farmers, ranchers
and other agricultural organizations)
‘‘who use the markets to hedge their
financial and commercial risks’’ because
the proposal ‘‘could raise the cost of
hedging product to prohibitive
levels.’’ 334 NIBA also stated that if small
to mid-sized FCMs are forced out of
business, market access ‘‘will become
limited and more expensive for IBs and
their smaller hedge and speculative
328 Id.
329 Id.
330 TCFA Comment Letter at 2 (Feb. 15, 2013);
NCBA Comment Letter at 2 (Feb. 15, 2013); FCStone
Comment Letter at 3 (Feb. 15, 2013); Randy Fritsche
Comment Letter at 1 (Feb. 15, 2013); Global
Commodity Comment Letter at 1 (Feb. 13, 2013);
AFMP Group Comment Letter at 1–2 (Sept. 18,
2013).
331 TCFA Comment Letter at 1 (Feb. 15, 2013);
NCBA Comment Letter at 1 (Feb. 15, 2013).
332 NCFC Comment Letter at 2 (Feb. 15, 2013).
333 Id.
334 NIBA Comment Letter at 1 (Feb. 15, 2013).

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clients.’’ 335 JSA argued that the
Proposed Residual Interest Requirement
would be ‘‘punitive in a highly
competitive environment that already
places the midsize operator at a
disadvantage to his better capitalized
multinational competitors.’’ 336 JSA also
asserted that the resulting consolidation
would cause ‘‘the loss of competitive
forces, [the] loss of significant numbers
of jobs, and the loss of transparency and
liquidity required for a highly
functioning hedging environment.’’ 337
Moreover, JSA stated that the cost of the
Proposed Residual Interest Requirement
would result in a higher cost of hedging,
which would be become prohibitive and
prompt agricultural users to walk away
from the futures market.338 CME averred
that mid-sized and smaller FCMs will
not have the capital required by the
Proposed Residual Interest Requirement
and that customers will be required to
pre-fund potential margin
obligations.339 CME asserted that, given
this increase in cost, some customers
may transfer their accounts to the larger,
better-capitalized FCMs to reduce the
cost of trading,340 but that agricultural
customers ‘‘likely will not be able to
transfer to the larger FCMs because they
do not fit their customer profile,’’
thereby making these customers bear
more of the cost burden.341 CME also
stated that the Proposed Residual
Interest Requirement will lead to
consolidation among FCMs, which will
‘‘actually increase[] systemic risk by
concentrating risk among fewer market
participants.’’ 342 Frontier Futures
argued that the Proposed Residual
Interest Requirement does not give an
FCM time to collect margin from
customers if the market moves against a
customer’s position.343 Because many
small customers, including most
farmers, do not watch markets
constantly, it would be difficult for
them to meet margin calls on a
335 Id. at 1–2. NIBA also asserted that
‘‘[t]ransferring accounts between brokerage houses
would become very difficult to accomplish’’
because open positions would ‘‘need to be
margined at the receiving house as well as the
transferring one,’’ thereby restraining Brokers ‘‘to
remain with one FCM, or completely close
customers’ positions in order to start up again with
a different FCM.’’ Id. at 2.
336 JSA Comment Letter at 1 (Feb. 15, 2013).
337 Id. at 1–2.
338 Id. at 2.
339 CME Comment Letter at 5–6 (Feb. 15, 2013).
340 Id. at 6.
341 Id.
342 Id. (emphasis in original). CME also
maintained that ‘‘those customers who qualify as
[ECPs] can move to the uncleared and less regulated
swaps space and decline to use centralized
clearing.’’ Id. at 6–7.
343 Frontier Futures Comment Letter at 3 (Feb. 15,
2013).

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moment’s notice, thereby causing FCMs
to require significantly higher margins
or to liquidate customer positions where
margin calls cannot be immediately
met.344 Frontier Futures also asserted
that the proposal ‘‘may force a number
of small to mid-sized FCMs out of the
market,’’ making it more expensive, if
not impossible, for IBs and small
members to clear their business,
removing ‘‘significant capital from the
futures industry,’’ and ‘‘reducing
stability to the markets as a whole.’’ 345
RJ O’Brien stated that the Proposed
Residual Interest Requirement is
impractical because many farmers and
agricultural clients still use checks and
ACH to meet margin calls.346
Several commenters presented
alternative proposals for the
Commission’s consideration. For
example, two commenters argued that
the Commission should consider less
costly alternatives to the current
residual interest proposal, such as
allowing the FCM ‘‘to count guaranty
fund deposits with [DCOs] as part of
their residual interest,’’ 347 with others
stating that the residual interest amount
that an FCM must carry should only
apply to a limited number of its largest
customers.348
Moreover, and as discussed more
fully below, other commenters urged the
Commission to conform the final
version of proposed Rules 1.20(i)(4),
22.2(f)(6), and 30.7(a) to the current
method of calculating residual interest
buffer for Cleared Swaps by dropping
the words ‘‘at all times.’’ 349 For
example, ISDA and FIA further urged
consideration of an alternative under
which the residual interest calculations
would be made once a day and that, by
the end of a business day, an FCM
would be required to maintain a
residual interest in its customer funds
accounts at least equal to its customers’
aggregate margin deficits for the prior
344 Id.
345 Id.

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346 RJ

O’Brien Comment Letter at 3 (Feb. 15,
2013). See also ICA Comment Letter at 1–2 (Feb. 15,
2013).
347 Newedge Comment Letter at 3 (Feb. 15, 2013).
See also RJ O’Brien Comment Letter at 5 (Feb. 15,
2013). Cf. Frontier Futures Comment Letter at 3
(Feb. 15, 2013) (suggesting further that firm
firewalls be put in place between customer funds
and an FCM’s proprietary funds in the form of
approval by an independent agency for an FCM to
transfer customer funds and that FCMs ‘‘do their
proprietary trading through another FCM thereby
engaging the risk management of a third party.’’)
348 See, e.g., Newedge Comment Letter at 3 (Feb.
15, 2013).
349 See, e.g., LCH.Clearnet Comment Letter at 5
(Feb. 15, 2013); ISDA Comment Letter at 6 (Feb. 15,
2013); RJ O’Brien Comment Letter at 5 (Feb. 15,
2013).

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trade date.350 ISDA stated this
alternative ‘‘would rationally reduce’’
FCMs cost of compliance351 and that
‘‘[f]or an FCM with robust credit risk
management systems, covering end-ofday customer deficits should not be a
significant cost.’’ 352 ISDA also noted
that at the end of the day ‘‘typically, all
customer calls have been met, and all
customer gains have been paid out; all
achieved without the FCM having
recourse to its own funding
resources.’’ 353 FIA asserted that it
would ‘‘achieve the Commission’s
regulatory goals without imposing the
damaging financial and operational
burdens on FCMs, and the resulting
financial burdens on customers.’’ 354
LCH.Clearnet argued that customer
collateral can be protected by
performing the ‘‘LSOC Compliance
Calculation’’ once per day, prior to
settlement at a DCO, because ‘‘prior to
meeting a call for an increased
requirement, a customer may be under
collateralized, but is not collateralized
by another customer.’’ 355 ISDA and FIA
evaluated the costs associated with
requiring FCMs to perform the residual
interest calculation once each day at the
close of business on the first business
day following the trade date.356 ISDA
estimated that ‘‘removing the predictive
element of FCM funding requirements’’
of the ‘‘at all times’’ method in favor of
the alternative approach would permit
markets to ‘‘reap the efficiencies of endof-day accounting,’’ 357 thereby
significantly reducing the overall cost of
compliance with the regulation. ISDA
estimated that for futures, the costs
associated with the would be the cost of
covering the out-standing margin
deficits of between 2 and 5% of its
futures customers, and thus would
impose only ‘‘incremental funding
requirements’’ on FCMs.358 ISDA
estimated that the costs of the alternate
proposal would be even smaller for
cleared swaps, due to the ‘‘more
350 See ISDA Comment Letter at 6 (Feb. 15, 2013);
FIA Comment Letter at 23–25 (Feb. 15, 2013).
351 ISDA Comment Letter at 6 (Feb. 15, 2013).
352 ISDA Comment Letter at 2 (May 8, 2013).
353 Id. ISDA further recommended that because
many FCM customers use custodians across the
world, ‘‘many customers cannot assure payment of
their morning FCM call before the end of the New
York day,’’ and therefore recommended that
Commission study the feasibility of reducing the
time in which customers have to meet margin calls,
if that is ‘‘imperative.’’ Id. at 3.
354 FIA Comment Letter at 23 (Feb. 15, 2013). See
also ISDA Comment Letter at 4 (May 8, 2013).
355 LCH.Clearnet Comment Letter at 5 (Feb. 15,
2013).
356 ISDA Comment Letter at 1–2 (May 8, 2013);
FIA Comment Letter at 8–10 (June 20, 2013).
357 Id. at 3.
358 ISDA Comment Letter at 3–4 (May 8, 2013).

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68547

professional’’ nature of the market.359
FIA estimated the financing costs to
FCMs of complying with FIA’s proposed
alternative and concluded that the costs
associated with the Proposed Residual
Interest Requirement would be
approximately ten times the costs
associated with the FIA proposal.360 FIA
also concluded that their proposal
would not ‘‘impos[e] damaging financial
and operational burdens on FCMs . . .
and the resulting financial burdens on
customers.’’361
RJ O’Brien also recommended that the
Commission drop the ‘‘at all times’’
requirement and that the residual
interest calculation be done once each
day at the close of business on the first
business day following the trade date.362
RJ O’Brien asserted that ‘‘this alternative
will reduce the substantial financial
burdens’’ on customers ‘‘while further
enhancing the protection of customer
funds.’’ 363
MFA stated that the Commission
should modify the proposed FCM
residual interest requirement in
§ 1.20(i)(4) so that it is a ‘‘point of time’’
obligation that requires FCMs to ensure
they maintain sufficient residual
interest ‘‘as of the close of business EST
on the business day after the FCM issues
a customer’s margin call.’’ 364 MFA
argued that this alternative would
‘‘reduce the stress on the market’’ and
‘‘eliminate[] the need for customer prefunding or intraday margin calls, while
also ensuring that * * * FCMs will hold
sufficient funds to protect against
customer shortfalls.’’ 365
Paul/Weiss stated that the
Commission should clarify that the
residual interest amount an FCM is
required to maintain must be
determined ‘‘at the time of any end-ofday, intra-day or special call payment
by an FCM to derivatives clearing
organization (or other clearing house or
clearing intermediary). . . .’’366 Paul/
Weiss argued that these payments are
‘‘the relevant points in time at which
359 Id.

at 4.
FIA Comment Letter at 8–10 (June 20,
2013). While the rates used by FIA in this exercise
may be conservative, and thus the Commission does
not purport to opine on the precise estimates
reached, the exercise is nevertheless illustrative and
useful for the purpose of comparing the costs of the
Residual Interest Proposal, the alternate proposal,
and the final rule.
361 Id. at 9.
362 RJ O’Brien Comment Letter at 5 (Feb. 15,
2013).
363 Id.
364 MFA Comment Letter at 8–9 (Feb. 15, 2013).
365 Id.
366 Paul/Weiss Comment Letter at 4 (Feb. 15,
2013).
360 See

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the FCM is obligated to transfer’’
customer margin.367
As a threshold matter, and as noted
above, the Commission reiterates that
the Act expressly prohibits an FCM from
using the collateral of one customer to
margin, secure, or guarantee the trades
or contracts of other customers.368
Congress specifically added this
prohibition in response to concerns that
certain customers were carrying the
risks and obligations of other favored
customers.369 By this token, any
customer that is undermargined is being
favored over the customers with excess
margin, in contravention of section
4d(a)(2) when other customers’ funds
are being used to cover the
undermargined amounts.370
Moreover, there is an inescapable
mathematical fact: When an FCM meets
the DCO’s margin requirements, the
property used to meet those
requirements can only come from one of
three sources: the responsible customer,
the FCM, or other customers. If the
property does not come from the
customer whose positions generated the
margin requirement or loss, or the FCM
itself (that is, the FCM’s residual
interest), then it must, of necessity,
come from other customers.371 In

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367 Id.
368 The Commission further notes that current
Commission regulations also include such
prohibitions. Namely, § 1.22 states that ‘‘No futures
commission merchant shall use, or permit the use
of, the futures customer funds of one futures
customer to purchase, margin, or settle the trades,
contracts, or commodity options of, or to secure or
extend the credit of, any person other than such
futures customer,’’ and § 22.2(d)(1) states that ‘‘No
futures commission merchant shall use, or permit
the use of, the Cleared Swaps Customer Collateral
of one Cleared Swaps Customer to purchase,
margin, or settle the Cleared Swaps or any other
trade or contract of, or to secure or extend the credit
of, any person other than such Cleared Swaps
Customer.’’
369 See 80 Cong. Rec. 6159, 6162 (1936)
(statement of Sen. James. P. Pope) (‘‘It further
appears that certain favored dealers have not been
required actually to put up the money for margins,
and have been extended credit in that respect. This
gives these favored dealers an advantage. In some
instances, large commission firms have become
bankrupt and the funds placed with them by a large
number of dealers were lost.’’); ‘‘Regulation of Grain
Exchanges: Before the H. Comm. on Agriculture,’’
73 Cong. 31 (1934) (statement of Dr. J. W. T. Duvel,
Chief Grain Futures Admin. Dept. of Agriculture)
(‘‘On the commodities exchanges certain classes of
speculators and others are able to secure credit but
in many cases the credit so extended represents
margin money taken from one class of customers
and used to extend credit on [sic] margin the trades
of others. Our aim is to protect the customers’
margin money and thereby protect the market as a
whole.’’).
370 As some commenters report, institutional
customers in particular are typically
undermargined. This could mean that institutional
customers are being favored over individual
customers. See, e.g., FIA Comment Letter at 15 (Feb.
15, 2013).
371 As recognized by the Commission previously,
the obligation to ensure that one customer’s

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reviewing the Commission’s customer
protection rules in light of MFGI and
PFGI, staff identified market practices
that were in tension with the plain
language of the Act, and, as such, the
Commission attempted to clarify
acceptable practices with respect to
these existing statutory requirements
with the Proposed Residual Interest
Requirement.
As noted above, several commenters
strongly supported the Proposed
Residual Interest Requirement, noting it
is consistent with Congressional intent
and the Commission’s historical
interpretations of the Act. In general,
these commenters argued that the
proposal correctly shifts the risk of loss
to customers with margin deficiencies
and away from customers with excess
margin. Some of these commenters
questioned market cost estimates and
statements regarding the technical
challenges associated with same-day
margin transfers, and urged the
Commission to avoid unnecessarily
weakening customer protection.
On the other hand, many commenters
expressed concern regarding the costs
associated with the Proposed Residual
Interest Requirement. In particular,
commenters stated that requiring the
FCM to be in compliance with residual
interest requirements ‘‘at all times’’
would disparately impact agricultural
producers, small and mid-size FCMs,
and hedgers; decrease market liquidity;
cause market consolidation; and
increase systemic risk. Moreover, the
Commission notes that many of the
estimates of the amount of additional
capital required as a result of the
Proposed Residual Interest Requirement
seem to result from a particular
interpretation of the meaning of the ‘‘at
all times’’ portion of the proposal, and
seemed to range from $49 billion (nonpeak) and $83 billion (peak),372 to $73.2
property is not used to margin or settle the trades
or contracts of another customer rests with the
FCM. See 46 FR 11668, 11669. (stating that ‘‘section
[4d(a)(2)] of the Act and §§ 1.20 and 1.22 of the
Commission’s regulations require an FCM to add its
own money into segregation in an amount equal to
the sum of all customer deficits.’’). See also CFTC
Letter 00–106 (Nov. 22, 2000) (stating that ‘‘each
FCM must segregate sufficient funds to cover any
amounts it owes to its customers in connection with
commodity interest transactions. The funds of
multiple customers may be commingled in a single
account for the benefit of the customers as a group.
If, however, the balance of any one of those
customers falls into a deficit, the FCM is obligated
to restore the amount of such deficit out of its own
funds or property in order to avoid the use of the
funds or property or any other customer to meet the
obligations of the customer in deficit. The
Commission requires FCM’s [sic] to maintain
minimum levels of capital to help assure that,
among other things, they are able to meet such
obligations.’’).
372 See Jefferies Comment Letter at 8–9 (Feb. 15,
2013). Jefferies states that the proposal would

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billion,373 to upwards of $100 billion.374
Further, commenters asserted that the
‘‘at all times’’ portion of the Proposed
Residual Interest Requirement would be
operationally unachievable, and argued
that the Proposed Residual Interest
Requirement would curtail competition,
concentrate capital in FCMs at a time
when the market would like to reduce
the amount of customer collateral held
at the FCM, and reduce the number of
viable FCMs, thereby negatively
impacting overall market risk and
market access for smaller customers and
agricultural hedgers. Commenters also
argued that the Proposed Residual
Interest Requirement is unnecessary
because in their view, customer funds
are not at risk when fellow customer
accounts are undermargined.375
Many of the commenters interpreted
the proposal to require FCMs to
continuously calculate and monitor the
margin deficits of their customers. In the
final rulemaking, the Commission is, in
general, following the concept advanced
by Paul/Weiss and LCH.Clearnet—that
is, what is required is that the FCM not
‘‘use’’ one customer’s property to
margin another customer’s positions.
For an interim phase-in period, the
Commission is adopting the alternative
proposal recommended by several
commenters, including FIA. Thus, for
the reasons set forth below, by the
Residual Interest Deadline, which is
defined in § 1.22(c)(5), an FCM would
be required to maintain a residual
interest in its customer funds accounts
at least equal to its customers’ aggregate
margin deficits for the prior trade
date.376 The commenters asserted, and
the Commission agrees that this
alternative would significantly and
materially reduce the financial burdens
that would otherwise be imposed on
require them to increase residual interest by $15
million (non-peak) to $30 million (peak).
373 See ISDA Comment Letter at 4–5 (Feb. 15,
2013). ISDA argued that the long term impact of the
‘‘at all times’’ portion of the proposal could be as
high as $335 billion.
374 See FIA Comment Letter at 15–17 (Feb. 15,
2013). FIA also estimated that the annual financing
costs associated with the $100 billion cost could
range from $810 million to $8.125 billion.
375 See Transcript, U.S. Commodity Futures
Trading Commission Agricultural Advisory
Committee Meeting held on July 25, 2013, available
at http://www.cftc.gov/ucm/groups/public/@
newsroom/documents/file/aac_
transcript072513.pdf.
376 See, e.g., Advantage Comment Letter at 8 (Feb.
15, 2013); CMC Comment Letter at 2 (Feb. 15, 2013);
CME Comment Letter at 5–6 (Feb. 15, 2013); FIA
Comment Letter at 4–5 (Feb. 15, 2013);
LCH.Clearnet Comment Letter at 4–5 (Jan. 25, 2013);
MGEX Comment Letter at 2 (Feb. 18, 2013); NPPC
Comment Letter at 2 (Feb. 15, 2013); RCG Comment
Letter at 3 (Feb. 12, 2013); RJ O’Brien Comment
Letter at 5 (Feb. 15, 2013); TD Ameritrade Comment
Letter at 4–5 (Feb. 15, 2013).

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customers and FCMs alike under the
Commission’s Proposed Residual
Interest Requirement 377 because, among
other things, this alternate approach
would not cause an extreme drain on
market liquidity, market consolidation,
increase in systemic risk, and
detrimental effect on agricultural
producers, small and mid-size FCMs,
and hedgers.378
After careful consideration of the
comments and the applicable statutory
provisions, the Commission has decided
to adopt the Proposed Residual Interest
Requirement with modifications.
Section 4d(a)(2) of the Act expressly
states that the money, securities, and
property received by an FCM from a
customer to margin, guarantee, or secure
the trades or contracts of that customer
shall be separately accounted for and
shall not be commingled with the funds
of such commission merchant or be
used to margin or guarantee the trades
or contracts, or to secure or extend the
credit, of any customer or person other
than the one for whom the same are
held.379 Moreover, the Commission
notes that when section 22 of the rules
and regulations of the Secretary of
Agriculture under the Act (the
predecessor of § 1.22) was adopted in
1937,380 the year after adoption of the
Act, it expressly stated that ‘‘No futures
commission merchant shall use, or
permit the use of, the money, securities,
or property of one customer to margin
or settle the trades or contracts, or to
secure or extend the credit, of any
person other than such customer. The
net equity of one customer shall not be
used to carry the trades or contracts or
to offset the net deficit of any other
customer or person or to carry the trades
or offset the net deficit of the same
customer in goods or property not
included in the term ‘commodity’ as
defined herein.’’ 381 This language
377 The Commission notes that representatives
from FIA, ISDA, and ADM Investor Services have
all indicated in meetings with Commission staff
that such an alternative would better protect
customers, benefit FCMs risk management
practices, and materially reduce many costs
associated with the Commission’s original proposal.
378 See ISDA Comment Letter at 3 (May 8, 2013)
(noting that a substantial majority of customer
margin calls are met by 5:00 p.m. on the day the
calls are issued and therefore the this approach
would not impose the costs and cause the problems
associated with the Proposed Residual Interest
Requirement); FIA Comment Letter at 9 (June 20,
2013) (estimating that the alternative approach
would be 10 times less costly for FCMs to finance).
See also MFA Comment Letter at 8–9 (Feb. 15,
2013); RJ O’Brien Comment Letter at 5 (Feb. 15,
2013).
379 See also section 4d(f)(2) of the Commodity
Exchange Act, as well as § 1.22 of this section and
§ 22.2(d)(1) of this chapter.
380 2 FR 1223, 1225 (July 16, 1937).
381 Id. at 1225 (emphasis supplied).

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addresses, by its terms, more than net
deficits, and appears to have remained
substantively unchanged for the next
four decades.
In 1981, in its Regulation of Domestic
Exchange-Traded Commodity Options,
the Commission revised § 1.22 to
combine segregation requirements for
options with existing segregation
requirements for futures.382 In doing so,
the Commission generalized the
regulatory language and deleted specific
references to ‘‘net equity.’’ However,
neither the adopting release nor the
proposing release for the ‘‘Regulation of
Domestic Exchange-Traded Commodity
Options’’ rulemaking indicated an
intent to alter or modify the existing
segregation requirements for futures.383
The current version of § 1.22 states
that ‘‘[n]o futures commission merchant
shall use, or permit the use of, the
futures customer funds of one futures
customer to purchase, margin, or settle
the trades, contracts, or commodity
options of, or to secure or extend the
credit of, any person other than such
futures customer.’’
The Commission’s Proposed Residual
Interest Requirement was intended to
ensure compliance with section 4d(a)(2)
and § 1.22 by shifting the risk of loss in
the event of a double default back to the
customer whose positions incurred the
loss and away from those customers
with excess margin at the FCM.
Contrary to the assertion of certain
commenters, whenever an FCM uses the
funds of customers with excess margin
to collateralize the positions of
undermargined customers, the
customers with excess funds are subject
to heightened risk, and diminished
availability of those excess funds for
transfer in the event the FCM is in
financial distress.
Nonetheless, commenters asserted
that there is ambiguity regarding (1) the
point at which an FCM has ‘‘used’’ or
‘‘permitted the use’’ of the futures
customer funds of one futures customer
to purchase, margin, or settle the trades,
contracts, or commodity options of, or
to secure or extend the credit of, another
futures customer, and (2) what an FCM
382 See

46 FR 54500 (Nov. 3, 1981).
id. at 54508 (Final Release) (stating that
because the Commission did not receive any
comments on its proposed regulations relating to
segregation of customer funds, it was adopting the
amendments essentially as proposed). In addition,
in stating that ‘‘the Commission is now proposing
that the option segregation requirements be
combined with the existing segregation
requirements for futures,’’ the proposing release
noted that certain definitions ‘‘have also been
added or modified to permit defined terms to be
used in the sections, as amended, and thereby
simplify the regulations.’’ See 46 FR 33293–01,
33298 (June 29, 1981).
383 See

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68549

is required to do to comply with this
requirement. Accordingly, the
Commission is adopting proposed
§§ 1.20(i) and 1.22 with certain
modifications.
First, the Commission is revising
proposed § 1.20(i) by removing the
Proposed Residual Interest Requirement
from paragraph (i)(4). In addition, the
Commission is revising the language in
§ 1.22 to add an amended residual
interest requirement and additional
technical corrections to § 1.20(i) as
described further below. Moreover, the
Commission is reorganizing proposed
§ 1.22 as follows: (1) The sentence that
reads ‘‘No futures commission merchant
shall use, or permit the use of, the
futures customer funds of one futures
customer to purchase, margin, or settle
the trades, contracts, or commodity
options of, or to secure or extend the
credit of, any person other than such
futures customer.’’ will be in paragraph
(a); (2) the remaining language in
proposed paragraph (a) will be deleted;
(3) the sentence that reads ‘‘Futures
customer funds shall not be used to
carry trades or positions of the same
futures customer other than in contracts
for the purchase of sale of any
commodity for future delivery or for
options thereon traded through the
facilities of a designated contract
market.’’ will remain in paragraph (b);
and (4) as discussed below, a new
paragraph (c) will be added to address
the revised residual interest
requirements.
As highlighted above, several
commenters questioned the ability of
FCMs to measure compliance on a
continuous and real-time basis,384 and
argued that the potential cost associated
with a continuous residual interest
requirement would have an adverse
impact on the market.385 The
Commission is persuaded that
continuous calculation and monitoring
requirements are not technologically
feasible at this time. The Commission is
also persuaded that it would not be
practical to make such calculations in
the futures markets based on intra-day
384 See, e.g., Advantage Comment Letter at 8 (Feb.
15, 2013); CMC Comment Letter at 2 (Feb. 15, 2013);
CME Comment Letter at 5–6 (Feb. 15, 2013); FIA
Comment Letter at 4–5 (Feb. 15, 2013);
LCH.Clearnet Comment Letter at 4–5 (Jan. 25, 2013);
MGEX Comment Letter at 2 (Feb. 18, 2013); NPPC
Comment Letter at 2 (Feb. 15, 2013); RCG Comment
Letter at 3 (Feb. 12, 2013); RJ O’Brien Comment
Letter at 5 (Feb. 15, 2013); TD Ameritrade Comment
Letter at 4–5 (Feb. 15, 2013).
385 See, e.g., CMC Comment Letter at 2 (Feb. 15,
2013); CME Comment Letter at 5 (Feb. 15, 2013);
MGEX Comment Letter at 2 (Feb. 18, 2013); NPPC
Comment Letter at 2 (Feb. 15, 2013); RJ O’Brien
Comment Letter at 4 (Feb. 15, 2013).

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changes.386 However, as discussed in
more detail below, the Commission is
persuaded that the calculations required
by the residual interest requirement are
feasible using a point in time approach.
As noted above, the Commission is
moving the Proposed Residual Interest
Requirement from proposed § 1.20(i) to
new paragraph (c) in § 1.22. Moreover,
and as suggested by commenters,387 the
Commission agrees that a point in time
approach to the determination of the
adequate size of the residual interest
amount would ‘‘ensure that an FCM has
appropriately sized the residual interest
buffer to cover the aggregated gross
margin deficiencies in respect of
customer transactions in the relevant
origin.’’ 388 Further, the Commission
agrees that this approach is consistent
with the Act and Commission
regulations, and would help ensure that
the collateral of one customer is never
used to margin the positions of another
customer.389 Moreover, the Commission
notes that a point in time approach is
consistent with the current practice
with respect to residual interest buffer
calculations for Cleared Swaps and with
the approach set forth in JAC Update
12–03.390
Accordingly, the Commission is
revising the Proposed Residual Interest
Requirement as follows. Regulation 1.22
(c)(1) defines the undermargined
amount for a futures customer’s account
as the amount, if any (i.e., the amount
must be greater than or equal to zero),
by which (i) the total amount of
collateral required for that futures
customer’s positions 391 in that account,
386 See, e.g., Advantage Comment Letter at 7 (Feb.
15, 2013); CME Comment Letter at 5 (Feb. 15, 2013);
FIA Comment Letter at 4, 15, 21–22 (Feb. 15, 2013);
MFA Comment Letter at 8 (Feb. 15, 2013); NPPC
Comment Letter at 2 (Feb. 15, 2013); RCG Comment
Letter at 3 (Feb. 12, 2013); TD Ameritrade at 4–5
(Feb. 15, 2013). Cf. ISDA Comment Letter at 1–2
(Aug. 27, 2013).
387 See ISDA Comment Letter at 6 (Feb. 15, 2013);
FIA Comment Letter at 23–25 (Feb. 15, 2013);
LCH.Clearnet comment Letter at 5 (Feb. 15, 2013);
Paul/Weiss Comment Letter at 4–5 (Feb. 15, 2013);
RJ O’Brien Comment Letter at 5 (Feb. 15, 2013).
388 Paul/Weiss Comment Letter at 4 (Feb. 15,
2013).
389 See generally id.; FIA Comment Letter at 23
(Feb. 15, 2013); ISDA Comment Letter at 4 (May 8,
2013).
390 Joint Audit Committee Regulatory Update #
12–03, Part 22 of CFTC Regulations—Treatment of
Cleared Swaps Customer Collateral—Legally
Segregated Operationally Commingled (‘‘LSOC’’)
Compliance Calculation (Oct. 18, 2012).
391 For purposes of this calculation, the FCM
should include as ‘‘positions’’ any trade or contract
that (i) would be required to be segregated pursuant
to 4d(f) of the Act or (ii) would be subject to § 30.7
of this chapter, but which is, in either case,
pursuant to a Commission rule, regulation, or order
(or a derivatives clearing organization rule
approved in accordance with § 39.15(b)(2) of this
chapter), commingled with a contract for the

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at the time or times referred to in
§ 1.22(c)(2), exceeds (ii) the value of the
net liquidating equity for that account,
as calculated in § 1.20(i)(2). An FCM is
required to perform the calculation set
forth in § 1.22(c)(1) on a customer by
customer basis. Regulation 1.22(c)(2)
requires an FCM to perform a residual
interest buffer calculation, at the close
of each business day, based on the
information available to the FCM at that
time,392 by calculating (i) the
undermargined amounts, based on the
clearing initial margin that will be
required to be maintained by that FCM
for its futures customers, at each DCO of
which the FCM is a member, at the
point of the daily settlement (as
described in § 39.14) that will complete
during the following business day for
each such DCO less (ii) any debit
balances referred to in § 1.20(i)(4)
included in such undermargined
amounts.393
An FCM is required to perform the
calculation in § 1.22(c)(2) once per day,
based on the information at the close of
business on that day, so that it can
determine the amount of customer
funds which will be needed to avoid
using the funds of one customer to
margin, guarantee, or secure the
positions of another customer.
Consistent with this revised residual
interest requirement, § 1.20(i)(4) is being
amended to state that the amount of
funds an FCM is holding in segregation
may not be reduced by any debit
balances that the futures customers of
the FCM have in their accounts. In
addition, § 1.20(i)(2)(ii) is being
removed because this requirement is
now set forth in § 1.22(c). Consistent
with Federal Register requirements,
§ 1.20(i)(2) is being renumbered and, for
clarity, the first sentence will be revised
to read as follows ‘‘The futures
commission merchant must reflect in
the account that it maintains for each
futures customer the net liquidating
equity for each such customer,

calculated as follows: the market value
of any futures customer funds that it
receives from such customer, as
adjusted by: . . . .’’ 394 Further, under
§ 1.22(c)(3), an FCM is required, prior to
the Residual Interest Deadline, as
defined in § 1.22(c)(5), to have residual
interest in the segregated account in an
amount that is at least equal to the
computation set forth in § 1.22(c)(2).395
However, the amount of residual
interest that an FCM must maintain may
be reduced to account for payments
received from or on behalf of (net of
disbursements made to or on behalf of)
undermargined futures customers
between the close of the previous
business day and the Residual Interest
Deadline.
Regulation 1.22(c)(4) provides that for
purposes of § 1.22(c)(2), an FCM should
include, as ‘‘clearing initial margin,’’
customer initial margin that the FCM
will be required to maintain, for that
FCM’s futures customers, at another
FCM, and, for purposes of § 1.22(c)(3),
must do so prior to the Residual Interest
Deadline. In other words, § 1.22(c)(4) is
intended to make clear that the
requirements with respect to futures
customer funds used by an FCM that
clears through another FCM are parallel
to the requirements applied with respect
to futures customer funds used when an
FCM clears through a DCO.
Regulation 1.22(c)(5) defines the
Residual Interest Deadline. Paragraph
(c)(5)(i) sets forth that except during the
phase-in period defined in paragraph
(c)(5)(ii), the Residual Interest Deadline
shall be the time of the settlement
referenced in paragraph (c)(2)(i), or, as
appropriate, (c)(4). However, in
response to the comments that urge that
achieving compliance with these
requirements may take time, and in
order to mitigate some of the cost
concerns raised by commenters,
paragraph (c)(5)(ii) provides that the
Residual Interest Deadline during the
phase-in period shall be 6:00 p.m.

purchase or sale of a commodity for future delivery
and any options on such contracts in an account
segregated pursuant to section 4d(a) of the Act and
should exclude as ‘‘positions’’ any trade or contract
that, pursuant to a Commission rule, regulation, or
order, is segregated pursuant to section 4d(f) of the
Act. This requirement is intended to be analogous
to the definition of Cleared Swap in § 22.1 of this
chapter.
392 An FCM is not expected to account for
changes in circumstances that occur after the close
of business and prior to the next business day’s
settlement, outside of normal end-of-day
reconciliation processes. In other words, an FCM
may use the information (such as position and
value information) available to it at the close of
each business day for this calculation.
393 This subtraction is intended to address the
potential double-counting of deficit balances that
was pointed out in a number of comments. See, e.g.,
Vanguard Comment Letter at 8 (Feb. 22, 2013).

394 As noted in the preamble to the proposal, the
purpose of the amendments to 1.20(i) is to
‘‘provid[e] more detail implementing the Net
Liquidating Method of calculating segregation
requirements.’’ 77 FR at 67882.
395 Following the completion of the phase-in
period, when the Residual Interest Deadline moves
to the time of settlement, an FCM may be subject
to multiple Residual Interest Deadlines, in which
case the FCM must maintain residual interest prior
to the Residual Interest Deadline in an amount that
is at least equal to the portion of the computation
set forth in § 1.22(c)(2) attributable to the clearing
initial margin required by the DCO making such
settlement. Thus, where an FCM is a member of
more than one DCO and the DCOs conduct their
daily settlement cycles at different times, an FCM
would be required, at the time of the daily
settlement for each DCO, to maintain the
proportionate share of residual interest in the
futures customer account.

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Eastern Time on the date of the
settlement referenced in paragraph
(c)(2)(i) or, as appropriate, (c)(4). The
phased compliance schedule for
§ 1.22(c) is set forth in § 1.22(c)(5)(iii).
However, the Residual Interest Deadline
of 6:00 p.m. Eastern Time in
§ 1.22(c)(5)(ii) shall begin one year
following the publication of this rule in
the Federal Register.396
Additionally, in further response to
the commenters’ request for additional
study,397 in paragraph (c)(5)(iii)(A), the
Commission is directing staff to
complete and publish for public
comment a report (‘‘the Report’’), no
later than 30 months following the date
of publication of this release,
addressing, to the extent information is
practically available, the practicability
(for both FCMs and customers) of
moving the Residual Interest Deadline
from 6:00 p.m. Eastern Time on the date
of the settlement referenced in
§ 1.22(c)(2)(i) to the time of that
settlement (or to some other time of
day), including whether and on what
schedule it would be feasible to do so.
The Report is also expected to address
cost and benefit considerations of such
potential alternatives. Moreover, staff
shall, using the Commission’s Web site,
solicit public comment and shall
conduct a public roundtable regarding
specific issues to be covered by the
Report. Paragraph (c)(5)(iii)(B) sets forth
that within nine months after the
publication of the Report, the
Commission may (but shall not be
required to) do either of the following:
(1) terminate the phase-in period, in
which case the phase-in shall end as of
a date established by order published in
the Federal Register, which date shall
be no less than one year after the date
such order is published, or (2)
determine that it is necessary or
appropriate in the public interest to
propose through rulemaking a different
Residual Interest Deadline, in which
event, the Commission shall establish,
by order published in the Federal
Register, a phase-in schedule. Finally,
paragraph (c)(5)(iii)(C) provides that if
the phase-in schedule has not been
396 For further discussion regarding the phase-in
schedule for the requirements in § 1.22(c), see
section III.F.
397 See, e.g., AIMA Comment Letter at 3 (Feb. 15,
2013); CCC Comment Letter at 2–3 (Feb. 15, 2013);
CHS Hedging Comment Letter at 2–3 (Feb. 15,
2013); CME Comment at 5–7 (Feb. 15, 2013); AFBF
Comment Letter at 2 (Feb. 15, 2013); Jefferies
Comment Letter at 9 (Feb. 15, 2013); JSA Comment
Letter at 1–2 (Feb. 15, 2013); NCBA Comment Letter
at 2 (Feb. 15, 2013); NGFA Comment Letter at 5
(Feb. 15, 2013); NIBA Comment Letter at 1–2 (Feb.
15, 2013); TCFA Comment Letter at 2 (Feb. 15,
2013); AFMP Group Comment Letter at 1–2 (Sept.
18, 2013).

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amended pursuant to § 1.22(c)(5)(iii)(B),
then the phase-in period shall end on
December 31, 2018.
With respect to the suggestion that a
portion (i.e., that portion attributable to
customer business) of the funds
contributed to an exchange’s guaranty
fund by an FCM should be considered
in that FCM’s residual interest
calculations,398 the Commission notes
that contributions to a guarantee fund
are not segregated for the benefit of
customers. Rather, they are, by design,
available to meet the defaults of other
clearing members, and thus cannot be
counted as customer segregated funds.
As such, the Commission declines to
adopt this suggestion.
The Commission also received several
requests for clarifications. CIEBA stated
that ‘‘while futures market participants
may be familiar with terms such as
‘residual interest’ and the technical
features of the proposed rule, other
market participants may not appreciate
the full scope of the rule and the
additional protections provided without
further explanation.’’ 399 CIEBA
requested that the Commission clarify
‘‘how this requirement is intended to
work with examples of its application so
as to more broadly communicate the
Commission’s intent to bolster the depth
of customer protections to minimize
customer risk and promote confidence
in the markets.’’ 400 The Commission
recognizes CIEBA’s concern and, as
discussed above, has provided
clarification in this release regarding the
mechanism by which FCMs measure
compliance with the statutory
requirement of 4d(a)(2). However, the
Commission also recognizes that FCMs
engage in a broad range of acceptable
business practices and should be given
flexibility in how best to tailor their
businesses to comply with such
requirement.
AIMA requested clarification that
§§ 1.17(c)(5) and 1.20(i)(4) are not
duplicative and therefore does not
require FCMs to ‘‘double count’’
residual interest.401 The Commission
reiterates that § 1.17(c)(5) and the
residual interest requirement now set
forth in 1.22(c)(2) are two separate
requirements. As discussed above,
§ 1.17 sets forth the Commission’s
minimum capital requirements for
FCMs and requires, among other things,
an FCM to incur a charge to capital for
customer and noncustomer accounts
398 See, e.g., Newedge Comment Letter at 3 (Feb.
15, 2013); RJ O’Brien Comment Letter at 5 (Feb. 15,
2013).
399 CIEBA Comment Letter at 3 (Feb. 15, 2013).
400 Id.
401 See AIMA Comment Letter at 3 (Feb. 15,
2013).

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68551

that are undermargined beyond a
specified period of time.402 The residual
interest requirements, on the other
hand, are intended to help make sure
that the collateral of one customer is
never used to margin the positions of
another customer. These requirements
are, therefore, not duplicative, and the
Final Rule does not actually require an
FCM to double count the residual
interest amount.403
Paul/Weiss requested that the
Commission confirm that the
requirements of jurisdiction and
denomination in § 1.49 do not apply to
an FCM’s cash management procedures
for meeting its residual interest
obligation.404 Paul/Weiss noted that JAC
Update 12–03,405 provides that the
denomination and jurisdiction
requirements set forth in § 1.49 do not
apply to the extent that an FCM deposits
additional funds in order to cover
margin deficiencies in the Cleared
Swaps Customer Account prior to a 406
DCO’s settlement.407 The Commission
agrees that, for purposes of meeting any
undermargined amount in a customer
account with a deposit of additional
funds prior to payment to any DCO, the
requirements of Commission § 1.49 with
respect to denomination or jurisdiction
should not apply, and accordingly, they
will not.
FCStone asked the Commission to set
price limits at levels equal to or below
the margin requirement in all
commodities to mitigate the potential
for under margined customer
positions.408 NPPC requested that the
Commission give ‘‘customers the
opportunity to ‘opt out’ of allowing
segregated funds to be used outside of
the customer accounts,’’ so that
‘‘customers can proactively protect their
funds from being used for potentially
fraudulent purposes’’ and when
‘‘coupled with higher fees to help
balance the trade off, customers could
determine the level of risk to which they
are comfortable subjecting their
funds.’’ 409 The Commission notes that
402 See

section II.F. above.
section II.F. above regarding the
requirement set forth § 1.17(c)(5).
404 Paul/Weiss Comment Letter at 6 (Feb. 15,
2013).
405 This update provides that, for purposes of
meeting any margin deficiency in the cleared swaps
customer account with a deposit of additional funds
prior to payment to any DCO, the requirements of
Commission § 1.49 with respect to denomination or
jurisdiction will not apply.
406 Paul/Weiss Comment Letter at 5–6 (Feb. 15,
2013).
407 Paul/Weiss Comment Letter at 5–6 (Feb. 15,
2013).
408 FCStone Comment Letter at 6 (Feb. 15, 2013).
409 NPPC Comment Letter at 2 (Feb. 15, 2013).
403 See

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these comments are outside the scope of
this rulemaking.
FCStone objected to proposed
§ 1.20(i), believing that the Commission
was mandating changing a customer’s
account balance to record margin
deficits, which they believe would
impact the tax treatment of customers’
accounts.410 The Commission clarifies
that the proposed amendments were not
intended to require any additional
charges to individual customer
accounts, but to ensure that the FCM
separately tracked the sum of such
amounts to ensure it was holding
residual interest in its segregated
accounts greater than the gross total of
such undermargined amounts.
10. Segregation Regimes

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Several commenters proposed that
language contained in customer account
agreements used by certain FCMs
should be restricted by the Commission.
These commenters referred to clauses
permitting customer collateral to be
pledged, liquidated or transferred by the
FCM and asked that the account
agreements be viewed as contracts of
adhesion due to the necessity to agree
to such clauses in order to open a
commodity futures trading account.411
These commenters, among other issues,
requested that the Commission limit the
ability of FCMs to require such
contractual language.
The Commission notes that any such
contractual language does not limit the
applicability of the Act and Commission
regulations with respect to the treatment
of customer property by FCMs. The
customer protection regime applies to
all segregated customer funds regardless
of any broader contractual terms.
The specific ability of an FCM to
pledge, liquidate or transfer customer
collateral is constrained by the Act and
Commission regulations regardless of
any reference in a customer agreement
to such applicable law, or a lack of
reference thereto. Section 4d is the
relevant provision of the Act that
addresses how FCMs must hold
customer funds. Section 4d(a)(2) of the
Act provides that each FCM must treat
and deal with all money, securities, and
property received by the FCM to margin,
guarantee, or secure the trades or
contracts of any customer of the FCM,
or accruing to such customer as the
410 FCStone

Comment Letter at 4 (Feb. 15, 2013).
Premier Metal Services Comment Letter at
2–3 (Jan. 1, 2013) and ISRI Comment Letter at 4–
5 (Dec. 4, 2012), which letters were cited and
supported by several other commenters. See also
Pilot Flying J Comment Letter at 2 (Feb. 14, 2013),
which stated that FCMs should not be permitted to
use customer funds for outside investments,
capitalization or collateralization.
411 See

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result of such trades or contracts, as
belonging to the customer. Section
4d(a)(2) further provides that customer
funds must be separately accounted for
and may not be commingled with the
funds of the FCM, or be used to margin
or guarantee the trades or contracts, or
to secure or extend credit, of any
customer or person other than the
customer that deposited the funds.
Commission regulations also set
requirements on how customer funds
may be held. Regulation 1.20(a)
provides that all customer funds must
be separately accounted for by the FCM
and segregated as belonging to
commodity or option customers. The
funds, when deposited with a bank,
trust company, clearing organization, or
another FCM must be deposited under
an account name that clearly identifies
the funds as belonging to customers and
shows that the funds are segregated
from the FCM’s own funds as required
by Section 4d(a)(2) of the Act.
Regulation 1.20(c) provides that each
FCM must treat and deal with the
customer funds of a customer as
belonging to the customer. The FCM
must separately accounted for customer
funds and may not commingle the funds
with the FCM’s own funds, or use the
funds to margin, guarantee, or secure
futures positions of any person, or
extend credit to any person, other than
the customer that owns the funds.
Regulation 1.25 sets forth
requirements on how FCMs may invest
customer funds. Pursuant to § 1.25, an
FCM is permitted to use customer funds
to purchase permitted investments. The
investments, however, are required to be
separately accounted for by the FCM
under § 1.26, and segregated from the
FCM’s own assets in accounts that
designate the funds as belonging to
customers of the FCM and held in
segregation as required by the Act and
Commission regulations.
FCMs also may sell customer
deposited securities under agreements
to repurchase the securities pursuant to
§ 1.25(a)(2)(ii). Regulation 1.25(d)(9)
provides that the cash transferred to the
segregation account for customer-owned
securities sold under a repurchase
agreement must be on a payment versus
delivery basis, and the customer
segregated funds account must receive
same-day funds credited to the
segregated account simultaneously with
the delivery or transfer of the securities
from the customer segregated accounts.
A customer, however, may condition its
deposits of securities with an FCM by
requiring that that FCM not engage in
reverse repurchase transactions with the
customer’s collateral.

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Accordingly, FCMs do not have an
unfettered ability to pledge,
rehypothecate, or otherwise use
customer funds (including customer
deposited securities) for their own
benefit or purposes. However, FCMs
also have the ability, as limited by all
such applicable law and regulation for
the benefit of customers, to liquidate
customer securities if the customer that
deposited the securities fails to meet a
margin call. FCMs also may pledge
customer deposited securities to DCOs
as margin for the customer accounts
carried by the FCM. The customer
collateral pledged to a DCO, however,
also must be held in customer
segregated accounts.
Even if transformed as permissible
under the Act and regulations and
contemplated by customer agreements,
such collateral maintains its character as
segregated customer property and
remains subject to the customer
protection regime. Commission staff has
further confirmed that there is
variability in the FCM community
regarding the specific language included
in customer account agreements and
that not all agreements include broad
authorities to the FCM for the use of
customer collateral. However, as noted
above, the contractual terms and
conditions could not result in an FCM
holding or using customer funds in a
manner that was not in conformity with
the Act and Commission regulations.
Several commenters also requested
that the Commission provide
alternatives to the current segregation
regime, including individual
segregation, the ability to use third-party
custodial accounts, or the ability to optout of segregation.412 While these issues
are beyond the scope of the Proposal,
the Commission notes that in adopting
the final regulations for the protection of
Cleared Swaps Customer Collateral in
February 2012, it stated that the issue of
alternative segregation regimes raise
important risk management and cost
externality issues, particularly in
ensuring that deposited collateral is
immediately available to the FCM or
DCO in the event of the default of the
customer or FCM.413 The Commission
directed staff to continue to analyze
different proposals with the goal of
developing a proposal to provide
additional or enhanced customer
protection.414 In this regard, staff is
continuing to review and meet with
412 See, e.g., ISRI Comment Letter at 6 (Dec. 4,
2013); AIM Comment Letter at 2–7 (Jan. 24, 2013);
MFA Comment Letter at 9 (Feb. 15, 2013); State
Street Comment Letter at 2 (Jan. 16, 2013).
413 77 FR 6336, 6343 (Feb. 7, 2012).
414 Id.

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industry representatives regarding
alternative segregation regimes.
In addition, the Commission noted
that customer funds held in third-party
custodial accounts constitute customer
property within the meaning of the
Bankruptcy Code. As such, positions
and collateral held in third-party
accounts are subject to the U.S.
Bankruptcy Code and applicable
provisions of the Act, which provide for
the pro rata share of available customer
property. The Commission also received
several comments requesting specific
and defined protections for funds
provided to an FCM by retail
counterparties engaged in off-exchange
foreign currency transactions.415 The
Proposal, however, focused on customer
protection issues in the futures market,
and the issue of the protection of funds
held by an FCM for retail foreign
currency counterparties is beyond the
scope of the Proposal.
H. § 1.22: Use of Futures Customer
Funds
RCG commented that the proposed
amendments to §§ 1.22, 1.23, 30.7(f) and
30.7(g) are inconsistent as to when an
FCM should use its own funds to cover
margin deficits with § 1.30, which
provides that an FCM cannot make an
unsecured loan to a customer.416 The
Commission does not believe that the
regulations are inconsistent. Regulation
§ 1.30 provides that an FCM may not
make a loan to a customer, unless such
loan is done a fully secured basis.
Regulations 1.22 and 30.7(f) provide
that an FCM cannot use the funds of one
customer to secure or extend credit to
another customer. Regulations 1.23 and
30.7(g) impose conditions upon when
an FCM may withdraw proprietary
funds from segregated accounts.
As discussed in greater detail in
section II.G.9. above, the Commission
has considered the comments and has
revised and reorganized § 1.22.
I. § 1.23: Interest of Futures Commission
Merchant in Segregated Futures
Customer Funds; Additions and
Withdrawals

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The Commission proposed amending
§ 1.23 to require additional safeguards
with respect to an FCM withdrawing
futures customer funds from segregated
415 See forex form letter group: Michael Krall;
David Kennedy; Robert Smith; Michael Carmichael;
Andrew Jackson; Donald Blais; Suzanne Slade;
Patricia Horter; JoDan Traders; Jeff Schlink; Sam
Jelovich; Matthew Bauman; Mark Phillips; Deborah
Stone; Po Huang; Aaryn Krall; Vael Asset
Management; Kos Capital; James Lowe; Tracy
Burns; Treasure Island Coins; Clare Colreavy,
Brandon Shoemaker.
416 RCG Comment Letter at 7 (Feb. 12, 2013).

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accounts that are part of the FCM’s
residual interest in such accounts.
Proposed § 1.23(a) provides that an
FCM may deposit unencumbered
proprietary funds, including securities
from its own inventory that qualify as
permitted investments under § 1.25, into
segregated futures customer accounts in
order to provide a buffer or cushion of
funds to protect against the firm failing
to maintain sufficient funds in such
accounts to meet its total obligations to
futures customers.
Under proposed § 1.23(a), an FCM has
access to its own funds deposited into
futures customer accounts to the extent
of the FCM’s residual interest in such
funds, subject to the restriction on
withdrawal of residual interest required
to cover undermargined amounts.
However, proposed § 1.23(b) prohibits
an FCM from withdrawing its residual
interest or excess funds from futures
customer accounts (any withdrawal not
made to or for the benefit of futures
customers would be considered a
withdrawal of the FCM’s residual
interest) on any given business day
unless the FCM had completed the daily
calculation of funds in segregation
pursuant to § 1.32 as of the close of the
previous business day, and the
calculation showed that the FCM
maintained excess segregated funds in
the futures customer accounts as of the
close of business on the previous
business day. Proposed § 1.23(b) further
requires that the FCM adjust the excess
segregated funds reported on the daily
segregation calculation to reflect other
factors, such as overnight and current
day market activity and the extent of
current customer undermargined or
debit balances, to develop a reasonable
basis to estimate the amount of excess
funds that remain on deposit since the
close of business on the previous day
prior to initiating a withdrawal.
The Commission proposed additional
required layers of authorization and
documentation if the withdrawal
exceeds, individually or in the aggregate
with other such withdrawals, 25 percent
or more of the FCM’s residual interest
computed as of the close of business on
the prior business day. Proposed
§ 1.23(c) prohibits an FCM from
withdrawing more than 25 percent of its
residual interest in futures customer
accounts unless the FCM’s CEO, CFO, or
other senior official that is listed as a
principal on the firm’s Form 7–R
registration statement and is
knowledgeable about the FCM’s
financial requirements (‘‘Financial
Principal’’) pre-approves the withdrawal
in writing.
Regulation 1.23(c) requires the FCM
to immediately file a written notice with

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68553

the Commission and with the firm’s
DSRO of any withdrawal that exceeds
25 percent of its residual interest. The
written notice must be signed by the
CEO, CFO, or Financial Principal that
pre-approved the withdrawal,
specifying the amount of the
withdrawal, its purpose, its recipient(s),
and contain an estimate of the residual
interest after the withdrawal. The
written notice also must contain a
representation from the person that preapproved the withdrawal that to such
person’s knowledge and reasonable
belief, the FCM remains in compliance
with its segregation obligations.
Regulation 1.23 further requires that the
official, in making this representation,
specifically consider any other factors
that may cause a material change in the
FCM’s residual interest since the close
of business on the previous business
day, including known unsecured futures
customer debits or deficits, current day
market activity, and any other
withdrawals. The written notice would
be required to be filed with the
Commission and with the FCM’s DSRO
electronically.
Proposed § 1.23(d) requires an FCM to
deposit proprietary funds sufficient to
restore the residual interest targeted
amount when a withdrawal of funds
from segregated futures customer
accounts, not for the benefit of the firm’s
customers, causes the firm to fall below
its targeted residual interest in such
accounts. The FCM must deposit the
proprietary funds into such segregated
accounts prior to the close of the next
business day. Alternatively, the FCM
may revise its targeted residual interest
amount, if appropriate, in accordance
with its written policies and procedures
for establishing, documenting, and
maintaining its target residual interest,
in accordance with the requirements of
proposed § 1.11. Proposed § 1.23 also
stated that should an FCM’s residual
interest, however, be exceeded by the
sum of the FCM’s futures customers’
margin deficits (i.e., undermargined
amounts), an amount necessary to
restore residual interest to that sum
must be deposited immediately.
Identical requirements with respect to
procedures required for withdrawals of
residual interest in Cleared Swaps
Customer Collateral Accounts and 30.7
secured accounts were proposed in
§§ 22.17(c) and 30.7(g), respectively.
NFA commented recommending that
the Commission revise the language in
§ 1.23 to keep it consistent with the
language in NFA Financial
Requirements Section 16 (prohibiting
withdrawals that are made ‘‘not for the
benefit of commodity and option
customers and foreign futures and

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foreign options customers’’).417 NFA
commented that without a definition of
‘‘proprietary use’’ a withdrawal that
may not be for an FCM’s own
proprietary use may still be a
withdrawal that is not for the benefit of
customers and, therefore, would trigger
NFA’s approval and notice requirements
pursuant to NFA Financial
Requirements Section 16, but not the
Commission’s approval and notice
requirements pursuant to § 1.23.418 NFA
also commented that the Commission
should remove proposed § 1.23(d)’s
reference to ‘‘business days’’ in order to
ensure that FCMs understand that the
requirements related to withdrawals of
25 percent or more apply at all times.419
The Commission has considered
NFA’s comment and is revising § 1.23 to
remove the term ‘‘proprietary use’’ and
is replacing it with the concept of
withdrawals that are not made to or for
the benefit of customers. The
Commission also is revising § 1.23 to
remove the reference to ‘‘business
days.’’ The revisions will more closely
align the Commission’s and NFA’s
regulations governing an FCM’s
withdrawal of proprietary funds from a
segregated account by making the
language and conditions more
consistent. This consistency of the
Commission and NFA requirements is
appropriate as it will allow FCMs to
operate under one set of conditions,
while also retaining the overall policy
goals of the Commission to limit an
FCM’s ability to withdraw funds from
segregated accounts until the FCM can
be reasonably assured that the funds are
excess, proprietary funds.420
NFA further requested the
Commission to clarify that pre-approval
of a series of transactions that in the
aggregate exceeded the 25 percent
threshold would not require after the
fact approvals of the first transactions of
the series, but only approvals of the
transactions resulting in the 25 percent
threshold being exceeded.421 The
Commission confirms that an FCM
would need to obtain the necessary
approvals only for the transaction that
caused the withdrawals to exceed the 25
percent threshold.
Jefferies commented that it generally
supported proposed amendments to
§ 1.23, but stated that requiring FCMs to
report when they draw down more than
25 percent of their residual interest will
discourage an FCM from voluntarily
417 NFA

adding to its residual interest.422
Jefferies commented that FCMs should
be permitted to withdraw any residual
interest amount in excess of their target
level and to withdraw up to 25 percent
of the target level before providing
notice, or if the last calculated residual
interest was below the target level, the
calculation should be 25 percent of the
lower amount.423 LCH.Clearnet and the
FIA also recommended revising
§§ 1.23(d) and 22.17(c) to apply only to
withdrawal of FCM funds in excess of
25 percent of the FCM’s targeted
residual interest, rather than on 25
percent of the total residual interest in
the customer segregated account,
specifically to ensure that FCMs have no
disincentive to maintain significant
excess funds above the targeted residual
interest segregation at DCOs for swaps
clearing.424
The Commission does not believe that
substituting the targeted residual
amount for the actual residual interest
amount would appropriately focus
management attention on significant
withdrawals relative to the actual, not
just target, excess, as well as clearly
establish a chain of responsibility for
such withdrawals, as is the intended
purpose of the proposed regulation. The
Commission clarifies that pre-approval
would be required, with respect to a
series of transactions, for the
transactions which would result in the
threshold being exceeded and not
earlier transactions in the series.
Accordingly, the Commission is
adopting § 1.23 and the conforming
provisions in §§ 22.17 and 30.7(g), with
changes as recommended by NFA
substituting language ‘‘not for the
benefit of customers’’ (with description
of customer as applicable to each such
provision) for ‘‘proprietary use’’ and
eliminating the reference to business
days.425
In addition, and in light of the
changes discussed herein with respect
to the residual interest requirements set
forth in §§ 1.22, 22.2, and 30.7, the
Commission is amending § 1.23 and the
conforming provisions in §§ 22.17 and
30.7(g) to make clear that if an FCM’s
residual interest is less than the
amounts required to be maintained in
§ 1.22, 22.2(f)(6), or 30.7(f), as
applicable, at any particular point in
time, the FCM must immediately restore
the residual interest to exceed the sum
of such amounts.

Comment Letter at 14 (Feb. 15, 2013).

418 Id.
419 Id.
420 The Commission also is making comparable
revisions to §§ 22.17(c) and 30.7(g) in light of NFA’s
comments.
421 Id.

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422 Jefferies Comment Letter at 4–6 (Feb. 15,
2013).
423 Id.
424 LCH.Clearnet Comment Letter at 7 (Jan. 25,
2013); FIA Comment Letter at 6 (Feb. 15, 2013).
425 See NFA Comment Letter at 14 (Feb. 15, 2013).

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J. § 1.25: Investment of Customer Funds
1. General Comments Regarding the
Investment of Customer Funds
Regulation 1.25 sets forth the
financial investments that an FCM or
DCO may make with customer funds.
The Commission received 32 comment
letters regarding the investment and
handling of customer funds by FCMs
and DCOs.426 In general, all of the
commenters supported the position that
FCMs and DCOs only be allowed to
make safe/non-speculative investments
of customer funds and not be allowed to
add risk that customers are unaware of
or do not sanction. More specifically, 29
of the commenters proposed that the
Commission amend its regulations to
provide commodity customers with the
ability to ‘‘opt out’’ of granting FCMs
permission to invest their funds
(including hypothecation and
rehypothecation).427 Additionally,
426 Schippers Comment Letter (Dec. 10, 2013),
Randy Fritsche Comment Letter (Feb. 14, 2013),
NPPC Comment Letter at 2 (Feb. 14, 2013), Strelitz/
California Metal X Comment (Jan. 15, 2013),
Premier Metal Services Comment Letter at 4 (Jan.
3, 2013), ISRI Comment Letter at 5–7 (Dec. 4, 2012),
AIM Comment Letter at 4 (Jan. 24, 2013), Kripke
Enterprises Comment Letter (Dec. 12, 2012),
Manitoba Comment Letter (Dec. 13, 2012), Solomon
Metals Corp. Comment Letter (Jan. 15, 2013),
Michael Krall Comment Letter (Dec. 17, 2012),
David Kennedy Comment Letter (Dec. 17, 2012),
Robert Smith Comment Letter (Dec. 17, 2012),
Michael Carmichael Comment Letter (Dec. 17,
2012), Andrew Jackson Comment Letter (Dec. 17,
2012), Donald Blais Comment Letter (Dec. 17,
2012), Suzanne Slade Comment Letter (Dec. 17,
2012), Patricia Horter Comment Letter (Dec. 17,
2012), JoDan Traders Comment Letter (Dec. 17,
2012), Jeff Schlink Comment (Dec. 18, 2012), Sam
Jelovich Comment Letter (Dec. 18, 2012), Matthew
Bauman Comment Letter (Dec. 20, 2012), Mark
Phillips Comment Letter (Dec. 22, 2012), Deborah
Stone Comment Letter (Dec. 24, 2012), Po Huang
Comment Letter (Dec. 24, 2012), Aarynn Krall
Comment Letter (Jan. 8, 2013), Vael Asset
Management Comment Letter (Jan. 10, 2013), Kos
Capital Comment Letter (Jan. 11, 2013), James Lowe
Comment Letter (Jan. 13, 2013), Tracy Burns
Comment Letter (Jan. 14, 2013), Treasure Island
Coins Comment Letter (Jan. 14, 2013), and Clare
Colreavy Comment Letter (Jan. 9, 2013).
427 NPPC Comment Letter at 2 (Feb. 14, 2013),
Premier Metal Services Comment Letter at 4 (Jan.
3, 2013), ISRI Comment Letter at 5–7 (Dec. 4, 2012),
AIM Comment Letter at 4 (Jan. 24, 2013), Kripke
Enterprises Comment Letter (Dec. 12, 2012),
Manitoba Comment Letter (Dec. 13, 2012), Solomon
Metals Corp. Comment Letter (Jan. 15, 2013),
Michael Krall Comment Letter (Dec. 17, 2012),
David Kennedy Comment Letter (Dec. 17, 2012),
Robert Smith Comment Letter (Dec. 17, 2012),
Michael Carmichael Comment Letter (Dec. 17,
2012), Andrew Jackson Comment Letter (Dec. 17,
2012), Donald Blais Comment Letter (Dec. 17,
2012), Suzanne Slade Comment Letter (Dec. 17,
2012), Patricia Horter Comment Letter (Dec. 17,
2012), JoDan Traders Comment Letter (Dec. 17,
2012), Jeff Schlink Comment Letter (Dec. 18, 2012),
Sam Jelovich Comment Letter (Dec. 18, 2012),
Matthew Bauman Comment Letter (Dec. 20, 2012),
Mark Phillips Comment Letter (Dec. 22, 2012),
Deborah Stone Comment Letter (Dec. 24, 2012), Po
Huang Comment Letter (Dec. 24, 2012), Aarynn

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
seven of the 29 commenters requested
that the Commission also mandate that
an FCM cannot prevent a customer who
so ‘‘opts out’’ from continuing to trade
through that FCM merely because the
customer elected to ‘‘opt out.’’ 428
The Commission did not propose to
amend the list of permitted investments
set forth in § 1.25, and believes that the
current investments and regulatory
requirements establish an appropriate
balance between providing investment
opportunities for FCMs with the overall
objective of protecting customer funds.
As further discussed in section II.L.
below, the Commission also is
amending § 1.29 to explicitly provide
that an FCM is responsible for any
losses resulting from the investment of
customer funds under § 1.25.
The Commission further notes that
the current regulatory structure does not
provide for a system whereby customers
can elect to ‘‘opt-out’’ of segregation or
§ 1.25. In the event of the insolvency of
an FCM, where there also was a shortfall
in customer funds, customers would be
entitled to a pro-rata distribution of
customer property under section 766 of
the U.S. bankruptcy code.429 Therefore,
even if a customer was permitted by the
FCM to ‘‘opt-out’’ of segregation, the
funds held by the FCM would be pooled
with other customer funds and
distributed on a pro-rata basis to all
customers participating in that account
class.

TKELleY on DSK3SPTVN1PROD with RULES2

2. Reverse Repurchase Agreement
Counterparty Concentration Limits
Regulation 1.25 provides that FCMs
and DCOs may use customer funds to
purchase securities from a counterparty
under an agreement for the resale of the
securities back to the counterparty
(‘‘reverse repurchase agreements’’).
Regulation 1.25 places conditions on
reverse repurchase agreements,
including, limiting counterparties to
certain banks and government securities
brokers or dealers, and prohibiting an
FCM or DCO from entering into such
agreements with an affiliate. Regulation
1.25(b)(3)(v) also imposes a
counterparty concentration limit on
Krall Comment Letter (Jan. 8, 2013), Vael Asset
Management Comment Letter (Jan. 10, 2013), Kos
Capital Comment Letter (Jan. 11, 2013), James Lowe
Comment Letter (Jan. 13, 2013), Tracy Burns
Comment Letter (Jan. 14, 2013), Treasure Island
Coins Comment Letter (Jan. 14, 2013), and Clare
Colreavy Comment Letter (Jan. 9, 2013).
428 NPPC Comment Letter at 2 (Feb. 14, 2013);
Premier Metal Services Comment Letter at 4 (Jan.
3, 2013); ISRI Comment Letter at 6 (Dec. 4, 2012);
AIM Comment Letter at 6 (Jan. 24, 2013); Kripke
Enterprises Comment Letter (Dec. 10, 2012);
Manitoba Comment Letter (Dec. 13, 2012); and
Solomon Metals Corp Comment Letter (Jan, 15,
2013).
429 11 U.S.C. 766.

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reverse repurchase agreements that
prohibits an FCM or DCO from
purchasing securities from a single
counterparty that exceeds 25 percent of
the total assets held in segregation by
the FCM or DCO.
The Commission proposed to amend
§ 1.25(b)(3)(v) to require an FCM or DCO
to aggregate the value of the securities
purchased under reverse repurchase
agreements if the counterparties are
under common control or ownership.
The aggregate value of the securities
purchased under a reverse repurchase
agreement from the counterparties
under common ownership or control
could not exceed 25 percent of the total
assets held in segregation by the FCM or
DCO. The Commission proposed the
amendment as it believed that the
expansion of the counterparty
concentration limitation to
counterparties under common
ownership or control is consistent with
the original intent of the regulation, and
to minimize potential losses or
disruptions due to the default of a
counterparty.
The Commission received comments
from LCH.Clearnet and CFA in support
of the proposed amendments.430 No
other comments were received. The
Commission is adopting the
amendments as proposed.
K. § 1.26: Deposit of Instruments
Purchased With Futures Customer
Funds
Regulation 1.26 requires each FCM or
DCO that invests customer funds in
instruments listed under § 1.25 to
separately account for such instruments
and to segregate the instruments from its
own funds. An FCM or DCO also must
deposit the instruments under an
account name which clearly shows that
they belong to futures customers and
that the instruments are segregated as
required by the Act and Commission
regulations. The FCM or DCO also must
obtain and retain in its files a written
acknowledgment from the depository
holding the instruments stating that the
depository was informed that the
instruments belong to futures customers
and that the instruments are being held
in accordance with the provisions of the
Act and Commission regulations.
The Commission proposed amending
§ 1.26 to specify how direct investments
by FCMs and DCOs in money market
mutual funds (‘‘MMMFs’’) that qualify
as permitted investments under § 1.25
must be held, and to adopt a Template
Letter to be used with respect to direct
investments in qualifying MMMFs. Like

the proposed Template Letters for
§§ 1.20 and 30.7, the proposed Template
Letter for § 1.26 contained provisions
providing for read-only access and
release of shares upon instruction from
the director of the Division of Clearing
and Risk, the director of the Division of
Swap Dealer and Intermediary
Oversight, or any successor divisions, or
such directors’ designees.
With respect to the Template Letter
for MMMFs, ICI noted that costs to
create electronic access to FCM
accounts at an MMMF would be ‘‘borne
by all investors and not just by FCMs,’’
which likely only constitute a small
percentage of an MMMF’s investors.431
As an alternative, ICI proposed that the
Template Letter be amended to require
the MMMF to provide FCM account
data promptly (i.e., within 48 hours)
upon request.432 ICI also commented
that the Commission should confirm: (1)
The ‘‘examination or audit’’ of the
accounts authorized by the
acknowledgment letter is limited to
verification of account balances and that
further inspection of an MMMF itself
would be referred to the SEC as primary
regulator; and (2) the proposal would
require only those MMMFs in which
FCMs directly invest customer funds (as
opposed to those held through
intermediated positions like omnibus
accounts or intermediary-controlled
accounts) to agree to provide FCM
account information.433
The Commission originally proposed
one Template Letter, Appendix A to
§ 1.26, to be used by both FCMs and
DCOs when investing customer funds in
an MMMF. However, as noted above in
the discussion of the § 1.20 Template
Letters, the Commission has determined
to eliminate the read-only access
requirement for DCOs. Therefore, the
Commission is adopting different
Template Letters for FCMs and DCOs in
§ 1.26. The Template Letter specific to
FCMs is now set forth in Appendix A
to § 1.26, and the Template Letter for
DCOs is set forth in Appendix B to
§ 1.26. The Commission has made other
modifications to the § 1.26 Template
Letters consistent with the
modifications to the § 1.20 Template
Letters.
The Commission also confirms that
examination of accounts authorized by
the acknowledgment letter would not
involve regulation or examination of the
MMMF itself, over which the
Commission does not have supervisory
or regulatory authority. The
examination would be limited to
431 ICI

430 LCH.Clearnet

Comment Letter at 4 (Jan. 25,
2013); CFA Comment Letter at 6 (Feb. 13, 2013).

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68555

Comment Letter at 4–5 (Jan. 14, 2013).
at 5.
433 Id. at 4–6 (Jan.14, 2013).
432 Id.

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verification of the account shares of the
FCM or DCO, and the Template Letters
required under § 1.26 are solely
applicable to directly-held investments
in MMMFs. For the purpose of
clarification, an FCM or DCO that holds
shares of an MMMF in a custodial
account at a depository (not directly
with the MMMF or its affiliate) is
required to execute the Template Letter
set forth in Appendix A or B of
Regulation 1.20, as applicable. In
addition, a MMMF would be required to
provide the Commission with read-only
access to accounts holding customer
funds only if the FCM directly deposits
customer funds with the MMMF.
Proposed paragraph (b) of § 1.26 has
been modified to include a reference to
Appendix B to § 1.20. Otherwise, the
Commission is adopting § 1.26 as
proposed.

TKELleY on DSK3SPTVN1PROD with RULES2

L. § 1.29: Increment or Interest Resulting
From Investment of Customer Funds
1. FCM’s Responsibility for Losses
Incurred on the Investment of Customer
Funds
Regulation 1.29 currently provides
that an FCM or DCO is not required to
pass the earnings from the investment of
futures customer funds to the futures
customers. An FCM or DCO may retain
any interest or other earnings from the
investment of futures customer funds.
The Commission proposed to amend
§ 1.29 to explicitly provide that an FCM
or DCO is responsible for any losses
incurred on the investment of customer
funds. Investment losses cannot be
passed on to futures customers. As the
Commission noted in the Proposal, an
FCM may not charge or otherwise
allocate investment losses to the
accounts of the FCM’s customers. To
allocate losses on the investment of
customer funds would result in the use
of customer funds in a manner that is
not consistent with section 4d(a)(2) and
§ 1.20, which provides that customer
funds can only be used for the benefit
of futures customers and limits
withdrawals from futures customer
accounts, other than for the purpose of
engaging in trading, to certain
commissions, brokerage, interest, taxes,
storage or other fees or charges lawfully
accruing in connection with futures
trading.434 Section 4d(b) of the Act also
provides that it is unlawful for a DCO
to use customer funds as belonging to
any person other than the customers of
the FCM that deposited the funds with
the DCO. Accordingly, such investment
losses are the responsibility of the FCM
or DCO, as applicable. Similar
434 77

FR 67866, 67888.

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regulations were proposed for Cleared
Swaps Customer Collateral under part
22 (§ 22.2(e)(1)), and for 30.7 customer
funds under part 30 (§ 30.7(i)).
FIA and CFA supported the proposed
amendments to § 1.29.435 No other
comments were received. The
Commission adopts the amendments to
§§ 1.29, 22.2(e)(1), and 30.7(i) as
proposed.
2. FCM’s Obligation in Event of Bank
Default
The Commission requested comment
on the extent of an FCM’s responsibility
to cover losses in the event of a default
of by a bank holding customer funds.
The CFA commented that FCM’s should
be responsible as such an obligation will
require that FCMs conduct adequate due
diligence on the banks in which they
place customers’ funds, a factor that
should limit the effect of a related future
bank failure.436
The FIA noted that the Commodity
Exchange Authority issued an
Administrative Determination in 1971
setting out the appropriate standard of
liability for an FCM in the event of a
bank default.437 The FIA also stated that
the deposit of customer funds in a bank
or trust company is not an investment
of customer funds under § 1.25, but is a
requirement by the Act and Commission
regulations.438 The FIA stated that
FCMs should not be strictly liable for a
bank’s failure, and that to hold FCMs to
such a standard would presume that
FCMs have the ability to know more
about a bank than the regulatory
435 FIA Comment Letter at 30–31 (Feb. 15, 2013);
CFA Comment Letter at 6 (Feb. 13, 2013).
436 CFA Comment Letter at 6 (Feb. 13, 2013).
437 FIA Comment Letter at 32–33 (Feb. 15, 2013).
The Administrative Determination applies to both
FCM and DCO deposits at banks, and provides as
follows:
To: Associate Administrator
Division Directors
Regional Directors
If a futures commission merchant or a clearing
association deposits regulated commodity
customers’ funds in a bank and the bank is later
closed and unable to repay the funds, the liability
of the futures commission merchant or clearing
association would depend upon the manner in
which the account was handled. It would not be
liable if it had used due care in selecting the bank,
had not otherwise breached its fiduciary
responsibilities toward the customers, and had fully
complied with the requirements of the Commodity
Exchange Act and the regulations thereunder
relating to the handling of customers’ funds. If two
banks were available in a particular city only one
of which was a member of FDIC and the futures
commission merchant or clearing association
without a compelling reason elected to use the
nonmember bank, we would contend that it had not
used due care in its selection.
Administrative Determination No. 230 issued by
Alex Caldwell, Administrator, Commodity
Exchange Authority (Nov. 23, 1971).
438 FIA Comment Letter at 32–33 (Feb. 13, 2013).

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authorities responsible for overseeing
the banks.439
The FIA further stated that the
Commission’s new § 1.11 will require
each FCM to establish and enforce
written policies and procedures
reasonably designed to assure
compliance with the segregation
requirements. The policies and
procedures also must include a process
for the evaluation of depositories, and a
program to monitor a depository on an
ongoing basis, including a thorough due
diligence review of each depository at
least annually. FIA notes that the
policies and procedures will be subject
to Commission and DSRO review, and
that either the Commission or DSRO can
direct the FCM to make any changes to
address identified weaknesses in the
policies or procedures, or in their
enforcement.440
Advantage stated that the deposit of
customer funds into a bank is not an
investment of the funds, and FCMs
should be able to assume that banks are
properly vetted by the relevant banking
and futures regulatory authorities.441
The Commission has considered the
issue and believes the issue of
depository risk raises important legal
and policy issues that were not
addressed in the Administrative
Determination. There are considerable
reasons to question whether the
Administrative Determination is
consistent with the CEA and the
Commission’s regulations thereunder.
Customers entrust their funds to FCMs,
who are required by the Act and
Commission regulations to treat the
funds as belonging to the customers, to
segregate the funds from the FCM’s own
funds, and to hold such funds in
specially designated accounts that
clearly state that the funds belong to
commodity customers of the FCM and
are being held as required by the Act
and Commission regulations. Customers
do not select the depositories to hold
these funds; FCMs do. FCMs are
responsible for conducting the initial
due diligence and ongoing monitoring
of depositories holding customer funds.
Moreover, as a practical matter, FCMs
are in a better position than customers
to perform these functions, as well as in
a better position than the customers
individually to make claim in the
insolvency proceeding for the
depository.442
439 Id.
440 Id.
441 Advantage Comment Letter at 3 (Feb. 15,
2013).
442 By a parity of reasoning, this would also apply
to relationships between DCOs and FCMs. Indeed,
it would be difficult to see how a DCO would be
liable for such losses, but an FCM would not.

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

M. § 1.30: Loans by Futures Commission
Merchants: Treatment of Proceeds
Regulation 1.30 provides that an FCM
may lend its own funds to customers on
securities and property pledged by such
customers, and may repledge or sell
such securities and property pursuant to
specific written agreement with such
customers. This provision generally
allows customers to deposit non-cash
collateral as initial and variation
margin. Absent the provision, an FCM
may be required to liquidate the noncash collateral if the customer was
subject to a margin call that could not
be met with other assets in the
customer’s account. Regulation 1.30
further provides that the proceeds of
loans used to margin the trades of
customers shall be treated and dealt

with by an FCM as belonging to such
customers, in accordance with and
subject to the provisions of the Act and
regulations.
The Commission proposed to amend
§ 1.30 by adding that an FCM may not
lend funds to a customer for margin
purposes on an unsecured basis, or
secured by the customer’s trading
account. The Commission stated in the
Proposal that it did not believe that
FCMs extended unsecured credit as a
common practice, as the FCM would be
required to take a 100 percent charge to
capital for the value of the unsecured
loan under § 1.17. The Commission also
noted that a trading account did not
qualify as collateral for the loan under
§ 1.17 and the FCM would have to take
a charge to capital for the full value of
the unsecured loan. The Commission
further noted that the proposed
amendment to § 1.30 was consistent
with CME Rule 930.G, which provides
that a clearing member may not make
loans to account holders to satisfy their
performance bond requirements unless
such loans are secured by readily
marketable collateral that is otherwise
unencumbered and which can be
readily converted into cash.444
RCG commented that it believes that
the proposal prohibiting an FCM from
making unsecured loans to customers
contradicts proposed § 1.22 as it applies
to funding customers’ margin
deficits.445 The Commission notes that
the requirement in § 1.22 for an FCM to
cover an undermargined account with
its own funds is intended to ensure that
the FCM complies with section 4d of the
Act by not using the funds of one
futures customer to margin or guarantee
the commodity interests of another
customer. The FCM is obligated under
section 4d to maintain sufficient funds
in segregation to cover undermargined
accounts. The FCM, however, is not
loaning funds to a particular customer
as performance bond is contemplated by
§ 1.30. When the FCM deposits
proprietary funds into segregated
accounts under § 1.22, the FCM is not
loaning any particular customer funds,
and the customers with an
undermargined account are not credited
with an increase in their cash balance.
Newedge also requested confirmation
the proposed prohibition in § 1.30
preventing an FCM from loaning
unsecured funds to a customer to
finance such customer’s trading would
not prohibit an FCM, when computing
a customer’s margin requirement, from
giving credit for the customer’s long

443 This discussion does not apply to funds that
have been deposited with a third-party depository
selected by a customer.

444 See CME rulebook at www.cmegroup.com/
rulebook/CME/I/9/9.pdf.
445 RCG Comment Letter at 4 (Feb. 12, 2013).

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Importantly, the AD fails to address
the question of precisely which
customers are exposed to depository
losses, and how much should be
allocated to each such customer. This
question is particularly important in the
context of omnibus customer accounts
permitted in the futures industry.
Would losses be allocated to persons
who are customers at the point the
depository becomes insolvent, to
persons who were customers at any
point the FCM maintained funds at the
depository, or to persons who were
customers at the point the losses were
crystalized? Would losses be allocated
to all customers, or could certain
favored customers avoid such exposure
by negotiation? If the depository lost
only securities, would customers who
deposited only cash share in the loss? If
the depository lost only cash, would
customers who deposited only
securities share in the loss? Would
customers whose margin was all used to
cover requirements at the DCO share in
losses of funds at a depository other
than a DCO? Moreover, would
customers to whom losses were
allocated share in dividends recovered
from the estate of the defaulting
depository? How would such customers
have the practical opportunity to
demonstrate their claims in such a
proceeding? How and when would such
recoveries be distributed to such
customers? These practical questions,
none of which was answered in the
Administrative Determination, call its
wisdom into question.443
Accordingly, the Commission has
directed staff to inquire into these
issues, and to develop an appropriate
proposed rulemaking.

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option value. The Commission confirms
that an FCM may continue to consider
a customer’s long option value when
computing such customer’s overall
account value and margin
requirements.446
The Commission is adopting the
amendments to § 1.30 as proposed.
N. § 1.32: (§ 22.2(g) for Cleared Swaps
Customers and § 30.7(l) for Foreign
Futures and Foreign Options
Customers): Segregated Account: Daily
Computation and Record
The Commission proposed to amend
§ 1.32 to require additional safeguards
with respect to futures customer funds
on deposit in segregated accounts, and
to require FCMs to provide twice each
month a detailed listing to the
Commission of depositories holding
customer funds.447
Regulation 1.32 requires an FCM to
prepare a daily record as of the close of
business each day detailing the amount
of funds the firm holds in segregated
accounts for futures customers trading
on designated contract markets, the
amount of the firm’s total obligation to
such customers computed under the Net
Liquidating Equity Method, and the
amount of the FCM’s residual interest in
the futures customer segregated
accounts. In performing the calculation,
an FCM is permitted to offset any
futures customer’s debit balance by the
market value (less haircuts) of any
readily marketable securities deposited
by the particular customer with the
debit balance as margin for the account.
The amount of the securities haircuts
are as set forth in SEC Rule 15c3–
1(c)(vi).
FCMs are required to perform the
segregation calculation prior to noon on
the next business day, and to retain a
record of the calculation in accordance
with § 1.31. Both the CME and NFA
require their respective member FCMs
to file the segregation calculations with
the CME and NFA, as appropriate, each
business day. FCMs, however, are only
required to file a segregation calculation
with the Commission at month end as
part of the Form 1–FR–FCM (or FOCUS
Reports for dual-registrant FCM/BDs).
Regulation 1.12, as discussed in section
II.C. above, requires the FCM to provide
immediate notice to the Commission
and to the firm’s DSRO if the FCM is
undersegregated at any time.
446 Newedge

Comment Letter at 5 (Feb. 15, 2013).
Commission also proposed amendments
to § 22.2(g) and § 30.7(l) to impose requirements for
Cleared Swaps and foreign futures and foreign
options transactions, respectively, that correspond
to the proposed amendments for § 1.32. The
comments for §§ 1.32, 22.2(g), and 30.7(l) are
addressed in this section.
447 The

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TKELleY on DSK3SPTVN1PROD with RULES2

The Commission proposed to amend
§ 1.32 to require each FCM to file its
segregation calculation with the
Commission and with its DSRO each
business day. The Commission also
proposed to amend § 1.32 to require
FCMs to use the Segregation Schedule
contained in the Form 1–FR–FCM (or
FOCUS Report for dual-registrant FCM/
BDs) to document its daily segregation
calculation.448
As previously noted, the CME and
NFA require their respective member
FCMs to file their segregation
calculations with them on a daily basis.
The CME and NFA also require the
FCMs to document their segregation
calculation using the Segregation
Schedule contained in the Form 1–FR–
FCM. Therefore, the additional
requirement of filing a Segregation
Schedule with the Commission is not a
material change to the regulation and is
consistent with current practices.449
The Commission stated in the
Proposal that the filing of daily
Segregation Schedules by FCMs will
enhance its ability to monitor and
protect customer funds as the
Commission will be able to determine
almost immediately upon receipt of the
Segregation Schedule whether a firm is
undersegregated and immediately take
steps to determine if the firm is
experiencing financial difficulty or if
customer funds are at risk.450
The Commission also proposed to
require an FCM to file its Segregation
Schedule with the Commission and
with the FCM’s DSRO electronically
using a form of user authentication
assigned in accordance with procedures
established or approved by the
Commission. The Commission currently
receives the Segregation Schedule
electronically via the WinJammer filing
system and the proposal would
continue to require FCMs to submit the
forms using WinJammer.
The Commission also proposed to
amend § 1.32(b) to provide that in
determining the haircuts for commercial
paper, convertible debt instruments, and
nonconvertible debt instruments
448 Each FCM currently already submits a daily
Segregation Schedule to its DSRO pursuant to rules
of the CME and NFA. Therefore, the Commission’s
amendments are codifying current regulatory
practices for each FCM.
449 In fact, since FCMs file the Segregation
Schedules with the CME and NFA via WinJammer,
the Commission already has access to the filings,
and the amendment will not require an FCM to
change any of its operating procedures.
450 Each Form 1–FR–FCM and FOCUS Report is
received by the Commission via WinJammer. The
financial forms are automatically electronically
reviewed within several minutes of being received
by the Commission and if a firm is undersegregated
an alert is immediately issued to Commission staff
members via an email notice.

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deposited by customers as margin, the
FCM may develop written policies and
procedures to assess the credit risk of
the securities as proposed by the SEC
and discussed more fully in section II.F.
above. If the FCM’s assessment of the
credit risk is that it is minimal, the FCM
may apply haircut percentages that are
lower than the 15 percent default
percentage under SEC Rule 15c3–
1(c)(2)(vi).
The Commission also proposed to
amend § 1.32 by requiring each FCM to
file detailed information regarding
depositories and the substance of the
investment of customer funds under
§ 1.25. Proposed paragraphs (f) and (j) of
§ 1.32 require each FCM to submit to the
Commission and to the firm’s DSRO a
listing of every bank, trust company,
DCO, other FCM, or other depository or
custodian holding customer funds. The
listing must specify separately for each
depository the total amount of cash and
§ 1.25 permitted investments held by
the depository for the benefit of the
FCM’s customers. Specifically, each
FCM must list the total amount of cash,
U.S. government securities, U.S. agency
obligations, municipal securities,
certificates of deposit, money market
mutual funds, commercial paper, and
corporate notes held by each depository,
computed at current market values. The
listing also must specify: (1) If any of the
depositories are affiliated with the FCM;
(2) if any of the securities are held
pursuant to an agreement to resell the
securities to a counterparty (reverse
repurchase agreement) and if so, how
much; and (3) the depositories holding
customer-owned securities and the total
amount of customer-owned securities
held by each of the depositories.
Each FCM is required to submit the
listing of the detailed investments to the
Commission and to the firm’s DSRO
twice each month. The filings must be
made as of the 15th day of each month
(or the next business day, if the 15th day
of the month is not a business day) and
the last business day of the month. The
filings are due to the Commission and
to the firm’s DSRO by 11:59 p.m. on the
next business day.
Proposed paragraph (k) of § 1.32
requires each FCM to retain the
Segregation Statement prepared each
business day and the detailed
investment information, together with
all supporting documentation, in
accordance with § 1.31.
FIA generally supported the
proposal.451 FIA noted that proposed
§ 1.32(a) requires an FCM to compute its
daily segregation requirement on a
currency-by-currency basis, and

requested that the Commission confirm
that a single Segregation Schedule can
be completed for each account class
(i.e., futures customers funds, Cleared
Swaps Customers funds, and § 30.7
customer funds) on a U.S. dollarequivalent basis. FIA further stated that
the detail regarding the investment of
customer funds provided by NFA on its
Web site is the appropriate level of
detail that should be made public
because additional detail would
disclose proprietary financial and
business information.452
Jefferies supported the proposal, and
recommended that the listing of detailed
investments should include all
investments, including cash and other
investments, regardless of where the
investments are held, and should
provide greater transparency for the
FCMs’ customers.453 MFA supported
the proposed amendments to § 1.32 to
require FCMs to provide the
Commission and their DSROs with: (1)
Daily reporting of the segregation and
part 30 secured amount computations;
and (2) semi-monthly reporting of the
location of customer funds and how
such funds are invested under § 1.25.454
The Commission has considered the
comments and is adopting the
amendments to §§ 1.32, 22.2(g), and
30.7(l) as proposed. In response to
Jefferies comment, the Commission
notes that the proposed and final
regulation require an FCM to report all
investments, including cash and other
investments, regardless of where the
investments are held.
In response to FIA’s comment, the
Commission does not believe that a full
disclosure of the investment of customer
funds would disclose proprietary
information of the FCM. The
Commission would require the disclose
of investment information in a manner
consistent with the current NFA
disclosures, which includes, for each
FCM, the percentage of the invested
customer funds that are held by banks,
or invested in U.S. government
securities, bank certificates of deposit,
money market funds, municipal
securities, and U.S. government
sponsored enterprise securities. The
Commission, however, further believes
that FCMs also should disclose the
amount of customer funds that are held
by clearing organizations and brokers.
The Commission also believes that
FCMs should disclose the amount of
customer-owned securities that are on
deposit as margin collateral, and
information regarding repurchase
452 Id.

at 31.
Comment Letter at 4 (Feb. 15, 2013).
454 MFA Comment Letter at 3 (Feb. 15, 2013).
453 Jefferies

451 FIA

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transactions involving customer funds
or securities. The additional disclosures
will provide customers and the market
with additional information that may be
relevant to their assessment of the risks
of placing their funds with a particular
FCM. The Commission further notes
that it plans to work with the SROs to
determine the most efficient and
effective method to disclose this
information to the public.
The Commission also confirms that an
FCM satisfies the requirement of § 1.32
if it prepares and submits to the
Commission, and to its DSRO, a
consolidated Segregation Schedule for
each account class on a U.S. dollarequivalent basis. The FCM, however,
must prepare segregation records on a
daily basis on a currency-by-currency
basis to ensure compliance with § 1.49,
which governs how FCMs may hold
funds in foreign depositories. The FCM
is not required under § 1.32 to file the
currency-by-currency segregation
records with the Commission or with its
DSRO.
O. § 1.52: Self-regulatory Organization
Adoption and Surveillance of Minimum
Financial Requirements
SROs are required by the Act and
Commission regulations to monitor their
member FCMs for compliance with the
Commission’s and SROs’ minimum
financial and related reporting
requirements. Specifically, DCM Core
Principle 11 provides, in relevant part,
that a board of trade shall establish and
enforce rules providing for the financial
integrity of any member FCM and the
protection of customer funds.455 In
addition, section 17 of the Act requires
NFA to establish minimum capital,
segregation, and other financial
requirements applicable to its member
FCMs, and to audit and enforce
compliance with such requirements.456
The Commission also has established
in § 1.52 minimum elements that each
SRO financial surveillance program
must contain to satisfy the statutory
objectives of Core Principle 11 and
section 17 of the Act. In this regard,
§ 1.52 requires, in part, each SRO to
adopt and to submit for Commission
approval rules prescribing minimum
financial and related reporting
requirements for member FCMs. The
rules of the SRO also must be the same
as, or more stringent than, the
Commission’s requirements for financial
statement reporting under § 1.10 and
minimum net capital under § 1.17.
In addition, the Commission adopted
final amendments to § 1.52 on May 10,
455 7
456 7

U.S.C. 7(d)(11).
U.S.C. 21(p).

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2012, to codify previously issued CFTC
staff guidance regarding the minimum
elements of an SRO financial
surveillance program.457 In order to
effectively and efficiently allocate SRO
resources over FCMs that are members
of more than one SRO, § 1.52(c)
currently permits two or more SROs to
enter into an agreement to establish a
joint audit plan for the purpose of
assigning to one of the SROs (the DSRO)
of the joint audit plan the function
examining member FCMs for
compliance with minimum capital and
related financial reporting obligations.
The audit plan must be submitted to the
Commission for approval. Currently all
active SROs are members of a joint audit
plan that was approved by the
Commission on March 18, 2009.458
The Commission proposed additional
amendments to § 1.52 to enhance and
strengthen the minimum requirements
that SROs must abide by in conducting
financial surveillance. As the
Commission explained in the Proposal,
these amendments are intended to
minimize the chances that FCMs engage
in unlawful activities that result, or
could result, in the loss of customer
funds or the inability of the firms to
meet their financial obligations to
market participants. Proposed § 1.52(a)
added a definitions section identifying
the terms ‘‘examinations expert,’’
‘‘material weakness,’’ and ‘‘generally
accepted auditing standards.’’
The term ‘‘examinations expert’’ was
defined as a ‘‘nationally recognized
accounting and auditing firm with
substantial expertise in audits of futures
commission merchants, risk assessment
and internal control reviews, and is an
accounting and auditing firm that is
acceptable to the Commission.’’ The
Commission received several comments
regarding the opinion that the
examinations expert is required to
provide on its review of the SRO
programs, which is addressed in section
II.O.4 below. The Commission did not,
however, receive comments regarding
the defined term ‘‘examinations expert’’
and is adopting the definition as
proposed.
The term ‘‘material weakness’’ was
defined as ‘‘as a deficiency, or a
457 77

FR 36611 (June 19, 2012).
original signatories of the joint audit plan
approved on March 18, 2009 are as follows: Board
of Trade of the City of Chicago, Inc.; Board of Trade
of Kansas City; CBOE Futures Exchange, LLC;
Chicago Climate Futures Exchange, LLC; Chicago
Mercantile Exchange Inc.; Commodity Exchange,
Inc.; ELX Futures, L.P.; HedgeStreet, Inc.; ICE
Futures U.S., Inc.; INET Futures Exchange, L.L.C.;
Minneapolis Grain Exchange; NASDAQ OMX
Futures Exchange; National Futures Association;
New York Mercantile Exchange, Inc.; NYSE Liffe
US, L.L.C.; and One Chicago, L.L.C.
458 The

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68559

combination of deficiencies, in internal
control over financial reporting such
that there is a reasonable possibility that
a material misstating of the entity’s
financial statements and regulatory
computations will not be prevented or
detected on a timely basis by the entity’s
internal controls.’’ The Commission has
determined not to adopt the definition
of material weakness to eliminate the
concern that the SROs examinations are
intended to replicate the financial
statement audits performed by public
accountants under § 1.16.
Proposed § 1.52(b) requires each SRO
to adopt rules prescribing minimum
financial and related reporting
requirements, and requires its member
FCMs to establish a risk management
program that is at least as stringent as
the risk management program required
of FCMs under § 1.11. Proposed
amendments to § 1.52 (c) requires each
SRO to establish a supervisory program
to oversee their member FCMs’
compliance with SRO and Commission
minimum capital and related reporting
requirements, the obligation to properly
segregated customer funds, risk
management requirements, financial
reporting requirements, and sales
practices and other compliance
requirements. The supervisory program
must address: (1) Levels and
independence of SRO examination staff;
(2) ongoing surveillance of member
FCMs; (3) procedures for identifying
high-risk firms; (4) on-site examinations
of member firms; and (5) the
documentation of all aspects of the
supervisory program. The supervisory
program also must be based on an
understanding of the internal control
environment to determine the nature,
timing, and extent of controls testing
and substantive testing to be performed
and must address all areas of risk to
which the FCM can reasonably be
foreseen to be subject. Proposed
§ 1.52(c) also requires that all aspects of
the SRO’s supervisory program must, at
a minimum, conform to generally
accepted auditing standards after
consideration to the auditing standards
issued by the PCAOB.
Proposed § 1.52(c) also requires each
SRO to engage an ‘‘examinations
expert’’ at least once every two years to
evaluate the quality of the supervisory
oversight program and the SRO’s
application of the supervisory program.
The SRO must obtain a written report
from the examinations expert with an
opinion on whether the supervisory
program is reasonably likely to identify
a material weakness in internal controls
over financial and/or regulatory
reporting, and in any of the other areas

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that are subject to the supervisory
program.
Proposed § 1.52(d) provides that two
or more SROs may enter into an
agreement to delegate the responsibility
of monitoring and examining an FCM
that is a member of more than one SRO
to a DSRO. The DSRO would monitor
the FCM for compliance with the
Commission’s and SROs’ minimum
financial and related reporting
requirements, and risk management
requirements, including policies and
procedures relating to the receipt,
holding, investing and disbursement of
customer funds.
The Commission received several
comments on the proposed amendments
to § 1.52 and, with the exception of the
issues discussed below, has determined
to adopt the amendments as
proposed.459

TKELleY on DSK3SPTVN1PROD with RULES2

1. Swap Execution Facilities Excluded
From the Scope of Regulation 1.52
The Commission is revising the final
§ 1.52 by adding a new defined term,
‘‘self-regulatory organization,’’ to
paragraph (a). The term ‘‘self-regulatory
organization’’ is defined in paragraph (a)
to mean, for purpose of § 1.52 only, a
contract market, as defined in § 1.3(h),
or a registered futures association. The
term ‘‘self-regulatory organization’’ is
further defined in paragraph (a) to
explicitly exclude a swap execution
facility (‘‘SEF’’), as defined in § 1.3(rrrr).
The revision to definition of selfregulatory organization in § 1.52 is
necessary due to the recent amendments
to the definition of ‘‘self-regulatory
organization’’ set forth in § 1.3(ee),
which defines the term as a contract
market, as defined in § 1.3(h), a SEF, as
defined in § 1.3(rrrr), or a registered
futures association under section 17 of
the Act.460 Therefore, since § 1.52
applies to each SRO, without including
a definition for the term ‘‘self-regulatory
organization’’ under § 1.52(a) that
excludes SEFs, the full provisions of
§ 1.52 would apply to SEFs.
In adopting new regulations
implement core principles and other
459 MGEX stated that the Commission’s Proposal
generally supports the current DSRO program by
requiring FCMs to file various reports and notices
with the Commission and with the firms’ DSROs.
MGEX further stated that the Commission should
not create a regulatory monopoly and should
recognize that an SRO may not wish to join the JAC.
The Commission believes that each SRO has a right
to elect to perform the financial surveillance
required under § 1.52 directly or to participate in
a joint audit agreement with other SROs. In
addition, § 38.604 requires each SRO to have rules
in place that require member FCMs to submit
financial information to the SRO.
460 77 FR 66288 (Nov. 2, 2012). Regulation 1.3 is
the general definitions provision of the
Commission’s regulations.

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requirements for SEFs, the Commission
did not require SEFs to adopt minimum
capital and related financial reporting
requirements for its member firms.461
The Commission further stated that a
SEF’s obligation to monitor its member
for financial soundness extended only
to a requirement to ensure that the
members continue to qualify as eligible
contract participants as defined in
section 1a(18) of the Act.462 Therefore,
the Commission previously has
determined that the extensive oversight
program required of SROs that are
contract markets or registered futures
associations by § 1.52 is not applicable
to SEFs.
2. Revisions to the Current SRO
Supervisory Program
The Commission received several
comments concerning the proposed
amendments to § 1.52, many of which
varied in support and context. The NFA
stated that it fully supports the
requirement that the supervisory
program include both controls testing
and substantive testing, and that the
examinations process be driven by the
risk profile of the FCM.463 NFA noted
that it has been modifying its
procedures to enhance its examination
of FCM internal controls as well as
substantive testing, and also has
updated its risk system to create risk
profiles of each of its FCMs.464 NFA also
agreed that SROs should identify those
FCMs that pose a high degree of
potential risk so that the SRO can
increase its monitoring of those firms
and that the examinations should focus
on the higher risk areas at each FCM.465
The CME and JAC generally did not
support the proposed amendments to
§ 1.52, stating that the current limited
role of regulatory exams is appropriate
as its purpose is not intended to give the
same level of assurances to the FCM, the
FCM’s investors, or third parties as that
which external auditors provide in
conducting financial statement audits of
FCMs.466 The CME also stated that
regulatory reviews are not designed to
protect investors in FCMs, nor should
they be.467 In addition, the CME
believes that SROs and DSROs play
461 78

regulatory roles, and it is no more
appropriate to have them report to an
audit committee of an FCM than it
would be to have the Commission itself
report to that audit committee.468
The JAC stated that the SRO
examinations are compliance reviews
focused on the particular and distinctive
regulatory requirements and associated
risks of the futures industry, including
whether FCMs are in compliance with
customer regulations and net capital
requirements to protect customers and
the functioning of the futures
industry.469 The JAC further stated that
incorporating the full risk management
requirements of § 1.11 into the SRO’s
examinations of FCMs, and the
requirement that the SRO audit program
address all areas of risk to which FCMs
can reasonably be foreseen to be subject,
are overly broad requirements that are
impractical, and virtually impossible to
meet.470
The JAC further stated that proposed
§ 1.52 imposes potential duplicative
oversight of FCM risk management
policies and procedures by SROs and
DCOs. The JAC noted that § 39.13(h)(5)
requires a DCO to review the risk
management policies, procedures, and
practices of each of its clearing
members.471 The JAC requested
clarification on the oversight
responsibilities of SROs and DCOs to
address potential duplicative
requirements.472 Lastly, the JAC stated
that expanding the SRO oversight
program to include operational and
technical risks will require additional
expertise, time and resources to perform
such reviews and will result in
increased costs.473
The Commission believes that the
CME, NFA, JAC, SROs and DSROs play
a critical role in examining FCMs and
other registrants under the selfregulatory structure of the futures
industry. Recent events, however,
demonstrate that the SROs’ current
focus on CFTC and SRO regulatory
requirements, including segregation and
net capital computations, are not in and
of themselves adequate to assess risk
and protect customers of the FCM. For
instance, a failure in an FCM’s nonfutures operations may pose risks to

FR 33476 (June 4, 2013).

462 Id.

468 Id.

463 NFA

469 JAC

Comment Letter at 3 (Feb. 15, 2013). See
also Paul/Weiss Comment Letter at 2 (Feb. 15 2013),
BlackRock Letter at 3 (Feb. 15. 2013), and MFA
Comment Letter at 4 (Feb. 15, 2013) expressing
general support for the proposed enhancements to
the SRO examinations program.
464 Id.
465 Id.
466 CME Comment Letter at 8–9 (Feb. 15, 2013);
JAC Comment Letter at 2–4 (Feb. 14, 2013); JAC
Comment Letter 2–4 (July 25, 2013).
467 CME Comment Letter at 11 (Feb. 15, 2013).

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470 Id.

Comment Letter at 2 (July 25, 2013).
See also JAC Comment Letter at 5 (Feb. 14,

2013).
471 Id.
472 Id.
473 Id. The JAC noted that the examination of the
controls and risk management policies and
procedures over an FCM’s technology systems
would require particular expertise that is different
from the knowledge and expertise or regulatory
staff, and that SROs will have to hire specialized
examiners to conduct such reviews.

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futures customers and the operation of
an FCM. In addition, technology failures
at an FCM also may pose risks to the
operation of an FCM and the overall
protection of customer funds.
Accordingly, to properly monitor and
assess risks to the FCM, the SRO must
be aware of non-futures related
activities of the FCM.
Recent events also demonstrate that
the examinations of FCMs must be risk
based and that the testing must be based
on an understanding of the registrant’s
internal control environment to
determine the nature, timing and extent
of the necessary tests. In order to help
ensure an appropriate risk based exam
is performed, an examiner must take
into account the risk profile of the firm
and build the examination program
accordingly. For example, if a firm has
weak controls over cash, the risk of
inaccurate accounting for cash
movements is greater and therefore
more detailed substantive testing of cash
transactions and balances is necessary
to provide the examiner with sufficient
assurance that reported balances are
accurate. To the contrary, if controls are
good over cash then less substantive
testing is needed.
The Commission acknowledges that
revised § 1.52 imposes new obligations
on SROs by requiring their supervisory
programs to include an assessment of
whether member FCMs comply with the
risk management requirements of § 1.11.
However, § 1.52 also requires that the
SRO’s examination of FCMs be
performed on a risk-based approach.
The scope of the examinations should
be based upon the SRO’s assessment of
risk at the FCM and full, detailed testing
is not mandated by § 1.52 in each area.
Lastly, the Commission recognizes that
DCOs impose certain risk management
requirements on clearing FCMs and are
required to review the operation of such
risk management requirements. While
§ 39.13(h)(5) is directed at risk that an
FCM may pose to a DCO and, therefore,
is more narrowly focused than the risk
management requirements in § 1.11,
SROs may coordinate with a DCO to
ensure that duplicative work is not
being performed by the separate
organizations.474
3. Auditing Standards Utilized in the
SRO Supervisory Program
Proposed § 1.52(c)(2)(ii) and
(d)(2)(ii)(F) require all aspects of an
SRO’s or DSRO’s, supervisory program
to conform, at a minimum, to U.S.
474 Under

the current JAC structure, the CME is
the only entity that is both an SRO that performs
periodic examinations of FCMs and a DCO that has
responsibilities under § 39.13(h)(5) to perform risk
management on clearing FCMs.

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GAAS after giving full consideration to
the auditing standards issued by the
PCAOB. NFA, CME, and JAC questioned
what is meant by the term ‘‘after giving
full consideration of auditing standards
prescribed by the PCAOB.’’ 475 NFA,
CME, and JAC did not agree with basing
the SRO Supervisory Program
framework on either U.S. GAAS or
PCAOB standards, largely because the
DSRO does not issue a report that
expresses an opinion with respect to the
FCM’s financial statements or issue an
Accountant’s Report on Material
Inadequacies.476 Additionally, CME
noted that invoking U.S. GAAS and
PCAOB standards opens up a complex
and detailed regulatory structure, which
includes a framework allowing auditor’s
to rely on interpretive publications,
professional journals and auditing
publications from state CPA societies,
none of which were designed to address
the regulatory function played by an
SRO or DSRO.477 However, NFA
acknowledged that certain U.S. GAAS
and PCAOB accounting standards and
practices should be followed by DSROs
in performing their regulatory
examinations (e.g., those standards
focusing on recordkeeping, training and
experience, the scope of the
examination and testing, the
confirmation process, and other related
examination practices).478
The Commission notes that the
objective of the Proposal was to ensure
that the SRO examinations are
conducted consistent with the
professional standards that CPAs and
others are subject to in conducting their
examinations. The Commission
recognizes that certain U.S. GAAS
principles and PCAOB principles would
not be applicable to the SRO
examinations (such as principles
addressing reporting, which provide
that the CPA must state whether the
financial statements are prepared in
accordance with Generally Accepted
Accounting Principles). However, other
U.S. GAAS and PCAOB standards
would be relevant to SRO examinations.
Such principles include standards
addressing the competency and
proficiency of the examinations staff
and the obtaining and documenting of
adequate audit evidence to support the
examiner’s conclusions.
The Commission has considered these
comments and has revised the proposed
language to state that at a minimum, an
475 NFA Comment Letter at 3 (Feb. 15, 2013);
CME Comment Letter at 9–10 (Feb. 15, 2013); JAC
Comment Letter at 2–3 (Feb 14, 2013).
476 Id.
477 CME Comment Letter at 9–10 (Feb. 15, 2013).
478 NFA Comment Letter at 3–4 (Feb. 15, 2013).

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examination should conform to PCAOB
auditing standards to the extent such
standards address non-financial
statement audits. While it is
acknowledged that PCAOB audit
standards are directed at financial
statement audits, the concept of many of
the standards are just as applicable to an
examination performed by an SRO or
DSRO, and as such should be adopted
in that light. The relevant PCAOB
standards would include, but are not
limited to, the training and proficiency
of the auditor, due professional care in
the performance of the work,
consideration of fraud in an audit, audit
risk, consideration of materiality in
planning and performing an audit, audit
planning, identifying and assessing risks
of material misstatement, the auditor’s
responses to the risk of material
misstatement, audit documentation,
evaluating the audit results,
communications with audit committees,
and due professional care in the
performance of work. In developing the
supervisory program, consideration
should also be given to other related
guidance such as the standards adopted
by the Institute of Internal Auditors
(Standards & Guidance—International
Professional Practices Framework) and
the Policy Statement and Supplemental
Policy Statement on the Internal Audit
Function and its Outsourcing issued by
the Board of Governors of the Federal
Reserve System, and generally accepted
auditing standards issued by the
American Institute of Certified Public
Accountants.479
4. ‘‘Examinations Expert’’ Reports
Proposed § 1.52(c)(2)(iv) and
(d)(2)(ii)(I) require each SRO and DSRO,
respectively, to engage an examinations
expert to evaluate the SROs or DSROs
programs and to express an opinion as
to whether the program is reasonably
likely to identify a material deficiency
in internal controls over financial and/
or regulatory reporting and in any of the
other areas that are subject to SRO or
DSRO review under the programs. The
JAC, CME, Center for Audit Quality,
Ernst & Young, and PWC did not
support the ‘‘examinations expert’’
requirement.480 Several of these
commenters expressed concern that the
term ‘‘examinations expert’’ as defined
479 The Commission is revising final § 1.52 to
remove from paragraph (a) a definition for the term
‘‘U.S. Generally accepted auditing standards’’ as
that term is no longer contained in the final
regulation.
480 JAC Comment Letter at 3–4 (Feb. 14, 2013);
Center for Audit Quality Comment Letter at 3 (Jan.
14, 2013); Ernst & Young Comment Letter at 3–4
(Jan. 14, 2013); PWC Comment Letter at 3 (Jan. 15,
2013).

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by § 1.52 imposes a criterion that most
CPA firms may not possess or would not
be willing to issue such a report.481
Moreover, NFA, JAC, and MGEX stated
that requiring an ‘‘examinations expert’’
is unnecessary and duplicative of
already existing Commission
responsibilities, noting that the JAC
provides the examination programs to
the Commission annually, and that the
Commission can perform a review of the
examination programs.482
NFA and JAC suggested, as cost
effective and more practical solution,
inviting individuals meeting the
‘‘examinations expert’’ designation to
participate in the already existing JAC
audit committee meetings.483 CME
suggested that if the proposed structure
is adopted, the time frame for review be
extended from 18 months to 31⁄2 years,
matching that required by the AICPA in
its Peer Review program.484
The Commission has taken these
comments into consideration and has
revised the final regulation by providing
that the report of the examinations
expert should conform to the consulting
services standards of the AICPA. The
Commission recognizes that generally
accepted auditing standards do not
provide a reporting framework by which
a certified public accountant can issue
an audit opinion consistent with the
requirements contained in § 1.52.
Accordingly, the Commission has
revised the final regulation by removing
the requirement that the examinations
expert provide an audit opinion.
The Commission also does not believe
that it is in a position to perform the
type of review of the SRO examination
reports required by § 1.52 given its
limited resources. Furthermore, the
examinations expert is an independent
party with expert knowledge of risk
assessment and internal controls
reviews and will be able to provide
more thorough and detailed review of
the joint audit program than
Commission staff can currently devote
to such a review. In addition, the
Commission staff has communicated to
the JAC that it would be very supportive
of having the accounting and auditing
experts join the JAC meetings to discuss
current industry issues.
The Commission has also considered
the impact of performing such a review
481 CME Comment Letter at 13 (Feb. 15, 2013);
Center for Audit Quality Comment Letter at 3 (Jan.
14, 2013); Ernst & Young Comment Letter at 3–4
(Jan. 14, 2013); PWC Comment Letter at 3 (Jan. 15,
2013).
482 NFA Comment Letter at 4–5 (Feb. 15, 2013);
JAC Comment Letter at 4 (Feb. 14, 2013) MGEX
Comment Letter at 3–4 (Feb. 18, 2013).
483 NFA Comment Letter at 4–5 (Feb. 15, 2013);
JAC Comment Letter at 4 (Feb. 14, 2013).
484 CME Comment Letter at 13 (Feb. 15, 2013).

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every two years and has modified the
proposal to require such a report on a
three year basis. This reflects the fact
that the DSROs will be updating their
programs as needed and therefore the
program should not be stagnant during
the intervening years. Finally, it was
pointed out that given the nature of the
report and to facilitate an open and
frank dialogue amongst the
examinations expert, the DSROs, and
the Commission, such report should be
considered confidential. The
Commission is revising the regulation to
provide that the report is confidential,
which is consistent with how the
PCAOB conducts its reviews of CPA
firms.
P. § 1.55: Public Disclosures by Futures
Commission Merchants
Regulation 1.55(a) currently requires
an FCM, or an IB in the case of an
introduced account, to provide a
customer with a separate written risk
disclosure statement prior to opening
the customer’s account (‘‘Risk
Disclosure Statement’’). Regulation
1.55(a) also provides that the Risk
Disclosure Statement may contain only
the language set forth in § 1.55(c) (with
an exception for non-substantive
additions such as captions), except that
the Commission may authorize the use
of Risk Disclosure Statements approved
by foreign regulatory agencies or selfregulatory organizations if the
Commission determines that such Risk
Disclosure Statements are reasonably
calculated to provide the disclosures
required by the Commission under
§ 1.55.485 Regulation 1.55(a) further
requires the FCM or IB to receive a
signed and dated statement from the
customer acknowledging his or her
receipt and understanding of the Risk
Disclosure Statement.486
The Commission reviewed the
adequacy of the current prescribed Risk
Disclosure Statement in light of its
experience with customer protection
issues during the recent failures of two
FCMs, MFGI and PFGI. In this regard, in
responding to questions and issues
raised primarily by non-institutional
market participants, including market
485 The Commission has previously approved an
alternative ‘‘generic’’ risk disclosure statement for
use in the United Kingdom, Ireland and the U.S.
486 FCMs and IBs are permitted to open
commodity futures accounts for ‘‘institutional
customers’’ pursuant to § 1.55(f) without furnishing
such institutional customers with a Risk Disclosure
Statement or obtaining the written acknowledgment
required by § 1.55. The term ‘‘institutional
customer’’ is defined by § 1.3(g) and section 1a of
the Act as an eligible contract participant. The
Commission did not propose to amend § 1.55(f) to
require FCMs or IBs to furnish institutional
customers with Risk Disclosure Statements.

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participants from the agricultural
community and retail market
participants, the Commission
recognized that such market
participants would benefit from several
additional disclosures regarding the
potential general risks of engaging in
futures trading through an FCM, and the
potential specific risks resulting from
the bankruptcy of an FCM. In addition
to proposing new general risk
disclosures, the Commission proposed
to also require each FCM to provide
customers and potential customers with
information about the FCM, including
its business, operations, risk profile, and
affiliates. The firm specific disclosures
are intended to provide customers with
access to material information regarding
an FCM to allow the customers to
independently assess the risk of
entrusting funds to the firm or to use the
firm for the execution of orders.
1. Amendments to the Risk Disclosure
Statement
The mandatory Risk Disclosure
Statement currently addresses the risks
of engaging in commodity futures
trading. The risks that must be disclosed
include: (1) The risks that a customer
may experiences losses that exceed the
amount of funds that he or she
contributed to trading and that the
customer may be responsible for losses
beyond the amount of funds deposited
for trading; (2) the risks that under
certain market conditions, a customer
may find it difficult or impossible to
liquidate a position, such as when a
market has reached a daily price move
limit; (3) the risks that placing certain
contingent orders (such as a stop limit
order) may not necessarily limit the
customer’s losses; (4) the risks
associated with the high degree of
leverage that may be obtainable from the
futures markets; and (5) the risks of
trading on non-U.S. markets, which may
not provide the same level of
protections provided under Commission
regulations.
As noted above, the Commission
proposed several additional disclosures
based upon its experience in working
with customers, particularly retail and
other non-institutional market
participants, during the recent failures
of MFGI and PFGI. Specifically, the
Commission proposed to amend the
Risk Disclosure Statement to provide
market participants with more
information regarding the risks
associated with an FCM holding
customer funds. In this regard, certain
market participants believed that the
fact that their funds were segregated
from the FCM’s proprietary funds
protected them from loss in the event of

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an FCM bankruptcy. Other customers
believed that a DCO guaranteed
customer losses, and other customers
believed that funds deposited for futures
trading were protected by the Securities
Investor Protection Corporation in the
event of an FCM/BD bankruptcy.
To provide greater clarity as to the
how customer funds are held and the
potential risks associated with FCMs
holding customer funds, the
Commission proposed to revise the Risk
Disclosure Statement by amending
§ 1.55(b) to include new paragraphs (2)
through (7) as follows:
(2) The funds you deposit with an
FCM for trading futures positions are
not protected by insurance in the event
of the bankruptcy or insolvency of the
futures commission merchant, or in the
event your funds are misappropriated
due to fraud;
(3) The funds you deposit with an
FCM for trading futures positions are
not protected by the Securities Investor
Protection Corporation even if the
futures commission merchant is
registered with the SEC as a BD;
(4) The funds you deposit with an
FCM are not guaranteed or insured by
a DCO in the event of the bankruptcy or
insolvency of the FCM, or if the FCM is
otherwise unable to refund your funds;
(5) The funds you deposit with an
FCM are not held by the FCM in a
separate account for your individual
benefit. FCMs commingle the funds
received from customers in one or more
accounts and you may be exposed to
losses incurred by other customers if the
FCM does not have sufficient capital to
cover such other customers’ trading
losses;
(6) The funds you deposit with an
FCM may be invested by the FCM in
certain types of financial instruments
that have been approved by the
Commission for the purpose of such
investments. Permitted investments are
listed in Commission Regulation 1.25
and include: U.S. government securities;
municipal securities; money market
mutual funds; and certain corporate
notes and bonds. The FCM may retain
the interest and other earnings realized
from its investment of customer funds.
You should be familiar with the types
of financial instruments that an FCM
may invest customer funds in; and
(7) FCMs are permitted to deposit
customer funds with affiliated entities,
such as affiliated banks, securities
brokers or dealers, or foreign brokers.
You should inquire as to whether your
FCM deposits funds with affiliates and
assess whether such deposits by the
FCM with its affiliates increases the
risks to your funds.

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The Commission received several
comments on the proposed amendment
to the Risk Disclosure Statement. NFA
stated that it fully supported the
Commission’s goal of ensuring that
customers receive a full description of
the risk associated with futures trading,
and agreed with the Commission that it
is important to update the Risk
Disclosure Statement to provide
information on the extent to which
customer funds are protected when
deposited with an FCM as margin or to
guarantee performance for trading
commodity interest.487
The FIA generally supported the
proposed amendments to the general
Risk Disclosure Statement set forth in
§ 1.55(b) and outlined above.488 The FIA
stated that many of the Commission’s
proposed amendments are consistent
with FIA’s recommendations to enhance
disclosures set forth in its paper, ‘‘Initial
Recommendations for the Protection of
Customer Funds,’’ which was published
on February 28, 2012 (‘‘Initial
Recommendations’’) in response to
MFGI.489 FIA also stated that its
document, ‘‘Protection of Customer
Funds—Frequently Asked Questions,’’
is being used by FCMs to provide
customers with increased disclosures on
the scope of how the laws and
regulations protect customers in the
futures market.490
With respect to the Commission’s
proposed amendments to § 1.55(b), FIA
recommended that the Commission
delete the phrase ‘‘due to fraud’’ in
§ 1.55 (b)(2) because customer funds
may be misappropriated for any
reason.491 Additionally, FIA suggested
the disclosure in § 1.55(b)(4) be revised
to take account of the CME Group
Family Farmer and Rancher Protection
Fund established in the wake of MFGI
as this fund will provide up to $25,000
to qualifying individual farmers and
ranchers and $100,000 to co-ops that
hedge their risk in CME futures
markets.492
The Commission has considered FIA’s
comments and had determined to revise
487 NFA

Comment Letter at 15 (Feb. 15, 2013).
Comment Letter at 41 (Feb. 15, 2013).
489 FIA Comment Letter at 2 (Feb. 15, 2013). The
FIA formed a special committee to develop and
recommend specific measures that could be
implemented by both the industry best practices
and regulatory change to address the issues arising
from the bankruptcy of MFGI.
490 Id. FIA’s ‘‘Protection of Customer Funds—
Frequently Asked Questions’’ provides information
covering five broad areas: (1) segregation of
customer funds; (2) collateral management and
investments; (3) basic information on FCMs, such
as the purpose of capital requirements and margin
processing: (4) issues for joint FCM/BDs; and (5) the
role of the DCO guarantee fund.
491 Id. at 41.
492 Id. at 41–42.
488 FIA

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the proposal. The Commission
recognizes that customer funds may be
misappropriated as a result of wrongful
conduct that does not rise to the level
of fraud. Accordingly, the Commission
is revising § 1.55(b)(4) by removing the
phrase ‘‘due to fraud’’ so that the
disclosure provides that customers’
funds are not covered by insurance in
the event of the insolvency of the FCM
or in the event the funds are
misappropriated.
The Commission also is revising final
§ 1.55(b)(4) in response to FIA’s
comment to provide an overall
statement that customer funds generally
are not insured by DCOs. The
Commission is further revising final
§ 1.55(b)(4) to include in the disclosure
the fact that a DCO may offer an
insurance program, and that a customer
should inquire of the FCM the extent of
any DCO insurance programs and
whether the customer would qualify for
coverage and understand the limitations
and benefits of the coverage. The
Commission believes that this approach
is more flexible to address future
developments in this area than a direct
reference to specific DCO insurance
programs that currently are available.
NEFI/PMAA questioned whether or
not existing and proposed disclosures
are sufficient, and further stated that
disclosure of customer protections are
equally important as the disclosure of
potential risks to ensure customer
confidence.493 Pilot Flying J stated
FCMs must be required to disclose
information to their customers on how
their accounts and positions will be
managed, as well as associated risks and
what kinds of financial protections are
afforded to customers by the firm,
exchange, and the Commission.
The Commission agrees with NEFI/
PMAA and Pilot Flying J that a
customer’s understanding of the
protections is as important as
understanding the risks. The Risk
Disclosure Statement is the minimum
information that an FCM should provide
to prospective customers, and is
intended to provide a high level
summary of the general risk of trading
commodity interests. FCMs should
provide additional information as
necessary to ensure that customers have
adequate information. The Commission
believes that FIA’s Initial
Recommendation and FAQ, which
includes the types of information that
NEFI/PMAA and Pilot Flying J are
requesting, should be made available to
all potential customers. FIA should
revise the documents, as appropriate, in
493 NEFI/PMAA Comment Letter at 2 (Jan. 14,
2013).

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response to changing market events or
other factors.
The Commission also requested
comment on whether and how the new
or revised Risk Disclosure Statement
should be provided to existing
customers at the effective date of the
regulation. Particularly, the Commission
requested comment on whether FCMs
should be required to obtain new
signature acknowledgments from
existing customers.
FIA stated that it was not opposed to
a requirement that FCMs provide the
revised Risk Disclosure Statement to
existing customers that are otherwise
required to receive the disclosure
document.494 FIA stated, however, that
FCMs should not be required to obtain
a written acknowledgment from existing
customers. FIA further stated that it
should be sufficient if the FCM makes
each customer aware of the revised Risk
Disclosure Statement by any appropriate
means, consistent with the means by
which the FCM normally communicates
important information to customers,
including but not limited to, a separate
mailing.495 The CFA stated that it is
very important for FCMs and their
DSROs to ascertain whether existing
and potential customers have
acknowledged receipt of the Risk
Disclosure Statement, and FCMs should
keep records of acknowledgments that
the Risk Disclosure Statements were
received.496 NGFA noted that providing
updated risk disclosure, with signed
acknowledgment of such to the FCM, is
a sound concept.497
Regulation 1.55(a) will continue to
require FCMs to obtain and retain
signed acknowledgments from new
customers that they received and
understand the Risk Disclosure
Statement. With respect to existing FCM
customers on the effective date of the
regulation, the Commission believes
that it is adequate for an FCM to provide
each of the customers with a revised
Risk Disclosure Statement via its normal
means of communicating with
customers, including the use of a
separate mailing, or providing a link on
the firm’s Web site to the revised Risk
Disclosure Statement, provided that the
FCM provides a paper copy of the Risk
Disclosure Statement upon the request
of a customer. The communication of
the revised Risk Disclosure Statement to
customers must be highlighted by the
FCM in such a manner to reasonably
ensure that the customers are
494 FIA

Comment Letter at 42–43 (Feb. 15, 2013).

adequately apprised of the revised Risk
Disclosure Statement.
FIA also noted that the Commission
previously approved, pursuant to
§ 1.55(c), an alternative risk disclosure
statement for use in the U.S., the United
Kingdom, and Ireland.498 The
alternative risk disclosure statement is
set forth in Appendix A to § 1.55. FIA
requested that the Commission confirm
whether FCMs may continue to use the
alternative risk disclosure statement and
further encouraged the Commission to
coordinate with other derivatives
regulatory authorities to revise the
alternative risk disclosure statement to
meet its regulatory objectives.499
Regulation 1.55(c) provides that the
Commission may approve for use in lieu
of the standard Risk Disclosure
Statement required by § 1.55(b) a risk
disclosure statement approved by one or
more foreign regulatory agencies or selfregulatory organizations if the
Commission determines that such risk
disclosure statement is reasonably
calculated to provide the disclosure
required by the standard Risk Disclosure
Statement. As noted above, the
Commission proposed amendments to
the Risk Disclosure Statement due to its
recent experiences with the MFGI and
PFGI insolvencies where certain
customers, particularly less
sophisticated customers, did not fully
comprehend the nature of the
protections of customer funds. Based
upon this recent experience, the
Commission does not believe that the
disclosures in the alternative risk
disclosure statement contained in
Appendix A provide sufficient detailed
disclosures to customers regarding the
risk of trading futures transactions.
Accordingly, the Commission is revising
§ 1.55(c) to provide that an FCM may
continue to use the alternative risk
disclosure statement provided that the
FCM also provides each customer
required to receive a disclosure
document with the revised Risk
Disclosure Statement and receives such
customer’s written acknowledgment
that it has received and understands the
Risk Disclosure Statement. This will
allow FCMs to continue to have a
common risk disclosure statement with
the United Kingdom and Ireland, and
also ensure that customers receive
additional risk disclosures to enhance
their understanding of engaging in
futures trading.

495 Id.
496 CFA

Comment Letter at 8 (Feb. 13, 2013).
Comment Letter at 5 (Feb. 15, 2013).

497 NGFA

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498 FIA

Comment Letter at 43 (Feb. 15, 2013).

499 Id.

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a. Firm Specific Disclosure Document
i. General Requirements
The Commission proposed new
paragraphs (i) and (k) to § 1.55 to
provide that an FCM may not enter into
a customer account agreement or accept
funds from a customer unless the FCM
discloses to the customer all
information about the FCM, including
its business, operations, risk profile, and
affiliates, that would be material to the
customer’s decision to entrust such
funds to such FCM and otherwise
necessary for full and fair disclosure to
customers (‘‘Firm Specific Disclosure
Document’’).
The Firm Specific Disclosure
Document is intended to enable
customers to make informed judgments
regarding the appropriateness of
selecting an FCM by providing
information for the meaningful
comparisons of business models and
risks across FCMs. Such information
will greatly enhance the due diligence
that a customer can conduct both prior
to opening an account and on an
ongoing basis, as the proposal will
require the FCM to update the Firm
Specific Disclosure Document at least
once every 12 months and as and when
necessary to keep it accurate and
complete. The Commission believes that
the proposed firm specific Firm Specific
Disclosure Document, coupled with the
existing Risk Disclosure Statement, will
provide customers with a more
complete perspective regarding the risks
of participating in the futures markets
and of opening an account with a
particular firm.
Proposed § 1.55(j) requires an FCM to
make the Firm Specific Disclosure
Document available to customers and to
the general public by posting the Firm
Specific Disclosure Document on the
FCM’s Web site. An FCM may, however,
use an alternative electronic means to
provide the Firm Specific Disclosure
document to its customers provided that
the electronic version is presented in a
format that is readily communicated to
the customers. Paper copies of the Firm
Specific Disclosure Document also must
be available upon the request of a
customer. The Commission also
proposed that each FCM disclose certain
financial information on its Web site to
provide the public with additional
information on the firm and the
customer funds that it holds. The
additional financial disclosures are set
forth in § 1.55(o) and are discussed
below.
SIFMA stated that the public
disclosure requirements will help
empower its members to choose safe
and trustworthy FCMs, and that the

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disclosures will hold FCMs accountable
to their customers, allowing the
customers to conduct due diligence
efficiently, actively monitor FCMs’
financial condition and regulatory
compliance, and make informed
decisions when selecting and doing
business with FCMs.500 Vanguard
expressed the view that the best
protection for customers is their own
due diligence, and that the proposed
additional enhancements add
significant, and much needed,
protections and transparency.501 The
FHLB supported the proposal with
respect to the publication of the Firm
Specific Disclosure Document and
strongly endorsed the requirement that
the FCM update the document as
circumstances warrant.502
FIA stated that it supports enhancing
disclosures to customers regarding the
FCM through which the customer may
elect to trade.503 FIA requested that the
Commission confirm that an FCM that
is part of a publicly-traded company,
whether U.S. or non-U.S., or is
otherwise required to prepare and to
make public an annual report including
information comparable to that required
by the Firm Specific Disclosure
Document under the proposed
regulation, may comply with the
regulation by making such annual
report, and any amendments thereto,
available on its Web site.504 FIA noted
that the Management Discussion and
Analysis (‘‘MD&A’’) required under SEC
rules (17 C.F.R. 229.303) requires
publicly traded companies to discuss
essentially the same topics required to
be discussed under the Commission’s
proposal. FIA stated that the topics
include business environment; critical
accounting policies; use of estimates;
results of operations; balance sheet and
funding sources; off-balance sheet
arrangements and contractual
obligations; overview and structure of
risk management; liquidity risk
management; market risk management;
credit risk management; operational risk
management; recent accounting
developments; and certain risk factors
that may affect the company’s
business.505 FIA estimated that
approximately 90 percent of customer
funds are held by FCMs that are also
SEC registered or part of a bank holding

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500 SIFMA

Comment Letter at 2 (Feb. 21, 2013).
Comment Letter at 4 (Feb. 2, 2013).
See also, Prudential Comment Letter at 2 (Jun. 9,
2013) and Security Benefit Comment Letter at 2
(Jan. 11, 2013 supporting the additional disclosures
proposed under § 1.55(i).
502 FHLB Comment Letter at 10 (Feb. 15, 2013).
503 FIA Comment Letter at 41 (Feb. 15, 2013).
504 FIA Comment Letter at 43–44 (Feb. 15, 2013).
505 Id.
501 Vanguard

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company or publicly-traded company
and believes this position is necessary
to avoid customer confusion in certain
circumstances and to assure that FCMs
are not subject to duplicative and,
perhaps conflicting, disclosure
requirements.506
FIA further requested that the
Commission confirm the level of detail
required to be provided by privatelyheld FCM companies should be
consistent with that provided in the
annual reports of publicly-traded
companies.507 Additionally, FIA stated
that privately-held companies would
need a period of time to develop the
required disclosures and requested that
the Commission make the compliance
date of the regulation no sooner than six
months after the effective date of the
regulation.508
The Commission has considered the
comments and is adopting § 1.55(i) and
(j) as proposed. In response to FIA’s
comments, the Commission confirms
that beyond the requirements stated in
§ 1.55, the Commission is not mandating
the form in which the required
information is conveyed, provided it is
responsive to the information
requirements of § 1.55 and provides
such information in a clear, concise, and
understandable matter. Accordingly an
FCM that is part of a publicly traded
company, or is otherwise required to
prepare and make public an annual
report including information
comparable to the information required
by proposed § 1.55(k), may satisfy the
disclosure requirements in § 1.55 by
making an annual report, and any
amendments thereto, available on its
Web site; provided that such annual
report provides the information required
by § 1.55 in a manner that is clear,
concise and understandable. The
Commission is similarly confirming that
a privately-held company may satisfy
the requirements in § 1.55 by making an
annual report, and any amendments
thereto, available on its Web site;
provided that such annual report
provides the information required by
§ 1.55 in a manner that is clear, concise
and understandable.
In assessing whether the annual
report contains the necessary
information required by § 1.55 in a
clear, concise and understandable
manner, the FCM must ensure that the
disclosures specifically address the risks
at the FCM and are not so general in
nature that they reflect that the FCM’s
business may not be material to the
public or private company for which the
506 Id.
507 Id.

annual report is prepared. An FCM is
not in compliance with § 1.55 if the
annual report information does not
disclose the information required by
§ 1.55 as it relates to the FCM. The
objective of the disclosures is to provide
prospective and existing customers of
the FCM with material information that
could have an impact on their decision
to engage in a relationship with the
FCM. If the annual report does not
include information regarding the FCM,
or such information is not clear concise
and understandable, the FCM would
have to enhance the disclosure by
providing supplemental material or
otherwise making the required
disclosures available to customers and
the public in a manner that is clear,
concise and understandable. In
addition, in order to provide customers
with clear, concise and understandable
disclosures, an FCM may be required to
extract information from various
sections of its annual report and provide
such information in an easy to read
format. If customers are required to
search through detailed annual reports
to locate the required § 1.55 disclosures,
the FCM is not providing the
information in a clear, concise and
understandable manner.
ii. Specific Disclosure Information
Required (by Rule Paragraph)
Proposed § 1.55(k)(1) requires an FCM
to disclose contact information for the
firm including the address of its
principal place of business and its
phone number. No comments were
received on the proposed § 1.55(k)(1)
and the Commission is adopting the
amendments as proposed.
Proposed § 1.55(k)(2) requires an FCM
to disclose the name and business
addresses of the FCM’s senior
management, including business titles
and background, areas of responsibility
and nature of duties of each person. The
FIA recommended the disclosure be
limited to those individuals identified
as principals on the NFA BASIC
system.509
The term ‘‘principal’’ is defined in
§ 3.1 to mean, with respect to an FCM:
(1) The proprietor and chief compliance
officer if the FCM is organized as a sole
proprietorship; (2) any general partner
and chief compliance officer if the FCM
is organized as a partnership; (3) any
director, the president, chief executive
officer, chief operating officer, chief
financial officer, chief compliance
officer, and any person in charge of a
principal business unit, division or
function subject to regulation by the
Commission if the FCM is organized as

at 44.

508 Id.

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a corporation; (4) any director, the
president, chief executive officer, chief
operating officer, chief financial officer,
chief compliance officer, the manager,
managing member or those members
vested with the management authority
for the entity, and any person in charge
of a principal business unit, division or
function subject to regulation by the
Commission if the FCM is organized as
a limited liability company or limited
liability partnership; and (5) in addition,
any person at the FCM occupying a
similar status or performing similar
functions as described above, having the
power, directly or indirectly, through
agreement or otherwise, to exercise a
controlling influence over the entity’s
activities that are subject to regulation
by the Commission.
The Commission agrees with FIA’s
comment and is revising the final
regulation to require an FCM to disclose
persons that are defined as ‘‘principals’’
of the FCM under § 3.1.
Proposed § 1.55(k)(3) requires an FCM
to disclose the significant types of
activities and product lines that the
FCM engages in and the approximate
percentage of assets and capital that are
contributed to each type of business
activity or product line. FIA
recommended that an FCM be required
to update the description in its annual
report, only if it adds a new business
activity or product line that requires
higher minimum capital under
applicable capital rules because the
approximate percentage of the FCM’s
assets and capital used in each type of
activity can change frequently.510
The Commission believes that FIA is
defining the requirements of § 1.55(k)(3)
too narrowly. The regulation is intended
to provide the public with information
concerning the major businesses
activities that an FCM engages in to
provide information regarding the
benefits and risks of using such firm to
conduct transactions in commodity
interests. Minimum capital
requirements are generally driven by
regulated business, such a being
registered as a BD. While such
information is material to potential
customers and is required to be
disclosed under § 1.55(k)(3), the
regulation also requires the disclosure of
non-regulated business that a firm may
engage in.
The Commission also recognizes that
an FCM’s assets and capital contributed
to different business activities can
change frequently, but such information
may be material for the public in
determining to entrust funds with the
firm and to perform effective due
510 Id.

at 45.

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diligence in monitoring the firm. Each
FCM will need to assess the materiality
of changes and use its judgment to
determine whether the Firm Specific
Disclosure Document should be revised.
In addition, the Commission notes that
§ 1.55(i) requires that the Firm Specific
Disclosure Document must be revised as
and when necessary, but at least
annually, to keep the information
accurate and complete. The Commission
has considered the comments and is
adopting the amendments as proposed.
Proposed § 1.55(k)(4) requires an FCM
to disclose its business on behalf of
customers, including types of accounts,
markets traded, international business,
and clearinghouses and carrying brokers
used, and its policies and procedures
concerning the choice of bank
depositories, custodians, and other
counterparties. FIA requested the
Commission confirm that: (1) The
disclosure required under this
paragraph is limited to the activities of
the FCM in its capacity as such; (2) the
term ‘‘accounts’’ means ‘‘customers’’;
and (3) the term ‘‘counterparties’’ is
limited to counterparties for § 1.25
investments.511
Regulation 1.55(k)(4) is intended to
provide customers and the public with
information regarding the FCM
operating its FCM’s business.
Accordingly, the Commission confirms
that the disclosures required under
§ 1.55(k)(4) are limited to the activities
of the FCM acting in its capacity as an
FCM. The term ‘‘types of accounts’’ in
§ 1.55(k)(4) should be ‘‘types of
customers,’’ and requires the FCM to
disclose the nature of its customer base
in the futures markets (i.e., institutional,
retail, agricultural, hedgers,) to provide
the public with information regarding
the firm’s experiences with different
types of markets and market
participants. The Commission also
confirms that the term ‘‘counterparties’’
is limited to § 1.25 counterparties. The
Commission is revising final § 1.55(k)(4)
accordingly.
Proposed § 1.55(k)(5) requires an FCM
to discuss the material risks,
accompanied by an explanation of how
such risks may be material to its
customers, of entrusting funds to the
FCM, including, without limitation, the
nature of investments made by the FCM
(including credit quality, weighted
average maturity, and weighted average
coupon); the FCM’s creditworthiness,
leverage, capital, liquidity, principal
liabilities, balance sheet leverage and
other lines of business; risks to the FCM
created by its affiliates and their
activities, including investment of
511 Id.

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customer funds in an affiliated entity;
and any significant liabilities,
contingent or otherwise, and material
commitments.
FIA commented that the word ‘‘risks’’
in § 1.55(k)(5) should be replaced with
the word ‘‘information,’’ and that the
Commission remove the phrase
‘‘accompanied by an explanation of how
such risks may be material to its
customers.’’ 512 FIA believed it sufficient
that an FCM present the required
information to the customer and that it
is the customer’s responsibility to
analyze this information and determine
the extent to which it is important or
relevant to the customer’s decision to
open or maintain an account with the
FCM.513 FIA further stated that if the
Commission believes FCMs should
provide guidance to customers
regarding the potential importance of
specific information, FIA believes this
guidance should be provided by means
of a generic statement.514 In addition,
FIA asked the Commission to confirm
that the term ‘‘investments’’ is limited to
investments of customer funds, and
does not include all investments made
by the FCM as an entity.515
Additionally, FIA requested that the
Commission delete the term
‘‘creditworthiness,’’ stating that such
reference is incongruous with
instructions under section 939A of the
Dodd-Frank Act.516 Moreover, FIA
opined that the only lines of business
that an FCM should be required to
disclose are those that would require
higher minimum capital under
applicable capital rules, and that this
information should only be required to
be updated annually.517 Additional
clarification was requested by FIA
regarding the phrase ‘‘investment of
customer funds with an affiliated
entity,’’ and whether that phrase refers
to the ‘‘deposit of customer funds in an
affiliated bank.’’ 518 Further clarification
was requested regarding the types of
liabilities and commitments requiring
disclosure under this section and
whether this information should
updated no more often than
semiannually, consistent with
comparable disclosures applicable to
512 FIA

Comment Letter at 45 (Feb. 15, 2013).

513 Id.
514 Id.
515 Id.
516 Section 939A required that the Commission,
‘‘remove any reference to or requirement of reliance
on credit ratings and to substitute in such
regulations such standard of creditworthiness as
each respective agency shall determine as
appropriate for such regulations.’’ FIA Comment
Letter at 46 (Feb. 15, 2013).
517 FIA Comment Letter at 46 (Feb. 15, 2013).
518 Id. at 51.

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BDs.519 Finally, FIA, while not opposed
to providing leverage information,
believed that disclosure should not be
required until it is certain the
calculation provides the most
appropriate measure of risk.520
The Commission believes that it is
appropriate that § 1.55(k)(5) requires an
FCM to identify material risks and to
explain how such risks may be material
to customers. The Commission further
believes, based upon its experiences
during MFGI, that customers
(particularly retail and less
sophisticated customers) would benefit
from an FCM providing its assessment
of the risks of the firm, accompanied by
an explanation of such risks.
The Commission notes, in response to
FIA’s comments, that § 1.55(k)(5)
requires an FCM to provide information
regarding its general investments and is
not limited to the investment of
customer funds. The disclosures
contemplated by § 1.55(k)(5) go to the
full operation of the FCM and not just
its regulated or futures activities. In
addition, limiting the disclosures only
to investments that result in an increase
in minimum capital requirements may
result in the non-disclosure of
significant operations that may impact a
customer’s decision to do business with
an FCM.
The Commission also notes that the
requirement in § 1.55(k)(5) for FCMs to
disclose leverage information would be
met by an FCM providing the leverage
information that each FCM is required
to calculate under § 1.10 and in
accordance with the regulations of the
NFA. An FCM should define the
leverage calculation in the Disclosure
Document and may provide any other
information necessary to make the
information meaningful for the public,
but if materially different from the then
prevailing NFA methodology, should
provide an explanation of the
differences therefrom.
Proposed § 1.55(k)(6) requires an FCM
to disclose the name of its DSRO and
the DSRO’s Web site, and the location
of where the FCM’s annual financial
statements are available. The
Commission received no comments on
proposed § 1.55(k)(6) and is adopting
the regulation as proposed.
Proposed § 1.55(k)(7) requires an FCM
to disclose any material administrative,
civil, enforcement, or criminal action
then pending, and any enforcement
actions taken in the last three years. FIA
requested that the Commission confirm
that a ‘‘pending’’ action is an action that
has been filed but not concluded, and
519 Id.
520 Id.

at 46.
at 34.

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recommended the Commission confirm
that the disclosure required under this
paragraph would be limited to matters
required to be disclosed in accordance
with § 4.24(l)(2).521
The Commission agrees with FIA that
the regulation should require an FCM to
disclose administrative, civil,
enforcement, and criminal actions that
have been filed but not concluded. The
proposal was not intended to cover
open or closed investigations that have
not resulted in the filing of a complaint.
The Commission is revising § 1.55(k)(7)
as appropriate to reflect this concept.
The Commission, however, does not
agree with FIA’s comment that
disclosures under proposed § 1.55(k)(7)
should be limited to administrative,
civil, enforcement, or criminal matters
that would be required to be disclosed
under § 4.24(l)(2). Regulation 4.24(l)(2)
provides that an action will be deemed
material if: (1) The action would be
required to be disclosed in the footnotes
to a commodity pool’s financial
statements under generally accepted
accounting principles as adopted in the
U.S.; (2) the action was brought by the
Commission, provided that if the matter
was concluded and did not result in a
civil monetary penalty in excess of
$50,000, it does not need to be
disclosed; and (3) the action was
brought by any other federal or state
regulatory agency, a non-U.S. regulatory
agency, or an SRO and involved
allegations of fraud or other willful
misconduct. The Commission believes
that the regulation’s requirement to
disclose material actions is appropriate
in the context of disclosures so that a
customer can perform adequate due
diligence to assess the risk of engaging
an FCM to conduct futures business and
in entrusting funds to the FCM. In this
regard, the Commission believes that
FCMs should disclose Commission
disciplinary actions that are pending or
have been concluded against the FCM
without regard to the amount of the civil
monetary penalty that may have been
imposed. In addition, the Commission
believes that there may be
circumstances in addition to fraud or
other willful misconduct that should be
disclosed to customers to allow
customers to better appreciate the
potential risks of entering into a
business relationship with an FCM.
Proposed § 1.55(k)(8) requires the
Firm Specific Disclosure Document to
contain a basic overview of customer
fund segregation, collateral management
521 Regulation 4.24(l)(2) requires a CPO to
disclose in a disclosure document for a commodity
pool certain material administrative, civil, or
criminal actions against an FCM that the CPO
engages to trade futures.

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68567

and investments, FCMs, and dual
registrant FCM/BDs. The disclosures
included under § 1.55(k)(8) should not
only include information regarding the
segregation of funds for trading on
designated contract markets, but should
also include information regarding the
risk to customers of engaging in foreign
futures and foreign options trading. In
conjunction with § 1.55(k)(4), which
requires an FCM to provide a profile of
its customer business, including its
international business and
clearinghouses and carrying brokers
used, an FCM in order to comply with
§ 1.55(k)(8) should disclose the risks of
engaging in trading on foreign markets.
The disclosures required by § 1.55(k)(8)
should include information that in the
event of the insolvency of the FCM, or
the insolvency of a foreign broker or
foreign depository that is holding
customer funds, customer funds held in
foreign jurisdictions may be subject to a
different bankruptcy regime and legal
system than if the funds were held in
the U.S. In addition, an FCM should
disclose that a customer also is subject
to fellow customer risk in foreign
jurisdictions and that, for purposes of
bankruptcy protection, a customer that
trades only in one country or in one
market is also exposed to fellow
customer risk from losses that may be
incurred in other countries and other
markets. The Commission did not
receive comment on § 1.55(k)(8) and is
adopting the amendments as proposed.
Proposed § 1.55(k)(9) requires the
FCM to include in the Firm Specific
Disclosure Document information on
how a customer may obtain information
regarding filing a complaint with the
Commission or the firm’s DSRO. The
Commission did not receive comment
on § 1.55(k)(9) and is adopting the
amendments as proposed.
Proposed § 1.55(k)(10) requires the
Firm Specific Disclosure Document to
include the following financial
information for the most recent month
end: (1) The FCM’s total equity,
regulatory capital, and net worth, all
computed in accordance with U.S.
Generally Accepted Accounting
Principles and the Commission’s capital
rule, § 1.17; (2) the dollar value of the
FCM’s proprietary margin requirements
as a percentage of the aggregated margin
requirements for futures customers,
Cleared Swaps Customers, and 30.7
customers; (3) the number of futures
customers, Cleared Swaps Customers,
and 30.7 customers that comprise 50
percent of the funds held for such
customers, respectively; (4) the
aggregate notional value, by asset class,
of all non-hedged, principal over-thecounter transactions into which the

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FCM has entered; (5) the amount,
generic source and purpose of any
unsecured lines of credit or similar
short term funding the FCM has
obtained but not yet drawn upon; (6) the
aggregated amount of financing the FCM
provides for customer transactions
involving illiquid financial products for
which it is difficult to obtain timely and
accurate prices; and (7) the percentages
of futures customers, Cleared Swaps
Customers, and 30.7 customers
receivable balances that the FCM had to
write-off as uncollectable during the
past 12 months, as compared to the
current balance held for such customers.
CMC generally supported proposed
§ 1.55(k)(10), as it would enhance
transparency to the public.522 NFA
provided a general comment supporting
the Commission’s objective of providing
customers with meaningful information,
but expressed concern that much of the
information proposed to be disclosed
under § 1.55(k)(10) may not be
understandable to smaller and less
sophisticated customers.523 NFA
specifically questioned whether such
customers would comprehend: (1) The
dollar value of the FCM’s proprietary
margin requirements as a percentage of
the aggregate margin requirements for
futures customers, Cleared Swaps
Customers, and 30.7 customers; (2) the
number of futures customers, Cleared
Swaps Customers, and 30.7 customers
that comprise 50 percent of the funds
held for such customers, respectively;
(3) the aggregate notional value, by asset
class, of all non-hedged, principal overthe-counter transactions into which the
FCM has entered; (4) the amount,
generic source and purpose of any
unsecured lines of credit or similar
short term funding the FCM has
obtained but not yet drawn upon; (5) the
aggregate amount of financing the FCM
provides for customer transactions
involving illiquid financial products for
which it is difficult to obtain timely and
accurate prices; and (6) the percentages
of futures customers, Cleared Swaps
Customers, and 30.7 customers
receivable balances that the FCM had to
write-off as uncollectable during the
past 12 months, as compared to the
current balance held for such
customers.524 NFA noted that as one of
its responses to MFGI, its Board of
Directors formed a special committee on
the protection of customer funds
(‘‘Special Committee’’) that was
comprised of NFA’s public directors.525
NFA stated that the Special Committee

spent a significant amount of time
reviewing information that FCMs
should make available to customers,
while focusing on the needs of smaller,
less sophisticated customers, and
concluded that much of the information
in § 1.55(k)(10) is complicated and not
meaningful for less sophisticated
customers.526 NFA also noted that more
sophisticated institutional customers
could request and would likely receive
this information directly from an
FCM.527
The Commission understands that not
all customers would have the same use
for the detailed information required by
§ 1.55(k)(10). In developing the
proposal, the Commission sought to
balance the information needs of all
types of customers and their respective
levels of sophistication. While certain
customers may not use the full amount
of information in assessing risks, the
Commission anticipates that other
customers will incorporate all or most of
the information into their risk
management process and will benefit
from the disclosures in performing their
due diligence. The Commission also
believes that the information should be
available to all customers without the
need for customers to specifically
request the § 1.55(k)(10) disclosures
from the FCM.
FIA agrees that customers should be
advised whether an FCM engages in
proprietary futures trading but does not
believe that FCMs should be required to
disclose the dollar value of their
proprietary margin requirements as a
percentage of customer margin
requirements as proposed in
§ 1.55(k)(10(ii) as such percentages will
change frequently.528 FIA also questions
the implication that customers may be
at greater risk if an FCM carries
proprietary futures positions noting, for
instances, that the FCM’s funds to
margin its proprietary positions would
be available to cover a potential
customer default.529 RJ Obrien,
however, noted that it is important that
customers be aware of the nature and
extent of a firm’s proprietary trading.530
The Commission believes that
information regarding an FCM’s
proprietary trading is necessary for
customers to appropriately assess the
risks of entrusting their funds to an
FCM. The risk profile of an FCM is
certainly different if it acts primarily as
an agent in handling customer funds, or
526 Id.

at 16.

527 Id.
522 CMC
523 NFA

Comment Letter at 2 (Feb. 15, 2013).
Comment Letter at 15–16 (Feb. 15, 2013).

524 Id.
525 Id.

Comment Letter at 48 (Feb. 15, 2013).

529 Id.
530 RJ O’Brien Comment Letter at 11 (Feb. 15,
2013).

at 1.

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if it acts as agent for customers and also
engages in proprietary trading. The
Commission further believes that
customers would benefit from some
measure of the FCM’s proprietary
trading rather than a simple statement
that the firm does or does not engage in
proprietary trading. The dollar value of
the FCM’s margin requirements for its
proprietary trading listed as a
percentage of its customer margin
requirements provides a means of
measuring how active and extensive a
firm’s proprietary trading may be
relative to its customer business, which
will factor into the public’s risk profile
of the firm.
FIA requested confirmation that the
requirement in § 1.55(k)(10)(iii) for an
FCM to disclose the number of futures
customers, cleared swap customers, and
30.7 customers that comprise 50 percent
of the FCM’s total funds held for such
customers, respectively, should be
based upon the smallest number of
customers that comprise the 50 percent
threshold.531 The Commission confirms
that FIA’s assumption is correct and is
revising the final regulation accordingly.
A purpose of the disclosure is to
provide information on the extent to
which a firm may have customers with
large positions relative to the FCM’s
general customer base.
FIA stated that the requirement in
§ 1.55(k)(10)(iv) for an FCM to disclose
the aggregate notional value, by asset
class, of its non-hedged, principal overthe-counter transactions would require
the FCM to disclose proprietary
information. In addition, FIA stated that
providing such information is not
practical as firms generally do not
manage their books this way and the
categorization of a swap transaction as
being hedged or not hedged would
change each day.
The objective of § 1.55(k)(10)(iv) is for
an FCM to disclose the extent of the risk
it is exposed to from over-the-counter
transactions that are not hedged or for
which the FCM does not hold margin
from the counterparty sufficient to cover
the exposure. While the Commission
recognizes that such information may
change frequently, § 1.55 only requires
an FCM to update the information on an
annual basis, or more frequently if the
changes are material. The information
also is in the aggregate, which should
minimize the risk of disclosing detailed
proprietary information. After
considering the comments, the
Commission is adopting the regulation
as proposed.
FIA stated that the Commission
should distinguish between committed
531 FIA

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and uncommitted lines of credit in the
requirement in § 1.55(k)(10)(v), which
requires an FCM to disclose the amount,
generic source and purpose of any
unsecured lines of credit it has obtained
but not yet drawn upon.532 The
Commission agrees that it would be
more appropriate to disclose committed
lines of credit and to exclude lines of
credit that could be withdrawn by the
potential lender. The Commission is
revising the final regulation to reflect
this change. In addition, the
Commission is clarifying that the
provision in § 1.55(k)(10)(v) that
requires the disclosure of the amount,
source and purpose of any unsecured
lines of credit or similar short-term
funding would include secured and
unsecured short-term funding.
Regulation 1.55(k)(10)(vi) requires an
FCM to disclose the aggregated amount
of financing the FCM provides for
customer transactions involving illiquid
financial products for which it is
difficult to obtain timely and accurate
prices. FIA requested that the
Commission define the type of financing
covered by the regulation, and also
requested that the Commission define
the term ‘‘illiquid financial products’’
and confirm whether the information
should include secured as well as
unsecured financing.533
The Commission notes that the
purpose of the disclosure is to provide
the public with information regarding
the possible extent of exposures an FCM
may have if customers failed to meet
their financial obligations to the FCM.
The Commission is adopting the
requirement as proposed. FCMs are
required to provide the necessary
information in the Disclosure
Document, and may explain the factors
it uses to determine if a financial
product is liquid or illiquid and the
extent to which transactions are secured
or unsecured.
Regulation 1.55(k)(10)(vii) requires an
FCM to disclose the percentage of
futures customer, Cleared Swaps
Customer, and 30.7 customer receivable
balances that the FCM had to write-off
as uncollectable during the past 12
months, as compared to the current
balances of funds held for such
customers.
Newedge and RJ O’Brien commented
that providing this information would
provide customers with valuable insight
into the strength of an FCM’s credit
policies, which benefits all
customers.534 FIA, however,
532 Id.

commented that it did not recognize the
relevance of the requested information,
which may be misleading without the
proper context (such as whether the
losses were caused by one or two large
customers or an aggregate of small
customers).535 FIA further stated that if
the Commission were to adopt the rule,
normal business write-offs should be
excluded, and the Commission should
establish a de minimis threshold were
reporting would not be required.
The Commission has considered the
comments and is adopting the
regulation as proposed. The
Commission believes that the disclosure
of the amount of write-offs an FCM had
to incur as a result of customers failing
to pay receivable balances will provide
information regarding the credit policies
of the FCM. The Commission does not
believe that there should be any de
minimis level or threshold amount
before the disclosure of the information
becomes a requirement. In response to
FIA’s comments that the information
may be misleading if not provided in
context, the Commission notes that
FCMs may include explanatory text in
the Disclosure Document provided such
information is not misleading.
Finally, proposed § 1.55(k)(11)
requires a summary of the FCM’s
current risk practices, controls and
procedures. FIA asked for confirmation
that the discussion of the FCM’s current
risk practices, controls and procedures
may be general in nature, noting that the
Commission has recognized that an
FCM’s risk practices, controls and
procedures may include proprietary
information.536 The Commission
confirms that the discussion of the
current risk practices, controls and
procedures may be general in nature so
that it does not disclose confidential
proprietary information.
2. Public Availability of FCM Financial
Information
Proposed § 1.55(o) requires each FCM
to make the following information
available to the public on its Web site:
(1) The daily Segregation Schedule,
Secured Amount Schedule, and the
Cleared Swaps Segregation Schedule for
the most current 12-month period; (2) a
summary schedule of the FCM’s
adjusted net capital, net capital, and
excess net capital, all computed in
accordance with § 1.17 and reflecting
balances as of the month-end for the 12
most recent months; and, (3) the
Statement of Financial Condition, the
Segregation Schedule, Secured Amount
Schedule, and Cleared Swaps

533 Id.
534 Newedge Comment Letter at 4 (Feb. 15, 2013);
RJ O’Brien Comment Letter at 11 (Feb. 15, 2013).

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535 FIA
536 FIA

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Comment Letter at 50 (Feb. 15, 2013).

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Segregation Schedule and all related
footnotes contained in the FCM’s most
recent certified annual financial report.
Regulation 1.55(o) also requires each
FCM to include a statement on its Web
site that additional financial
information on the firm and other FCMs
may be obtained from the NFA and the
Commission, and to include hyperlinks
to the NFA and Commission Web sites.
MFA, SIFMA, Prudential, Security
Benefit, CoBank, and the FHLBs
supported the requirement for FCMs to
post their daily Segregation Schedule,
Secured Amount Schedule, and Cleared
Swaps Segregation Schedule on their
Web site each day, stating that the
disclosure of such information would
place customers in a better position to
assess an FCM’s stability, and if
customers identify concerns and deem
appropriate, to transfer their positions
and funds to a different FCM.537 MFA,
SIFMA, Prudential, Security Benefit,
CoBank, and the FHLBs also stated that
the Commission should require FCMs to
disclose additional information,
including the FCM’s monthly
Segregation Schedule, Secured Amount
Schedule, and Cleared Swaps
Segregation Schedule, and monthly
summary balance sheet and income
statement information, for the most
recent 12-month period.538 MFA noted
that each FCM’s monthly Segregation
Schedule, Secured Amount Schedule,
and Cleared Swaps Segregation
Schedule are publicly available under
§ 1.10, and suggested that each FCM
should be required to disclose the
schedules to the public without the
public having to request such
statements from the firms as is currently
required under § 1.10.539
The ACLI encouraged the
Commission to make public as much
information as possible regarding FCMs’
financial condition, treatment of
customer funds, and regulatory
compliance.540 The ACLI also noted that
access to these categories of information
should be straightforward and
simple.541 TIAA–CREF supported the
proposed enhanced financial
disclosures and encouraged the
Commission to require the prompt
public disclosure of relevant FCM
537 MFA Comment Letter at 4 (Feb. 15, 2013);
SIFMA Comment Letter at 2 (Feb. 21, 2013);
Prudential Comment Letter at 2 (Jun. 9, 2013);
Security Benefit Comment Letter at 2 (Jan. 11,
2013); CoBank Comment Letter at 2 (Jan. 14, 2013);
FHLB Comment Letter at 7 (Feb. 15, 2013).
538 Id. See also The Commercial Energy Working
Group Comment Letter at 2–3 (Feb. 12, 2013).
539 MFA Comment Letter at 4–6 (Feb. 15, 2013);
SIFMA Comment Letter at 2 (Feb. 21, 2013).
540 ACLI Comment Letter at 2–3 (Feb. 15, 2013).
541 Id.

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information.542 TIAA–CREF stated that
such disclosures would be a positive
step towards ensuring a level playing
field between each FCM and its
customers and among FCMs themselves,
and supported the Commission’s efforts
to require FCMs to disclose information
regarding the FCM’s segregation of
customer property (e.g., the Cleared
Swaps Segregation Schedule), financial
health and creditworthiness and would
also support efforts by the Commission
to cause such disclosures to be posted
on the relevant FCM’s Web site, in lieu
of requiring customers to make a request
to the Commission to receive such
information (which may be
administratively burdensome).543
FXCM noted that currently the
Commission’s monthly ‘‘net capital’’
reports is the only publicly available
way to determine how much money an
FCM or RFED has set aside for net
capital, but this provides very little
insight into how the firm is doing
financially.544 FXCM stated that FCMs
and RFEDs should be required to
publish quarterly consolidated balance
sheets and income statements, including
holding company financials, for the
trading public so they will know the
level of risk involved in dealing with a
firm.545
FIA stated that the daily segregation,
secured amount, and cleared swaps
customer account calculations should
not be made publicly available. FIA
noted that NFA currently makes this
information available on its Web site as
of the 15th and last business day of each
month and believes disclosure twice
each month should be sufficient. If the
Commission concludes more frequent
disclosure is necessary, FIA
recommended that disclosure should be
required no more often than weekly, i.e.,
as of the close of business each Friday
(or the last business day of the week if
Friday is a holiday).
Phillip Futures Inc. proposed that the
Commission limit the financial data
made public to that which is most
appropriate for the average customer to
make an educated decision regarding
his choice of broker.546 It further stated
542 ACLI

Comment Letter at 2–3 (Feb. 15, 2013).
Comment Letter at 2–3 (Feb. 15,

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543 TIAA–CREF

2013).
544 FXCM Comment Letter at 2–3 (Dec. 14, 2013).
545 Id. See also forex form letter group: Michael
Krall; David Kennedy; Robert Smith; Michael
Carmichael; Andrew Jackson; Donald Blais;
Suzanne Slade; Patricia Horter; JoDan Traders; Jeff
Schlink; Sam Jelovich; Matthew Bauman; Mark
Phillips; Deborah Stone; Po Huang; Aaryn Krall;
Vael Asset Management; Kos Capital; James Lowe;
Tracy Burns; Treasure Island Coins; Clare Colreavy,
Brandon Shoemaker.
546 Phillip Futures Inc. Comment Letter at 3 (Feb.
14, 2013).

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that rather than making the financial
information public, it should only be
provided to customers at their
request.547
RCG stated that if the Commission
makes the Segregation Schedule,
Secured Amount Schedule, and Cleared
Swaps Segregation Schedule public, the
public will only see a targeted residual
interest amount, without realizing and
comprehending the many factors that
have impacted a particular firm’s
determination of its target.548
TD Ameritrade expressed its concern
regarding the public disclosure of the
firm’s targeted residual interest
computation.549 TD Ameritrade stated
that the public would not be privy to
any of the internal discussions and
analysis that goes into the development
and setting of the firm’s targeted
residual interest, and that any changes
to its target could cause market
upheaval, volatility, and unintended
consequences.550
The Commission has considered the
comments and is adopting the
regulations as proposed, with the
revision to § 1.55(o) to require each FCM
to disclose on its Web site its monthly
Segregation Schedule, Secured Amount
Schedule, and Cleared Swaps
Segregation Schedule for the 12 most
recent month-end dates.
The Commission currently discloses
FCM financial data on its Web site.
Specifically, § 1.10(g) provides that the
Form 1–FR–FCM (or FOCUS Report) is
exempt from mandatory public
disclosure under the Freedom of
Information Act and the Government in
the Sunshine Act, except for the
following information: (1) The amount
of the FCM’s adjusted net capital under
§ 1.17 as of the reporting date, the
amount of adjusted net capital
maintained by the firm on the reporting
date, and the amount of excess net
capital on the reporting date; (2) the
Segregation Schedule and Secured
Amount Schedule as of the reporting
date; and (3) the Statement of Financial
Condition in the certified annual report
and related footnote disclosures. The
Commission summarizes the FCM’s
segregation, secured amount and capital
information each month and makes
such information available to the public
on its Web site.
The Commission believes that
customers should have access to
sufficient financial information for each
FCM to allow such customers to
547 Id.
548 RCG
549 TD

Comment Letter at 6 (Feb. 12, 2013).
Ameritrade Comment Letter at 4 (Feb. 15,

2013).
550 Id.

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adequately assess and monitor the
financial condition of firms. The
disclosure of the daily segregation and
secured amount computations will
provide customers with additional
information to assess the adequacy of an
FCM’s targeted residual interest given
the firm’s business operations and
amount of customer funds held in
segregated or secured accounts. The
Commission also believes that the
expanded disclosures required under
§ 1.55 offer each FCM with the ability to
provide an explanation describing the
rationale and business justification for
its computation of the target residual
interest to better inform the public. The
reporting of segregated and secured
account balances on a daily basis also
will provide customers with
information regarding any trends
developing with particular reported
balances that the customers may wish to
consider as part of their risk assessment
of the FCMs.
The Commission further believes that
customers should have access to an
FCM’s financial information by
reviewing such information directly on
the FCM’s Web site as part of the Firm
Specific Disclosures. By reviewing the
Firm Specific Disclosures and having
access to financial data of the FCM,
customers will be able to better assess
the risks of engaging a particular FCM.
The Commission also believes that
customers would benefit from being
informed that additional financial
information on each FCM is available
from the NFA and Commission, and by
requiring the FCMs to maintain a
hyperlink to the Commission’s and
NFA’s Web sites. NFA and Commission
data provide historical information that
allows customers to assess financial
trends on a customer-by-customer basis,
and provides sufficient financial
information such that customers can
compare financial data across FCMs as
part of their risk management program.
The NFA also discloses additional
information regarding how FCMs are
holding customer funds and investing
customer funds under § 1.25, which is
material information for customers in
assessing risk at particular FCMs.
Regulation 1.10(g) currently requires a
customer to request from the FCM
monthly Segregation Schedules and
Secured Amount Schedules, as well as
the Statement of Financial Condition
contained in the FCM’s certified annual
report. In response to several of the
comments, the Commission is revising
§ 1.55(o) to require each FCM to post
such financial information on its Web
site. The Commission agrees with the
commenters that FCMs should disclose
this information, which is currently

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publicly available under § 1.10(g),
without requiring each customer or
member of the public having to
specifically request such information
from the FCM.
The Commission is not expanding the
required disclosures to include
summary income statement information
or balance sheet information as
requested by several commenters. As
noted above, § 1.10(g) currently
provides that the Form 1–FR–FCM and
FOCUS Reports are not subject to
mandatory public disclosure under the
Freedom of Information Act or the
Government in the Sunshine Act, and
the Commission did not propose to
amend § 1.10(g) in the Proposal. In
addition, the comments addressing
quarterly financial statements and
consolidated financial statements for
FCMs and RFEDs are beyond the scope
of the Proposal as the Commission did
not propose to amend the regulations to
require an FCM or RFED to prepare or
file with the Commission quarterly
financial statements on either an
individual or consolidated basis.
Accordingly, the Commission is not
revising final § 1.55(o) to require such
disclosures.
Q. Part 22—Cleared Swaps
As discussed above, the Commission
adopted final regulations in part 22 that
implement certain provisions of the
Dodd Frank Act and impose
requirements on FCMs and DCOs
regarding the treatment of Cleared
Swaps Customer contracts (and related
collateral).551 Although substantive
differences in the segregation regimes
between futures and cleared swaps exist
at the clearing level under the final part
22 regulations, requirements with
respect to collateral which is not posted
to clearinghouses and maintained by
FCMs for Cleared Swaps Customers
replicate or incorporate by reference
many of the same regulatory
requirements applicable to the
segregation of futures customer funds
under section 4d(a)(2) of the Act and
Commission regulations (for example,
holding funds separate and apart from
proprietary funds, limitations on the
FCM’s use of customer funds, titling of
depository accounts, Acknowledgment
Letter from depository requirements,
and limitations on investment of swap
customers’ funds, are currently
contained in both part 1 and part 22
regulations).
The determination that appropriate
enhancements are necessary with
respect to the regulatory requirements
discussed above for segregated futures
551 See

discussion in section I.A. above.

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customer funds under section 4d(a)(2) of
the Act is equally applicable to Cleared
Swaps Customer Collateral. In this
regard, the risk management program
that each FCM that holds customer
funds is required to implement under
§ 1.11 encompasses the firm’s business
with futures customers, Cleared Swaps
Customers, and 30.7 customers.
In addition, the Commission proposed
amendments to § 22.2(d)(1) and (f)(6)
that require an FCM to maintain at all
times sufficient residual interest in
Cleared Swaps Customer Accounts to
exceed the sum of the margin deficits
(i.e., undermargined amounts) of all of
its Cleared Swaps Customers. The
proposed amendments to § 22.2(e)(1)
that explicitly provide that an FCM
shall bear sole responsibility for any
losses resulting from the investment of
Cleared Swaps Customer Funds in
§ 1.25 compliant instruments is
consistent with the amendments
adopted for § 1.29(b) that require an
FCM to bear sole responsibility for any
losses resulting from the investment of
futures customers funds in § 1.25
compliant instruments. The proposed
amendments to § 22.2(f)(4) provide that
an FCM must be in compliance at all
times with its segregation requirements
for Cleared Swaps Customers is
consistent with amendments adopted in
§ 1.20(a) that require an FCM to be in
compliance at all times with its
segregation requirements for futures
customers. The proposed amendments
in § 22.2(f)(5)(iii)(B) permit an FCM to
develop its own program to assess credit
risk for purposes of computing haircuts
on securities securing a Cleared Swaps
Customer’s deficit account is consistent
with the amendments adopted in 1.32
for computing haircuts on securities
securing a futures customer’s deficit
account. The proposed amendments to
§ 22.2(g)(2), (3), and (5) require an FCM
to prepare and submit to the
Commission and the FCM’s DSRO a
daily Cleared Swap Segregation
Schedule and twice monthly listing of
the holding of Cleared Swaps Customer
funds is consistent with the
amendments adopted to § 1.32 that
require an FCM to prepare and submit
to the Commission and the FCM’s DSRO
a daily Segregation Schedule and twice
monthly listing of the holding of futures
customer funds.
Comments on the substantive
provisions being adopted by the
Commission under part 22 have been
considered and addressed in large part
in the discussion of the related
substantive provisions in part 1 with
respect to futures customer segregated
funds. The Commission has considered
those comments and, with the exception

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68571

of the proposed amendments to § 22.2(a)
and (f)(6), is adopting the amendments
to part 22 as proposed.
In addition, several commenters,
including MFA, CIEBA and Franklin
urged the Commission to adopt a full
physical segregation option specific for
Cleared Swaps Customer Collateral.552
This comment is outside of the scope of
the proposal. The Commission,
however, has previously clarified the
ability of FCMs to employ third party
custodial accounts for Cleared Swaps
Customer Collateral, while reiterating
that as customer property, in the event
of an FCM insolvency, any funds held
in such a third party custodial account
would be subject to pro-rata distribution
along with all other customer
property.553 Commission staff is also
continuing to explore alternative
collateral custody arrangements as
directed by the Commission.554
As discussed in more detail above,
several commenters objected to
proposed residual interest requirements
under §§ 1.20(i) and 22.2(f).555 Of those
commenters, a number focused on the
proposed residual interest requirements
for Cleared Swaps and highlighted the
inconsistency of the ‘‘at all times’’
requirement with the Commission’s
analysis in the part 22 final rules.556
LCH.Clearnet, ISDA, Paul/Weiss, and
other commenters specifically stated
that the inclusion of the language ‘‘at all
times’’ is inconsistent with the LSOC
requirement to calculate such deficits at
the time of a margin call by a DCO to
its clearing FCMs, and with the
requirement to have sufficient residual
interest to cover such deficit by the time
the clearing FCMs are required to meet
such payment obligations.557 These
commenters argued that when the
Commission adopted the part 22 final
rules, it considered this point in time
552 MFA Comment Letter at 9 (Feb. 15, 2013);
CIEBA Comment Letter at 3–4 (Feb. 20, 2013);
Franklin Comment Letter at 2 (Feb. 15, 2013).
553 77 FR 6336, 6343.
554 Id. at 6343–6344.
555 See section II.G.9. above.
556 See LCH.Clearnet Comment Letter at 4–5 (Jan.
25, 2013); FIA Comment Letter at 22–23 (Feb. 15,
2013).
557 See, e.g., LCH.Clearnet Comment Letter at 4–
5 (Jan. 25, 2013); Paul/Weiss Comment Letter at 3–
5 (Feb. 15, 2013); ISDA Comment Letter at 2–3 (Feb.
15, 2013). ISDA further argued that variation margin
payments are not ‘‘used’’ until the point of
settlement. See ISDA Comment Letter at 1–2 (Aug.
27, 2013) (citing CFTC Letter No. 12–31, ‘‘Staff
Interpretation Regarding Part 22,’’ (November 1,
2012) (‘‘Part 22 Staff Interpretation’’) and arguing
that the use restriction set forth in 4d(f)(2)(B) of the
CEA ‘‘is driven by the meaning of ‘property . . .
received’ ’’ and that ‘‘‘received’ in this context
cannot be intended to include variation margin
fluctuations pre-settlement because it is only upon
settlement that an item of property will have been
received by the FCM.’’).

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approach to be consistent with the Act
and sufficient to ensure that the
collateral of one Cleared Swaps
Customer is never used to margin the
positions of another customer.558
In response to these comments, the
Commission notes that the proposed
amendments to § 22.2(a) and (f)(6) were
meant to capture the current practice
with respect to residual interest buffer
calculations for Cleared Swaps using
language that was consistent with the
Proposed Residual Interest Requirement
for futures. In other words, the
Commission did not intend to alter the
current residual interest requirements,
as set forth in the part 22 final rules.559
Indeed, the Commission notes that Staff
guidance from November 1, 2012, states
that ‘‘FCMs are prohibited from ‘us[ing]
or permit[ing] the use of, the Cleared
Swaps Customer Collateral of one
Cleared Swaps Customer to purchase,
margin, or settle the Cleared Swaps or
any other trade or contract of, or to
secure or extend the credit of, any
person other than such Cleared Swaps
Customer.’ Where a Cleared Swaps
Customer is undermargined, then the
FCM must ensure that, to the extent of
such shortfall, its own money,
securities, or other property—and not
that of other Cleared Swaps
Customers—is used to cover a margin
call (whether initial or variation)
attributable to that Cleared Swaps
Customer’s portfolio of rights and
obligations.’’ 560
Because of the confusion expressed by
commenters regarding the residual
interest requirements for Cleared Swaps,
the Commission is revising § 22.2(a) and
(f). The Commission is revising
proposed § 22.2(a) by deleting the last
sentence. The Commission is revising
§ 22.2(f)(6) by replacing the language
from the proposal with new language
which sets forth the residual interest
requirements for Cleared Swaps in a
manner that is consistent with current
market practice and that parallels the
language used in § 1.22. To be clear, and
as requested by several commenters, the
Commission confirms that the language
in § 22.2(f)(6) is not intended to, and
thus should not be read to, change
current practice with respect to an
FCM’s residual interest requirements for
Cleared Swaps as set forth in
Commission regulations and JAC
Update 12–03, and consistent with Staff
Interpretation 12–31. Thus, ‘‘where a
Cleared Swaps Customer is
558 See

LCH.Clearnet Comment Letter at 4–5 (Jan.
25, 2013); FIA Comment Letter at 22–23 (Feb. 15,
2013); ISDA Comment Letter at 2–3 (Feb. 15, 2013).
559 See also Part 22 Staff Interpretation.
560 See id. at 2 (answer to Question 2.1).

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undermargined,561 the FCM must
ensure that, to the extent of such
shortfall, its own money, securities, or
other property—and not that of other
Cleared Swaps Customers—is used to
cover a margin call (whether initial or
variation) attributable to that Cleared
Swaps Customer’s portfolio of rights
and obligations.’’ 562 Consistent with
this revised residual interest
requirement, § 22.2(f)(4) is being
amended to state that the amount of
funds an FCM is holding in segregation
may not be reduced by any debit
balances that the futures customers of
the futures commission merchants have
in their accounts. Finally, § 22.2(f)(2) is
being revised, consistent with 1.20(i)(2)
and current market practice, to clarify
that the calculation set forth therein is
the Net Liquidating Equity Method.
R. Amendments to § 1.3: Definitions;
and § 30.7: Treatment of Foreign
Futures or Foreign Options Secured
Amount
Part 30 of the Commission’s
regulations was adopted in 1987 and
governs the offer and sale in the U.S. of
futures contracts and options traded on
or subject to the rules of a foreign board
of trade.563 The Commission proposed
to amend several regulations in part 30
to provide a more coordinated approach
to the regulations governing the offer
and sales of futures contracts traded on
foreign boards of trade and the
comparable regulations governing the
offer and sale of futures contracts traded
on designated contract markets.
Aligning the regulations, including
regulations governing how an FCM
holds funds for customers trading on
non-U.S. markets with the requirements
for customers trading on U.S. markets,
will greatly enhance the protection of
customer funds, and avoid competitive
imbalances between trading on
domestic and foreign contract markets
that might result in regulatory arbitrage.
The Commission’s Proposal, along with
the comments received, is discussed in
the sections below.
1. Elimination of the ‘‘Alternative
Method’’ for Calculating the Secured
Amount
Regulation 30.7(a) requires an FCM to
set aside in separate accounts for the
561 In this context, a Cleared Swaps Customer is
undermargined to the extent that (a) the minimum
margin requirement, attributable to that Cleared
Swaps Customer’s portfolio of rights and
obligations, at the DCO (for an FCM that is clearing
such Cleared Swaps Customer’s positions directly)
or at the Collecting FCM (for a Depositing FCM)
exceeds (b) the customer’s net liquidating value,
including securities posted at margin value.
562 See Part 22 Staff Interpretation at 2.
563 52 FR 28980 (Aug. 5, 1987).

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benefit of its ‘‘foreign futures or foreign
options customers’’ an amount of funds
defined as the ‘‘foreign futures or
foreign options secured amount.’’ The
term ‘‘foreign futures or foreign options
customer’’ is defined in § 30.1 as any
person located in the U.S., its territories,
or possessions who trades in foreign
futures or foreign options. The term
‘‘foreign futures or foreign options
secured amount’’ is defined in § 1.3(rr)
as the amount of funds necessary to
margin the foreign futures or foreign
options positions held by the FCM for
its foreign futures or foreign options
customers, plus or minus any gains or
losses on such open positions. The
calculation of the foreign futures or
foreign options secured amount as
defined in § 1.3(rr) is referred to as the
‘‘Alternative Method.’’
Requirements concerning the
collateral of foreign futures or foreign
options customers are substantially less
robust for funds deposited with an FCM
under the Alternative Method than
requirements concerning the collateral
of futures customers deposited with an
FCM under section 4d(a)(2) of the Act
or Cleared Swaps Customer Funds
deposited under section 4d(f) of the Act.
Section 4d(a)(2) of the Act and §§ 1.20
and 1.22 require an FCM to hold in
accounts segregated for the benefit of
futures customers a sufficient amount of
funds to satisfy the full account equities
of all of the FCM’s futures customers
trading on designated contract
markets.564 Section 4d(f) and § 22.2
require an FCM to segregate for the
benefit of Cleared Swaps Customers a
sufficient amount of funds to satisfy the
full account equities of all of the FCM’s
Cleared Swaps Customers. The
calculations required under sections
4d(a)(2) and 4d(f) of the Act are referred
to as the ‘‘Net Liquidating Equity
Method.’’
The Alternative Method contrasts
with the Net Liquidating Equity Method
in that the Alternative Method obligates
an FCM to set aside in separate accounts
for the benefit of its customers an
amount of funds sufficient to cover only
the margin required on open foreign
futures and foreign option positions,
plus or minus any unrealized gains or
losses on such positions. Any funds
deposited by foreign futures or foreign
options customers in excess of the
amount required to be set aside in
separate accounts may be held by the
564 The Commission is also adopting as final
amendments to § 1.20(a) that clarify and provide
explicitly that an FCM is required to hold funds in
segregated accounts in an amount at all times in
excess of its total obligations to all futures
customers. See section II.G.9. above for a discussion
of the amendments to § 1.20.

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FCM in operating cash accounts and
may be used by the FCM as if it were
its own capital. Since an FCM is not
required under the Alternative Method
to set aside in separate accounts an
amount of funds sufficient to repay the
full account balances of each of its
foreign futures or foreign options
customers, the FCM may not be in a
financial position to return 100 percent
of the account equities (or transfer such
account equities to another FCM) of
each foreign futures or foreign options
customer in the event of the insolvency
of the FCM.
In addition § 30.7 further differs from
the regulations governing how FCMs
hold funds for futures customers and
Cleared Swap Customers in that § 30.7
requires an FCM to set aside in a
separate account funds only for ‘‘foreign
futures or foreign options customers.’’
As previously stated, the term ‘‘foreign
futures or foreign options customer’’ is
defined in § 30.1 as any person located
in the U.S., its territories, or possessions
who trades in foreign futures or foreign
options. Thus, an FCM is not required
to set aside in separate accounts funds
for foreign-domiciled customers trading
on foreign futures markets. Regulation
30.7 permits an FCM to set aside funds
for foreign futures customers located
outside of the U.S., but an FCM is not
obligated under the regulations to do so.
Requiring FCMs to include foreigndomiciled customers’ funds in
segregated accounts benefits all
customers placing funds on deposit for
use in trading foreign futures and
foreign options. Neither Subchapter IV
of Chapter 7 of the Bankruptcy Code nor
the Commission’s part 190 regulations
discriminate between foreign-domiciled
and domestic-domiciled customers.
Thus, any deficiency arising from the
reduced requirements will impact both
foreign and domestic customers pro
rata.
The Commission proposed various
amendments to the part 30 regulations
to eliminate the Alternative Method and
to require FCMs to use the Net
Liquidating Equity Method to compute
the amount of funds they must set aside
in separate accounts for the benefit of
foreign futures or foreign options
customers. The Commission also
proposed to extend the protections of
part 30 to foreign-domiciled customers
trading on foreign markets through an
FCM. The intent of the proposed
amendments is to provide 30.7
customers with equivalent protections
available to futures customers and
Cleared Swaps Customers by requiring
each FCM to hold in secured accounts
sufficient funds to cover the full Net

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Liquidating Equity of each customer
trading on foreign futures markets.
To implement these revisions, the
Commission proposed to define the
term ‘‘30.7 customer’’ in § 30.1 to mean
any person, whether domiciled within
or outside of the U.S., that engages in
foreign futures or foreign options
transactions through the FCM. The
Commission also proposed to amend
§ 1.3(rr) to match structurally the
definition of the term ‘‘customer funds’’
in § 1.3(gg) 565 and to define the term
‘‘foreign futures or foreign options
secured amount’’ to mean ‘‘all money,
securities and property received by an
FCM for, or on behalf of, ‘‘30.7
customers’’ to margin, guarantee, or
secure foreign futures and foreign
options transactions, and all funds
accruing to ‘‘30.7 customers’’ as a result
of such foreign futures and foreign
options transactions.’’ The effect of the
proposed amendments is to adopt the
Net Liquidating Equity Method for
foreign futures and foreign options by
requiring an FCM to set aside in
separate accounts a sufficient amount of
funds to cover the full account balances
(i.e., the Net Liquidating Equities) of
both the U.S. and foreign-domiciled
customers.
The Commission also proposed to
amend § 30.7(a) to allow an FCM to use
an internal credit risk model to compute
the appropriate market deductions, or
haircuts, on readily marketable
securities deposited by customers that
have account deficits. The proposal is
consistent with the proposed
amendments for computing haircuts on
securities under § 1.32(b) in section II.N.
above. The result of these amendments
as discussed should be consistency
between the methodologies applied in
the 4d segregation calculation and the
§ 30.7 calculation.
Consistent with proposed changes in
§ 1.20(i) and part 22, the Commission
also proposed to add language to
§ 30.7(a) to provide that an FCM must
hold residual interest in accounts set
aside for the benefit of 30.7 customers
equal to the sum of all margin deficits
(i.e., undermargined amounts) for such
accounts, to provide an equivalent clear
mechanism for ensuring that the funds
of one 30.7 customer are not margining
or guaranteeing the positions of another
30.7 customer

2. Funds Held in Non-U.S. Depositories
The Commission proposed to amend
§ 30.7(c) to limit the amount of 30.7
customers’ funds that an FCM could
hold in non-U.S. jurisdictions. Under
the proposal, an FCM must hold 30.7
customer funds in the U.S., except to
the extent that the funds held outside of
the U.S. are necessary to margin,
guarantee, or secure (including any
prefunding obligations) the foreign
futures or foreign options positions of
an FCM’s 30.7 customers. The proposal
further allowed an FCM to deposit
additional 30.7 customer funds outside
of the U.S. up to a maximum of 10
percent of the total amount of funds
required to be held by non-U.S. brokers
or foreign clearing organizations for 30.7
customers as a cushion to meet
anticipated margin requirements. The
proposal also provided that the FCM
must hold 30.7 customer funds under
the laws and regulations of the foreign
jurisdiction that provide the greatest
degree of protection to such funds; and
that the FCM may not by contract or
otherwise waive any of the protections
afforded customer funds under the laws
of the foreign jurisdiction.
Several comments were received on
the proposal. Pilot Flying J supported
the requirement that 30.7 customer
funds, if held outside of the U.S., must
be held under the laws of the foreign
jurisdiction that provides the funds with
the greatest degree of protection.567
FIA and Jefferies each recommended
that an FCM be permitted to maintain
an excess of up to 50 percent of the
amount an FCM is required to deposit
with a foreign broker to maintain
customer foreign futures and foreign
options positions, a position that they

565 The Commission recently adopted final
regulations that revised the definitions in § 1.3. In
this rulemaking, § 1.3(gg) was renumbered as 1.3(jjj)
and re-designated ‘‘futures customer funds.’’ The
substance of the definition, however, was not
revised and the final rulemaking has no impact on
the analysis in this rulemaking. See 77 FR 66288
(Nov. 2, 2012).

566 See section II.R.4. below for a discussion of
the residual interest proposal. CFA stated that it
generally supported the proposed amendments to
§ 30.7 and treating customers from all parts of the
globe in a similar manner. CFA Comment Letter at
9 (Feb. 13, 2013).
567 Pilot Flying J Comment Letter at 2 (Feb. 14,
2013).

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With the exception of the residual
interest proposal, the Commission did
not receive any comments on the
various proposed amendments
discussed above, including its proposal
to eliminate the ‘‘Alternative Method’’
and to require FCMs to use the ‘‘Net
Liquidating Equity Method’’ to compute
the amount of funds they must set aside
in separate accounts for the benefit of its
foreign futures or foreign options
customers. Accordingly, the
amendments referred to above, with the
exception of the residual interest
proposal as discussed further below, are
being adopted by the Commission.566

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stated is consistent with § 1.17 that
requires an FCM to incur a capital
charge for unsecured receivables due
from a foreign broker greater than 150
percent of the amount required to
maintain positions in accounts with the
foreign broker.568 FIA recommended
that, at a minimum, a cushion of 20
percent should be provided.569 FIA
stated that the proposal is more
restrictive than the provisions of § 1.49,
which set out the terms and conditions
pursuant to which an FCM may hold
futures customers’ segregated funds and
Cleared Swaps Collateral outside of the
U.S. and suggested that the proposal be
revised to permit an FCM to hold funds
comprising the foreign futures and
foreign options secured amount in
depositories outside of the U.S. to the
same extent that an FCM may hold
futures customer segregated funds and
Cleared Swaps Collateral outside of the
U.S.570 They further recommended that
the ‘‘10% limitation’’ apply only to
funds deposited with a foreign broker or
foreign clearing organization.571
RCG requested the Commission to
clarify application of § 30.7(c) as it
relates to banks located outside the U.S.
that FCMs use for settlement purposes,
and how the limitation applies to
variation amounts.572
Jefferies stated that the proposed rule
disadvantages customers who may no
longer deposit ‘‘customer owned’’
securities and would instead have to
prefund their obligations with cash.573
Advantage stated that FCMs typically
must maintain a relationship with a
foreign bank in order to meet cutoff
times for payment of fees and clearing
on foreign exchanges and that if an FCM
can’t maintain funds at a foreign
institution, it may inhibit its ability to
trade foreign futures.574 The effect, they
asserted, could be that U.S. FCMs will
be required to use non-U.S. brokers that
are not regulated by the Commission for
their foreign futures business.575 They
further requested that the Commission
clarify how the prohibition on keeping
non-margin foreign futures funds in an
institution outside the U.S. would apply
to § 30.7(b), which appears to allow
such funds to be held at a bank or trust
company outside the U.S.576
568 FIA Comment Letter at 37 (Feb. 15, 2013);
Jefferies Bache Comment Letter at 6 (Feb. 15, 2013).
569 FIA Comment Letter at 37 (Feb. 15, 2013).
570 Id. See also RJ O’Brien Comment Letter at 11
(Feb.15, 2013).
571 FIA Comment Letter at 37 (Feb. 15, 2013).
572 RCG Comment Letter at 7 (Feb. 12, 2013).
573 Jefferies Bache Comment Letter at 6 (Feb. 15,
2013).
574 Advantage Letter at 8 (Feb. 15, 2013).
575 Id. at 9.
576 Id.

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In response to commenter concerns,
the Commission is adopting the
amendments generally as proposed, but
the final rule will permit an FCM to post
with depositories outside of the U.S.
sufficient funds to cover the full margin
obligations imposed by foreign brokers
or foreign clearing organizations on the
FCM’s 30.7 customers’ positions, plus
an additional amount equal to 20
percent of the required margin on such
positions.
The Commission is increasing the
amount of 30.7 customer funds that an
FCM may hold in a foreign jurisdiction
in response to the comments. The
Commission is adopting this regulation
to provide greater protection to both
U.S. and foreign-domiciled customers in
the event of the insolvency of the FCM.
Recent experience has demonstrated
that funds held outside of the U.S, at
depositories subject to foreign
insolvency regimes, present challenges
and potential delays in the ability of the
Trustee to return customer property to
the customers of the FCM. In increasing
the amount of funds an FCM may hold
outside of the U.S. from 10 percent of
the required margin to 20 percent of the
required margin, the Commission is
striving to strike a proper balance that
would not interfere with the ability of
30.7 customers to trade on foreign
markets (and the ability of FCMs to
facilitate such transactions by allowing
them to meet their 30.7 customers’
margin and other financial obligations
to foreign brokers and clearing
organizations), with the Commission’s
desire to provide 30.7 customers with
an appropriate level of protection in the
event of the insolvency of an FCM. The
Commission believes that, to the
maximum extent commercially
practicable, funds deposited by 30.7
customers that are not required to
margin positions with foreign brokers or
foreign clearing organizations should be
held within in the U.S. to provide
greater assurance that such funds would
be subject to the bankruptcy provision
of U.S. law and the Commission’s
regulations under the jurisdiction of
U.S. courts.
The Commission further notes that
the 20 percent limitation is based upon
the amount of margin required on open
positions. In response to RCG’s request
for clarification, FCMs may transfer
funds to foreign depositories to cover
variation margin calls and exclude such
funds from the calculation of the 20
percent ‘‘cushion.’’ In addition, the
Commission notes that FCMs may
deposit 30.7 customer funds with any of
the foreign depositories listed under
§ 30.7(b), provided that the FCMs do not
exceed the 20 percent limit on the

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amount of funds that are permitted to be
held in foreign jurisdictions. The
Commission believes that the ability to
post variation margin in foreign
jurisdictions and an additional 20
percent cushion should allow FCMs to
conduct foreign futures activities on
behalf of their customers, while also
providing additional protections to the
current regulatory regime.
3. Commingling of Positions in Foreign
Futures and Foreign Options Accounts
Commission staff previously issued
an Advisory stating that while it was
desirable for FCMs to hold only a
customer’s foreign futures transactions
(and the funds supporting such
transactions) in such customer’s foreign
futures account, this limitation was not
mandatory and that the FCM could also
hold such customer’s unregulated
transactions (and the funds supporting
such transactions) in the foreign futures
accounts.577 Thus, pursuant to this
Advisory, FCMs were permitted to
commingle the funds supporting a
customer’s foreign futures and options
transactions with such customer’s
unregulated transactions, including
over-the-counter transactions. The
Advisory was issued before the passage
of Dodd-Frank, section 724(a) of which
established in section 4d(f) of the CEA
a segregation regime for the funds of
cleared swaps customers, and the
Commission’s promulgation of part 22,
implementing that statute.
In response to an FIA
recommendation at a public roundtable
held in advance of the Commission’s
publication of the proposal, the
Commission proposed to amend § 30.7
by adopting new paragraph (e) to
prohibit an FCM from commingling
funds from unregulated transactions
with funds for foreign futures and
options transactions in part 30 secured
accounts, except as authorized by
Commission order. The prohibition on
holding unregulated transactions or
other non-foreign futures or foreign
option transactions in part 30 set aside
accounts is consistent with the
treatment applicable under section
4d(a)(2) of the Act for segregated
accounts and section 4d(f) of the Act for
Cleared Swaps Customers’ accounts.
The Commission noted in the
proposal that when part 30 was being
adopted, commenters cited back office
operational difficulties with establishing
multiple ‘‘customer’’ account classes or
origins.578 Given the technological
changes during the intervening decades,
and the new statutory and regulatory
577 CFTC
578 See

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Advisory No. 87–4 (Nov. 18, 1987).
52 FR 28980, 28985–28986.

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framework, these concerns should no
longer dictate the advisability of
commingling the funds of regulated
foreign futures and foreign options
transactions with unregulated
transactions.
New § 30.7(e) extends the prohibition
against commingling of customer funds
currently found in section 4d(a)(2)
futures customer accounts and section
4d(f) Cleared Swaps Customer Accounts
to 30.7 customer accounts, except as
otherwise permitted by Commission
regulation or order.
CIEBA stated that it supported the
prohibition on the commingling of
funds deposited by futures customers,
Cleared Swaps Customers, and 30.7
customers.579 Nodal requested that the
Commission make explicit in the
adopting release that 30.7 accounts may
continue to hold customer funds to
margin contracts traded on a market that
is pending designation as a contact
market at the time the rules become
effective, until such market is registered
as a DCM or upon the withdrawal or
denial of the DCM application.580
LCH.Clearnet noted that while it does
not have a position on whether the
Commission should prohibit
commingling of 30.7 customer funds
with the funds of futures customers and
Cleared Swaps Customers, if adopted, it
urged the Commission to preserve the
ability to allow such commingling
pursuant to a Commission rule or
order.581
The Commission is adopting new
§ 30.7(e) as proposed. As it noted in the
proposal, should there be a need to
permit commingling of funds, the
Commission will continue to have the
ability to permit such commingling
under the formalities of processes
associated with a Commission order or
rule pursuant to section 4d of the CEA.
Absent such a rule or order, however,
protection for such customer property
would not be available under the
Commission’s part 190 regulations or
the Bankruptcy Code, and thus such
commingling would not be permitted. In
addition, the Commission does not
agree with Nodal’s request that FCMs
may continue to hold margin funds in
30.7 accounts for positions that are
executed on markets that are pending
approval as designed contract markets.
As noted above, a purpose of § 30.7(e)
is to enhance the protection of 30.7
customers by prohibiting the
commingling of 30.7 customer funds
with funds held by an FCM for
579 CIEBA

Comment Letter at 4 (Feb. 20, 2013).
Comment Letter at 1–2 (Jan. 21, 2013).
581 LCH.Clearnet Comment Letter at 6–7 (Jan. 25,
2013).
580 Nodal

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unregulated transactions. Commingling
of unregulated transactions with
regulated transactions could also
impede the resolution of 30.7 customer
claims in the event of the insolvency of
the FCM carrying the funds.
4. Further Harmonization With
Treatment of Customer Segregated
Funds
The Commission proposed to adopt
new paragraphs (f) and (k) in § 30.7, to
extend regulatory provisions from
§§ 1.20, 1.21, 1.22 and 1.24, that
previously were applicable only to 4d
segregated funds, to funds set aside as
the foreign futures or foreign options
secured amount under § 30.7. These
proposed requirements would make
clear that: (1) FCMs would not be
permitted to use funds set aside as the
foreign futures or foreign options
secured amount other than for the
benefit of 30.7 customers; (2) FCMs
must hold sufficient residual interest in
30.7 accounts to make sure that 30.7
customer funds of one 30.7 customer are
not used to margin, secure or guarantee
the obligations of other customers; (3)
funds set aside as the foreign futures or
foreign options secured amount should
not be invested in any obligations of
clearing organizations or boards of
trade; and (4) no funds placed at foreign
brokers should be included as funds set
aside as the foreign futures or foreign
options secured amount unless those
funds are on deposit to margin the
foreign futures or foreign options
positions of 30.7 customers. In addition
to extending the existing Commission
regulations noted above to § 30.7, the
Commission also proposed a new
requirement prohibiting an FCM from
imposing any liens or allowing any liens
to be imposed on funds set aside as the
foreign futures or foreign options
secured amount. This requirement
parallels that currently applicable to
cleared swap customers with respect to
the segregation of Cleared Swaps
Collateral.582
As discussed above, the Commission
received several comments regarding
the residual interest requirements set
forth in the Proposal.583 While most of
the commenters focused on the impact
of the Proposed Residual Interest
Requirement to the futures market, some
of the more general comments would
also apply to the foreign futures or
foreign options market. Given the
statutory prohibition in sections 4d(a)
and 4d(f) of the Act against using one
582 See

§ 22.2(d)(2).
sections II.G.9. and II.Q. above for
discussion of the Proposed Residual Interest
Requirement.

68575

customer’s funds to margin, secure or
guarantee the obligations of another
customer, FCMs that participate in the
swaps and futures market may not
‘‘use’’ one customer’s property to
margin another customer’s positions.
Nonetheless, the Commission clarified
that an FCM does not ‘‘use’’ a
customer’s funds until the time of
settlement.584
The Commission recognizes that the
statutory prohibitions set forth in
sections 4d(a) and 4d(f) of the Act apply
to the futures and swaps markets.
Conversely, as discussed above, the
proposed changes to § 30.7 were
intended to provide a more coordinated
approach to the regulations governing
foreign futures and foreign options, with
standards that are consistent with those
for the futures and swaps markets.
These regulations, including regulations
governing how an FCM holds funds for
customers trading on non-U.S. markets,
would greatly enhance the protection of
customer funds and avoid regulatory
arbitrage. Such consistency would, to
the extent practicable and appropriate,
contribute to the goal of having
customer protection across futures,
swaps and foreign futures markets be
substantively similar.
The Commission did not receive any
comments opposing the concept of
having consistent residual interest
requirements across markets. The
Commission did, however, receive
comments regarding the additional
complexities associated with trading
foreign futures and foreign options.585
As such, the Commission is adopting
residual interest requirements in part 30
that are substantively similar to the
amended requirement in part 1, but
with a modification as to the time by
which an FCM must maintain such
residual interests that will give FCMs
the flexibility necessary to account for
differences in the regulatory
requirements and market practices
applicable to foreign brokers and
clearing organizations in other
jurisdictions. Thus, the Commission is
revising § 30.7(f) as follows.
Regulation 30.7(f)(1)(i) sets forth the
general requirement that an FCM may
not use, or permit the use of, the funds
of one 30.7 customer to purchase,
margin or settle the trades, contracts, or
commodity options of, or to secure or
extend credit to, any person other than
such 30.7 customer. Regulation
30.7(f)(1)(ii)(A) states that the
undermargined amount for a 30.7
customer’s account is the amount, if any
(i.e., the must be amount equal to or

583 See

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584 See
585 See

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Roundtable Tr. at 266–267 (Feb. 5, 2013).

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greater than zero), by which the total
amount of collateral required for that
30.7 customer’s positions in that
account at a specified time exceeds the
value of the 30.7 customer funds in that
account, as calculated in new
§ 30.7(f)(2)(ii). Regulation
30.7(f)(1)(ii)(B) requires FCMs to
perform a residual interest buffer
calculation, at the close of each business
day, based on the information available
to the FCM at that time, by calculating
(1) the undermargined amounts, based
on the clearing initial margin that will
be required to be maintained by that
FCM for its 30.7 customers, at each
clearing organization of which the FCM
is a member, at any settlement that will
occur before 6:00 p.m. Eastern Time on
the following business day for each such
clearing organization less (2) any debit
balances referred to in § 30.7(f)(2)(B)(iv)
that is included in such undermargined
amounts.
In addition, and for the reasons set
forth above, pursuant to
§ 30.7(f)(1)(ii)(C)(1) FCMs must maintain
residual interest prior to 6:00 p.m.
Eastern Time on the date referenced in
§ 30.7(f)(1)(ii)(B) in segregated funds
that is equal to or exceeds the
computation set forth in (ii)(B).
Moreover, § 30.7(f)(1)(ii)(C)(2) provides
that an FCM may reduce the amount of
residual interest required in
§ 30.7(f)(1)(ii)(C)(1) to account for
payments received from or on behalf of
undermargined 30.7 customers (less the
sum of any disbursements made to or on
behalf of such customers) between the
close of business the previous business
day and 6:00 p.m. Eastern Time on the
following business day. Regulation
30.7(f)(1)(ii)(D) provides that for
purposes of § 30.7(f)(1)(ii)(B), an FCM
should include, as clearing initial
margin, customer initial margin that the
FCM will be required to maintain, for
that FCM’s 30.7 customers, at a foreign
broker, and, for purposes of
§ 30.7(f)(1)(ii)(C), must do so by 6:00
p.m. Eastern Time. In other words,
§ 30.7(f)(1)(ii)(D) is intended to make
clear that the requirements with respect
to 30.7 customer funds that are used by
an FCM that clears through a foreign
broker are parallel to the requirements
applied to 30.7 customer funds that are
used when an FCM clears directly on a
clearing organization.
Finally, to provide greater clarity, the
Commission is adding a new
subparagraph (2) to paragraph (f), which
sets out the requirements as to the
FCM’s calculation of the Net
Liquidating Equities of their 30.7
customers. Because of the addition of
new subparagraph (2), the Commission
is renumbering proposed § 30.7(f)(2) and

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(f)(3) to § 30.7(f)(3) and (f)(4), and since
the Commission did not receive any
comments on the substantive provisions
of these paragraphs, it is adopting them
as proposed.
The Commission did not receive any
comments on the substantive provisions
of proposed § 30.7(k) and is adopting
this new paragraphs as proposed.
MFA, however, requested
confirmation that the Commission’s
prior guidance with respect to a
customer’s authority to grant liens or
security interests on its own Cleared
Swaps Customer Account under part 22
would also be applicable to customers
on their foreign futures or foreign
options secured amount under § 30.7.586
The Commission agrees with this
position and hereby confirms the
applicability of its prior guidance.587
5. Harmonization With Other
Commission Proposals
The Commission also proposed
various other amendments to its part 30
regulations to harmonize the rules with
those applicable to U.S. customers
under other Commission regulations.
As discussed in section II.I. above, the
Commission is adopting in this release
new limitations on withdrawals of
segregated funds in § 1.23. The
amendments provide for an FCM’s
residual interest in segregated funds,
and permit withdrawals from segregated
funds for the proprietary use of the FCM
to the extent of such residual interest,
subject to the requirement that the
withdrawal must not occur prior to the
completion of the daily segregation
computation for the prior day, and
should the withdrawal (individually or
aggregated with other withdrawals)
exceed 25 percent of the prior day
residual interest, the withdrawal must
be subject to specific approvals by
senior management and appropriately
586 MFA

Comment Letter at 10 (Feb. 15, 2013).
In the Final LSOC Release the
Commission clarified:
an FCM may not, under any circumstances, grant
a lien to any person (other than to a DCO) on its
Cleared Swaps Customer Account, or on the FCM’s
residual interest in its Cleared Swaps Customer
Account. On the other hand, a Cleared Swaps
Customer may grant a lien on the Cleared Swaps
Customer’s individual cleared swaps account (an
‘FCM customer account’) that is held and
maintained at the Cleared Swaps Customer’s FCM.
77 FR at 6352.
In addition, Commission Staff issued an
interpretive letter that stated:
Regulation 22.2(d) does not prohibit a Cleared
Swaps Customer from granting security interests in,
rights of setoff against, or other rights in its own
Cleared Swaps Customer Collateral, regardless of
whether those assets are held in the Cleared Swaps
Customer’s FCM customer account. Furthermore,
nothing in the rule is intended to inhibit this right
of the Cleared Swaps Customer.
CFTC Letter No. 12–28 at 2 (Oct. 17, 2012).
587 Specifically,

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documented, and further subject to a
complete prohibition on withdrawals of
residual interest to the extent necessary
to maintain proper residual interest to
cover undermargined amounts. The
Commission proposed and is adopting
paragraph (g) of § 30.7 to apply the same
restrictions on withdrawals of an FCM’s
residual interest in funds set aside as
the foreign futures or foreign options
secured amount.
Current § 30.7(g) was recently adopted
by the Commission to provide that the
investment of § 30.7 funds be subject to
the investment limitations contained in
§ 1.25.588 As proposed, the Commission
is moving this permitted investment
requirement to a new paragraph
§ 30.7(h), and further is adopting a new
paragraph § 30.7(i) to make clear that
FCMs are solely responsible for any
losses resulting from the permitted
investment of funds set aside as the
foreign futures or foreign options
secured amount. New paragraph
§ 30.7(i) is intended to apply the same
standard as is being adopted in the
amendment to § 1.29 for segregated
funds discussed above.
The Commission also proposed and is
adopting an amended paragraph (j) to
§ 30.7 to clarify the circumstances under
which an FCM may make secured loans
to 30.7 customers and to adopt the same
restriction on unsecured lending to 30.7
customers as has been adopted with
respect to futures customers and 4d
segregated funds in the amendment to
§ 1.30 discussed above.
Finally, the Commission proposed
and is adopting an amended paragraph
(l) to § 30.7 to require the daily
computation of the foreign futures or
foreign options secured amount and the
filing of such daily computation with
the Commission and DSROs, as well as
to require the FCM to provide
investment detail of the foreign futures
or foreign options secured amount as of
the middle and end of the month. The
amendments to paragraph (l) of § 30.7
are intended to be consistent with the
requirements for the daily segregation
calculation for segregated customer
funds and the provision of the
segregation investment detail which are
adopted in § 1.32.
No comments were received on the
above proposals and the Commission is
adopting the amendments as proposed.
S. § 3.3: Chief Compliance Officer
Annual Report
Regulation 3.3 requires each FCM (as
well as swap dealers and major swap
participants) to designate an individual
to serve as its CCO. The CCO is required
588 76

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to be vested with the responsibility and
authority to develop, in consultation
with the FCM’s board of directors or
senior officer, appropriate policies and
procedures to fulfill the duties set forth
in the Act and Commission regulations
relating to the FCM’s activities as an
FCM. Regulation 3.3(e) also requires the
FCM’s CCO to prepare an annual
compliance report that includes a
description of any non-compliance
events that occurred during the last
reporting period along with the action
taken to address such events. The
annual compliance report currently is
required to be filed electronically with
the Commission simultaneously with
the FCM’s certified annual financial
report, and in no event later than 90
days after the firm’s fiscal year end.
The Commission proposed a
conforming amendment to § 3.3(f)(2) to
reflect the amendments to
§ 1.10(b)(1)(ii), discussed in section II.A.
above, that require an FCM to file its
annual certified financial statements
with the Commission within 60 days of
the firm’s fiscal year end. In this regard,
the Commission proposed to require
that each FCM file the CCO annual
report with the Commission
simultaneously with the filing of the
firm’s certified annual report, and in no
event later than 60 days after the FCM’s
fiscal year end.
The NFA commented that it
supported the proposal.589 No other
comments were received. The
Commission has determined to amend
§ 3.3 as proposed.

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III. Compliance Dates
The final regulations will be effective
January 13, 2014. The compliance date
for the regulations will be the effective
date, subject to the following
exceptions:
A. Financial Reports of FCMs: § 1.10
An FCM that is not dually-registered
as a BD currently is required to submit
its certified annual report to the
Commission within 90 days of the firm’s
year end date. The Commission has
amended § 1.10(b)(1)(ii) to require such
certified annual report to be submitted
within 60 days of the firm’s year end
date.
The Commission recognizes that
many FCMs have contracted with public
accountants to perform the current
year’s audit examination, and that those
audits are currently in process. In order
to allow the current year audits to be
completed, the Commission is setting a
compliance date for § 1.10(b)(1)(ii) for
FCMs with years ending after June 1,
589 NFA

Comment Letter at 9 (Feb. 15, 2013).

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2014. This date will also coincide with
several other compliance dates affecting
public accountants discussed under
§ 1.16 below.
B. Risk Management Program for FCMs:
§ 1.11
Section 1.11 requires each FCM that
carries customer funds to establish a
risk management program. RJ O’Brien
requested that the Commission provide
at least one year for FCMs to comply
with the new risk management
regulations in the event the proposed
Risk Management Program is adopted.
RJ O’Brien stated that the new
requirements would likely necessitate a
period of time for firms to reorganize,
develop the policies and procedures,
implement the policies and procedures,
acquire adequate personnel, and
conduct extensive training of new and
existing employees. Advantage stated
‘‘that most aspects of proposed § 1.11
are appropriate and unlikely to be
burdensome as FCMs typically have
most (if not all) of these requirements in
place.’’ 590
The Commission recognizes that some
FCMs may need a sufficient period of
time to develop and implement a risk
management program that complies
with § 1.11, but believes that many firms
already maintain programs that comply
with many of the requirements in § 1.11.
Accordingly, FCMs must file their
initial Risk Management Program within
180 days of the effective date of the
regulation. The filings must be made via
electronic transmission to the
Commission using the WinJammer
electronic filing system.
C. Qualifications and Reports of
Accountants: § 1.16
The Commission is amending § 1.16
to require a public accountant to meet
certain qualification standards in order
to be qualified to conduct audits of
FCMs. The Commission is amending
§ 1.16(b) to require that the public
accountant: (1) Must be registered with
the PCAOB; (2) must have undergone a
PCAOB inspection; and (3) may not be
subject to a temporary or permanent bar
to engage in the audit of public issuers
or BDs as a result of a PCAOB
disciplinary action. The Commission is
further amending § 1.16(c) to require
that the public accountant’s audit report
must state whether the audit was
conducted in accordance with PCAOB
auditing standards.
The Commission is establishing a
compliance date of June 1, 2014 for the
amendment to § 1.16(b)(1) that requires
590 Advantage Comment Letter at 2 (Feb. 15,
2013).

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a public accountant to be registered
with the PCAOB in order to conduct an
audit of an FCM. The Commission also
is establishing a compliance date of June
1, 2014 for the amendment to § 1.16(c)
that requires a public accountant to
conduct an audit of an FCM in
accordance with the standards issued by
the PCAOB. A compliance date of June
1, 2014 will allow current year audits to
be completed without interruption, and
provides sufficient time for public
accountants that audit FCMs to register
with the PCAOB if such public
accountants are not already registered.
In addition, a June 1, 2014 compliance
date will align the Commission’s
requirements for the use of PCAOB
standards in the audit of an FCM with
the SEC audit standards for public
accountants auditing BDs.591 Without
such alignment, public accounts of a
dually-registered FCM/BD would have
to issue two different audit reports; one
audit report to the SEC for an
examination conducted under PCAOB
audit standards, and a second audit
report for the Commission for an
examination conducted under U.S.
GAAS.
The Commission also is establishing a
compliance date of December 31, 2015
for the requirement in § 1.16 that a
public accountant must have undergone
an inspection by the PCAOB in order to
qualify to conduct an audit of an FCM.
The extension of the compliance date to
December 31, 2015 will provide
additional time for the PCAOB to
conduct inspections of public
accountants that registered with, but
have not been inspected by, the PCAOB.
Lastly, the compliance date for the
amendment to § 1.16(b)(1) the provides
that a public accountant may not be
subject to a temporary or permanent bar
to engaging in the audit of public issuers
or BDs as a result of a PCAOB
disciplinary action is the effective date
of the amendment. The Commission
believes that if a public accountant is
registered with the PCAOB and is
subject to a PCAOB disciplinary action
that temporarily or permanently bars the
public accountant from auditing public
issuers, the public accountant is not
qualified to conduct audits of FCMs.
D. Minimum Financial Requirements for
FCMs
The Commission is amending the
capital rule to require an FCM to incur
a capital charge for undermargined
591 The SEC recently amended its regulations to
require public accountants to conduct audits of BDs
pursuant to the audit standards issued by the
PCAOB. This requirement is effective for audits of
BDs with a year-end of June 1, 2014 or later. See
78 FR 51910 (Aug. 21, 2013).

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customer, noncustomer, and omnibus
accounts that are undermargined more
than one business day after a margin
call is issued by the FCM. For example,
if an account is undermargined on
Monday and the FCM issues a margin
call on Tuesday, the FCM would have
to take a reduction to capital equal to
the amount of the margin call that was
not met by close of business
Wednesday.
The Commission is establishing a
compliance date for the revised
timeframe for the capital charges
required by § 1.17(c)(5)(viii) and (ix) of
one year following publication of this
rule in the Federal Register. The
compliance date provides FCMs with a
period of time that the Commission
believes is sufficient to adjust its
systems for issuing and collecting
margin from customers and provides
customers with an opportunity to adjust
their operations, as necessary, to meet
its margin obligations on a reduced
timeframe for the current regulation.
E. Written Acknowledgment Letters:
§§ 1.20, 1.26, and 30.7
The Commission is amending
§§ 1.20(d) and (g), 1.26(b), and 30.7(d) to
require FCMs and DCOs, as applicable,
to obtain standard form
acknowledgment letters from each
depository that the FCMs or DCOs use
to hold customer funds.592 The
Commission is further requiring FCMs
and DCOs to use Template Letters set
forth in appendices to the regulations.
The Commission is establishing a
compliance date of 180 days after the
effective date of the regulations in order
to provide FCMs and DCOs with
sufficient time to obtain from
depositories new acknowledgment
letters that conform to the Template
Letters.
F. Undermargined Amounts: §§ 1.22(c),
30.7(f)

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The Commission received several
comments on the appropriate timing for
the effectiveness of the Proposed
Residual Interest Requirement. At the
public roundtable held on February 5,
2013, several panelists argued that the
Proposed Residual Interest Requirement
would require substantial time to
implement in order to change the
behavior of all futures markets
592 The regulations, however, provide that an
FCM is not required to obtain an acknowledgment
letter from a DCO if the DCO maintains rules that
have been submitted to the Commission and that
provide for the segregation of customer funds in
accordance with all relevant provisions of the Act
and Commission regulations or orders. See
§§ 1.20(d)(1) and 30.7(d)(1).

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participants.593 In addition, FIA
asserted that implementation would
require multiple years and ‘‘radical’’
changes to processing procedures for
futures market participants,594 and RCG
requested that the Commission provide
‘‘with a period of time not less than one
year from the promulgation of the
relevant final rules for FCMs to
implement them.’’ 595
As discussed above, the residual
interest requirements set forth in part 22
are the requirements that are currently
in place today. As such, FCMs are
expected to continue meeting their
regulatory requirements. With respect to
the residual interest requirements set
forth in §§ 1.22(c) and 30.7(f), the
Commission recognizes that these
requirements represent a significant
change in current market practice.
Given the costs associated with
compliance with these requirements, as
well as comments received from the
interested parties requesting sufficient
time to achieving compliance with these
requirements, the Commission has
determined that a phased compliance
schedule for § 1.22(c) is necessary and
appropriate. The phased compliance
schedule for § 1.22(c) is set forth in
§ 1.22(c)(5)(iii). However, the Residual
Interest Deadline of 6:00 p.m. Eastern
Time in § 1.22(c)(5)(ii) shall begin one
year following the publication of this
rule in the Federal Register.596 With
regards to the residual interest
requirements set forth in § 30.7(f), the
Commission is establishing a
compliance date of one year following
the publication of this rule in the
Federal Register.
G. SRO Minimum Financial
Surveillance: § 1.52
The Commission amended § 1.52 to
require each SRO to establish a
supervisory program to oversee their
member FCMs’ compliance with SRO
and Commission minimum capital and
related reporting requirements, the
obligation to properly segregated
customer funds, risk management
requirements, financial reporting
requirements, and sales practices and
other compliance requirements. The
Commission also amended § 1.52(c) to
require each SRO to engage an
‘‘examinations expert’’ at least once
every three years to evaluate the quality
of the supervisory oversight program
and the SRO’s application of the
593 See Roundtable Tr. at 252–255, 257, 266–267
(Feb. 5, 2013).
594 See FIA Comment Letter at 21 (Feb. 15, 2013).
595 See RCG Comment Letter at 8 (Feb. 12, 2013).
596 For further discussion regarding the phase-in
schedule for the requirements in § 1.22(c), see
section II.G.9.

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supervisory program. The SRO must
obtain a written report from the
examinations expert with an opinion on
whether the supervisory program is
reasonably likely to identify a material
weakness in internal controls over
financial and/or regulatory reporting,
and in any of the other areas that are
subject to the supervisory program.
The Commission established a
compliance date in amended § 1.52(e)
that requires each SRO to submit a
supervisory program to the Commission
for review, together with the
examinations expert’s report on the
supervisory program, within 180 days of
the effective date of the amendments to
§ 1.52, or such other time as may be
approved by the Commission. The
Commission further revised § 140.91(10)
to delegate the authority to extend the
time period for the submission of the
initial supervisory program to the
Director of the Division of Swap Dealer
and Intermediary Oversight and the
Director Division of Clearing and Risk,
with the concurrence of the General
Counsel or, in his or her absence, a
Deputy General Counsel.597
Commission staff will consult with
the SROs to assess their progress in
preparing an initial supervisory
program, including the examinations
expert’s review, and may adjust
compliance dates as appropriate.
H. Public Disclosures by FCMs: § 1.55
The Commission has amended
§ 1.55(b) by revising the Risk Disclosure
Statement to include several additional
disclosures intended to provide
customers and potential customers with
enhanced information to further their
understanding of the risks of engaging
in the futures markets. The Commission
recognizes that FCMs will be required to
revise the Risk Disclosure Statement to
implement the revisions, and is
establishing a compliance date for the
amendments to 1.52(b) of 90 days after
the effective date of the amendments.
The Commission believes that this
provides sufficient time for FCMs to
revise the Risk Disclosure Statement
and to modify their systems, if
necessary, in the case of firms that
597 The Commission also amended
§ 1.52(d)(2)(ii)(H) to provide that a Joint Audit
Committee must submit an initial Joint Audit
Program to the Commission, along with an
examinations expert’s report on the Joint Audit
Program, within 180 days of the effective date of the
regulation. The Director of the Division of Swap
Dealer and Intermediary Oversight and the Director
of the Division of Clearing and Risk also are
authorized under § 1.52(d)(2)(ii)(H) an § 140.91(10),
with the concurrence of the General Counsel or, in
his or her absence, a Deputy General Counsel, to
extend the initial filing deadline if warranted.

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provide electronic account opening
documents.
The Commission also amended
§ 1.55(i)–(k) to require each FCM to
disclose to customers all information
that would be material to the customers’
decision to entrust funds to, or
otherwise do business with, the FMC,
including its business, operations, risk
profile, and affiliates. The Commission
is establishing a compliance date of 180
days after the effective date of the
regulation to provide adequate time for
FCMs to develop the required
disclosures and make them available to
the public.
The Commission also amended
§ 1.55(o) to require each FCM to disclose
on its Web site certain current and
historical information regarding its
holding of customer funds, and its
certified annual report. The Commission
is establishing a compliance date of 180
days after the effective date of the
regulation to provide FCMs with
sufficient time to modify electronic
systems, and make any additional
operational changes, necessary for the
firms to comply with the requirements.

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IV. Cost Benefit Considerations
Statutory Mandate To Consider the
Costs and Benefits of the Commission’s
Action: Commodity Exchange Act
Section 15(a)
Section 15(a) of the Act requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the Act
or issuing certain orders. 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 the
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) considerations.
In the NPRM, the Commission
established, based on the subject matter
of the proposals, that it did not consider
any of the proposals contained therein
to have any significant impact on price
discovery. The Commission received no
responses from commenters with
respect to its analysis regarding price
discovery. For the remaining areas, the
Commission addressed, section by
section, the qualitative substantial
benefits perceived to be obtained from
the regulatory proposals contained in
the NPRM. Where reasonably possible,

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the Commission has estimated costs
quantitatively associated with such
proposals section by section. The
Commission asked specifically and
generally for comments with respect to
its analysis of benefits and such cost
estimates, and requested information
from commenters where the
Commission qualitatively considered
but could not reasonably quantitatively
estimate costs.
The underlying purpose of the
regulations adopted herein as stated in
the NPRM was to bolster the protection
of customers and customer funds, in
response to the misuse or mishandling
of customer funds at specific FCMs like
MFGI or PFGI. Further, the purpose of
certain proposals was to provide
regulators the means by which to detect
and deter the misuse or mishandling of
customer funds by FCMs, including
bolstering standards for the examination
and oversight of FCMs by SROs and
public accountants. In addition to the
significant benefits to the protection of
market participants and the public, the
Commission determined that a strong
package of reforms, including enhanced
information and disclosures available to
customers, adopted in light of the recent
FCM failures resulting in and from
misuse of customer funds, would be
extremely beneficial to restore trust in
the financial integrity of futures
markets. The Commission also included
certain proposals intended to both
increase the protection of customer
funds and strengthen FCM risk
management, specific to customer funds
processes and procedures.
As stated in the NPRM, a loss of trust
in the financial integrity of futures
markets could deter market participants
from the benefits of using regulated,
transparent markets and clearing. The
overarching purpose of the reforms
contained in this rulemaking is to
produce the benefits that accrue by
virtue of avoiding similar defaults in the
future. This prevents the costs certain to
follow, including lost customer funds,
decreased market liquidity that follows
from a crisis in confidence, and the
potential for the failure of one FCM to
cause losses in other clearing
members.598
In this rulemaking, the Commission
adopted new rules and amended
existing rules to improve the protection
of customer funds. The content of the
Commission’s adopted new rules and
amended rules can be categorized in
598 The failure of one clearing member could lead
to losses for other clearing members if the losses
due to the first member’s failure are large enough
to exhaust the guarantee fund and require
additional capital infusion from other clearing
members.

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seven parts: (1) requiring FCMs to
implement extensive risk management
programs including written policies and
procedures related to various aspects of
their handling of customer funds; (2)
increasing reporting requirements for
FCMs related to segregated customer
funds, including daily reports to the
Commission and DSRO; (3) requiring
FCMs to establish target amounts of
residual interest to be maintained in
segregated accounts as well as creating
restrictions and increased oversight for
FCM withdrawals out of such residual
interest in customer segregated
accounts, specifically including clear
sign off and accountability from senior
management for such withdrawals; (4)
strengthening requirements for the
acknowledgment letters that FCMs and
DCOs must obtain from their
depositories; (5) eliminating the
Alternative Method for calculating 30.7
customer funds segregation
requirements and requiring FCMs to
include foreign investors’ funds in
segregated accounts; (6) strengthening
the regulatory requirements applicable
to SRO and DSRO oversight of FCMs,
including regulating oversight provided
under the function of a Joint Audit
Committee that would establish
standards for, and oversee the execution
of, FCM audits; and (7) requiring FCMs
to provide additional disclosures to
investors.
Overview of the Costs and Benefits of
the Proposed Rules and Amendments in
Light of the 15(a) Considerations—
Protection of Market Participants and
the Public
The Commission designed the
adopted reforms to improve the
protection of customer funds. The
Commission expects each of the seven
categories identified above to
significantly increase the levels of
protection for customer funds.
Requiring FCMs to implement risk
management programs that include
documented policies and procedures
regarding various aspects of handling
customer funds helps to protect
customer funds by promoting robust
internal risk controls and reducing the
likelihood of errors or fraud that could
jeopardize customer funds. In addition,
by requiring each FCM to document
certain policies and procedures, the
rules enable the Commission, DSROs,
and other auditors to evaluate each
FCM’s compliance with their own
policies and procedures. Moreover, the
requirement that FCMs establish a
program for quarterly audits by
independent or external people that is
designed to identify any breach of the
policies and procedures helps to ensure

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regular, independent validation that the
procedures are followed diligently.
Audits of this sort provide more
thorough review of internal procedures
than the Commission or DSROs are able
to perform regularly with existing
resources, which provides helpful
scrutiny of each FCM’s procedures on a
regular basis. This, together with the
requirement that FCMs establish a
program of governing supervision that is
designed to ensure the policies required
in § 1.11 are followed, will tend to
promote compliance with the FCM’s
own policies and procedures. And by
promoting such compliance, the
requirements reduce the risk of
operational errors, lax risk management,
and fraud, and thus the risk of
consequent loss of customer funds.
Increasing reporting requirements for
FCMs related to segregated customer
funds helps the Commission and DSRO
identify FCMs that should be monitored
more closely in order to safeguard
customer funds. Moreover, by making
some additional reported information
public, the rules facilitate additional
market discipline that further promotes
protection of customer funds.
Creating restrictions and increased
oversight for FCM withdrawals out of its
residual interest in customer segregated
accounts, and requiring review by
senior management for large
withdrawals protects customers by
helping to ensure that such withdrawals
do not cause segregated account
balances to drop below required
amounts, which are, in turn, designed to
prevent losses of customer funds.
Moreover, requiring personal
accountability by senior management
for withdrawals that affect the balance
of such accounts promotes more
effective oversight of customer
segregated accounts.
The acknowledgments and
commitments depositories are required
to make through §§ 1.20, 1.26, and 30.7
provide additional protection for
customer funds by, among other things,
requiring depositories that accept
customer funds to acknowledge that
customer funds cannot be used to secure
the FCM’s obligations to the depository.
Such an acknowledgment provides
additional protection of customer funds
and fosters prompt transfer in the event
of an FCM’s default.
In addition, depositories must agree
in the acknowledgment letter to give the
Commission and DSROs read-only
electronic access to an FCM’s segregated
accounts, which benefits customers by
enabling the Commission and DSROs to
review the accounts for discrepancies
between the FCM’s reports and the
balances on deposit at various

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depositories. These enhancements to
oversight provide an additional
mechanism by which customers would
be protected against a shortfall in
customer funds due to operational
errors or fraud.
Requiring FCMs to include foreigndomiciled customers’ funds in
segregated accounts benefits all
customers placing funds on deposit for
use in trading foreign futures and
foreign options. Because neither the
Bankruptcy Code nor the Commission’s
part 190 regulations distinguish
between foreign-domiciled and U.S.
domiciled customers at the point
customer funds are distributed, any
shortfall in available funds would be
shared among all such customers. As
discussed below, the Commission
understands that most, if not all, FCMs
currently compute secured amount
requirements for both U.S.-domiciled
and foreign-domiciled customers.
However, incorporating foreigndomiciled customers within the
calculations required for 30.7 customers
ensures that both groups are fully
protected. Similarly, eliminating the
Alternative Method provides additional
protection to customer funds by
ensuring that FCMs are not allowed to
reduce their segregation requirements
for 30.7 accounts during a time of
financial strain. As discussed below,
this change provides protection to both
U.S-domiciled and foreign-domiciled
customers with funds in 30.7 accounts.
The provisions in § 1.52 include
additional requirements for both the
supervisory program for SROs as well as
for the formation of a Joint Audit
Committee to oversee the
implementation and operation of a Joint
Audit Program that directs audits of
FCMs by DSROs. By requiring both the
SRO supervisory programs and the Joint
Audit Program to comply with U.S.
generally accepted audit standards, to
develop written policies and
procedures, to require controls testing as
well as substantive testing, and to have
an examinations expert review the
programs at least once every two years,
the amendments help to ensure that
audits of FCMs by SROs or DSROs are
thorough, effective, and continue to
incorporate emerging best practices for
such audits. As a consequence, the
amendments help to ensure that audits
are as effective as possible at identifying
potential fraud, strengthening internal
controls, and verifying the integrity of
FCMs’ financial reports, each of which
tend to provide protection for FCMs’
customers, counterparties, and
investors.
In addition § 1.55 requires disclosure
of firm-specific risks to customers. This

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additional information should be
helpful to customers when selecting an
FCM to deposit their funds. In doing so,
the rules promote market discipline that
incents FCMs to manage their risks
carefully and assists customers in
understanding how their funds are held
and what risks may be relevant to the
safety of their funds.
Last, FCMs maintaining residual
interest in customer accounts is an
important aspect of protection for
customer funds. While an FCM’s
residual interest is not exhausted, it may
be used to meet the FCM’s obligations
to each customer without using another
customer’s funds to do so. All else being
equal, the larger the residual interest,
the less likely that market participants
will lose customer funds posted as
collateral, with associated detriment to
members of the public with interests in
such market participants.
Efficiency, Competitiveness and
Financial Integrity of Futures Markets
The proposed amendments should
increase the efficiency and financial
integrity of the futures markets by
ensuring that FCMs have strong risk
management controls that are subject to
multiple and enhanced external checks,
by enhancing reporting requirements,
facilitating increased oversight by the
Commission and DSROs, by allowing
FCMs flexibility in the development of
newly required policies and procedures
wherever the Commission has
determined that such flexibility is
appropriate, and by requiring FCMs to
implement training regarding the
handling of customer funds. In addition,
the rules include some requirements
that many industry participants have
requested as necessary for the adequate
protection of customers and also
highlighted as best practices already
adopted within the industry. Requiring
such standards to be adopted by all
FCMs promotes the competitiveness of
futures markets by preventing an FCM
from skimping on customer protection
safeguards. There are also provisions in
the proposal that permit FCMs that are
not BDs to implement certain securities
net capital haircuts that apply to jointly
registered FCM/BDs by the SEC. This
enhances competition between FCMs
that are not dually registered and jointly
registered FCM/BDs with respect to
such requirements.
Smaller FCMs may have more
difficulty than large FCMs in absorbing
the additional costs created by the
requirements of the rules (particularly
§ 1.22). It is possible that some smaller
FCMs may elect to stop operating as
FCMs as a result of these costs. The
Commission does not anticipate,

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
however, that the rules will have a
material effect on FCM pricing due to
reduced competition (although the
increased costs may affect pricing).
More specifically, the amendments to
§§ 1.10, 1.11, 1.12, 1.32, 22.2, and 30.7
increase reporting requirements for
FCMs related to segregated customer
funds, including daily, bi-monthly, and
additional event-triggered reports to the
Commission and DSROs. The expanded
range and frequency of information that
the Commission and DSRO receive
under the proposed regulations
enhances their ability to monitor each
FCM’s segregated accounts, which
promotes the integrity of futures
markets by helping to ensure proper
handling of customer funds at FCMs.
In addition, the changes facilitate
increased oversight by the Commission
and DSROs by including additional
notification requirements, obligating
FCMs to alert the Commission when
certain events occur that could indicate
an FCM’s financial strength is
deteriorating or that important
operational errors have occurred. Such
notifications should enable the
Commission and DSROs to increase
monitoring of such FCMs to ensure that
customer funds are handled properly in
such circumstances. The rules also
require FCMs to obtain an
acknowledgment letter from
depositories that should give the
Commission and DSROs electronic
access to view customer accounts at
each depository when requested by the
Commission. That should enable both
the Commission and DSROs to verify
the presence of customer funds which
would provide a safeguard against fraud
and would promote the integrity of
markets for futures, cleared options, and
cleared swaps.
The rules also require FCMs to
establish policies and procedures
regarding several aspects of how they
handle customer funds. The rules
should give FCMs the flexibility, where
appropriate, to develop policies and
procedures tailored to the unique
composition of their customer base,
size, and other operational
disincentives. This flexible approach
protects FCMs from additional
regulatory compliance costs that could
otherwise result from rules requiring
every FCM to operate in exactly the
same way without sacrificing the
additional accountability that results
from written policies and procedures
that the Commission or DSRO can
review and use as the basis for FCM
audits.
The requirement that FCMs provide
annual training to all finance, treasury,
operations, regulatory, compliance,

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settlement and other relevant employees
regarding the segregation requirements
for segregated funds, for notices under
§ 1.12, procedures for reporting noncompliance, and the consequences of
failing to comply with requirements for
segregated funds, should enhance the
integrity of the futures markets by
promoting a culture of compliance by
the FCM’s personnel. The training
should help to ensure that FCM
employees understand the relevant
policies and procedures, that they are
empowered and incented to abide by
them, and that they know how to report
non-compliance to appropriate
authorities.
The rules allow FCMs that are not
dual registrants (i.e., are not both FCMs
and BDs) to follow the same procedures
as dual registrants when determining
what regulatory capital haircut applies
to certain types of securities in which
the FCM invests its own capital or
customer funds. This change is needed
as the SEC has proposed a change for
BDs which would permit joint
registrants to possibly apply a lower
regulatory haircut for certain securities,
but which would not be applicable to
FCMs that are not dual registrants
without this rule. Therefore, the rule
should help to ensure that FCMs that
are not dual registrants are not
competitively disadvantaged and are
able to continue applying the same
regulatory capital haircuts for such
securities as joint registrants.
Last, residual interest is an important
aspect of protection for customer funds
because it enables the FCM to ensure
that it can meet its obligations to each
customer without using another
customer’s funds to do so. All else being
equal, the larger the residual interest,
the more secure are customer funds.
This contributes to confidence in U.S.
futures markets and their financial
integrity. Adequate residual interest
improves the competition between
FCMs, inasmuch as FCMs are competing
less by transferring risks from customers
with deficit funds to customers with
surplus funds.
Sound Risk Management
The amendments should promote
sound risk management by facilitating
market discipline, enhancing internal
controls, enabling the Commission and
DSROs to monitor FCMs for compliance
with those controls, by reducing the risk
that an FCM’s financial strain could
interfere with customers’ ability to
manage their positions, by requiring
FCMs to notify the Commission in
additional circumstances that could
indicate emerging financial strain, and
by requiring senior management to be

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68581

involved in the process of setting targets
for residual interest.
The reporting requirements should
enhance market discipline by providing
additional information to investors
regarding the location of their funds,
and the size of residual interest buffer
that an FCM targets and maintains in its
segregated accounts. This additional
information should be valuable to
customers selecting an FCM and
monitoring the location of their funds
deposited with the FCM which should
promote market discipline. For
example, if an FCM were to establish a
low target for residual interest, or
maintain a very low residual interest,
then market participants are likely to
recognize this as a practice that could
increase risk to the funds they have on
deposit at the FCM. Consequently,
customers would likely either apply
pressure to the FCM to raise their target,
or take their business to a different FCM
that maintains a larger residual interest
in customer fund accounts. This market
discipline should incent FCMs to
maintain a level of residual interest that
is adequate to ensure that a shortfall
does not develop in the customer
segregated accounts.
The rules should also enhance FCM
internal controls by requiring them to
establish a risk management program
that includes policies and procedures
related to various aspects of how
segregated customer funds are handled.
For example, FCMs are required to
establish procedures for continual
monitoring of depositories where
segregated customer funds are held, and
should have to establish a process for
evaluating the marketability, liquidity,
and accuracy of pricing for § 1.25
compliant investments.
In addition, documented policies and
procedures should benefit the FCM
customers and the public by providing
the Commission and DSROs greater
ability to monitor and enforce
procedures that FCMs perform to ensure
that the protection of customer funds is
achieved, with the effect that the
Commission should have a greater
ability to address and protect against
operational errors and fraud that put
customer funds at risk of loss.
Further, through the amendments to
§ 1.17(a)(4), FCMs will need to manage
their access to liquidity so as to be able
to certify to the Commission, at its
request, that they have sufficient access
to liquidity to continue operating as a
going concern. This rule should provide
the Commission with the flexibility to
deal with emerging liquidity drains at
FCM s which may endanger customers,
potentially prior to instances of
regulatory capital non-compliance,

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allowing customer positions and funds
to be transferred intact and quickly to
another FCM. This change should
promote sound risk management
practices by helping to ensure that
customers maintain control of their
positions without interruption.
The proposed additions to
notification requirements established in
§ 1.12 should enhance the Commission’s
ability to identify situations that could
lead to financial strain for the FCM,
which makes it possible for the
Commission to monitor further
developments with that FCM more
carefully and to begin planning earlier
for the possibility that the FCM’s
customer positions may need to be
transferred to other FCMs, in the event
that the FCM currently holding those
positions defaults. Advance notice helps
to ensure customers’ positions are
protected by enabling the Commission
to work closely with DCOs and DSROs
to identify other FCMs that have
requisite capital to meet regulatory
requirements if they were to take on
additional customer positions, thus
facilitating smooth transition of those
positions in the event that it is
necessary.
Last, FCMs maintaining residual
interest in customer accounts is an
important aspect of protection for
customer funds. While an FCM’s
residual interest is not exhausted, it may
be used to meet the FCM’s obligations
to each customer without using another
customer’s funds to do so. All else being
equal, the larger the residual interest,
the more secure are customer funds.
Moreover, these requirements will
create incentives for FCMs to monitor
their customers’ undermargined
amounts, thereby enhancing the FCM’s
risk management. By requiring that
senior management set the target for
residual interest, and that they conduct
adequate due diligence in order to
inform that decision, the rule promotes
both informed decision making about
this important form of protection, and
accountability among senior
management for this decision, both of
which are consistent with sound risk
management practices.
Other Public Interest Considerations
As discussed above, the recent
failures of MFGI and PFGI, FCMs to
which customers have entrusted their
funds, sparked a crisis of confidence
regarding the security of those funds.
This crisis in confidence could deter
market participants from using
regulated, transparent markets and
clearing which would create additional
costs for market participants and losses
in efficiency and safety that could create

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additional burdens for the public. The
Commission hopes that this rule will
not only address the current crisis of
confidence, but that it will produce
benefits for the public by virtue of
avoiding similar defaults in the future.
These amendments are not, however,
without costs. First, the most significant
costs created by the amendments are
those that result from the increased
amount of capital that FCMs are
required to hold in segregated accounts
as part of establishing a target for their
residual interest and requiring residual
interest for undermargined amounts.
Second, additional costs may be created
by the amendments that incent FCMs to
hold additional capital, and prevent
them from holding excess segregated
funds overseas. Third, operational costs
are likely to arise from amendments that
result in the formation of a risk
management unit and adoption of new
policies and procedures.
Multiple rule changes are expect to
incent or require FCMs to increase the
amount of residual interest that they
maintain in segregated accounts
including: (1) Requiring FCMs to
establish a target for residual interest
that reflects proper due diligence on the
part of senior management; (2)
disclosing the FCMs’ targeted residual
interest publicly; (3) requiring them to
report to the Commission and their
DSROs any time their residual interest
drops below that target, and (4)
requiring FCMs to hold residual interest
large enough to cover their customers’
undermargined amounts. In addition by
restricting FCMs’ ability to withdraw
residual interest from segregated
accounts and obligating FCMs to report
to the Commission and their respective
DSRO each time the residual interest
drops below the target, the regulations
should incent FCMs to hold additional
capital, which is also likely to be a
significant cost.
When FCMs hold excess customer
funds overseas, such funds will likely
be held at depositories that are
themselves subject to foreign insolvency
regimes. These regimes may provide
less effective protections for customer
funds than those applicable under U.S.
law. By prohibiting FCMs from holding
some excess customer funds overseas,
and thereby reducing investment
opportunities for customer funds, the
regulations may reduce the returns that
FCMs can obtain on invested customer
funds.
And last, the requirements related to
operational procedures are likely to
create significant costs, particularly
related to creating and documenting
policies and procedures, as well as
complying with ongoing training, due

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diligence, and audit requirements.
However, in several cases the
implementation costs of the changes
should be minor. For example, some
proposed requirements should obligate
FCMs to provide the Commission and
DSROs more regular access to
information that FCMs and their
depositories are already required to
maintain, or in some cases are already
reporting to their DSROs. The
Commission also anticipates that some
of the changes proposed codify best
practices for risk management that many
FCMs and DCOs may already follow. In
such cases, the costs of compliance
would be mitigated by the compliance
programs or best practices that the firm
already has in place. Moreover, in other
cases the changes codify practices that
are already required by SROs, and
therefore would impose no additional
costs.
The initial and ongoing costs of the
rules for FCMs should vary significantly
depending on the size of each FCM, the
policies and procedures that they
already have in place, and the frequency
with which they experience certain
events that would create additional
costs under the rules. In the NPRM, the
Commission estimated that the initial
operational cost 599 of implementing the
rules would be between $193,000 and
$1,850,000 per FCM.600 And the initial
cost to the SROs and DSROs would be
between $41,100 and $63,500 per SRO
or DSRO. The Commission estimated
599 The Commission was not able to quantify the
costs that would result from increased residual
interest held in customer segregated accounts, from
increased capital held by the FCM, or from lost
investment opportunities due to restrictions on the
amount of funds that may be held overseas. The
Commission did not have sufficient data to estimate
the amount of additional residual interest FCMs are
likely to need as a consequence of proposed, the
amount of additional capital they may hold for
operational purposes, the cost of capital for FCMs,
or the opportunity costs FCMs may experience
because of restrictions on the amount of customer
funds they can hold overseas, each of which would
be necessary in order to estimate such costs.
600 The lower bound assumes an FCM requires
the minimum estimated number of personnel hours
to be compliant with these new rules and that,
when possible, they already have policies,
procedures, and systems in place that would satisfy
the proposed requirements. The upper bound
assumes an FCM requires the maximum amount of
personnel hours and do not have pre-existing
policies, procedures, and systems in place that
would satisfy the proposed requirements. The
greatest amount of variation within in the range
would depend on the number of new depositories
an FCM must establish relationships with due to
current depositories that would not be willing to
sign the required acknowledgment letter. The lower
bound assumes that an FCM does not need to
establish any new relationships with depositories.
The Commission estimates that the largest FCMs
may have as many as 30 depositories, and as a
conservative estimate, the Commission assumes for
the upper bound that an FCM would have to
establish new relationships with 15 depositories.

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that the ongoing operational cost to
FCMs would be between $287,000 and
$2,300,000 per FCM per year.601 As
described below in § 1.52, the
Commission did not have adequate
information to determine the ongoing
cost of the proposed requirements for
SROs and DSROs.
On a minor note, the rules also
harmonize the definition of leverage
ratio reporting with the definition
established by a registered futures
association.
In the sections that follow, the
Commission provides its analysis of cost
benefit considerations including
comments received, section by section,
in light of the relevant 15(a) public
interest, cost-benefit considerations.
Consideration of Costs and Benefits
Section by Section
Section 1.3(rr)—Definition of ‘‘Foreign
Futures or Foreign Options Secured
Amount’’

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The Commission adopted an
amendment to § 1.3(rr) replacing the
term ‘‘foreign futures or foreign options
customers’’ with the term ‘‘30.7
customers.’’ The former only included
U.S.-domiciled customers, whereas the
term ‘‘30.7 customers’’ includes both
U.S.-domiciled and foreign-domiciled
customers who place funds in the care
of an FCM for trading on foreign boards
of trade. This change expanded the
range of funds that the FCM must
include as part of the foreign futures or
foreign options secured amount.
In addition, the definition of ‘‘foreign
futures or foreign options secured
amount’’ was amended so that it is
equal to the amount of funds an FCM
needs in order to satisfy the full account
balances of each of its 30.7 customers at
all times. This definitional change is
necessary to implement the conversion
in § 30.7 from the ‘‘Alternative Method’’
to the ‘‘Net Liquidating Equity Method’’
of calculating the foreign futures or
foreign options secured amount.
601 As above, the lower bound assumes that an
FCM requires the minimum estimated number of
personnel hours to be compliant and that for eventtriggered costs, the FCM bears the minimum
number of possible events. The upper bound
assumes an FCM requires the maximum number of
personnel hours to be compliant. It also assumes an
FCM has to notify the Commission pursuant to the
proposed amendments in § 1.12 five times per year,
and that an FCM withdraws funds from residual
interest for proprietary use 50 times per year. The
estimate does not include additional costs that
would result if FCMs increase the amount of
residual interest or capital that they hold in
response to the proposed rules, or certain
operational costs that the Commission does not
have sufficient information to estimate.

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Costs and Benefits
These definitional changes determine
how much funds are considered part of
the ‘‘foreign futures or foreign options
secured amount.’’ However, the costs
and benefits of these changes are
attributable to the substantive
requirements related to the definitions
and, therefore, are analyzed with respect
to changes adopted to § 30.7 and
discussed below.
Section 1.10—Financial Reports of
Futures Commission Merchants and
Introducing Brokers
The Commission adopted
amendments to § 1.10 revising the Form
1–FR–FCM by establishing a new
schedule called the ‘‘Cleared Swap
Segregation Schedule’’ that is included
in the FCM’s monthly report, together
with the Segregation Schedule and
Secured Amount Schedule. The
amendments also provide that the
Cleared Swap Segregation Schedule is a
public document.602 The Commission
also amended the Segregation Schedule
and the Secured Amount Schedule to
include reporting of the FCM’s target for
residual interest in the accounts
relevant to that Schedule, as well as a
calculation of any surplus or deficit in
residual interest with respect to that
target. The Commission also required
each FCM to report to the Commission
monthly leverage information.
Costs and Benefits
In the NPRM, the Commission
considered the amendments to § 1.10 to
have significant benefits to the
protection of market participants,
namely, customers. The Commission
anticipated that continuing the public
availability of the Segregation Schedule
and the Secured Amount Schedule,
with the addition of the Cleared Swaps
Segregation Schedule, would be
beneficial to customers in assessing the
financial condition of the FCMs with
whom they choose to transact. The
Commission posited that FCMs would
have competing incentives to set higher
or lower targeted residual amounts, but
that public disclosure would enhance
the quality of the assessment of a
reasonable targeted amount of residual
interest. The Commission stated that
providing publicly the additional
information would permit customers to
weigh this consideration, along with
considerations of price, in selecting an
FCM, benefiting the protection of
market participants. The Commission
also stated that requiring FCMs to report
their leverage to the Commission on a
602 The Segregation Schedule and Secured
Amount Schedule are already public documents.

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68583

monthly basis would assist the
Commission in monitoring each FCM’s
overall risk profile, which would help
the Commission to identify FCMs that
should be monitored more closely for
further developments that could weaken
their financial position, enhancing the
protection of market participants.
The Commission could not
quantitatively estimate the cost of FCMs
having an incentive by public disclosure
to hold higher targeted residual amounts
in customer segregated accounts. The
Commission did consider that
qualitatively it expected that costs
would be incurred as a result, as a
return available to FCMs on restricted
investments permissible under § 1.25
would likely be lower than returns on
capital not restricted by being held as
target residual amounts subject to the
investment requirements of § 1.25, and
public disclosure would, other factors
being equal, give an incentive to FCMs
to hold a larger target residual amount.
The Commission estimated
quantitatively costs associated with
system modifications to produce
additional reports for leverage. The
Commission did not receive comments
regarding its quantitative estimates of
those costs or its qualitative analysis
that costs would be associated with the
amendments to § 1.10, particularly the
public disclosure of the Cleared Swaps
Segregation Schedule and the changes
to the Segregation Schedule and
Secured Amount Schedule to include
the targeted residual amount.
Specifically, the Commission received
no comments regarding the assumption
that the target residual amount would in
fact be higher once publicly disclosed,
or as to what forms or costs associated
with any additional capital that may be
required following disclosure of the
target residual amount, if any at all. Nor
did the Commission receive comments
discussing the quantitative spread
difference between § 1.25 investments
compared to investments that are not
subject to § 1.25. Without comment as to
these cost drivers, the Commission is
unable to accurately estimate these
costs.
The Commission received a comment
from NFA to consider an alternative to
the regulatory language proposed for
leverage ratio reporting to refer to the
formulation of leverage established by a
registered futures association.603 The
Commission, believing that this
alternative would have no detrimental
impact on the benefits anticipated from
obtaining reporting of leverage,
modified the language in the final
regulation to conform to the alternative
603 NFA

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suggested by NFA. The alternative
language in the final regulation will
permit the leverage reporting
requirement to stay harmonized with
NFA’s leverage reporting requirement as
NFA has indicated it intends to update
and refine the formulation, which will
continue to provide the Commission
with information necessary to monitor
FCMs for the protection of market
participants.604
The Commission received numerous
comments regarding the benefits of the
public disclosure of the Segregation
Schedule, Secured Amount Schedule,
and Cleared Swaps Segregation
Schedule, and the amounts of the FCM’s
targeted residual interest.605 Many
commenters reiterated the utility of, and
value to, customers of the public
availability of the schedules and
financial condition information of
FCMs.606 However, several FCMs
commented, and FIA expressed
concern, that the information would not
be useful to customers and would be
difficult for customers to understand
without understanding all the factors
involved in setting a target residual
amount.607 These commenters were
concerned that customers may, to their
detriment, overweigh the consideration
of the targeted residual amount.608
These comments are discussed in detail
at section II.P. above.
The Commission understands the
concerns of both sets of commenters but
believes that the protection of market
participants is enhanced in this
circumstance by the greater availability
of public information, particularly
concerning customer funds, to
customers and potential customers.
Notwithstanding the concerns of FIA
and several FCMs particularly
questioning the benefits of the public
availability of the targeted residual
amount, the Commission believes that
public disclosure—and consequent
market discipline—is an important
counterweight to other FCM incentives
with respect to establishing the target.
The Commission herein has adopted
numerous measures increasing
disclosures to customers, believing, on
balance, that additional disclosures
regarding customer funds in particular
to have significant benefits to the
protection of market participants.
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604 Id.
605 See, e.g., SIFMA Comment Letter at 2 (Feb. 21,
2013); SUNY Buffalo Comment Letter at 8 (Mar. 19,
2013); Vanguard Comment Letter at 5–6 (Feb. 22,
2013).
606 Id.
607 See, e.g., FIA Comment Letter at 52 (Feb. 15,
2013); RJ O’Brien Comment Letter at 6 (Feb. 15,
2013).
608 Id.

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Greater availability of information may
also provide additional confidence in
the financial integrity of futures
markets.
Finally, the Commission, in its
consideration of costs and benefits for
the amendments to § 1.10, asked
questions for particular comments on
the costs and benefits of making public
daily segregation and secured amount
calculations, or other more frequent
calculations, and solicited comments on
alternatives. Similar to the comments on
the public availability of the Segregation
Schedule, Secured Amount Schedule,
and the Cleared Swaps Segregation
Schedule, some commenters supported
and other commenters opposed the
public availability of daily margin
segregation calculations.
The Commercial Energy Working
Group noted, generally, that the
Commission’s proposals for the
publication of information would be a
cost-effective mechanism to make FCMs
more accountable to their customers.609
The Commercial Energy Working Group
posited that additional costs of
publication of daily segregation
calculations should be nominal.610
There were no other specific comments
on the costs of making publicly
available daily or more frequent
information. The Commission proposed
requiring daily segregation disclosures
in the amendments adopted to § 1.55,
and the benefits of such disclosures will
be further discussed in that section,
although the only comment received as
to the costs of such publication of
information was as discussed herein.
The NFA commented that the
Commission should consider the
alternative of directing customers to its
BASIC system where certain financial
information on FCMs would be
available in one place, as opposed to
requiring FCMs to publish financial
information, including the Segregation
Schedule, Secured Amount Schedule,
and Cleared Swaps Segregation
Schedule on their respective Web
sites.611 NFA commented that the
Commission should carefully
distinguish between categories of
information, as those meaningful to all
customers which should be readily
available, meaningful to regulators but
which may be sensitive and subject to
misinterpretation if made public, and
meaningful to more sophisticated
customers that FCMs should be required
to provide upon request.612 The
609 Commercial Energy Working Group Comment
Letter at 2 (Feb. 12, 2013).
610 Id. at 3
611 NFA Comment Letter at 15 (Feb. 15, 2013).
612 Id. at 16.

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Commission believes enhanced benefits
to the protection of market participants
and the financial integrity of futures
markets, and market discipline, are best
achieved by the public availability of
the Segregation Schedules, Secured
Amount Schedules, and Cleared Swaps
Segregation Schedules in their entirety
on a monthly basis, but also agrees with
NFA’s concern regarding the sensitivity
of information that may be readily
available to regulators but not publicly
disclosed. The Commission does not
agree that there may be a benefit to
distinguishing between categories of
customers with respect to public
availability of information. The
Commission agrees there could be
enhanced utility to customers by having
schedules provided by the NFA through
its BASIC portal as an alternative,
however, also notes that NFA could
implement this under the rule as
adopted so long as the schedules are
required to be made publicly available
and are not exempt from public
disclosure.
Section 1.11 Risk Management
Program for Futures Commission
Merchants
The Commission adopted new § 1.11
requiring an FCM that carries accounts
for customers to establish a risk
management unit that is independent
from the business unit handling
customers or customer funds and
reports directly to senior management.
In addition, each FCM must establish
and document a risk management
program, approved by the governing
body of the FCM, that, at a minimum:
(a) Identifies risks and establishes risk
tolerance limits related to various risks
that are approved by senior
management; (b) includes policies and
procedures for detecting breaches of risk
tolerance limits, and for reporting them
to senior management; (c) provides risk
exposure reports quarterly and
whenever a material change in the risk
exposure of the FCM is identified; (d)
includes annual review and testing of
the risk management program; and (e)
meets specific requirements related to
segregation risk, operational risk, and
capital risk.
Regarding segregation risk, each FCM
must establish written policies and
procedures that require, at a minimum:
(1) Documented criteria for selecting
depositories that would hold segregated
funds; (2) a program to monitor
depositories on an ongoing basis; (3) an
account opening process that ensures
the depository acknowledges that funds
in the account are customers’ funds
before any deposits are made to the
account, and that also ensures accounts

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are titled appropriately; (4) a process for
determining a residual interest target for
the FCM that involves due diligence
from senior management; (5) a process
for the withdrawal of an FCM’s residual
interest when such a withdrawal is not
made for the benefit of the FCM’s
customers; (6) a process for determining
the appropriateness of investing funds
in § 1.25 compliant investments; (7)
procedures to assure that securities and
other non-cash collateral held as
segregated funds are properly valued
and readily marketable and highly
liquid; (8) procedures that help to
ensure appropriate separation of duties
between those who account for funds
and are responsible for statutory and
regulatory compliance versus those who
act in other capacities with the company
(e.g., those who are responsible for
treasury functions); (9) a process for the
timely recording of all transactions; and
(10) a program for annual training of
FCM employees regarding the
requirements for handling customer
funds.
The new § 1.11 requires automated
financial risk management controls that
address operational risk, and written
procedures reasonably designed to
ensure that an FCM has sufficient
capital to be in compliance with the Act
and regulations and to meet its liquidity
needs for the foreseeable future.
Costs and Benefits
In the NPRM, the Commission
provided a detailed discussion of the
significant benefits of the new risk
management requirements for FCMs to
the protection of market participants
and customer funds, sound risk
management, and directly as well as by
extension, the financial integrity of
futures markets. Specifically, the
Commission stated that it considered
the specific requirements of § 1.11 to
reduce the negative impact of conflicts
of interest on decision making relating
to customer funds, to result in stronger
controls which could quickly focus
management attention on emerging risks
and minimize the risk of a breakdown
in control at times of financial stress,
and to promote more formal
responsibility and require specific
accountability up the chain of FCM
management and governance for risk
controls both generally and specific to
customer funds processes and
procedures. Documentation
requirements for policies and
procedures were considered beneficial
to promote Commission and SRO
oversight of the tools chosen by FCMs
in putting the stronger controls in place,
although the Commission also
determined that permitting flexibility

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with respect to the manner of the
policies and procedures would be
beneficial to the efficiency of FCMs in
putting the new stronger and more
rigorous requirements into practice. The
Commission considers the requirements
adopted under § 1.11 to be extremely
important in eradicating the potential
for poor internal controls environments
at FCMs, which could be susceptible to
fraud or operational error, which in turn
could result in losses to customer funds
without clear and documented
management accountability.
Documentation of the criteria for
decision making and management
determinations with respect to choice of
depositories, and other management
determinations impacting customer
funds such as residual interest and
investment choices, as well as requiring
periodic review and testing of the risk
management program, allows for an
iterative process with a clear purpose,
the protection of customers and
customer funds, transparent to both
Commission and SRO examination.
Providing clear factors which must be
considered by FCMs in their adopted
practices, such as selection of
depositories, was also considered by the
Commission to provide greater clarity to
customers with respect to
determinations of significant
consequence for customers, with a
result being likely enhanced market
discipline coming from customers
evaluating FCMs. In many specific
areas, the Commission considered the
requirements being adopted to greatly
benefit risk management, the protection
of market participants and the financial
integrity of futures markets as the
requirements would necessarily require
FCMs to improve internal management
communication, internal controls,
management accountability, separation
of duties, and training of personnel in
many respects. The Commission
considered that FCMs were already
responsible under the Act and existing
regulations for the protection of
customer funds. The adoption of § 1.11
requires now that FCMs develop written
policies and procedures and put
programs and controls into practice, to
ensure going forward that they have in
place consistent and reviewable
processes to achieve the required
outcomes for protecting customers and
customer funds. The Commission, in
adopting the rules, was however,
cognizant that there would be
significant costs involved in compliance
with § 1.11, to the extent that for some
FCMs these processes and procedures
were not already in place or have no
equivalent foundation. However, the

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68585

Commission considered an additional
benefit to the requirements to be that
there would no longer be a competitive
cost advantage to FCMs to not put in
place such important measures. Many
FCMs are anticipated by the
Commission to already have in place
strong internal controls and practices
similar to what is now specifically being
required to be put in place under § 1.11,
and those FCMs will not have to bear a
competitive disadvantage any longer for
doing so with respect to bearing the
costs of such practices in order to
adequately protect customers. The
Commission, cognizant of the
significance of its estimates of costs
with respect to the requirements,
adopted the regulations in a manner that
provides FCMs with flexibility in the
manner of adopting practices that fulfill
the requirements. The Commission did
not receive specific comments on its
quantitative estimates of the initial and
recurring costs of adopting § 1.11.
The Commission did receive
comments from several FCMs objecting
to the requirements of § 1.11 to require
the independence of risk management
from the business unit (defined to
identify parties responsible for customer
business or dealing with customer funds
or supervising such lines of
responsibility). RCG and Phillip Futures
cited the loss of a talent pool available
to participate in risk management as a
negative consequence of the
requirement.613 Phillip Futures also
recommended that the Commission
consider as an alternative that internal
controls, senior leadership and training
programs could suffice in lieu of
required separations between risk
management and the business unit.614
Phillip Futures contended that natural
conflicts of interest will always exist
and can be mitigated by supervisory
levels, policies and procedures.615
CHS Hedging and RJ O’Brien cited the
difficulty of a small or mid-size FCM
having a separate unit for risk
management personnel, noting it to be
impracticable operationally or
financially and not cost effective.616
Frontier Futures generally commented
that the costs associated with requiring
FCMs to increase risk management
standards for the purpose of protecting
an FCM’s customers from losses caused
by fellow customers, would be
prohibitive to smaller FCMs being able
613 RCG Comment Letter at 5 (Feb. 12, 2013);
Phillip Futures Comment Letter at 2 (Feb. 14, 2013).
614 Phillip Futures Comment Letter at 2 (Feb. 14,
2013).
615 Id.
616 CHS Hedging Comment Letter at 3 (Feb. 15,
2013); RJ O’Brien Comment Letter at 9–10 (Feb. 15,
2013).

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to continue operations, and is an area
that FCMs were adept at and already
have a large incentive to properly
manage.617 FIA asked for clarification
that § 1.11 does not require formal
structured risk management units,
provided that the FCM is able to
identify all personnel responsible for
required risk management activities in
order to comply with the line reporting
requirements and independence from
supervision by the business unit.618
The Commission understands the
general concerns of commenters
regarding the costs of the requirements
of § 1.11, along with the other new
provisions being adopted herein by the
Commission. The Commission did
provide clarity in section II.B. as
requested by FIA, which is intended to
make clear the amount of flexibility
available in complying with the
separation of duties of risk management
adopted in § 1.11. However, the
Commission notes that such separation
as a fixed requirement is particularly
important to the protection of market
participants, as the Commission
continues to believe conflicts of interest
to be a significant risk to the protection
of customer funds during periods of
financial or operational stress absent
such clear reporting and accountability
lines being established.
Section 1.12 Maintenance of Minimum
Financial Requirements by Futures
Commission Merchants and Introducing
Brokers
The changes to § 1.12 alter the notice
requirements so that it is no longer
acceptable to give ‘‘telephonic notice to
be confirmed, in writing, by facsimile.’’
Instead, all notices from FCMs must be
made in writing and submitted through
an electronic submission protocol in
accordance with instructions issued or
approved by the Commission (currently,
WinJammer).
In addition, the amendments to § 1.12
require that if an FCM has a shortfall in
net capital, but is unable to accurately
compute its current financial condition,
the FCM should not delay reporting the
under capitalization to the Commission.
The FCM must communicate each piece
of information (knowledge of the
shortfall and knowledge of the financial
condition of the FCM) to the
Commission as soon as it is known.
The Commission proposed
requirements in paragraphs (i), (j), (k)
and (l) of § 1.12 to identify additional
circumstances in which the FCM must
provide immediate written notice to the
617 Frontier Futures Comment Letter at 2 (Feb. 14,
2013).
618 FIA Comment Letter at 55 (Feb. 15, 2013).

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Commission, relevant SRO, and to the
SEC if the FCM is also a BD. Those
circumstances were: (1) If an FCM
discovers that any of the funds in
segregated accounts are invested in
investments not permitted under § 1.25;
(2) if an FCM does not have sufficient
funds in any of its segregated accounts
to meet its targeted residual interest; (3)
if the FCM experiences a material
adverse impact to its creditworthiness
or ability to fund its obligations; (4)
whenever the FCM has a material
change in operations including changes
to senior management, lines of business,
clearing arrangements, or credit
arrangements that could have a negative
impact on the FCM’s liquidity; and (5)
if the FCM receives a notice,
examination report, or any other
correspondence from a DSRO, the SEC,
or a securities industry SRO, the FCM
must notify the Commission, and
provide a copy of the communication as
well as a copy of its response to the
Commission. The Commission adopted
the proposed additional notification
requirements with some changes in
response to commenters, narrowing the
scope of certain of the new notification
requirements.
Last, the Commission adopted a new
paragraph (n) of § 1.12 that requires that
every notice or report filed with the
Commission pursuant to § 1.12 include
a discussion of how the reporting event
originated and what steps have been, or
are being taken, to address the event.
Costs and Benefits
The benefits of requiring that notice to
the Commission be given in written
form via specified forms of electronic
communication not only adapt the rule
to account for modern forms of
communication, but also reduce the
possibility of notification being delayed
in reaching appropriate Commission
staff. Ensuring that important regulatory
notices go directly through electronic
systems will result in appropriate staff
being alerted as soon as possible and
that there are no unnecessary delays to
regulatory attention to the notice, which
should benefit the protection of market
participants and the financial integrity
of futures markets, potentially
significantly depending on the
importance of the issue being addressed.
For example, with respect to the
adopted change in § 1.12(a)(2), if an
FCM knows that it does not have
adequate capital to meet the
requirements of § 1.17 or other capital
requirements, and is also not able to
calculate or determine its financial
condition, it is likely that the FCM is in
a period of extraordinary stress. In these
circumstances, time is of the essence for

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the solvency of the FCM and for the
protection of its customers and
counterparties. Therefore, it is
important that the Commission, DSRO,
and SEC (if the FCM is also a BD) be
notified immediately so that they can
begin assessing the FCM’s condition,
and if necessary, make preparations to
allow the transfer of the customers’
positions to another FCM in the event
that the FCM currently holding those
positions has insufficient regulatory
capital. These preparations help to
ensure that the customers’ funds are
protected in the event of the FCM’s
default, and that the positions of its
customers are transferred expeditiously
to another FCM where those customers
may continue to hold and control those
positions without interruption.
The situations enumerated as adopted
in § 1.12(i) and (j) are more specific
indicators of potential or existing
problems in the customer segregated
funds accounts. Notifying the
Commission in such circumstances
enables it to monitor steps the FCM is
taking to address a shortfall in targeted
residual interest, or to direct the FCM as
it takes steps to address improperly
invested segregated funds. In either
case, the Commission will be able to
closely monitor the FCM’s actions,
benefiting the continued protection of
customer segregated funds.
The Commission also asked questions
in the NPRM regarding whether public
availability of § 1.12 notices would
enhance customer protection, but did
not propose to make the notifications
public as it did other additional
disclosures relevant to customer funds,
such as the various segregation
schedules. Comments were received
both in favor of and in opposition to
public availability. One commenter,
FHLB, posited that the costs of public
availability would be negligible because
the reporting would already be done
and be done electronically, and the
benefit substantial, so that the
Commission should require public
availability.619 However, other
commenters, including RJ O’Brien and
FIA, raised concerns about potential
detrimental market impacts on FCMs
from the public availability of § 1.12
notices, at odds with FHLB’s assertion
that FCMs could not be impacted by a
‘‘run on the bank’’ scenario and that
costs would be negligible, with RJ
O’Brien believing a main risk of public
availability being precisely a possibly
disorderly and erroneous ‘‘run on the
bank’’ scenario.620
619 FHLB

Comment Letter at 3 (Feb. 15, 2013).
Comment Letter at 37 (Feb. 15, 2013); RJ
O’Brien Comment Letter at 10 (Feb. 15, 2013).
620 FIA

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
The Commission, although in most
circumstances believing there to be
substantial benefits to greater
availability of public information
concerning segregated funds, declined
to adopt any requirement for public
availability of § 1.12 notices, weighing
the comments received, and recognizing
an additional benefit to maintaining
equivalence of treatment with the SEC
for joint registrants, whose similar
notices are not made public. The
Commission agrees that the risk of the
possibility of a disorderly ‘‘run on the
bank’’ scenario from § 1.12 notices being
made immediately public would be too
great relative to the benefit of such
publication. The possibility of that
result could exacerbate a potentially
solvable problem at an FCM and not
result in the best protection of market
participants. The Commission is
adopting other types of additional
customer disclosures required of FCMs
under § 1.55, which it believes are more
beneficial to the protection of customers
and appropriate to the disclosure
purposes than the public availability of
§ 1.12 notices.
The situations enumerated that were
proposed in § 1.12(k) through (l) are
circumstances indicating that the FCM
is undergoing changes that could
indicate or lead to financial strain.
Alerting the Commission and relevant
SROs in such circumstances will benefit
the protection of market participants by
fostering their ability to monitor such
FCMs more closely in order to ensure
that any developing problems are
identified quickly and addressed
proactively by the FCM with the
oversight of the Commission and the
relevant SROs. In response to
commenters who proposed alternatives,
believing the proposals to be overly
broad and difficult to clearly comply
with, the Commission adopted the
requirements but narrowed and
provided additional detail for the
circumstances under which such
notices would be required. The
Commission believes the requirements
as adopted continue to provide the
intended benefits to the protection of
market participants.
The proposed § 1.12(m) requirement
that the FCM notify the Commission
whenever it receives a notice or results
of an examination from its DSRO, the
SEC, or a securities-industry SRO, was
intended to ensure that the Commission
is aware of any significant
developments affecting the FCM that
have been observed or communicated
by other regulatory bodies. Such
communications could prompt the
Commission to heighten its monitoring
of specific FCMs, or create an

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opportunity for the Commission to work
collaboratively and proactively with
other regulators and self-regulatory
organizations to address any concerns
about how developments in the FCM’s
business could affect customer funds.
The Commission adopted § 1.12(m),
with changes to address the requests of
commenters that the scope of the
requirement needed to be narrowed in
order to provide the benefit intended
without potentially overly burdensome
costs. TD Ameritrade, in particular,
commented that the volume of its filings
with securities regulators would make
the § 1.12(m) requirement both overly
costly with respect to the intended
benefit, and also not likely to result in
the benefit as intended.621 The
Commission believes the narrowed
language adopted for § 1.12(m) should
appropriately address the comment and
provide the benefit intended without
overly burdensome costs.
The requirement that notifications to
the Commission pursuant to § 1.12
include a discussion of what caused the
reporting event and what has been, or is
being done about the event, would
provide additional information to
Commission staff that would help them
quickly gauge the potential severity of
related problems that have been or are
developing at the reporting FCM, IB, or
SRO. The benefit of requiring the
additional information is that it will
assist Commission or SRO staff in
determining whether the situation is
likely to be corrected quickly or to
continue deteriorating. Commission
staff may be best able to protect market
participants with appropriate and
timely intervention, with more
information received initially regarding
how a potential regulatory problem is
being handled.
The Commission made quantitative
estimates of costs for the amendments to
§ 1.12 in the NPRM, including the new
notice requirements, the additional
information required to be included in
notices, and monitoring that would be
necessary in order for FCMs to submit
notices and received no comments
specific to those estimates. The
Commission estimated the costs of
requiring electronic filing of notices for
FCMs to be negligible as the filing
system is already in place, and received
no comment on that estimate. The
Commission asked specific questions
regarding costs for the additional notice
requirements and did not receive any
response to such questions from
commenters.
621 TD Ameritrade Comment Letter at 3 (Feb. 15,
2013).

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Section 1.16 Qualifications and
Reports of Accountants
The adopted changes to § 1.16 require
that in order for an accountant to be
qualified to conduct an audit of an FCM,
the accountant would have to be
registered with the PCAOB, and have
undergone inspection by the PCAOB. In
addition, the amendments also would
require that the governing body of the
FCM ensure that the accountant engaged
for an audit is duly qualified, and
specifies certain qualifications that must
be considered when evaluating an
accountant for such purpose. Finally,
the amendments require the public
accountant to state in the audit opinion
that the audit was conducted in
accordance with the auditing standards
adopted by the PCAOB.
Costs and Benefits
The Commission adopted
amendments to § 1.16 primarily to
obtain the benefits of quality control
and oversight of accountants and higher
standards to apply to certified audits of
FCMs, for the greater protection of
market participants, and to increase the
financial integrity of futures markets. In
at least one circumstance of FCM
failure, which was an impetus for the
package of additional protections to
customer funds contained in the
Proposal, the experience and quality of
the FCM auditor contributed to the
audit failure and the inability of an
audit to be an effective additional check
on the compliance and financial
integrity of FCMs and customer
funds.622
The Commission also considers the
newly adopted requirement for the
governing body of the FCM to have
accountability for assessing auditor
qualifications to be an appropriate tool
to ensure responsibility for a lack of
conflicts, true independence and a
quality audit by experienced auditors to
be connected back to the FCM’s
governing body and to be clearly
understood to be a responsibility of that
governing body. The Commission
believes this enhanced accountability
will benefit the protection of market
participants and promote the financial
integrity of futures markets by
contributing to ensuring audit quality of
FCMs.
In the NPRM, the Commission did not
quantitatively estimate costs associated
with the amendments to § 1.16,
however, it qualitatively considered the
622 See In the Matter of Jeannie Veraja-Snelling,
CFTC Docket No. 13–29, available at http://
www.cftc.gov/ucm/groups/public/@
lrenforcementactions/documents/legalpleading/
enfverajaorder082613.pdf.

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likelihood that PCAOB registered
accountants would be expected, all else
being equal, to have higher audit fees,
thereby incurring additional costs. The
Commission requested, but did not
receive, quantitative information from
commenters to better assess these costs.
However, the Commission did receive
several comments regarding the
proposed amendments to § 1.16 and the
Commission altered some of the
proposed § 1.16 requirements in
response to such comments, as
discussed in section II.E. above.
One commenter, the AICPA, proposed
that the Commission consider a practice
monitoring program, such as the AICPA
peer review, as an alternative to the
PCAOB inspection requirement.623 The
AICPA stated it did not believe the
PCAOB inspection requirement would
have the benefit of enhancing audit
engagements in situations where
inspections are not required (i.e., nonissuer FCMs).624 The Commission does
believe the PCAOB inspection
requirement will enhance audit quality
over time, particularly as inspections
become required for the audits of SEC
registered BDs.
However, in considering the practical
impediments to registering and
becoming inspected by the PCAOB, the
Commission made several clarifications
in adopting the amendments.625 Most
notably, the Commission extended the
compliance date for inspection by the
PCAOB until December 31, 2015. As
noted above in section II.E., based on
the Commission’s most recent review,
currently there are only seven CPA
firms (auditing fifteen FCMs) that would
not meet this requirement. Six of those
firms are registered with the PCAOB as
and indicate that they will be subject to
the PCAOB BD inspection program and
will presumably receive a PCAOB
inspection in the future. Therefore, the
Commission is adopting the inspection
requirement as proposed but has
extended the compliance date to
December 31, 2015 in order to provide
additional time for accountants to be
subject to PCAOB inspections.
The Commission received no
comments addressing costs associated
with an anticipated increase in audit
fees for PCAOB registration. Nor did the
Commission receive comment as to any
increased costs associated with
becoming PCAOB registered.
Nonetheless, the Commission believes
that currently only one FCM audit firm
is not PCAOB registered, and would
623 AICPA

Comment Letter at 3 (Feb. 11, 2013).
at 2–3.
625 See additional discussion at section II.E.
above.
624 Id.

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therefore be required to register to
continue to conduct audits of FCMs.
Currently, a public accountant that
audits less than 49 public issuers is
required to pay the PCAOB a
registration fee of $500.626 Annual fees
for public accountants with less 200
issuers also are $500 per year.627
Therefore, any costs associated with
registering the one and only existing
accounting firm which would not be in
compliance, or any firm in the future
that will need to register with the
PCAOB, will be nominal.
Section 1.17 Minimum Financial
Requirements for Futures Commission
Merchants and Introducing Brokers
Section 4f(b) of the Act provides that
no person may be registered as an FCM
unless such person meets the minimum
financial requirements that the
Commission has established by
regulation. The Commission’s minimum
capital requirements for FCMs are set
forth in § 1.17 which, among other
things, provides that an FCM must cease
operating as an FCM and transfer its
customers’ positions to another FCM if
the FCM is not in compliance with the
minimum capital requirements, or is
unable to demonstrate its compliance
with the minimum capital requirements.
The Commission proposed to amend
§ 1.17 by adding a new provision that
will authorize the Commission to
require an FCM to cease operating as an
FCM and transfer its customer accounts
if the FCM is not able to certify and
demonstrate sufficient access to
liquidity to continue operating as a
going concern. Additionally, FCMs that
are also registered BDs will be allowed
to use the SEC’s BD approach 628 to
evaluate the credit risk of securities that
the FCM invests in and assign smaller
626 See http://pcaobus.org/Registration/rasr/
Pages/AnnualFees.aspx.
627 Id.
628 Under the SEC proposal, a BD may impose the
default haircuts of 15 percent of the market value
of readily marketable commercial paper, convertible
debt, and nonconvertible debt instruments or 100
percent of the market value of nonmarketable
commercial paper, convertible debt, and
nonconvertible debt instruments. A BD, however,
may impose lower haircut percentages for
commercial paper, convertible debt, and
nonconvertible debt instruments that are readily
marketable, if the BD determines that the
investments have only a minimal amount of credit
risk pursuant to its written policies and procedures
designed to assess the credit and liquidity risks
applicable to a security. A BD that maintains
written policies and procedures and determines
that the credit risk of a security is minimal is
permitted under the SEC proposal to apply the
lesser haircut requirement currently specified in the
SEC capital rule for commercial paper (i.e., between
zero and 1⁄2; of 1 percent), nonconvertible debt (i.e.,
between 2 percent and 9 percent), and preferred
stock (i.e., 10 percent).

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haircuts 629 to those that are deemed to
be a low credit risk.630 The
Commission’s amendment to
§ 1.17(c)(5)(v) allows FCMs that are not
dual registrants to use the same
approach. Finally, the Commission has
adopted amendments revising the
period of time that an FCM is permitted
to wait before taking an undermargined
capital charge from three business days
after the call is issued on a customer’s
account to one business day, and from
two business days after the call is issued
on a noncustomer or omnibus account
to one business day.
Costs and Benefits
In the NPRM, the Commission
provided a detailed discussion of the
benefits the changes to § 1.17 would
provide. Regarding the potential transfer
of customer accounts if the FCM was
unable to certify and demonstrate
sufficient access to liquidity to continue
operating as a going concern, several
commentators stated that the
Commission should not adopt the rule
before clearly articulated objective
standards were established and exigent
circumstances that would give the
Commission authority to require an
FCM to cease operating were defined.
The Commission understands the
concerns of commenters regarding the
process by which the Commission, or
the Director of the Division of Swap
Dealer and Intermediary Oversight
acting pursuant to delegated authority
under § 140.91(6), could require
immediate cessation of business as an
FCM and the transfer of customer
accounts.
However, that same authority
currently exists should a firm fail to
meet its minimum capital requirement.
The Commission believes the ability to
certify, and if requested, demonstrate
with verifiable evidence, sufficient
liquidity to operate as a going concern
to meet immediate financial obligations,
is a minimum financial requirement
necessary to ensure an FCM will
continue to meet its obligations as a
registrant under the Act. Moreover,
because liquidity difficulties will not be
made transparent to the FCM’s
customers pursuant to 1.12, it is
especially important that the
Commission be permitted to act.
629 In computing its adjusted net capital, an FCM
is required to reduce the value of proprietary
futures and securities positions included in its
liquid assets by certain prescribed amounts or
percentages of the market value (otherwise known
as ‘‘haircuts’’) to discount for potential adverse
market movements in the securities.
630 The adoption of the Commission’s rule is
conditional upon the SEC adoption as final its
proposed rule to eliminate references to credit
ratings.

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
Regarding the proposed amendment
to § 1.17(c)(5)(v) revising the capital
charge (or haircut) procedures for FCMs,
the Commission notes that it only
impacts FCMs that are not dual
registrants. Because FCMs that are not
dual registrants do not typically invest
in securities that would be subject to
reduced haircuts under the SEC’s
proposed rules, the change should not
have a significant impact on the capital
requirements for such FCMs. The CFA
believes that capital models should be
established by the relevant regulatory
agencies for use by FCMs or BDs and
has serious concerns that internal
models used for calculating minimum
capital requirements are prone to failure
in crisis.631 The Commission
appreciates the CFA’s concerns,
however, the Commission notes that for
securities positions, § 1.17 incorporates
by reference the securities haircuts that
a BD is required to take in computing
its net capital under the SEC’s
regulations.632 This is a result of the
Commission’s determination to defer to
the SEC in areas of its expertise,
specifically with respect to market risk
and appropriate haircuts on securities
positions.633 For FCMs that are duallyregistered as BDs, any changes adopted
by the SEC to these securities haircuts
will be applicable under § 1.17(c)(5)(v)
unless the Commission specifically
provides an alternate treatment for
FCMs.634 The Commission’s
amendment merely allows FCMs that
are not dual registrants to follow the
same rules as those that are dual
registrants. This change would
harmonize the regulation of FCMs with
respect to minimal financial
requirements and would place FCMs
that are not dual registrants on a more
level playing field with those that are
dual registrants, which improves the
competition between FCMs. The FCMs
that use their own internal models will
also be subject to review by regulators,
including the SEC, SROs, or securities
SROs.
Regulation 1.17(c)(5)(viii) required an
FCM to take a capital charge if a
customer account is undermargined for
three business days after the margin call
is issued. Likewise, § 1.17(c)(5)(ix)
required an FCM to take a capital charge
631 CFA

Comment Letter at 4–5 (Feb. 13, 2013).
Regulations 1.17(c)(5)(v) and
1.32(b) both incorporate 17 CFR 240.15c3–
1(c)(2)(vi) by reference.
633 See 43 FR 15072, 15077 (Apr. 10, 1978) and
43 FR 39956, 39963 (Sept. 8, 1978).
634 See discussion adopting § 1.17(c)(5)(vi) for
options haircuts, with respect to the applicability of
provisions incorporating by reference and referring
to the rules of the SEC for securities broker dealers
also registered as futures commission merchants. 43
FR 39956, 39964.

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for noncustomer and omnibus accounts
that are undermargined for two business
days after the margin call is issued.
These timeframes were appropriate
when the capital rules were adopted in
the 1970s, when the use of checks and
the mail system were more prevalent for
depositing margin with an FCM. They
are obsolete, however, in today’s
markets with the use of wire transfers to
meet margin obligations. Therefore, the
Commission has amended
§ 1.17(c)(5)(viii) and (ix) to require an
FCM to take capital charges for
undermargined customer, noncustomer,
and omnibus accounts that are
undermargined for more than one
business day after a margin call is
issued.
FIA stated that while institutional and
many commercial market participants
generally meet margin calls by means of
wire transfers, the proposal creates
operational problems because it does
not consider delays arising from
accounts located in other time zones
that cannot settle same day, or ACH
settlements, or the requirement to settle
or convert certain non-U.S. dollar
currencies.635 FIA also stated that a
substantial number of customers that do
not have the resources of large
institutional customers (in particular
members of the agricultural community)
depend on financing from banks to fund
margin requirements, which may
require more than one day to obtain.636
RJ O’Brien objected to the proposed
amendment because many customers
that use the markets to hedge
commercial risk still meet margin calls
by check or ACH because of the
impracticality and costliness of wire
transfers to their circumstances.637 RJ
O’Brien stated that in many cases, the
costs of a wire transfer would exceed
the transaction costs paid by the client
to its FCMs, and additionally, that some
customers in the farming and ranching
community finance their margin calls,
which can require additional time to
arrange for delivery of margin call funds
due to routine banking procedures.638 RJ
O’Brien also stated that if the proposal
is adopted, FCMs that service noninstitutional clients will struggle to
remain competitive and the proposal
may result in fewer clearing FCMs and
greater systemic risk to the
marketplace.639 RJ O’Brien further
stated that a loss of such smaller FCMs
will result in fewer options available to
635 FIA

Comment Letter at 26 (Feb. 15, 2013).

636 Id.
637 RJ O’Brien Comment Letter at 3–4 (Feb. 15,
2013).
638 Id.
639 Id.

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68589

these ranchers, farmers and other
commercial market participants that
wish to hedge their commercial risks.640
Other commenters expressed the
general concern that the proposal will
harm the customers it is meant to
protect by requiring more capital to be
kept in customer accounts, possibly
forcing users to hold funds at FCMs well
in excess of their margin
requirements.641 Those commenters
argued that such pre-funding could add
significant financial burdens to trading
as customers find themselves having to
provide excess funds to their brokers
which could increase their risk with
regard to the magnitude of funds
potentially at risk in the event of future
FCM insolvencies.642 The commenters
generally expressed significant concerns
that reducing margin calls to one day
will harm many customers as: (1) Many
small businesses, farmers, cattle
producers and feedlot operators
routinely pay by check and forcing them
to use wire transfers increases their cost
of doing business; (2) clients who make
margin calls by ACH payments instead
of wire transfers because ACH is
cheaper, would no longer be able to do
so because there is a one-day lag in
availability of funds; and (3) foreign
customers would not be able to make
margin calls due to time zone
differences, the time required to convert
certain non-USD currencies, and for
whom banking holidays fall on different
days.643
The CCC stated that the proposed
amendment to the capital rule places an
undue burden on the FCMs, which will
likely result in FCMs demanding that
customers prefund trades to prevent
market calls and potential capital
charges.644 The CCC also stated that the
proposal could result in forced
liquidations of customer positions to
ensure that the FCM does not incur a
capital charge.645
FIA and RJ O’Brien suggested
alternatives to the Commission’s
640 Id.
641 NPPC Comment Letter at 2 (Feb. 14, 2013);
NGFA Comment Letter at 3 (Feb. 15, 2013); NEFI/
PMAA Comment Letter at 3 (Jan. 14, 2013); AIM
Comment Letter at 15 (Jan. 24, 2013); Amarillo
Comment Letter at 1 (Feb. 14, 2013); NCFC
Comment Letter at 1 (Feb. 15, 2013); NFA Comment
Letter at 12–13 (Feb. 15, 2013); FCStone Comment
Letter at 3 (Feb. 15, 2013); Advantage Comment
Letter at 1–2 (Feb. 15, 2013); AFBF Comment Letter
at 2 (Feb. 15, 2013); CCC Comment Letter at 2 (Feb.
15, 2013); CME Comment Letter at 5 (Feb. 15, 2013);
AIM resubmitted the comment letters of Premier
Metal Services, NEFI/PMAA, and the ISRI and
indicated its support for the recommendations
therein (Jan. 14, 2013).
642 Id.
643 Id.
644 CCC Comment Letter at 2–3 (Feb. 15, 2013).
645 Id.

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proposal. Both FIA and RJ O’Brien
offered that an FCM be required to take
a capital charge for any customer margin
deficit exceeding $500,000 that is
outstanding for more than one business
day.646 FIA further suggested that if the
customer’s margin deficit is $500,000 or
less, the FCM should take a capital
charge if the margin call is outstanding
two business days or more after the
margin call is issued.647 RJ O’Brien also
stated that the Commission should
provide at least a one year period of
time for any changes to the timeframe
for taking a capital charge for
undermargined accounts to be effective,
and that the Commission should require
futures exchanges to increase their
margin requirements to 135% of
maintenance margin to reduce the
number and frequency of margin
calls.648
The NFA and FIA stated that if the
Commission adopts the amendments
regarding residual interest as proposed,
then the Commission should consider
whether a capital charge for
undermargined accounts remains
necessary at all because the FCM will
have already accounted for an
undermargined account by maintaining
a residual interest sufficient at all times
to exceed the sum of all margin deficits;
hence the capital charges related to an
undermargined account appear to
impose an additional financial burden
without any necessary financial
protection.649
The Commission has considered the
comments and is adopting the
amendments to § 1.17(c)(5)(vii) and (ix)
as proposed. The revised regulation will
provide the intended benefits to
customers and the marketplace.
Commenters have stated that the
proposal would increase customer costs
by requiring the prefunding of margin
calls, which will also potentially expose
more customer funds to FCM control.
Commenters, however, did not provide
any quantitative estimates or provide
any substantive analysis in support of
their statements. In addition, the
Commission notes that much of this
argument is based on the assumption
that FCMs would not be able to support
the additional capital charge through
their existing excess capital. In addition,
many FCMs utilize a variety of funding
sources from which additional capital
may be obtained, if required, and
therefore costs could vary significantly
646 FIA Comment Letter at 27 (Feb. 27, 2013); RJ
O’Brien Comment Letter at 4 (Feb. 15, 2013).
647 FIA Comment Letter at 27 (Feb. 15, 2013).
648 RJ O’Brien Comment Letter at 4 (Feb. 15,
2013).
649 NFA Comment Letter at 13 (Feb. 15, 2013).

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from one FCM to another FCM. Without
quantitative estimates as to how much
excess capital FCMs typically maintain,
would be required to maintain, or the
difference of these costs in relation to
aged margin calls between one and three
days, the Commission cannot quantify
any increase in costs associated with
this amendment.
Moreover, the Commission believes
that the benefits of the final regulation
will enhance the protection of the
markets and customers. The
Commission notes that the timely
collection of margin is a critical
component of an FCM’s risk
management program and is intended to
ensure that an FCM holds sufficient
funds deposited by account owners to
meet potential obligations to a DCO. As
guarantor of the financial performance
of the customer accounts that it carries,
the FCM is financially responsible if the
owner of an account cannot meet its
margin obligations to the FCM and
ultimately to a DCO.
Regulation 39.13(g)(2) requires that a
sufficient amount of funds is
maintained in an account to cover 99
percent of the observed market moves
over a specified period of time.
Customers that maintain fully margined
accounts are exposed to greater risk to
the safety of their funds if some of the
accounts of their fellow customers are
undermargined. The intent of the
proposed amendment is to encourage an
FCM to require customers to promptly
fund margin deficiencies, or to reserve
a sufficient amount of capital to cover
the amount of the deficiencies. As a
consequence, the risk that a debit
balance could develop in a customer’s
account due to tardy margin call
payments would be reduced, and the
amount of residual interest that the FCM
would need to maintain in the
segregated accounts in order to protect
against the possibility that such debit
balances could cause them to have less
that is required in their segregated
accounts would also be reduced. This
provides benefits for the FCM by
reducing the amount of capital that it
must contribute to the customer
segregated accounts. Customers also
benefit by FCMs requiring more prompt
payments on undermargined accounts,
as it is less likely that FCMs would close
out the positions of customers failing to
meet margin obligations more quickly,
reducing the potential losses that would
be passed on to non-defaulting
customers in the event of a default of a
customer and a default of a clearing
member.

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Section 1.20 Futures Customer Funds
To Be Segregated and Separately
Accounted for
The amendments to § 1.20 reorganize
the section and alter the substance of
the section’s requirements in certain
places.
The final § 1.20 includes Appendix A
and Appendix B, which set forth the
Template Letters for the written
acknowledgments that FCMs and DCOs,
respectively, must obtain from any
depository with which they open an
account to hold futures customer funds.
The rule requires FCMs and DCOs to
use the applicable Template Letter to
obtain the required acknowledgment
before depositing any funds with a
depository. Regulation 1.20 also
requires FCMs, DCOs, and depositories
to file the written acknowledgment with
the Commission within three business
days of executing the letter, and to
update the written acknowledgment
within 120 days of any changes to the
business name, address, or account
numbers referenced in the letter.
The Commission received 15
comment letters related to the proposed
acknowledgment letter requirements.
Some commenters addressed the costs
and benefits associated with these
requirements; none of them, however,
provided any data to aid the
Commission in estimating costs. In the
sections that follow, the Commission
considers the benefits and costs arising
from the adoption of the
acknowledgment letter requirements.
The Commission also discusses the
corresponding comments accordingly.
Benefits
Regulation 1.20(d)(2) requires an FCM
to use the Template Letter in Appendix
A to obtain a written acknowledgment
from any depository that holds futures
customer funds. A depository accepting
customer funds is required to: (1)
Acknowledge that the funds are
customer segregated funds subject to
section 4d of the Act and the
Commission’s regulations thereunder;
(2) acknowledge and agree that the
funds cannot be used to secure any
obligation of the FCM to the depository
or used by the FCM to secure or obtain
credit from the depository; (3) agree to
reply promptly and directly to any
request from the Commission or the
FCM’s DSRO for confirmation of
account balances or provision of any
other information regarding or related to
an account; (4) agree that the depository
will allow the Commission and the
FCM’s DSRO to examine the accounts at
any reasonable time; and (5)
acknowledge and agree that the

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depository will provide the Commission
with technological connectivity
necessary to permit read-only electronic
access to the accounts.
Regulation 1.20(g)(4) requires a DCO
to use the Template Letter in Appendix
B to obtain a written acknowledgment
from any depository that holds futures
customer funds. The DCO Template
Letter is largely the same as the FCM
Template Letter except that: (1) It does
not require read-only electronic access;
and (2) it does not require the
depository to agree to Commission or
DSRO examination of customer
accounts.
These acknowledgments and
commitments would result in important
benefits. First, by acknowledging that
the funds are subject to the Act and
CFTC regulations, the depository
recognizes that it must comply with
relevant statutory and regulatory
requirements related to its handling of
those funds. Second, the depository
acknowledges that neither the FCM (or
DCO) nor the depository is permitted to
use customer funds as belonging to any
person other than the customer which
deposited them, i.e., an FCM or DCO
cannot use customer funds to secure its
obligations to the depository. Third, the
Template Letter for FCMs constitutes
written permission by the depository to
allow Commission or DSRO officials to
examine the FCM’s customer accounts
at any reasonable time and to provide
the Commission with read-only
electronic access to those accounts. As
a consequence, the Template Letters
would enable both the Commission and
the DSRO to monitor actual balances at
the depository more readily. This would
help to ensure that any discrepancy
between balances reported by the FCM
on its daily customer segregation
account reports and balances actually
held by the depository would be
identified quickly by the Commission or
the DSRO. Moreover, with the explicit
agreement from the depository
permitting the examination of customer
segregated accounts, both the
Commission and DSRO would be better
able to move quickly to resolve a
problem.
By requiring FCMs and DCOs to
submit copies of the executed Template
Letters to both the Commission and, as
applicable, an FCM’s DSRO, the
Commission and DSROs would be better
able to act quickly to protect customer
funds because the necessary legal
permissions will be in place. In
addition, the Template Letters provide
account information such as account
numbers, essential for management of
an FCM or DCO bankruptcy situation.
Also, requiring that the Template Letters

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be retained for five years past the time
when customer segregated funds are no
longer held by a depository helps ensure
that proper documentation of all
relevant acknowledgments and
commitments is in the possession of
each party that relies upon the existence
of those commitments.
Commenters were generally
supportive of adopting the Template
Letters. The Depository Bank Group
stated that ‘‘the acknowledgment letters
will help to facilitate a more efficient
process for the establishment and
maintenance of customer segregated
accounts by FCMs and DCOs and serve
to clarify the rights and responsibilities
of depository institutions holding
customer segregated funds.’’ 650 Eurex
expressed their appreciation for ‘‘the
potential convenience and increases in
certainty and transparency that such a
standardized approach would likely
afford.’’ 651 CME stated its support for
‘‘the Commission’s efforts to strengthen
and standardize the form of
acknowledgment letters.’’ 652
Costs
To date, FCMs and DCOs have
negotiated each acknowledgment letter
with depositories; accordingly, the use
of standardized non-negotiable language
in the Template Letter may result in cost
savings. However, FCMs and DCOs are
likely to bear some initial and ongoing
costs as a result of the requirement to
use the Template Letters. Regarding
initial costs, some depositories may not
be willing to sign the Template Letter,
which would require the FCM or DCO
to move any customer funds held by
that depository to a different depository,
creating certain due diligence and
operational costs. These cost concerns
were discussed in the comment letters
from MGEX and RCG.653
In the NPRM, the Commission
estimated that the cost of obtaining a
new acknowledgment letter from each
existing depository is between $1,300
and $4,200.654 The Commission
650 Depository Bank Group Comment Letter at 2
(Feb.15, 2013).
651 Eurex Comment Letter at 1 (Aug. 1, 2013).
652 CME Comment Letter at 7 (Feb. 15, 2013).
653 MGEX Comment Letter at 3 (Feb. 18, 2013)
and RCG Comment Letter at 7 (Feb. 12, 2013).
654 This estimate assumed 10–40 hours of time
from a compliance attorney and 10–20 hours from
an office services supervisor. The average
compensation for a compliance attorney is $85.35/
hour [$131,303 per year/(2000 hours per year)*1.3
is $85.35 per hour]; $85.35*10 = $853.47 and
$85.35*40 = $3,413.88. The average compensation
for an office services supervisor is $40.15/hour
[$61,776.00 per year/(2000 hours per year)*1.3 is
$40.15 per hour]; $40.15*10 = $401.54 and
$40.15*20 = $803.09. These figures were taken from
the 2011 SIFMA Report on Management and
Professional Earnings in the Securities Industry.

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68591

estimated that FCMs and DCOs would
have approximately 1 to 30 depositories
each, from which they would need to
obtain a new acknowledgment letter.
Therefore, the Commission estimated
that the cost of obtaining new
acknowledgment letters from existing
depositories would be between $2,700
and $82,000 per FCM or DCO.655 In
addition, the Commission estimated that
the process of identifying new potential
depositories, conducting necessary due
diligence, formalizing necessary
agreements, opening accounts, and
transferring funds to a new depository
would likely take between three to six
months and would likely require
support from compliance attorneys, as
well as operations, risk management,
and administrative personnel. In the
NPRM, the Commission estimated that
the cost of moving accounts from an
existing depository that is not willing to
sign the letter would be between
$50,000 and $102,000.656
There may be additional operational
costs associated with any changes that
would necessitate updating the letter.
The per-entity cost of obtaining the
letter from new depositories is likely to
be the same as it would be for obtaining
the letter from existing depositories (i.e.,
$1,300 and $4,200). In the NPRM, the
Commission estimated that the cost
associated with changes that would
require the acknowledgment letter to be
updated would be between $1,100 and
$2,800 per year.657
655 Total figures are taken from previous
calculation. ($1,255.01+$4,216.97)/2 = $2,735.99;
$2,735.99*1 = $2,735.99 and $2,735.99*30 =
$82,079.69.
656 This estimate assumed one compliance
attorney working full-time for 3–6 months, 50–200
hours from an office services supervisor, 80–160
hours of time from a risk management specialist,
and 40–60 hours from an intermediate accountant.
The average compensation for a compliance
attorney is $85.35/hour [$131,303 per year/(2000
hours per year)*1.3 is $85.35 per hour]; $85.35 *40
hours/week*4 weeks/month*3 months = $40,966.54
and $85.35 *40 hours/week*4 weeks/month*6
months = $81,933.07. The average compensation for
an office services supervisor is $40.15/hour
[$61,776.00 per year/(2000 hours per year)*1.3 is
$40.15 per hour]; $40.15*50 = $2,007.72 and
$40.15*200 = $8,030.88. The average compensation
for a risk management specialist is $65.33/hour
[$100,500 per year/(2000 hours per year)*1.3 is
$65.33 per hour]; $65.33*80 = $5,226.00 and
$268.84*160 = $10,452.00. The average
compensation for an intermediate accountant is
$34.11/hour [$52,484.00 per year/(2000 hours per
year)*1.3 is $34.11 per hour]; $34.11*40 =
$1,364.58 and $34.11*60 = $2,046.88. These figures
were taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.
657 This assumed 20–50 hours per year from an
office manager for operational costs. The average
compensation for an office manager is $55.82/hour
[$85,875 per year/(2000 hours per year)*1.3 =
$55.82/hour]; $55.82*20 = $1,116.38 and $55.82*50
= $2,790.94. This figure was taken from the 2011

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RCG discussed the need to develop
policies and procedures as well as train
personnel.658 These costs were
considered in the NPRM and are
discussed above. MGEX asserted, based
on the Commission’s estimates in the
NPRM, that the costs of using the
Template Letters would outweigh the
benefits of using them. It did not,
however, provide further analysis as to
the basis for its conclusion.659 In the
NPRM, the Commission quantified some
of the potential costs and only discussed
the benefits qualitatively. Consequently,
there is no direct comparison between
the costs and benefits based on the
Commission’s estimates in the NPRM.
The Depository Bank Group, FIA, and
Schwartz & Ballen expressed concern
that the Template Letters’ standard of
liability provision would shift
significant amount of risk onto
depository institutions and would likely
increase the costs incurred in both
monitoring for violations and
maintaining customer segregated
accounts.660 As discussed in the
preamble, the Commission revised the
language in the Template Letters to
address these concerns. FCStone and
Schwartz & Ballen commented that the
proposed restriction on depositories
placing liens on customer accounts
when there is an overdraft in an account
would likely lead to losses to
depositories. As discussed in the
preamble, the Template Letter clarifies
that liens on accounts are permitted
only in certain limited circumstances
and that a depository may not take a
lien against a customer account to cover
overdrafts. The final Template Letters
do not deny a depository the right to
recover funds advanced in the form of
cash transfers, lines of credit,
repurchase agreements or other similar
liquidity arrangements made in lieu of
liquidating non-cash assets held in an
account or in lieu of converting cash in
one currency to cash in a different
currency.
The requirement, embedded in the
FCM Template Letter, that depositories
provide the Commission with read-only
electronic access to customer accounts
would create certain costs for
depositories that would likely be passed
onto FCMs. ICI noted that the read-only
access requirement would result in a
SIFMA Report on Management and Professional
Earnings in the Securities Industry.
658 RCG Comment Letter at 8 (Feb. 12, 2013).
659 MGEX Comment Letter at 3 (Feb.18. 2013).
660 Depository Bank Group Comment Letter at 2
(Feb. 15, 2013), FIA Comment Letter at 40 (Feb. 15,
2013) and Schwartz & Ballen Comment Letter at 6
(Feb. 15, 2013).

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process that might be burdensome.661
The Commission does not have
adequate data to estimate the cost for
establishing such a system and no data
was provided by commenters to aid the
Commission in estimating such costs.662
The Commission also has decided not to
adopt the read-only electronic access
requirement for DCOs.663
FCStone asserted that the ultimate
costs of requiring Template Letters will
be borne by customers of FCMs.664 ICI
noted that the costs with respect to a
MMMF Template Letter requirements
would be borne by all investors in a
MMMF and not just by the FCMs.665
The Commission, however, is unable to
forecast how these costs will ultimately
be allocated.
Section 1.22 Use of Customer Funds
Restricted
Under current regulations, an FCM is
not permitted to use one customer’s
funds to purchase, margin, secure, or
settle positions for another customer.
However, prior regulations did not
specify how FCMs should demonstrate
compliance with this requirement.
Revised regulation 1.22(c) provides such
a mechanism.
Section 1.22(c)(1) defines the
undermargined amount for an account.
Sections 1.22(c)(2) and (c)(4) require
FCMs to compute, based on the
information available to the FCM as of
the close of each business day, (i) the
undermargined amounts, based on the
clearing initial margin that will be
required to be maintained by that FCM
for its futures customers, at each DCO of
which the FCM is a member or FCM
through which the FCM clears, at the
point of the daily settlement (as
described in 39.14) that will complete
during the following business day for
each such DCO (or FCM through which
the FCM clears) less (ii) any debit
balances referred to in 1.20(i)(4)
included in such undermargined
amounts.
Moreover, under section 1.22(c)(3), an
FCM is required to, prior to the Residual
661 ICI Comment Letter at 5 (Jan. 14, 2013).
Although ICI’s comments focused on MMMFs,
some of the costs they discussed apply generally to
read-only access requirements.
662 The Commission intends to rely primarily on
other means of obtaining account information from
depositories, and would activate the read-only
electronic access only in situations where it was
deemed necessary. The Commission will generally
seek to obtain account information from the NFA
and CME automated daily segregation confirmation
system and/or from depositories directly prior to
requesting a depository to activate electronic access.
663 DCOs hold omnibus customer segregated
accounts that do not reflect funds attributable to
individual clearing members or customers.
664 FCStone Comment Letter at (Feb. 15, 2013).
665 ICI Comment Letter at 5 (Jan. 14, 2013).

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Interest Deadline defined in section
1.22(c)(5), have residual interest in the
segregated account in an amount that is
at least equal to the computation set
forth in section 1.22(c)(2).666 The
amount of residual interest that an FCM
must maintain may be reduced to
account for payments received from or
on behalf of undermargined futures
customers between the close of the
previous business day and the Residual
Interest Deadline.
Section 1.22(c)(5) defines the Residual
Interest Deadline. During an initial
phase-in period, the Residual Interest
Deadline is 6:00 p.m. Eastern Time on
the date of the settlement referenced in
(c)(2)(i) or (c)(4). On December 31, 2018,
which is the expiration of the phase-in
period, the Residual Interest Deadline
shifts to the time of the settlement
referenced in (c)(2)(i) or (c)(4). In the
interim, paragraph 1.22(c)(5)(iii)
requires Commission staff to solicit
further public comment and conduct
further analysis in a report (the
‘‘Report’’) for publication in the Federal
Register regarding the practicability of
moving the Residual Interest Deadline
from 6:00 p.m. Eastern Time on the date
of settlement to the time of settlement
(or to some other time of day). The
Report will discuss whether and on
what schedule it would be feasible to
move the Residual Interest Deadline,
and the cost and benefits of such
potential requirements. In addition, staff
is instructed to, using the Commission’s
Web site, solicit public comment and
conduct a public roundtable regarding
specific issues to be covered by the
Report. Paragraph 1.22(c)(5)(iii)(B)
provides that the Commission may,
taking into account the Report, (1)
terminate the phase-in period, in which
case the phase-in shall end as of a date
established by Commission order
published in the Federal Register,
which date shall be no less than one
year after the date of such Commission
order, or (2) determine that it is
necessary and appropriate in the public
interest to propose through rulemaking
a different Residual Interest Deadline. In
that event, the Commission shall
establish by order published in the
Federal Register, a phase-in schedule.
Costs and Benefits
The requirement in § 1.22(c) benefits
customers whose accounts are not
undermargined by reducing the risk that
their segregated funds would be used to
cover a shortfall in customer funds due
666 See note 395 above regarding the operation of
the requirement in § 1.22(c)(3) where an FCM is
subject to multiple Residual Interest Deadlines.

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
to a ‘‘double default.’’ 667 When
combined with the reporting
requirements in §§ 1.10, 1.32, 22.2, and
30.7, the requirement in § 1.22(c) will
further provide the Commission and the
public with information that should
allow them to determine whether FCMs
are using one customer’s funds to
purchase, margin, secure or settle
positions for another customer.668
It would be difficult to quantify these
benefits reliably. An estimate would
depend on the expected value of losses
due to a double default (i.e., a default of
both a customer and the FCM) which, in
turn, depend on the probability of a
double default and the magnitude of
deficits that would exist in customer
accounts compared to the amount of
residual interest at the time of the
double default. Given the small number
of historical examples, it is unlikely that
any estimate of probability would be
reliable. Moreover, the magnitude of the
impact of a loss of customer funds is
dependent on an estimate of the amount
of funds lost, a number that is also
difficult to predict with any reliability,
as well as the loss of market confidence
(which may be even more important),
which is also difficult to estimate
reliably.
As discussed above, the Commission
has revised the residual interest
requirements in the final rule by
adopting a point in time approach.669
As a consequence, once the requirement
in § 1.22(c) is phased in, FCMs will have
several hours between the close of
business on a particular day (the point
in time upon which the calculation is
based), and the time of day when the
requisite amount of residual interest
must be held in segregation (that is, the
time of the daily settlement). Moreover,
during the phase-in period described in
§ 1.22(c)(5), FCMs will initially have a
longer period (until 6:00 p.m. Eastern
Time on the following business day) to
ensure that the requisite amount of
residual interest is held in segregation.
These adjustments to the final rule
will avoid the need for FCMs
continuously to monitor whether they
are maintaining residual interest in their
segregated customer accounts that is
sufficient to cover the sum of the
undermargined amounts in customers’
accounts. Instead, FCMs will have to
ensure that they are able to cover the
sum of the undermargined amounts in
customers’ accounts by the Residual
Interest Deadline. This should
significantly reduce the amount of
667 See discussion of double defaults in sections
I.D. and II.G.9. above.
668 See the discussion in section II.G.9. above.
669 See the discussion in section II.G.9. above.

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residual interest that an FCM must
maintain in segregated accounts on an
ongoing basis. In the absence of
information regarding what specific
changes various market participants
might make to their systems and
operations in order to expedite margin
payments, it is not possible for the
Commission to provide an estimate of
the costs of such technical changes.
Moreover, the FCM’s funding
requirement will be reduced to the
extent that customers are able to reduce
the undermargined amount in their
accounts prior to the Residual Interest
Deadline. The Commission expects that
FCMs will work with customers during
the phase-in period to develop the
systems and operational patterns that
will be necessary to facilitate more
prompt margin calls and payments. As
a consequence, those FCMs’ customers
that do not already have the capability
to make margin payments before the
Residual Interest Deadline may develop
that capability, which will further
reduce the funding burden borne by
FCMs.
The cost associated with maintaining
sufficient residual interest to cover
undermargined amounts will also
depend upon the policies and
procedures that FCMs put into place to
meet the targeted residual interest
requirement set forth in § 1.11. To the
extent that the undermargined amount
is greater than the targeted residual
interest amount that an FCM maintains
in its customer accounts, the FCM
would have to increase the amount of
residual interest it maintains in the
customer segregated account by the time
it is obligated to make settlement
payments to the DCO. Some FCMs may
seek to avoid this situation by requiring
their customers to pre-fund (i.e., require
customers to provide initial margin for
a position before the FCM sends the
position to a DCO to be cleared, and
provide sufficient excess margin to the
FCM to reduce any undermargined
amount). If the FCM elects to increase
the amount of residual interest that it
maintains in the customer segregated
accounts, this would likely reduce the
range of investment options the FCM
has for those additional funds and may
prompt the FCM to hold additional
capital to meet operational needs.
Similarly, if the FCM requires
additional margin from customers, that
will result in capital costs to those
customers.
On the other hand, to the extent the
FCM would otherwise maintain targeted
residual interest (i.e., to the extent the
targeted residual interest is greater than
or is included within the
undermargined amount), then the rule

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68593

would not create any additional funding
costs.
Despite these revisions to the
proposed rule, the Commission
recognizes that the requirements of final
rule § 1.22(c) will create significant
additional costs for FCMs and their
customers. Developing and
implementing the systems and
operational changes necessary to
facilitate more rapid margin payments
will create costs for FCMs and their
customers. Those costs are likely to vary
significantly across FCMs depending on
the infrastructure and operational
patterns that each FCM already has in
place, and depending on the
specifications of the revised systems
and operational patterns that FCMs and
customers develop in order to facilitate
more rapid margin payments.670
In addition, the Commission expects
that some FCMs may choose to require
some customers to increase the amount
of margin they maintain in their
accounts. This is more likely for those
customers who are presently not able to
make their margin payments prior to the
Residual Interest Deadline. Customers
subject to increased pre-funding
requirements will bear costs from their
cost of capital resulting from prefunding multiplied by the amount of the
increased pre-funding requirement. The
cost of capital for each customer
depends on the investment strategy of
the individual customer, and the
amount of increased pre-funding
requirement is likely to vary depending
on the ability of the customer to respond
to margin calls promptly and the FCM’s
ability to cover the customer’s deficits
through increased residual interest
contributions.671
Last, whatever undermargined
amounts are not addressed through
customer payments prior to the Residual
Interest Deadline will have to be
covered through increased residual
interest contributions from the FCM.
The Commission expects that in order
to comply with the requirements of
§ 1.22(c), FCMs may need to maintain
670 In the absence of information regarding what
specific changes various market participants might
make to their systems and operations in order to
expedite margin payments, it is not possible for the
Commission to provide an estimate of these costs.
671 Commenters did not provide, and the
Commission does not have, data characterizing the
range of investment strategies used by FCM
customers, its impact on their cost of capital for
additional margin, the extent to which customers
will not be able to develop the ability to make more
rapid margin payments, or the extent of the margin
requirements for those customers. In the absence of
this information it is not possible at this time to
estimate the additional cost associated with prefunding requirements that some customers may
bear. These are subjects that may be addressed in
the Report.

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

additional residual interest in order to
cover the sum of undermargined
amounts in customers’ accounts that
still remain by the Residual Interest
Deadline on ordinary trading days, and
are likely to acquire and maintain access
to additional liquidity that can be
accessed rapidly to meet the sum of
customers’ gross undermargined
amounts in a worst-case-scenario.
Therefore, in order to estimate the cost
of additional residual interest that FCMs
will maintain, it is necessary to estimate
the amount of additional residual
interest that FCMs will need to maintain
in their segregated accounts during
ordinary trading days, the amount of
additional residual interest that will be
needed on highly volatile trading days,
the ratio of ordinary to highly volatile
trading days on an annual basis, the cost
of capital for the additional funds that
are deposited into residual interest, and
the cost to maintain a revolving credit
facility or some other source of funding
that can be accessed quickly and that is
sufficient to cover the projected largest
undermargined amount in aggregate for
customers’ accounts.
As discussed further below, the
Commission believes that the point in
time approach adopted in this final rule
will significantly reduce the amount of
additional residual interest that FCMs
need to maintain in their segregated
accounts on an ongoing basis in order to
comply with § 1.22(c).
Several commenters provided
estimates of the cost of the ‘‘at all times’’
portion of the proposal. FIA estimated
that compliance with the ‘‘at all times’’
portion of the proposal would require
FCMs or their customers to deposit
significantly in excess of $100 billion
into customer funds accounts beyond
the sum required to meet initial margin
requirements, and that the annual
financing costs for these increased
deposits will range from $810 million to
$8.125 billion.672 FIA estimated the
highest single day customer margin
deficits per FCM would likely be
between $196 million to $6.1 billion per
FCM, depending on the size and
composition of the FCM’s customer
accounts.673 Jefferies estimated that it
would be required to increase its own
residual interest by $15 million (nonpeak) or $30 million (peak),
respectively.674 Jefferies also stated that
the industry would be required to
increase its residual interest by $49
billion (non-peak) or $83 billion (peak)
at a cost of approximately $2 billion
672 FIA
673 See

Comment Letter at 14, 16 (Feb. 15, 2013).
FIA Comment Letter at 2–3 (June 20,

2013).
674 Id. at 8.

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(non-peak) or $5 billion (peak),
respectively.675 ISDA estimated that the
highest single day sum of gross
customer margin deficits would likely
be approximately $73.2 billion for all
FCMs combined, with a long term
funding impact of $335 billion.676
While the Commission expects that
the residual interest requirement will
create additional capital costs for most
FCMs, the Commission believes that the
estimates presented by commenters
include certain assumptions that may
lead to overstated costs. First, residual
interest that is not needed to be pledged
as collateral for customers may be
invested overnight and during the day
in investments that are consistent with
the requirements of Commission
Regulation 1.25 (‘‘§ 1.25
investments’’).677 The return on residual
interest would offset a portion of the
cost of funds. That is, the additional
funds that FCMs place in residual
interest will both incur costs and
generate returns for the FCM. Estimates
of the effective cost of the additional
funds that must be used to increase
residual interest must account for
both.678 The returns on § 1.25
investments have the potential to reduce
the effective cost of funds.
Second, both FIA and ISDA confound
total residual interest with additional
residual interest by assuming that the
total amount of residual interest that
would be required by the proposed rule
is equal to the additional amount of
additional interest that would be
required by the rule. FCMs, in general,
maintained some residual interest prior
to this rule, and are required to do so
to comply with § 1.23.679 Therefore, it is
only the additional residual interest that
is necessary because of rule 1.22(c) that
is relevant for consideration here.
Third, the Commission agrees with
FIA that U.S. Treasury securities are an
appropriate proxy for the marginal cost
of capital for a low-risk project, such as
funds to be placed in residual interest.
FIA and Jefferies did not explain why
they chose long-dated maturities on the
yield curve for their estimates.
675 Id.
676 See

ISDA Comment Letter at 4 (Feb. 15, 2013).
ISDA used market data for FCMs (November 30,
2012) available at http://www.cftc.gov/
MarketReports/FinancialDataforFCMs/index.htm.
677 17 CFR 1.25.
678 For example, FIA cited a historical cost of
funds of 8.125% in January 1990. At that time, the
constant maturity one month Treasury yield was
7.86%, see http://mortgage-x.com/general/indexes/
cmt_tcm_history.asp?f=m. Thus, using the cost of
funds proxy from the commenter, the cost of funds
would be closer to 0.365% (calculated as 8.125%
¥ 7.86% + 0.10% (for underwriting and
administrative overhead)).
679 See section II.G.10. above.

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Presumably, an FCM could borrow
funds at a much shorter maturity than
five years, for example, a month or less,
potentially lowering borrowing costs
substantially.
The Commission notes, and discusses
further below, that FCMs might mitigate
costs by maintaining a credit facility
that is sufficient to cover most of their
additional residual interest needs on
unusually volatile trading days, but that
is not used on the majority of trading
days. This approach would not only
lower the amount of capital needed, but
would also reduce the amount of time
during which the capital is borrowed.
As discussed further below, the
Commission is not able to estimate
accurately what fees banks would
charge. However, the Commission has
considered that FCMs would bear an
ongoing cost associated with
maintaining an open credit facility that
is able to provide rapid access to
sufficient liquidity to meet any
additional residual interest
requirements on highly volatile days.
As noted above, several commenters
requested the Commission revise the
proposal to require that the residual
interest calculation be made once a day,
specifically by the end of the business
day.680 These commenters suggested an
alternative (the ‘‘Industry Commenters’
Alternative’’) by which, at this point in
time, an FCM would be required to
maintain a residual interest in its
customer funds accounts at least equal
to its customers’ aggregate margin
deficits for the prior trade date. ISDA
stated this alternative ‘‘would rationally
reduce’’ FCMs cost of compliance 681
and that ‘‘[f]or an FCM with robust
credit risk management systems,
covering end-of-day customer deficits
should not be a significant cost.’’ 682
ISDA also noted that at the end of the
day ‘‘typically, all customer calls have
been met, and all customer gains have
been paid out; all achieved without the
FCM having recourse to its own funding
resources.’’ 683 FIA asserted that it
would ‘‘achieve the Commission’s
regulatory goals without imposing the
680 See ISDA Comment Letter at 6 (Feb. 15, 2013);
FIA Comment Letter at 23–25 (Feb. 15, 2013);
LCH.Clearnet comment Letter at 5 (Jan. 25, 2013);
Paul/Weiss Comment Letter at 4–5 (Feb. 15, 2013);
RJ O’Brien Comment Letter at 5 (Feb. 15, 2013).
681 ISDA Comment Letter at 6 (Feb. 15, 2013).
682 ISDA Comment Letter at 2 (May 8, 2013).
683 Id. ISDA further observed that many FCM
customers use custodians across the world, and
‘‘many customers cannot assure payment of their
morning FCM call before the end of the New York
day,’’ and therefore recommended that Commission
study the feasibility of reducing the time in which
customers have to meet margin calls, if that is
‘‘imperative.’’ Id. at 3. This will be addressed in the
Report.

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damaging financial and operational
burdens on FCMs, and the resulting
financial burdens on customers.’’ 684
ISDA and FIA evaluated the costs
associated with requiring FCMs to
perform the residual interest calculation
once each day at the close of business
on the first business day following the
trade date.685 ISDA estimated that
‘‘removing the predictive element of
FCM funding requirements’’ of the ‘‘at
all times’’ method in favor of the
Industry Commenters’ Alternative
would permit markets to ‘‘reap the
efficiencies of end-of-day
accounting,’’ 686 thereby reducing the
overall cost of compliance with the
regulation. ISDA estimated that for
exchange-traded futures, the costs
associated with the alternative would be
the cost of covering the outstanding
margin deficits of between 2% and 5%
of an FCM’s futures customers, and thus
that approach would impose only
‘‘incremental funding requirements’’ on
FCMs.687 ISDA estimated that the costs
of the alternative would be even smaller
for cleared swaps, due to the ‘‘more
professional’’ nature of the market.688
FIA acknowledged that if FCMs were
given until the end of the following
business day to ensure that the requisite
amount of residual interest was
maintained, that approach would
eliminate approximately 90–95% of the
anticipated additional residual interest
that larger FCMs would need to
maintain in order to meet an at all times
requirement.689 FIA estimated the
financing costs to FCMs of complying
with the Industry Commenters’
Alternative, and concluded that the
costs associated with an at all times
residual interest requirement would be
approximately ten times the costs
associated with the Industry
Commenters’ Alternative.690 Finally, the
FIA concluded that the Industry
Commenters’ Alternative would not
‘‘impos[e] damaging financial and
operational burdens on FCMs . . . and
the resulting financial burdens on
customers’’ that would result from the at
all times approach.691
684 FIA Comment Letter at 23 (Feb. 15, 2013). See
also ISDA Comment Letter at 4 (May 8, 2013).
685 ISDA Comment Letter at 1–2 (May 8, 2013);
FIA Comment Letter at 8–10 (June 20, 2013).
686 ISDA Comment Letter at 3 (May 8, 2013).
687 Id. at 3–4.
688 Id. at 4.
689 See FIA Comment Letter at 3 (June 20, 2013).
690 See FIA Comment Letter at 8–10 (June 20,
2013). While the rates used by FIA in this exercise
may be conservative, and the Commission does not
adopt these precise estimates, the exercise is
nevertheless illustrative and useful for the purpose
of comparing the costs of the at all times approach
and the Industry Commenters’ Alternative.
691 Id. at 9.

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However, the point in time approach
adopted in final rule § 1.22(c) gives
FCMs until the time of settlement with
the DCO (typically the beginning of the
following business day for end of day
margin calls from the DCO), and also
provides an extended phase-in period,
during which FCMs have until 6:00 p.m.
Eastern Time on the date of such
settlement. After the phase-in period,
and absent further Commission action
following the Report, the final rule does
not provide FCMs until the end of the
following business day to ensure that
the requisite amount of residual interest
is held, as would be the case in the
Industry Commenters’ Alternative.
Therefore, the Commission expects that
the point in time approach adopted by
the Commission will reap much, but not
all, of the cost reduction discussed by
the industry commenters.692
During the phase-in period, FCMs
would be subject to Industry
Commenters’ Alternative (and, thus, all
of those cost savings would be realized).
The following analysis assumes that
the Commission does not take further
action to modify the Residual Interest
Deadline after considering the results of
the Report. It refers to estimates of
ongoing costs and benefits that only
would be incurred and realized after the
end of the phase-in period.
The Commission expects that the
post-phase-in form of § 1.22(c)—with a
point in time requirement
corresponding to the time of
settlement—will achieve some, but not
all of the cost reductions associated
with Industry Commenters’ Alternative.
Moreover, during the phase-in period,
the Commission anticipates that
customers and FCMs will improve their
abilities to submit and receive margin
payments prior to the FCM’s settlement
with the DCO, and the Commission will
be examining this issue further in the
Report. In light of these factors, the
Commission believes it is reasonable to
suppose that the settlement time
approach will significantly reduce—
perhaps by 25% to 50%—the amount of
additional residual interest that is
needed on highly volatile trading days,
and by a greater amount on ordinary
trading days.
In order to reasonably estimate the
potential range of the amount of
additional capital that is necessary on
highly volatile trading days, the
Commission uses ISDA’s formulation
for the aggregate gross deficit across all
692 FIA estimated that the Industry Commenters’
Alternative would reduce the amount of additional
residual interest that is necessary by 90–95% when
compared to the at all times approach. See id. at
3 (June 20, 2013). See also ISDA Comment Letter
at 1–2 (May 8, 2013).

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68595

customers. ISDA estimated that on high
volatility days, the aggregate amount of
all customers’ gross margin deficits for
all FCMs would be equal to 60% of
initial margin required by all customers’
positions. This estimate is based on an
assumption that all of an FCM’s
customers will be holding positions in
the same commodity (or that all
commodities in which customers hold
positions will move in unison) and that
either shorts or longs will
predominate.693 This approach is
conservative because it does not take
into account diversification effects. For
example, while some customers may
hold positions in energy products,
which may be volatile on a particular
day, others may predominately hold
positions in interest rates, which may
not be volatile on the same day.
Moreover, because of the point in time
approach adopted by the Commission,
FCMs will have time to react to such
changes.
The Commission’s cost estimates for
the amount of additional residual
interest that will be required reflect an
effort to make a reasonable assumption
regarding the potential range of
additional residual interest that could
be necessary on a volatile trading day.
The amount of additional residual
interest that could reasonably be
expected to be necessary on an ordinary
trading day would be much lower
because the aggregate of all customers’
gross undermargined amounts would be
significantly lower on such days.
However, commenters only estimated
the aggregate of customers’ gross
undermargined amounts on highly
volatile days. They did not estimate or
provide data regarding the aggregate of
customers’ gross undermargined
amounts on ordinary trading days. In
the absence of either data or estimates
from commenters regarding
undermargined amounts in customers’
accounts on ordinary trading days, the
Commission is not able to quantify the
amount of additional residual interest
needed by FCMs in ordinary trading
conditions, but believes that it is
significantly less than what is estimated
above for volatile trading days.
Commenters did not identify what
level of volatility they had in view when
offering estimates for additional residual
interest that would be necessary for a
‘‘volatile’’ trading day. For example,
commenters may have had in mind days
that were volatile relative to market
conditions over the last year or two, or
that are volatile relative to the range of
all possible outcomes. Context suggests
693 See ISDA Comment Letter at 4–5 (Feb. 15,
2013).

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the latter assumption, since commenters
asserted elsewhere that FCMs would
have to anticipate market movements in
order to maintain sufficient residual
interest at all times to cover the sum of
customers’ undermargined amounts
during a highly volatile trading day.694
Given this, the Commission notes that
highly volatile days are only a small
fraction of all total trading days, and
therefore, the costs associated with
additional residual interest required on
such highly volatile days would only
accrue on a correspondingly small
fraction of the total trading days in a
given year.
FCMs would, however, bear an
ongoing cost associated with
maintaining an open credit facility or
some other source of funds that is able
to provide rapid access to sufficient
liquidity to meet any additional residual
interest requirements when highly
volatile days do occur. The Commission
does not have adequate data to estimate
the cost of this credit facility. Since it
is not feasible to estimate the costs to
FCMs to cover the need for additional
residual interest between the times of
the daily settlement and the end-of-day
by obtaining intraday lines of credit
from lenders, the Commission has taken
a conservative approach, and has
assumed, for the sake of quantification,
that firms will raise capital sufficient to
meet their residual interest needs on
highly volatile trading days, and will
keep that amount of capital on all days,
holding it either in residual interest or
in liquid assets that are available to be
deposited into segregation.
The Commission is aware that the
top-10 largest FCMs (ranked by total
amount of customer funds in section
4d(a)(2) segregated accounts and 30.7
accounts as of November 30, 2012) are
contained in bank holding
companies.695 Most of these bank
holding companies have short-term
credit ratings of Moody’s P–1, Standard
& Poor’s A–1, and Fitch F1, while a few
have holding companies with P–2, A–2,
and F2 ratings. The FCM subsidiary
usually derives its credit standing from
the bank holding company, with the
rating of the FCM subsidiary being often
the same or sometimes one credit grade
694 See, e.g., LCH.Clearnet Comment Letter at 4–
5 (Jan. 25, 2013) (noting that ‘‘regardless of the
amount of capital an FCM dedicated to continuous
compliance, FCMs would still be at risk of a
violation’’). See also CMC Comment Letter at 2 (Feb.
15, 2013); CME Comment Letter at 5 (Feb. 15, 2013);
FIA Comment Letter at 4, 13, 15 (Feb. 15, 2013);
MFA Comment Letter at 8 (Feb. 15, 2013); NPPC
Comment Letter at 2 (Feb. 15, 2013); TD Ameritrade
Comment Letter at 4–5 (Feb. 15, 2013).
695 See http://www.cftc.gov/MarketReports/
FinancialDataforFCMs/HistoricalFCMReports/
index.htm.

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lower than the holding company. To
estimate the interest rate that a bank
holding company would charge its FCM
subsidiary for funding additional
residual interest, the Commission is
using as a proxy for the costs of these
funds the historical average of 30-day
AA-financial commercial paper
(consonant with the short-term credit
ratings of the bank holding companies)
minus the yield on the 4-week constant
maturity U.S. Treasury bill (to account
for the return that FCMs will earn on
investments permitted under Regulation
1.25) and is adding 0.10% for
underwriting and administrative
overhead costs to issue commercial
paper.696 This results in an average cost
of funds of 0.35% for the top-10 largest
FCMs from July 2001 to July 2013. For
the remaining FCMs, the Commission is
using as a proxy for the costs of funds
the difference between the prime rate
and the yield on the 4-week constant
maturity U.S. Treasury bill. This results
in an average cost of funds of 3.25%
from July 2001 to July 2013.697 The
Commission is using historical FCM
data from November 30, 2012, even
though there is more recent data
available, to be consistent with the data
ISDA used in the analysis in its
comment letter.698 As of November 30,
2012, there was approximately $147.1
billion in customer funds in section
4d(a)(2) segregated accounts (excluding
excess amounts contributed by
FCMs).699 The top-10 FCMs held
approximately $111.7 billion in section
4d(a)(2) segregated accounts,700 and the
remaining FCMs held approximately
$35.4 billion in section 4d(a)(2)
segregated accounts.701
ISDA estimated the potential future
FCM funding requirement for futures
arising from the residual interest
proposal by subtracting the existing
customer excess. ISDA estimated the
futures excess to be between $40–$70
billion and employed the midpoint of
this range, $55 billion in its
calculations. Using ISDA’s point
estimate for existing customer excess of
696 The Commission computes the average yields
from July 2001 to July 2013. The constant maturity
4-week Treasury yield time series with month
observations begins in July of 2001. See http://
www.federalreserve.gov/releases/H15/data.htm.
697 The Commission recognizes that there may be
some FCMs with weak credit ratings that would
have to pay even more than the prime interest rate
to secure additional residual interest. See id.
698 The Commission believes that the November
30, 2012 FCM data is typical. Moreover, this
permits comparison with other estimates in the
comment letter.
699 See http://www.cftc.gov/MarketReports/
FinancialDataforFCMs/HistoricalFCMReports/
index.htm.
700 See id.
701 Id.

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$55 billion, the Commission estimates
there was, at the top-10 FCMs, (55/
177.1) (i.e., 31%) times $111.7 billion or
approximately $34.7 billion in existing
customer excess in section 4d(a)(2)
segregated accounts. Similarly, for the
remaining FCMs, the Commission
estimates that there was approximately
$11 billion in customer excess in
section 4d(a)(2) segregated accounts.702
First, the Commission performs its
calculations for the residual interest
projected in the section 4d(a)(2)
segregated accounts based on ISDA’s
assumption that residual interest were
required ‘‘at all times.’’ For the top-10
FCMs, the Commission subtracts $34.7
billion from $111.7 billion giving
approximately $77 billion in required
margin. The Commission uses ISDA’s
suggestion for additional residual
interest needed by FCMs and takes 60%
of this figure, approximately $46.2
billion, as the estimate for total residual
interest needed. As of November 30,
2012, the top-10 FCMs held
approximately $6.5 billion in residual
interest.703 Using these figures, the top10 FCMs would need to fund
approximately $39.7 billion in
additional residual interest. At a cost of
funds of 0.35%, this would result in an
annual cost of $139 million for the top10 FCMs based on the historical costs of
funds.
For the remaining FCMs, the
Commission subtracts $11 billion
(excess margin) from $35.4 billion
(balance in 4d(a)(2) accounts) leaving
approximately $24.4 billion (required
margin in 4d(a)(2) accounts). Again,
using ISDA’s 60% formulation gives
$14.6 billion in total residual interest
needed under an at all times approach.
The remaining FCMs are holding
approximately $3.9 billion in residual
interest.704 Consequently, the remaining
FCMs would need to fund
approximately $10.7 billion ($14.6
billion–$3.9 billion) in additional
residual interest. At a cost of funds of
3.25%, this gives the historical annual
cost of approximately $348 million.
For all FCMs, the aggregate annual
cost is approximately $487 million (that
is, $139 million plus $348 million) to
fund the additional residual interest
needed by FCMs due to § 1.22 if
residual interest were required at all
times.
However, these figures change
significantly if residual interest is not
required until the daily settlement. As
702 That is, 31% of $35.4 billion and $2.3 billion,
respectively.
703 See http://www.cftc.gov/MarketReports/
FinancialDataforFCMs/HistoricalFCMReports/
index.htm.
704 See id.

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noted above, both FIA and ISDA
estimate that the residual interest
requirement would be reduced by 90%
or more if it were required to be present
at the end-of-day on the following
business day. As discussed above, the
Commission estimates that using the
point in time approach with morning
settlement (rather than end-of-day) will
reduce the need for additional residual
interest by 25–50%. The midpoint of
this range is 37.5%. A reduction of
37.5% (as a consequence of moving to
the point in time approach) leaves a
multiplier of 62.5%. Multiplying 62.5%
by ISDA’s estimate (for the at all times
approach) of 60% of required margin
results in a product of 37.5%.705 For the
top-10 FCMs, the Commission
multiplies the $77 billion in required
margin by 37.5% giving approximately
$28.9 billion in residual interest needed.
The top-10 FCMs are currently holding
approximately $6.5 billion in residual
interest. The top-10 FCMs would be
required to fund approximately $22.4
billion ($28.9 billion–$6.5 billion) in
additional residual interest. At a cost of
funds of 0.35%, this would result in an
annual cost of approximately $78
million for the top-10 FCMs.
For the remaining FCMs, the
Commission multiplies $24.4 billion
(required margin in 4d(a)(2) accounts)
by 37.5% giving approximately $9.2
billion. The remaining FCMs are
holding $3.9 billion in residual
interest.706 Consequently, the remaining
FCMs would be required to fund
approximately $5.3 billion ($9.2
billion¥$3.9 billion) in additional
residual interest. At a cost of funds of
3.25%, this would result in an annual
cost of approximately $171 million with
current economic conditions. This
result in a total annual cost of
approximately $249 million to fund the
additional residual interest needed by
FCMs due to § 1.22 using the
Commission’s assumption of 37.5% of
initial margin needed for residual
interest.
As explained above, the final rule
does not require FCMs to take this
approach. Instead, the Commission
believes that firms are likely to manage
margin calls to reduce the sum of
customers’ gross undermargined
amounts prior to the time of settlement.
They may also mitigate costs by using
revolving credit facilities or other
temporary sources of liquidity to meet,
705 The fact that the reduction of 37.5% (the
midpoint of 25% and 50%) multiplied by ISDA’s
estimate of 60% results in a product that is also
37.5% is coincidental.
706 See http://www.cftc.gov/MarketReports/
FinancialDataforFCMs/HistoricalFCMReports/
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in part, the need for additional residual
interest on volatile trading days. The
Commission received comments on the
proposed costs and benefits of § 1.22.
Several commenters supported the
proposal, noting that it would prevent
customer funds from being used to
subsidize an FCM’s obligations, reduce
systemic risk, and enhance customer
protection, especially in the event of an
FCM bankruptcy.707 In particular,
SIFMA stated that the proposal, ‘‘in
effect, shifts the costs and burdens of a
margin shortfall from customers with
excess margin to customers with
deficits, where it properly belongs.’’ 708
In addition, Vanguard argued that the
‘‘proposed changes correctly shift the
risk to customers in deficit and away
from any excess margin transferred by
other customers.’’ 709
On the other hand, a number of
commenters interpreted the ‘‘at all
times’’ language to require FCMs to
continuously calculate their customers’
aggregate margin deficits and stated that
they believe such a requirement is
infeasible.710 As a result of this
interpretation of the proposal, these
commenters argued that the proposal
would dramatically increase costs and
create liquidity issues for FCMs and
their customers.711 Many commenters
asserted that the proposal would
therefore result in FCMs requiring
707 See, e.g., CFA Comment Letter at 5–6 (Feb. 13,
2013); CIEBA Comment Letter at 2–3 (Feb. 20,
2013); ICI Comment Letter at 3 (Jan. 14, 2013);
Franklin Comment Letter at 2 (Feb. 15, 2013); Paul/
Weiss Comment Letter at 3 (Feb. 15, 2013); SIFMA
Comment Letter at 2 (Feb. 21, 2013); Vanguard
Comment Letter at 7–8 (Feb. 22, 2013).
708 SIFMA Comment Letter at 2 (Feb. 21, 2013).
709 Vanguard Comment Letter at 7 (Feb. 22, 2013).
710 See, e.g. Advantage Comment Letter at 6–8
(Feb. 15, 2013); CMC Comment Letter at 2 (Feb. 15,
2013); CME Comment Letter at 5 (Feb. 15, 2013);
FIA Comment Letter at 4, 7–8, 13 (Feb. 15, 2013);
LCH.Clearnet Comment Letter at 4–5 (Jan. 25, 2013);
MFA Comment Letter at 8 (Feb. 15, 2013); MGEX
Comment Letter at 2 (Feb. 18, 2013); Newedge
Comment Letter at 2 (Feb. 15, 2013); NPPC
Comment Letter at 2 (Feb. 15, 2013; RCG Comment
Letter at 3 (Feb. 12, 2013); TD Ameritrade Comment
Letter at 4–5 (Feb. 15, 2013).
711 See, e.g., Advantage Comment Letter at 8 (Feb.
15, 2013) (‘‘The avalanche of buying or selling that
this rule will induce contradicts decades of effort
by the industry to thwart market panics and provide
markets with liquidity and stability.’’); CMC
Comment Letter at 2 (Feb. 15, 2013) (stating that the
proposal ‘‘could create liquidity issues and increase
costs for FCMs and end users. Such a decrease in
liquidity could be substantial, and limit the number
and type of transactions FCMs clear, the number of
customers they service and the amount of financing
they provide.’’); CME Comment Letter at 5–6 (Feb.
15, 2013) (‘‘We believe that this will be a significant
and unnecessary drain on liquidity that will make
trading significantly more expensive for customers
to hedge financial or commercial risks. The
liquidity drain will be exacerbated to the extent that
the demand for excess margin will increase the
costs and limit the activities of market makers.’’).

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68597

customers to pre-fund their positions.712
FHLB cautioned that ‘‘[w]hile it cannot
be disputed that a residual interest
buffer should lower the risk that an
FCM will fall out of compliance with its
segregation requirements, there will
likely be a real economic cost associated
with maintaining whatever residual
interest buffers is established by an
FCM.’’ 713 FHLB further noted that the
‘‘funds maintained by an FCM as
residual interest can reasonably be
expected to earn less than the FCM’s
unrestricted funds,’’ thus, the proposal
‘‘represents a real cost to FCMs’’ that
will be passed on to customers.714 ISDA
stated that the proposal will make
customers ‘‘self-guaranteeing’’ and
diminish reliance on the FCM, and that,
while this would diminish overall risk
of FCM default, it comes at a very
significant cost to market participants,
market volumes, and liquidity.715 CHS
Hedging observed that ‘‘pre-funding
accounts concentrates additional funds
at FCMs, which seems to contradict the
spirit of the’’ customer protection
rules.716
As noted above, the Commission
recognizes that some FCMs may require
their customers, or some subset of their
customers, to increase the margin they
maintain in their accounts in order to
cover possible deficits that could
materialize during the period of time it
would typically take that customer to
respond to a margin call. This is
particularly the case if and when the
Residual Interest Deadline moves to the
time of the daily settlement. However,
the Commission expects that the
number of customers and the amount of
additional margin required from those
customers would be significantly less
than was asserted by some of the
commenters because of modifications
made to the final rule. As noted above,
the final version of the rule allows
FCMs to meet the gross sum of the
undermargined amounts several hours
after (and, during the phase-in period, at
the end of the next business day after)
712 See, e.g., FIA Comment Letter at 17 (Feb. 15,
2013); MFA Comment Letter at 8 (Feb. 15, 2013);
Newedge Comment Letter at 2 (Feb. 15, 2013).
713 FHLB Comment Letter at 3–4 (Feb. 15, 2013).
714 Id. at 4 n.5.
715 ISDA Comment Letter at 3 (Feb. 15, 2013)
(noting that ‘‘[e]ffectively doubling margins will
damage futures and swaps markets by destroying
the value proposition for many liquidity providers
essential to the market’s efficiency.’’). See also ISDA
Comment Letter at 2–3 (May 8, 2013) (stating that
the proposal would cause customers to pre-fund
margin, which ‘‘would remake the cleared swaps
and futures markets into one exclusively for ‘selfguaranteeing’ customers,’’ which ‘‘would be
damaging to markets by destroying the incentives
for continued participation by liquidity providers
essential to the markets’ efficiency.’’).
716 Id.

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the undermargined amount is
calculated, which is expected to
significantly mitigate the need for FCMs
to maintain a ‘‘preventative buffer’’ of
residual interest or additional customer
margin that is sufficient to cover
customers’ potential undermargined
amounts in a worst case scenario.
Moreover, in cases where customers
develop the ability to submit margin
payments prior to the Residual Interest
Deadline, there will not be any need for
additional customer margin on an
ongoing basis. It is therefore likely that
FCMs will require additional customer
margin on an ongoing basis in situations
only where (1) a particular customer is
not be able to routinely make margin
payments prior to the Residual Interest
Deadline, and (2) the sum of the
undermargined amounts in customers’
accounts that cannot be collected before
the Residual Interest Deadline is a
relatively large compared to the amount
of residual interest that the FCM
otherwise chooses to maintain.717
The Commission does not agree that
increased residual interest requirements
are contrary to the spirit of the customer
protection rules. The rules are intended
to provide additional protections to
funds held at FCMs, not to reduce the
amount of funds held at FCMs. The
likelihood of customer defaults leading
to an FCM default is reduced. So,
additional customer funds at FCMs are
better protected with the increased
residual interest requirements in place.
Several commenters argued that the
costs associated with the proposal
would decrease competition between
FCMs.718 In particular, FIA stated that
the proposal may force a number of
small to mid-sized FCMs out of the
market, which will decrease access to
the futures markets and increase costs
for IBs, hedgers and small traders.719 In
717 The Commission expects that this would
happen on normal trading days. On highly volatile
trading days, the Commission expects that
customers’ gross undermargined amounts would
likely be covered by residual interest acquired
through a line of credit or credit facility, as
discussed above, rather than through customer prefunding since the costs of the former are likely to
be considerably less than the costs of the latter.
However, the Commission does not, at this time,
have data regarding individual customers’ historical
gross undermargined amounts and therefore does
not have adequate information to estimate the
number of FCM and customer combinations where
additional customer margin would be required on
an ongoing basis.
718 See, e.g., CHS Hedging Comment Letter at 2
(Feb. 15, 2013); CME Comment Letter at 6 (Feb. 15,
2013); FIA Comment Letter at 17 (Feb. 15, 2013);
Frontier Futures Comment Letter at 3 (Feb. 15,
2013); Jefferies Comment Letter at 7 (Feb. 15, 2013);
JSA Comment Letter at 1–2 (Feb. 15, 2013); NCFC
Comment Letter at 2 (Feb. 15, 2013); NIBA
Comment Letter at 1 (Feb. 15, 2013).
719 See FIA Comment Letter at 17 (Feb. 15, 2013).

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addition, FIA argued that the proposal
would significantly impair the price
discovery and risk management
functions served by the market.720 JSA
argued that the proposal would be
‘‘punitive in a highly competitive
environment that already places the
midsize operator at a disadvantage to
his better capitalized multinational
competitors.’’ 721 Moreover, JSA stated
that the cost of the proposal would
result in a higher cost of hedging, which
would be prohibitive and prompt
agricultural users to walk away from the
futures market.722 The Congressional
Committees requested that the
Commission consider these effects in
drafting the final rule.723
Other commenters argued that the
proposal would disproportionately
burden smaller FCMs and the customers
of smaller FCMs.724 CME asserted that,
given this increase in cost, some
customers may transfer their accounts to
the larger, better-capitalized FCMs to
reduce the cost of trading,725 but that
agricultural customers ‘‘likely will not
be able to transfer to the larger FCMs
because they do not fit their customer
profile,’’ thereby making these
customers bear more of the cost
burden.726 Frontier Futures asserted that
many small customers, including most
farmers, do not watch markets
constantly. Therefore, it would be
difficult for them to meet margin calls
on a moment’s notice, thereby causing
FCMs to require significantly higher
margins or to liquidate customer
positions where margin calls cannot be
immediately met.727 Frontier Futures
also asserted that the proposal ‘‘may
force a number of small to mid-sized
FCMs out of the market,’’ making it
more expensive, if not impossible, for
IBs and small members to clear their
business, removing ‘‘significant capital
from the futures industry,’’ and
‘‘reducing stability to the markets as a
whole.’’728 RJ O’Brien stated that the
proposed residual interest requirement
720 See

id. at 4, 17.
Comment Letter at 1 (Feb. 15, 2013).
722 Id. at 2.
723 See Congressional Committees Letter at 1
(Sept. 25, 2013).
724 See, e.g., CME Comment Letter at 5–6 (Feb. 15,
2013); FCStone Comment Letter at 3 (Feb. 15, 2013);
Global Commodity Comment Letter at 1 (Feb. 13,
2013); Randy Fritsche Comment Letter at 1 (Feb. 15,
2013); JSA Comment Letter at 1 (Feb. 15, 2013);
NCBA Comment Letter at 2 (Feb. 15, 2013); NCFC
Comment Letter at 2 (Feb. 15, 2013); RJ O’Brien
Comment Letter at 3 (Feb. 15, 2013); ICA Comment
Letter at 1–2 (Feb. 15, 2013); TCFA Comment Letter
at 2 (Feb. 15, 2013).
725 CME Comment Letter at 6 (Feb. 15, 2013).
726 Id.
727 See Frontier Futures Comment Letter at 2–3
(Feb. 14, 2013).
728 Id.
721 JSA

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is impractical because many farmers
and agricultural clients still use checks
and ACH to meet margin calls.729 RJ
O’Brien also stated that if the proposal
is adopted, FCMs that service noninstitutional clients will struggle to
remain competitive and the proposal
may result in fewer clearing FCMs and
greater systemic risk to the
marketplace.730 Similarly, CME stated
that the proposed residual interest
requirement would lead to
consolidation among FCMs, which will
‘‘actually increase[ ] systemic risk by
concentrating risk among fewer market
participants.’’ 731
The Commission recognizes that
smaller FCMs may have more difficulty
than large FCMs in absorbing the
additional costs created by the
requirements in § 1.22. In general, it is
likely that smaller FCMs have a larger
percentage of customers who do not
have requisite personnel or systems to
receive margin calls and make margin
payments in a matter of hours, thus
creating a disproportionate need for prefunding or additional residual interest at
smaller FCMs. Smaller FCMs are also
likely to have higher borrowing costs
than larger FCMs, so the impact of
obtaining additional capital to meet
increased residual interest needs may be
more significant for them. If increased
costs force some smaller FCMs out of
the market, it is possible, though not
certain, that smaller customers could
have difficulty finding alternative FCMs
to service their needs. However, as
noted above, the Commission believes
that the changes made to § 1.22(c), and
the extended phase-in period, in the
final rule substantially reduce the costs
to FCMs and their customers when
compared to the proposed version of the
requirement. By reducing the costs,
these changes have also reduced some
of the associated burdens that would
potentially be disproportionately borne
by smaller FCMs. The Commission does
not agree that a reduced number of
FCMs would necessarily reduce
competition in a way that impacts the
price of services. Any increases in costs
to customers are more likely the result
of increased costs to the FCM that are
passed on to customers, which are the
costs that have been mitigated by
changes to the final rule. Moreover, the
Commission is cognizant of the cost of
an FCM failure where customers suffer
a loss of segregated funds, both in terms
729 RJ O’Brien Comment Letter at 3 (Feb. 15,
2013). See also ICA Comment Letter at 1–2 (Feb. 15,
2013).
730 RJ O’Brien Comment Letter at 3 (Feb. 15,
2013).
731 CME Comment Letter at 6 (Feb. 15, 2013)
(emphasis in original).

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
of costs to the customers who lose such
funds (or, if such funds are ultimately
recovered, the use of such funds) as well
as the industry-wide cost associated
with a loss in confidence in the safety
of customer funds. These costs support
the importance of increasing the safety
of the system. Moreover, the
Commission will closely review these
issues as part of considering the Report.
The Commission disagrees with the
comments that there would be a
consolidation of FCMs that would cause
the rule to have a net effect of increasing
systemic risk. Instead, the Commission
expects that the overall effect of the
final rule will be to significantly reduce
systemic risk. For example, as noted by
CIEBA,732 the residual interest
requirement will likely reduce systemic
risk by enabling FCMs to ensure that
they can meet all customer obligations
at any time without using another
customer’s funds to do so. Moreover,
larger, well-capitalized FCMs are more
likely to be able to absorb losses than
less well-capitalized FCMs. To the
extent that FCMs that are affiliated with
large financial institutions take on
additional business as a result of a
potential reduction in the number of
FCMs, the increase in risk to these
financial institutions is expected to be
small relative to their existing risk and
to not materially increase the systemic
risk associated with these financial
institutions. Finally, some of the costs
that commenters asserted could lead to
a reduction in the number of FCMs
under the proposed rule have been
mitigated by changes to the final rule.
Several commenters also observed
that the proposal would mark a
significant departure from current
market practice and could have a
material adverse impact on the liquidity
and smooth functioning of the futures
and swaps markets.733 The Commission
has chosen to provide an extended
phase-in period for the requirement in
§ 1.22(c) and therefore does not expect
that smooth functioning of the futures
and swap markets will be disrupted. If
customers withdraw from the futures
and swap markets as a consequence of
the additional costs, liquidity could be
negatively affected. However, the
Commission believes that by allowing
FCMs several hours (and, during the
phase-in period, until the end of the
next business day) after customer
accounts become undermargined to
ensure that the requisite amount of
732 See

CIEBA Comment Letter at 3 (Feb. 20,

2013).
733 See, e.g., MGEX Comment Letter at 2 (Feb. 18,
2013); AIMA Comment Letter at 3 (Feb. 15, 2013);
CMC Comment Letter at 2 (Feb. 15, 2013).

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residual interest is on deposit, the costs
associated with the requirement have
been mitigated, which reduces the
likelihood that customers will be
prompted to withdraw from the markets
due to related expenses.
The Commission also considered
several additional alternative proposals
raised by the commenters.
Newedge suggested that the
Commission consider less costly
alternatives to the proposed rule, such
as allowing the FCM ‘‘to count guaranty
fund deposits with [DCOs] as part of
their residual interest’’ or limiting the
residual interest amount that an FCM
must carry to only a limited number of
its largest customers.734 The
Commission believes, however, that the
latter proposal is not consistent with the
statutory requirement that ‘‘one
customer’s funds may not be used to
margin, guarantee, or pay another
customer’s obligations’’ and therefore
did not adopt this suggestion. Regarding
the former alternative, guarantee funds
held at the DCO are a critical part of the
waterfall that covers losses in the event
of an FCM’s default. One of the primary
purposes of the customer protection
regime is to protect customers from the
risk of losses in the event that their FCM
defaults. Using funds that may be used
to cover the FCM’s proprietary losses
(i.e., the guarantee fund) to guarantee
customers’ funds could expose customer
funds to the FCM’s losses in a double
default scenario. The Commission,
therefore, does not believe that this
alternative is consistent with the goals
of the customer protection regime.
Frontier Futures suggested that firm
firewalls be put in place between
customer funds and an FCM’s
proprietary funds in the form of
approval by an independent agency for
an FCM to transfer customer funds.735
Frontier Futures also recommended that
FCMs ‘‘do their proprietary trading
through another FCM thereby engaging
the risk management of a third
party.’’ 736 The Commission has chosen
not to require FCMs to seek external
approval before pulling excess residual
interest out of a customer segregated
account, or to conduct their proprietary
trading through another FCM. The
Commission expects that the
requirements in § 1.23 will accomplish
some of the same benefits—ensuring
that FCMs only withdraw significant
portions of excess residual interest
when they have adequate information to
734 Newedge Comment Letter at 3 (Feb. 15, 2013).
See also RJ O’Brien Comment Letter at 5 (Feb. 15,
2013).
735 See Frontier Futures Comment Letter at 3 (Feb.
14, 2013).
736 Id.

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ensure that it is truly excess and that
senior management is accountable for
such decisions—with greater efficiency
and less operational costs. Internal
verification of residual interest balances
and obtaining signatures from
individuals inside the organization is
likely to be considerably faster, and
therefore more efficient and less costly.
Regarding the second proposal, it is
not clear how the commenter expected
the third party FCM to augment the first
FCM’s risk management or what specific
type of risk would be addressed by such
an arrangement. A third party FCM
would be responsible for collecting
margin and for making payments to the
DCO for positions related to the first
FCM’s proprietary positions. But this
arrangement would not help protect
customers at the first FCM from ‘‘fellow
customer risk.’’
Finally, some commenters requested
that the Commission refrain from
adopting the proposal until it conducts
further analysis with the industry
regarding the costs and benefits of such
proposal.737 Further, the Congressional
Committees requested that the
Commission weigh the costs and
benefits of the final rule, and in
particular ‘‘carefully consider the
consequences of changing the manner or
frequency in which ‘residual interest’
. . . is calculated.’’ 738 The ‘‘point in
time’’ approach adopted by the
Commission in this final rule and the
extended phase-in period will
significantly reduce (as compared to the
proposed rule) the amount of additional
residual interest that FCMs need to
maintain in their segregated accounts on
an ongoing basis in order to comply
with § 1.22(c). As noted above, the final
rule will mitigate some, though not all
of the costs associated with pre-funding
obligations that commenters expressed
concern about, while simultaneously
ensuring that the statutory obligations
are met and that the corresponding
protection from ‘‘fellow customer risk’’
is achieved.
In light of these concerns and in
response to the commenters’ requests,
the Commission is directing staff to,
within thirty months of the publication
737 See, e.g., AIMA Comment Letter at 3 (Feb. 15,
2013); CCC Comment Letter at 2–3 (Feb. 15, 2013);
CHS Hedging Comment Letter at 2–3 (Feb. 15,
2013); CME Comment at 5–7 (Feb. 15, 2013); AFBF
Comment Letter at 2 (Feb. 15, 2013); Jefferies
Comment Letter at 9 (Feb. 15, 2013); JSA Comment
Letter at 1–2 (Feb. 15, 2013); NCBA Comment Letter
at 2 (Feb. 15, 2013); NGFA Comment Letter at 5
(Feb. 15, 2013); NIBA Comment Letter at 1–2 (Feb.
15, 2013); TCFA Comment Letter at 2 (Feb. 15,
2013); AFMP Group Comment Letter at 1–2 (Sept.
18, 2013).
738 Congressional Committees Comment Letter at
1 (Sept. 25, 2013).

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of this release, solicit further public
comment, hold a public roundtable, and
conduct further analysis regarding the
practicability of moving the Residual
Interest Deadline from 6:00 p.m. Eastern
Time on the date of settlement to the
time of settlement (or to some other time
of day). The Report should include an
analysis of whether and on what
schedule it would be feasible to move
the Residual Interest Deadline, and the
costs and benefits of such potential
requirements. All of this will take place
well before the expiration of the phasein period. The Commission will
consider the Report and within nine
months after the publication of the
Report may take additional action
regarding the phase-in period by
Commission order and may change the
Residual Interest Deadline by
rulemaking.
Section 1.23 Interest of Futures
Commission Merchants in Segregated
Funds; Additions and Withdrawals
Revised § 1.23 places new restrictions
regarding an FCM’s withdrawal of
residual interest funds not for the
benefit of customers. As adopted, an
FCM cannot withdraw any residual
interest funds not for the benefit of
customers unless it has prepared the
daily segregation calculation from the
previous day and has adjusted the
segregation calculation for any activity
or events that may have decreased
residual interest since the close of
business the previous day. In addition,
an FCM is permitted to withdraw more
than 25 percent of its residual interest
for purposes other than the benefit of
customers within one day only if it: (1)
Obtains a signature from the CEO, CFO
or other senior official as described in
§ 1.23(c)(1) confirming approval to make
such a withdrawal; and (2) sends
written notice to the Commission and
the firm’s DSRO indicating that the
requisite approvals from the CEO, CFO
or other senior official have been
obtained, providing reasons for the
withdrawal, listing the names and
amounts of funds provided to each
recipient, and providing an affirmation
from the signatory indicating that he or
she has knowledge and reasonable belief
that the FCM is still in compliance with
segregation requirements after the
withdrawal.
In addition, if the FCM drops below
its target threshold for residual interest
because of a withdrawal of residual
interest not for the benefit of customers,
the next day it must either replenish
residual interest sufficient to surpass its
target, or if senior leadership believes
that the original target is excessive, the
FCM may revise its target in accordance

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with its policies and procedures
established in § 1.11. The amendments
to § 1.23 were also made for Cleared
Swaps and foreign futures at § 22.17,
and § 30.7(g) respectively, and the costs
and benefits considerations of those
amendments are considered to be
substantively the same.
Costs and Benefits
Restrictions on withdrawals of
residual interest provide the benefit of
an additional layer of protection for
customer funds contained in segregated
accounts. An FCM may withdraw
residual interest as long as it always
maintains sufficient FCM funds in the
account to cover any shortfall that exists
in all of its customers’ segregated
accounts. However, as a practical
matter, the segregation requirements
fluctuate constantly with market
movements, and customer surpluses or
deficits also fluctuate depending on the
speed with which customers meet
margin calls. As a consequence, the
amount of residual interest an FCM has
in a segregated account similarly
fluctuates. A sufficient amount of
residual interest to cover deficiencies in
customers’ accounts at one point in time
may appear insufficient by the next
settlement cycle in extreme market
conditions. Therefore, it is important for
an FCM to maintain sufficient residual
interest to cover both current
deficiencies in customer accounts as
well as any additional deficiencies that
could develop over a relatively short
period of time. Restrictions on
withdrawals of residual interest help to
ensure that the FCM maintains a stable
base of residual interest and not
withdraw it for other liquidity needs
when doing so may result in
jeopardizing customer funds in the
segregated account if market conditions
change quickly.
Prohibiting any withdrawal of
residual interest until the customer
segregation account calculations are
complete for the previous day and
requiring the FCM take into account any
subsequent developments in the market
or the account that could impact the
amount of residual interest before
withdrawing funds protects customer
funds by reducing the likelihood that
lack of current information could cause
the FCM to make a withdrawal from
customer funds that is large enough to
cause the account to fall below its
segregated funds requirement.
The adopted amendments require
FCMs to take several steps in order to
remove more than 25 percent of their
residual interest in a single day. Large,
single-day withdrawals of the FCM’s
residual interest in the customer

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segregated account could be an
indication of current or impending
capital or liquidity strains at the FCM.
The additional steps ensure that senior
management is knowledgeable of and
accountable for such withdrawals, that
no shortfall in the customer segregated
accounts is created by the withdrawals,
and that the CFTC and DSRO are both
alerted to allow them to monitor the
FCM and its segregated accounts closely
over subsequent days and weeks.
Additional monitoring will help to
ensure that the integrity and sufficiency
of the FCM’s customer segregated
accounts are protected. In addition,
notifying the CFTC and DSRO gives
both an opportunity to ask questions
about the FCM’s reasonable reliance on
its estimations of the adequacy of its
funds necessary to meet segregation
requirements. Such questions may give
the Commission and DSRO comfort that
the transaction does not indicate any
strain on the FCM’s financial position,
or conversely, may raise additional
questions and alert the CFTC and DSRO
to the need for heightened monitoring of
the FCM or further investigation of its
activities. The amendment also adds
protection by ensuring that the
Commission has records regarding the
name and address of parties receiving
funds from any withdrawal of residual
interest in segregated funds not for the
benefit of customers. Also, requiring an
FCM to replenish its residual funds the
following day any time a withdrawal
causes it to drop below the FCM’s target
amount helps to ensure that residual
interest is not used by the firm to
address liquidity needs in other parts of
the firm unless those needs are very
short-term in nature (i.e., less than 24
hours). Finally, the amendments are
consistent with rules imposed on all
FCMs by the DSROs.
In the NPRM, the Commission
qualitatively analyzed that the
amendments to § 1.23 would create
costs for FCMs and quantitatively
estimated costs associated with
obtaining management approvals for
withdrawals exceeding 25 percent of the
prior day’s residual interest. The
restrictions on withdrawals were
anticipated to potentially prevent an
FCM from withdrawing funds quickly in
order to meet certain operational needs,
or to take advantage of specific
investment opportunities, and in
general could be expected to result in an
FCM needing to hold additional capital
outside of residual interest in order to
meet operational needs.
The Commission did not receive
comments on its quantitative estimates
of the costs of obtaining management
approvals. However, the Commission

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did receive comments on its qualitative
analysis of costs, and also received
comments that the use of the prior day’s
actual residual interest as the amount
applicable to the restriction would
provide a disincentive to FCMs holding
additional funds at DCOs as residual
interest, which commenters posited as
less beneficial to the protection of
customers. Several commenters,
including FIA and Jefferies suggested
the Commission utilize the targeted
residual amount as the threshold for
notifications and withdrawal
restrictions, in order to not discourage
FCMs from holding additional funds as
residual interest.739 FIA suggested that
the qualitative analysis of the costs was
not sufficient and that the amendments
would impose a tremendous operational
and financial burden on the industry,
requiring the development and
implementation of entirely new systems
to assure compliance and detrimentally
impacting liquidity.740 The Commission
believes however, that this comment is
not directed to the withdrawal
restrictions as adopted or the necessity
to replenish the targeted residual
interest amount, but instead directed at
requirements with respect to holding
residual interest sufficient to cover
customer under margined amounts,
which is addressed separately in the
cost benefit considerations for § 1.22.
Jefferies provided some quantitative
estimates of the costs of holding
increased residual interest, specifically
positing that even a five percent
increase in residual interest could cost
Jefferies $500,000.741 FIA posited that
FCMs currently may increase residual
interest day-to-day for expected events,
including during stressed market
conditions and for the purpose of
currency facilitation, and to impose
withdrawal restrictions based on the
actual, as opposed to targeted, excess
would reduce the actual likelihood of
FCMs infusing of additional proprietary
funds in those circumstances.742
The Commission understands that
establishing a target and holding
residual interest does have costs, but
disagrees with the underlying
assumptions of the cost estimates
provided by Jefferies. The cost estimates
provided by Jefferies imply the cost of
holding additional residual interest is
the same as the FCM’s cost of capital.
However, the cost considered for the
amendments should be the difference in
what can be earned by more
739 See FIA Comment Letter at 29 (Feb. 15, 2013);
Jefferies Comment Letter at 4 (Feb. 15, 2013).
740 FIA Comment Letter at 13 (Feb. 15, 2013).
741 Jefferies Comment Letter at 5 (Feb. 15, 2013).
742 FIA Comment Letter at 27–29 (Feb. 15, 2013).

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conservative investments permitted for
segregated funds versus otherwise if
held by FCMs as unrestricted capital,
unless the targeted residual amount
exceeds an FCM’s minimum net capital
requirement. The costs of holding some
amount of residual interest is an
existing cost of doing business as an
FCM because, practically speaking,
there is a need to hold some amount of
residual interest on a day to day basis
to remain in segregation compliance.
Significant minimum net capital
requirements exist for FCMs, currently.
Unless the targeted residual interest in
fact exceeds a firm’s minimum net
capital requirement, the requirement to
hold capital as residual interest in
customer segregated accounts is not a
separate additional capital requirement.
Therefore, Jefferies’ contention with
respect to the costs of the withdrawal
restrictions being represented by the
costs of additional required capital for a
firm is not persuasive. Such cost is only
an incremental cost of the newly
adopted requirements of establishing or
publicizing targets or imposing
withdrawal restrictions. Further, the
withdrawal restrictions adopted require
a one day delay, and management
approval and regulatory notifications.
These are not absolute restrictions to the
withdrawal of residual interest funds
and the costs considered and incentives
or disincentives created should not be
analyzed as if they were. Even the
replenishment requirement adopted,
with respect to withdrawals not for the
benefit of customers resulting in
residual interest dropping below the
target for residual interest, in order to
maintain the targeted residual amount,
provides an FCM with the flexibility to
reassess the target as an alternative.
However, all these processes must be
transparent to the Commission,
including the FCM’s management’s
accountability for such processes.
The Commission is not persuaded
that the reduced incentives to provide
added funds to residual interest would
be a reason to adopt an alternative of
using the targeted residual as opposed
to the actual prior day residual as the
measurement for the 25 percent
withdrawal restriction, which is a
requirement for notice and approval,
and therefore, not an absolute
restriction. The rationales for adding
funds specific to certain anticipated
events could just as easily provide a
clear basis for the management approval
and notification process required for the
subsequent withdrawal of funds after
those circumstances, as opposed to
making them unlikely to occur at all.
The benefits of clear management

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accountability and regulatory
transparency with respect to such
practices and related operational risks
(such as potentially more volatile cash
flows through segregated accounts not
for the benefit of customers) would still
be obtained.
Section 1.25 Investment of Customer
Funds
Regulation 1.25 sets forth the
financial investments that an FCM or
DCO may make with customer funds.
Among other things, § 1.25 permits
FCMs and DCOs to use customer funds
to purchase securities from a
counterparty under an agreement for the
resale of the securities back to the
counterparty. This type of transaction is
referred to as a reverse repurchase
agreement and in effect, is a
collateralized loan by the FCM to its
counterparty. Regulation 1.25(b)(3)(v)
establishes a counterparty concentration
limit, prohibiting FCMs and DCOs from
using more than 25 percent of the total
funds in the customer segregated
account to conduct reverse repos with a
single counterparty. The Commission’s
amendment expands the definition of a
counterparty to include additional
entities under common ownership or
control. Thus, as adopted, the 25percent counterparty concentration
limit for reverse repurchase agreements
applies not only to a single
counterparty, but to all counterparties
under common control or ownership.
The additional adopted changes to
§ 1.25 are conforming amendments
proposed in order to harmonize this
section with other amendments adopted
in this release.
Costs and Benefits
In the NPRM, the Commission
discussed how the expansion of the
concentration limitation to
counterparties under common control or
ownership is consistent with the
original intention of the concentration
limitation, which was to mitigate the
potential losses or disruptions due to
the default of a counterparty. The
Commission has elected to adopt the
amendment as a further protection to
customer funds, because a default by
one counterparty that is under common
control or ownership, may adversely
impact all of the counterparties to the
reverse repurchase agreement and hence
adversely impact the FCM and the funds
it holds for its customers. Because the
amendment incorporates the
Commission’s interpretation of the
existing rule, it does not alter the rule’s
meaning and, therefore, the amendment
does not create any incremental costs or
benefits. Likewise, the additional

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changes to § 1.25 are conforming
amendments proposed in order to
harmonize this section with other
amendments proposed in this release,
and, therefore, do not create any
incremental costs or benefits.
Because § 1.25 sets forth the financial
investments that an FCM or DCO may
make with customer funds, several
members of the public 743 expressed
their general opinions regarding the
investment and handling of customer
funds by FCMs and DCOs. In general, all
of the commenters supported the
position that FCMs and DCOs only be
allowed to make safe/non-speculative
investments of customer funds and not
be allowed to add risk that customers
are unaware of or do not sanction. In
addition, some of the commenters 744
743 Schippers Comment Letter (Dec. 10, 2013),
Randy Fritsche Comment Letter (Feb. 14, 2013),
NPPC Comment Letter at 2 (Feb. 14, 2013), Strelitz/
California Metal X Comment Letter (Jan. 15, 2013),
Premier Metal Services Comment Letter at 4 (Jan.
3, 2013), ISRI Comment Letter at 5–7 (Dec. 4, 2012),
AIM Comment Letter at 4 (Jan. 24, 2013), Kripke
Enterprises Comment Letter (Dec. 12, 2012),
Manitoba Comment Letter (Dec. 13, 2012), Solomon
Metals Corp. Comment Letter (Jan. 15, 2013),
Michael Krall Comment Letter (Dec. 17, 2012),
David Kennedy Comment Letter (Dec. 17, 2012),
Robert Smith Comment Letter (Dec. 17, 2012),
Michael Carmichael Comment Letter (Dec. 17,
2012), Andrew Jackson Comment Letter (Dec. 17,
2012), Donald Blais Comment Letter (Dec. 17,
2012), Suzanne Slade Comment Letter (Dec. 17,
2012), Patricia Horter Comment Letter (Dec. 17,
2012), JoDan Traders Comment Letter (Dec. 17,
2012), Jeff Schlink Comment Letter (Dec. 18, 2012),
Sam Jelovich Comment Letter (Dec. 18, 2012),
Matthew Bauman Comment Letter (Dec. 20, 2012),
Mark Phillips Comment Letter (Dec. 22, 2012),
Deborah Stone Comment Letter (Dec. 24, 2013), Po
Huang Comment Letter (Dec. 24, 2012), Aarynn
Krall Comment Letter (Jan. 8, 2013), Vael Asset
Management Comment Letter (Jan. 10, 2013), Kos
Capital Comment Letter (Jan. 11, 2013), James Lowe
Comment Letter (Jan. 13, 2013), Tracy Burns
Comment Letter (Jan. 14, 2013), Treasure Island
Coins Comment Letter (Jan. 14, 2013), and Clare
Colreavy Comment Letter (Jan. 9, 2013).
744 NPPC Comment Letter at 2 (Feb. 14, 2013),
Premier Metal Services Comment Letter at 4 (Jan.
3, 2013), ISRI Comment Letter at 5–7 (Dec. 4, 2012),
AIM Comment Letter at 4 (Jan. 24, 2013), Kripke
Enterprises Comment Letter (Dec. 12, 2012),
Manitoba Comment Letter (Dec. 13, 2012), Solomon
Metals Corp. Comment Letter (Jan. 15, 2013),
Michael Krall Comment Letter (Dec. 17, 2012),
David Kennedy Comment Letter (Dec. 17, 2012),
Robert Smith Comment Letter (Dec. 17, 2012),
Michael Carmichael Comment Letter (Dec. 17,
2012), Andrew Jackson Comment Letter (Dec. 17,
2012), Donald Blais Comment Letter (Dec. 17,
2012), Suzanne Slade Comment Letter (Dec. 17,
2012), Patricia Horter Comment Letter (Dec. 17,
2012), JoDan Traders Comment Letter (Dec. 17,
2012), Jeff Schlink Comment Letter (Dec. 18, 2012),
Sam Jelovich Comment Letter (Dec. 18, 2012),
Matthew Bauman Comment Letter (Dec. 20, 2012),
Mark Phillips Comment Letter (Dec. 22, 2012),
Deborah Stone Comment Letter (Dec. 24, 2013), Po
Huang Comment Letter (Dec. 24, 2012), Aarynn
Krall Comment Letter (Jan. 8, 2013), Vael Asset
Management Comment (Jan. 10, 2013), Kos Capital
Comment (Jan. 11, 2013), James Lowe Comment
Letter (Jan. 13, 2013), Tracy Burns Comment Letter
(Jan. 14, 2013), Treasure Island Coins Comment

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proposed that the Commission amend
its regulations to provide commodity
customers with the ability to ‘‘opt out’’
of granting FCMs the ability to invest
customer funds (including
hypothecation and rehypothecation);
seven 745 of which further requested that
the Commission mandate that an FCM
cannot prevent a customer who so ‘‘opts
out’’ from continuing to trade through
that FCM merely because the customer
elected to ‘‘opt out.’’ Additionally,
Vanguard requested that customers have
immediate access to the reports
indicating that FCMs have failed to
comply with various mandates
including compliance with § 1.25
margin investment limits; and that
customers have access on a twice
monthly basis to reports on an FCM’s
actual investment of customer assets to
determine whether such investments are
concentrated in more or less liquid
assets as allowed under § 1.25.746
Although the Commission understands
the concern of the public regarding the
safety and investment of customer
funds, because an ‘‘opt out’’ provision
was not proposed by the Commission,
and would in any case not be effective
due to pro-rata distribution in an FCM
bankruptcy, this alternative is not
adopted in this final rulemaking.
Section 1.26 Deposit of Instruments
Purchased with Customer Funds
Regulation 1.26 requires an FCM or
DCO that invests futures customer funds
in instruments described in § 1.25 to
obtain a written acknowledgment from
any depository holding such
instruments. The FCM or DCO must use
the Template Letters in the appendices
to § 1.20, in accordance with the
requirements established in § 1.20. The
specifics of those requirements, as well
as the costs and benefits of them, are
detailed in the discussion of costs and
benefits for § 1.20. If, however, an FCM
or DCO invests funds with a money
market mutual fund (MMMF), the FCM
or DCO must use the Template Letters
in the appendices of § 1.26 rather than
the acknowledgment letters in the
appendices of § 1.20.747 The content of
Letter (Jan. 14, 2013), and Clare Colreavy Comment
Letter (Jan. 9, 2013).
745 NPPC Comment Letter at 2 (Feb. 14, 2013);
Premier Metal Services Comment Letter at 4 (Jan.
3, 2013); ISRI Comment Letter at 6 (Dec. 4, 2012);
AIM Comment Letter at 6 (Jan. 24, 2013); Kripke
Enterprises Comment Letter (Dec. 10, 2012);
Manitoba Comment Letter (Dec. 13, 2012); and
Solomon Metals Corp. Comment Letter (Jan, 15,
2013).
746 Vanguard Comment Letter at 4–6 (Feb. 22,
2013).
747 Further, per § 1.25(c)(3), the FCM or DCO shall
obtain the § 1.26 Template Letter from ‘‘an entity
that has substantial control over the [MMMF] shares

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the Template Letters in the appendices
to § 1.26 is identical to those in the
appendices to § 1.20 except that they
include three additional provisions
related specifically to funds held by the
MMMF or its custodian. Specifically,
the Template Letters set out the
requirements established in § 1.25(c)
that: (1) the value of the fund must be
computed and made available to the
FCM or DCO by 9:00 a.m. on the
following business day; (2) the fund
must be legally obligated to redeem
shares and make payments to its
customers (i.e., the FCM or DCO) by the
following business day; and (3) the
MMMF does not have any agreements in
place that would prevent the FCM or
DCO from pledging or transferring fund
shares.
Benefits
The benefits are largely the same as
for the Template Letters required under
§ 1.20, described above in the cost-andbenefit section related to § 1.20.
However, there are benefits to requiring
FCMs and DCOs to obtain a different
Template Letter from MMMFs with
respect to customer funds invested in
MMMFs. Specifically, MMMFs or their
custodians (as applicable) are required
to acknowledge their additional
obligations under § 1.25(c).
Costs
The costs are largely the same as for
the Template Letters required under
§ 1.20. The general concerns raised by
commenters regarding the costs arising
from the Template Letters as well as the
Commission’s responses are detailed in
the discussion of costs for § 1.20.
Section 1.29 Gains and Losses
Resulting From Investment of Customer
Funds
Regulation 1.29 provides that an FCM
or DCO may keep as its own any interest
or other gain resulting from the
investment of customer funds in
financial instruments permitted under
§ 1.25; however, the FCM or DCO must
manage the permitted investments
consistent with the objectives of
preserving principal and maintaining
liquidity. The Commission’s
amendment also explicitly provides that
although an FCM or DCO is not required
to pass the earnings on the investment
of customer funds back to its futures
customers, the FCM or DCO is solely
responsible for any losses that result
from its investment of customer funds.
purchased with customer funds and has the
knowledge and authority to facilitate redemption
and payment or transfer of the customer funds.
Such entity may include the [MMMF] sponsor or
depository acting as custodian for [MMMF] shares.’’

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Costs and Benefits
In the NPRM, the Commission
discussed how the amendment clarifies
that the allocation of losses on the
investment of customer funds by an
FCM or DCO to its customers would
result in the use of customer funds in a
manner that is not consistent with
section 4d(a)(2) and § 1.20, as customer
funds can only be used for the benefit
of futures customers and limits
withdrawals from futures customer
accounts, other than for the purpose of
engaging in trading, to certain
commissions, brokerage, interest, taxes,
storage or other fees or charges lawfully
accruing in connection with futures
trading. This change was supported by
FIA, which stated its belief that the
FCM’s or DCO’s responsibility for losses
in § 1.25 investments ‘‘is clear and is
implicit in the Act and the
Commission’s rules.’’ 748 The
Commission believes that market
participants already recognize this
responsibility and obligation and direct
the investment of customer funds
accordingly. Therefore, the Commission
does not believe that the amendment to
§ 1.29(b) will create any additional
costs; however, the marketplace will
benefit in that the amendment provides
clarity as to the FCM’s or DCO’s sole
responsibility for any losses resulting
from the investment of customer funds
in the financial instruments listed under
§ 1.25. FIA filed a comment supporting
the proposed amendments to § 1.29.749
No other comments were received. The
Commission has adopted the
amendments to § 1.29 as proposed.
Section 1.30 Loans by Futures
Commission Merchants; Treatment of
Proceeds
The Commission adopted
amendments to § 1.30 to clarify that,
while an FCM may provide secured
loans to a customer with adequate
collateral, it may not make loans to a
customer on an unsecured basis or use
a customer’s futures or options positions
as security for a loan from the FCM to
that customer.

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Costs and Benefits
The amendments prohibiting FCMs
from providing unsecured loans to
customers and from using a customer’s
positions to secure loans made to such
customers reduce counterparty risk
borne by the FCM. The former
748 FIA, ‘‘Initial Recommendations for Customer
Funds Protection’’ available at http://
www.futuresindustry.org/downloads/Initial_
Recommendations_for_Customer_Funds_
Protection.pdf.
749 FIA Comment Letter at 30–31 (Feb. 15, 2013).

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prohibition prevents the FCM from
accumulating exposures to customers
that have not margined their positions,
while the latter prevents the additional
exposure that otherwise would result
from using the same collateral to secure
two different risks (i.e., the risks
associated with the open positions and
the risks associated with the secured
loan). Additionally, to the extent that
the amendments would force certain
customers to obtain loans from another
lender, it diversifies the counterparty
risk across multiple entities. The
amendments also are comparable to
rules of the CME for its member firms.
The Commission did not
quantitatively estimate the potential
increase to customers’ operational costs
due to the inability of customers who
need or desire to use borrowed funds to
meet initial and maintenance margin
requirements to obtain loans necessary
to fund their futures or options
positions from a third party lender. The
Commission requested, but did not
receive, comments regarding the
prevalence of FCMs’ extension of loans
to customers and the potential costs
customers might bear if it were
necessary to obtain loans from third
parties rather than from the FCMs with
whom their segregated customer
accounts are held. Neither were any
comments received generally suggesting
a qualitative burden in complying with
the amendments.
Section 1.32 Reporting of Segregated
Account Computation and Details
Regarding the Holding of Customer
Funds
The adopted amendments to § 1.32
allow an FCM that is not a dual
registrant to follow the same procedures
as dual registrants (FCM/BDs) when
assessing a haircut to securities
purchased with customer funds if the
FCM determines that those securities
have minimal credit risk. This is the
same change as adopted in § 1.17,
except that in § 1.17 the amendment is
with respect to the haircut for securities
purchased by an FCM with its own
capital, whereas this amendment
applies to the haircut ascribed to the
collateral value of securities deposited
by customers for the purpose of securing
customer net debits. The cost benefit
considerations are the same as those
analyzed with the corresponding
amendment to § 1.17.
In addition, the adopted amendments
(1) require FCMs to submit their daily
Segregation Schedules, Secured Amount
Schedules, and Cleared Swaps
Segregation Schedules to the
Commission and their DSROs
electronically by noon the following

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business day; (2) require that twice per
month, each FCM submits a detailed list
of all the depositories and custodians
where customers’ segregated funds are
held, including the amount of customer
funds held by each entity and a breakdown of the different categories of § 1.25
investments held by each entity, further
identifying if any of the depositories are
affiliated with the FCM; and (3) require
that the detailed list of depositories be
submitted to the Commission
electronically by 11:59 p.m. the
following business day and that both
segregation and secured amount
statements and the detailed listing of
depositories be retained by the FCM in
accordance with § 1.31.
Costs and Benefits
Requiring FCMs to submit their daily
segregation and secured amount
calculations to the Commission and
DSROs will enable the Commission and
DSROs to better protect customer funds
by more closely monitoring for any
discrepancies between the assets in
segregated accounts reported by the
FCM and their depositories as reported
to the DSRO and available to the
Commission through an aggregator of
depository balances. The ability of the
Commission and DSRO to check for
discrepancies more regularly, without
notice, is likely to provide an additional
deterrent to fraud. Moreover, it will
enable both the Commission and DSROs
to monitor for any trends that would
indicate that operational or financial
problems are developing at the FCM,
which would give the Commission an
opportunity to enhance its supervision
and to intervene, if necessary, to protect
customer segregated funds. In addition,
the amendments are consistent with the
rules of SROs that currently require
each FCM to submit daily segregation
and secured amount calculations to the
SROs.
The detailed list of depositories will
provide additional information to the
Commission and DSROs beyond what is
required under §§ 1.20, 1.26, and 30.7.
First, the detailed list of depositories
will provide additional account detail
including the types of securities and
investments that constitute each
account’s assets, rather than just the
total value. Second, the reports will
account for any pending transactions
that would not necessarily be apparent
from the daily balances submitted to an
aggregator by the depositories. Third,
FCMs will, in these reports, provide to
the Commission and DSROs a
reconciled balance, which will not be
included with balances provided to the
aggregator by depositories. Last, the
FCM will be required to specifically

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identify any depositories that are
affiliated with the FCM. Each of these
additional forms of information would
enable the Commission and DSROs to
provide better oversight and create
additional accountability for the FCM,
enhancing the protection of market
participants.
FCMs are already calculating
segregated funds information daily and
reporting the results to NFA via
WinJammer by noon the following day.
Similarly, the detailed list of
depositories that would be required to
be submitted twice per month is already
required by NFA to be produced and
submitted to NFA via WinJammer.750
Requiring FCMs to submit these reports
to the Commission via the same
platform is not expected to create any
additional costs.
FIA commented in support of the
amendments to § 1.32 and asked for
clarification that on a daily basis, a
single U.S. dollar equivalent, as
opposed to multiple currency by
currency schedules, is what is required
to be filed.751 Jefferies commented that
the amendments to § 1.32 will not
achieve the benefit of transparency to
customers because of the way cash and
investments are presented separately
from balances at other FCMs and
DCOs.752 However, this comment
appears related to the requirements of
disclosure to customers of NFA’s
publicly available information, not the
requirements of § 1.32, which require
similar information to be reported to the
Commission and DSROs. The
Commission believes the detailed
information required, along with all the
additional disclosures being provided to
customers in the amendments to all
rules contained herein, do provide
sufficient transparency for customers to
be able to assess the risks of depositing
funds with FCMs. The specific detailed
amounts of cash and securities held in
segregation must be provided, by
individual depository, including DCOs,
under the amendment to § 1.32. The
Commission does not believe that
customers will misinterpret the
liquidity of cash held at DCOs as
opposed to other types of depositories,
and that therefore the requirements do
not provide the transparency intended,
although the Commission understands
that Jefferies is concerned with the
appearance of percentage calculations
that are provided publicly on NFA’s
portal. The Commission notes, however,
750 See Segregated Investment Detail Report at
http://www.nfa.futures.org/NFA-compliance/NFAfutures-commission-merchants/fcm-reporting.pdf.
751 FIA Comment Letter at 30–31 (Feb. 15, 2013).
752 See Jefferies Comment Letter at 3 (Feb. 15,
2013).

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that the amendments to § 1.32 do not
require reporting of any percentage
calculations. There were no comments
received regarding the Commission’s
analysis that, due to the existing NFA
requirements, the Commission’s
amendments to § 1.32 were not expected
to result in incremental costs for FCMs.
With respect to the adopted changes
to allow FCMs to utilize lower haircuts
applicable to the market value of
customer securities, if such securities
are determined to have minimal credit
risk, in determining the allowance
provided for securing net deficits of
customers, the CFA specifically objected
to the ability of FCMs to obtain the
benefit of lower haircuts by utilizing the
process of establishing credit risk
proposed in the amendment to the
SEC’s rule 15c3–1.753 However, the
Commission has determined that the
ability of FCMs to utilize haircuts lower
than the standard deduction of 15%
otherwise applicable under SEC rule
15c3–1 should be equally available to
FCMs along with jointly registered BD/
FCMs under the Commission’s adopted
amendment to the net capital rule at
§ 1.17, to promote equity and fairness of
competition between FCMs and joint
BD/FCMs and to maintain uniformity
with the capital rule of the SEC for the
treatment of securities as much as
practicable. The Commission believes,
despite the CFA’s comments indicating
the haircut could be manipulated, that
the collateral value haircut for the same
security for the purpose of securing net
deficits should also be determined by
reference to the net capital haircut for
the same security, and notes both have
always been determined by the SEC’s
net capital haircuts for securities. The
Commission believes the benefits of
continuing to have such uniformity are
substantial. The alternative, which
necessarily would be applying a very
substantial standard haircut to a debt
security with minimal credit risk
collateralizing a short term obligation,
would be overly harsh and not
accurately reflect the market risk to such
collateral for the stated purpose of
valuing the extent to which the
customer debit is adequately secured.
The Commission further notes that the
SEC’s rule, which is the basis for these
amendments at §§ 1.17, 1.32 and 30.7,
and the formulation adopted in these
amendments, still provides a standard,
although lesser percentage, haircut, not
a model-based haircut, and also
provides for an audit trail of the BD/
FCM’s determinations supporting the
determination of minimal credit risk,
which should prevent the ability of
753 See

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FCMs to manipulate the haircut, as
suggested by CFA.
Section 1.52 Self-regulatory
Organization Adoption and Surveillance
of Minimum Financial Requirements
The amendments to 1.52 revise the
supervisory program that SROs are
required to create and adopt. In
addition, for SROs that choose to
delegate the function to examine FCMs
that are members of two or more SROs
to a DSRO, the amended rules require a
plan that establishes a Joint Audit
Committee which, in turn, must
propose, approve, and oversee the
implementation of a Joint Audit
Program. The amended rules specify a
number of additional requirements for
the SRO supervisory program as well as
for the Joint Audit Program.
Costs and Benefits
The amendments adopted to § 1.52
provide significant additional protection
to market participants and customer of
FCMs by helping to ensure that SRO
examinations of member FCMs are
thorough, effective and risk-based, and
include evaluation and testing of
internal controls as well as meeting, as
applicable, other objective criteria from
related professional audit standards.
Specifically, an SRO’s audit program
must be risk-based (e.g., the scope and
focus of such examinations would be
determined by the risk profile that the
SRO develops for each FCM) and
address ‘‘all areas of risk to which FCM
can reasonably be foreseen to be
subject,’’ and that the examination itself
includes both controls testing as well as
substantive testing. Requiring regulatory
examinations by SROs to include testing
and review of internal controls will help
ensure that each FCM is not only
compliant with capital and segregation
requirements at the time of the
examination, but that they continue to
operate in such a manner without
undetected internal controls
inadequacies that could jeopardize the
FCM and its customers.
By requiring that the supervisory
program for an SRO to adhere to
professional standards for auditing as
applicable, the Commission is provided
with additional assurance as to
standards for aspects of an examination
such as the adequacy of the evaluation
of evidence obtained supporting
examination conclusions; the training
and proficiency of the examinations
staff; due professional care in the
performance of the work; consideration
of fraud, audit risk and materiality in
conducting an audit; planning and
supervision; understanding the entity
and its environment and assessing the

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risk of material misstatement;
communication with those charged with
governance of the examined entity; and
communicating internal control matters
identified in an examination. These
benefits are obtained by requiring SRO
supervisory programs to include
consideration of specific issues and be
carried out in compliance with
professional standards as may be
applicable to non-financial audits. The
Commission believes more rigorous
requirements and the application of
professional standards in carrying out
such requirements will add additional
protection to an FCM’s counterparties
and customers.
The Commission also proposed to
require SROs and as applicable the JAC,
to obtain an evaluation of the SRO’s or
JAC’s supervisory program at least once
every two years from an examinations
expert, defined as a nationally
recognized accounting and auditing firm
with substantial expertise in audits of
FCMs, risk assessment and internal
control reviews, and that is an
accounting and auditing firm that is
acceptable to the Commission (as
delegated to the Director of the Division
of Swap Dealer and Intermediary
Oversight). The benefits of such
evaluation by examinations experts
were expected to be that the
Commission would ensure that the
supervisory program and SRO audits
continue to build on best practices,
which further promotes thorough and
effective audits of FCMs. The
Commission quantitatively estimated
costs for making incremental changes to
the requirements of the supervisory
program for each SRO and members of
the JAC in the NPRM. The Commission
did not quantitatively estimate the
ongoing costs of obtaining an evaluation
by an examinations expert or requiring
examinations to comply with
professional standards, although the
Commission did consider that requiring
such an evaluation and requiring
compliance with such standards and
coverage of additional risks would add
costs to examinations by SROs and
members of the JAC.
The Commission received many
comment letters regarding the changes
proposed to § 1.52. Several of the
commenters objected to the
requirements for having a review of the
examination program by an
examinations expert.754 Specifically,
PWC raised concern with the ability of
nationally recognized accounting and
auditing firms to be able to issue any
754 CME,

JAC, MGEX, NFA and PWC all
commented objecting to or raising concern with this
aspect of the amendment to § 1.52.

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type of assurance without a reporting
framework.755 NFA, MGEX, and CME
all commented that costs would be
prohibitive and that benefits would be
reduced because such an evaluation
would be duplicative to the functions of
the Commission in review of the Joint
Audit Program. NFA commented that it
attempted to obtain cost estimates from
a few nationally recognized firms but
that such firms represented that they
were unable to provide cost information
without a better understanding of the
type of review the Commission was
proposing.756 CME commented that the
quantitative estimates of the
Commission for revising the program
were grossly underestimated.757 CME
analogized that requiring adherence to
professional standards would result in
examination requirements similar to the
average man hours applicable to private
and public company audits, which were
represented at 1,951 and 17,457
respectively.758 CME represented that
the costs of compliance with
professional standards and expanding
the program were prohibitively
expensive and requested that only
applicable provisions should be carried
into JAC protocols.759 CME commented
that any benefit from obtaining an
evaluation from an examinations expert
could be obtained at a much reduced
cost by including representatives from
such nationally recognized firms in the
JAC meetings and in the current process
to develop JAC protocols, without
obtaining a formal assessment, which
such firms would more likely to be
willing to do.760 CME further posited
that if such alternative was not adopted,
the timeframe should be lengthened
from two to three and a half years.761
MGEX further commented that if such
report were to be required, highly
qualified regional firms should be
considered as well as nationally
recognized firms, as more competition
would likely result in more manageable
costs.762
In consideration of the concerns of
commenters, the Commission has
adopted revised amendments to the
examinations expert requirement to
§ 1.52, which extend the time between
evaluations required to three years, and
clarify that the standard for such
evaluation should be that of a
consulting services report. The
755 See

PWC letter at 3 (Jan. 15, 2013).
NFA Comment Letter at 5 (Feb. 15, 2013).
757 CME Comment Letter at 11 (Feb. 15, 2013).
758 Id.
759 Id.
760 Id.
761 See CME Comment Letter at 12–13 (Feb. 15,
2013).
762 See MGEX letter at 4 (Feb. 18, 2013).
756 See

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68605

Commission also has considered the
comments of CME and others with
respect to the costs and inapplicability
of many aspects of the PCAOB auditing
standards to regulatory examination and
has adopted, in the revised amendments
to the professional standards
requirements, that only such standards
as would be analogous to non-financial
statement audits would be applicable.
The JAC also filed an additional
comment letter positing that the
requirements of proposed § 1.52,
requiring review of risk management,
would be duplicative to risk reviews
required to be performed by DCOs.763
Although the Commission agrees there
may be overlapping responsibilities
between oversight performed by DCOs
and SROs which could result in
duplicated costs, the primary focus of
DCO requirements are the protection of
the DCO, not the protection of
customers and market participants. The
Commission notes that the same
duplication could exist if an FCM were
examined by each SRO of which it was
a member. The Commission already
permits the Joint Audit Committee, the
Joint Audit Plan and the DSRO structure
for the purpose of mitigating duplicative
examination work and costs. As stated
in the preamble, a DSRO may be able to
fulfill parts of its examination program
by incorporating aspects of risk reviews
and work already performed by a DCO,
but the DSRO would be responsible for
ensuring any such work was adequately
and specifically incorporated into the
DSRO program, and oriented to
ensuring the protection of customers
and risks to the FCM.
Additionally, the Commission notes it
was not feasible to quantify any costs
associated with utilizing an
examinations expert. This is largely
because several nationally recognized
accounting firms expressed their
reluctance to provide such
information.764 Such a response is not
surprising given the fact that reviewing
a DSRO’s examination program is likely
a unique and limited engagement for
any firm, which would require fully
understanding the scope and
requirements of the review. Yet, the
Commission notes there are several
capable firms which would meet the
definition of ‘‘examinations expert’’ and
could perform the type of review
required by the regulation. Thus, the
costs for performing such a service will
likely be competitive.
763 See JAC Comment Letter at 3–4 (July 25,
2013).
764 See NFA Comment Letter at 5, n.2 (Feb. 15,
2013).

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Section 1.55 Public Disclosures by
Futures Commission Merchants
Amended § 1.55 significantly revises
the disclosures that FCMs are required
to provide to prospective customers and
the public, detailed in § 1.55(b). The
new required provisions include a
statement that: (1) Customer funds are
not protected by insurance in the event
of the bankruptcy or insolvency of the
FCM, or if customer funds are
misappropriated; (2) customer funds are
not protected by SIPC, even if the FCM
is a BD registered with the SEC; (3)
customer funds are not insured by a
DCO in the event of the bankruptcy or
insolvency of the FCM holding the
customer funds; (4) each customer’s
funds are not held in an individual
segregated account by an FCM, but
rather are commingled in one or more
accounts; (5) FCMs may invest funds
deposited by customers in investments
listed in § 1.25; and (6) funds deposited
by customers may be deposited with
affiliated entities of the FCM, including
affiliated banks and brokers. The
required additional disclosures must be
provided as an addition to the generic
risk disclosure statement if used by an
FCM as permitted under Appendix A to
§ 1.55.
In addition, the amendments at
§ 1.55(i), (j) and (k) require each FCM to
provide a Firm Specific Disclosure
Document that would address firm
specific information regarding its
business, operations, risk profile, and
affiliates that would be material to a
customer’s decision to entrust funds to
and do business with the FCM.
The Firm Specific Disclosure
Document is required to be made
available electronically, which may be a
link to the FCM’s Web site, but must be
provided in paper form upon request,
and would provide material information
about: (1) General firm contact
information; (2) the names, business
contacts, and backgrounds for the FCM’s
senior management and members of the
FCM’s board of directors; (3) a
discussion of the significant types of
business activities and product lines
that the FCM engages in and the
approximate percentage of the FCM’s
assets and capital devoted to each line
of business; (4) the FCM’s business on
behalf of its customers, including types
of accounts, markets traded,
international businesses, and
clearinghouses and carrying brokers
used, and the FCM’s policies and
procedures concerning the choice of
bank depositories, custodians, and other
counterparties; (5) a discussion of the
material risks of entrusting funds to the
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risks may be material to its
customers 765; (6) the name and Web site
address of the FCM’s DSRO and the
location of annual audited financial
statements; (7) a discussion of any
material administrative, civil, criminal,
or enforcement actions pending or any
enforcement actions taken in the last
three years; (8) a basic overview of
customer fund segregation, FCM
collateral management and investments,
and of FCMs and joint FCM/BDs; (9)
information regarding how customers
may file complaints about the FCM with
the Commission or appropriate DSRO;
(10) certain financial data from the most
recent month-end when the disclosure
document is prepared; and (11) a
summary of the FCMs’ current risk
practices, controls and procedures.
FCMs are required to update the Firm
Specific Disclosure Document as and
when necessary to make the information
accurate and complete, but at least
annually.
The newly adopted § 1.55(l) also
requires FCMs to adopt policies and
procedures reasonably designed to
ensure that advertising and solicitation
activities of such FCMs and any
introducing brokers associated with the
FCMs are not misleading in connection
with their decision to entrust funds and
do business with such FCMs.
FCMs are further required by § 1.55(o)
to disclose on their Web sites their daily
Segregation Schedule, daily Secured
Amount Schedule, and daily Cleared
Swaps Segregation Schedule. Each FCM
must maintain 12 months of such
schedules on its Web site. Each FCM
must disclose on its Web site summary
schedules of its adjusted net capital, net
capital, and excess net capital for the 12
most recent month-end dates, as well as
the Statement of Financial Condition,
Segregation Schedule, Secured Amount
Schedule, Cleared Swaps Segregation
Schedule, and all footnotes related to
the above statements and schedules
from its most current year-end annual
report that is certified by an
independent public accountant.
Costs and Benefits
Current regulations require FCMs to
provide a risk disclosure to potential
765 The material risks addressed must include,
without limitation, ‘‘the nature of investments made
by the futures commission merchant (including
credit quality, weighted average maturity, and
weighted average coupon); the futures commission
merchant’s creditworthiness, leverage, capital,
liquidity, principal liabilities, balance sheet
leverage and other lines of business; risks to the
futures commission merchant created by its
affiliates and their activities, including investment
of customer funds in an affiliated entity; and any
significant liabilities, contingent or otherwise, and
material commitments.’’

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customers before accepting customer
funds, which existing risk disclosure
statement primarily provides a customer
with disclosure of the market risks of
engaging in futures trading. The revised
disclosure requirements of § 1.55
provide customers with additional
information regarding certain non-firmspecific risks that have been relevant in
recent FCM bankruptcies and that could
be relevant in the event of future FCM
bankruptcies or insolvencies.
The Firm Specific Disclosure
Document required by this amendments
address firm-specific risk, which will
give potential customers additional
information that they may use when
conducting due diligence and selecting
an FCM. By requiring that the disclosure
address several specific topics, the
public comparability of information on
such topics will be available, to
potential customers conducting due
diligence on potential FCMs. The nonfirm specific additional disclosures will
provide a significant benefit to the
protection of market participants as
many customers in the aftermath of
recent FCM bankruptcies revealed
fundamental misconceptions about the
protection of their funds. Specifically,
certain customers did not fully
understand how FCMs held customer
funds or the protections extended to
such funds. Consequently, certain
customers did not make informed
choices to help themselves or to provide
market discipline to their FCMs.
In the NPRM, the Commission
described how each additional specific
risk disclosure was expected to benefit
the protection of market participants by
providing more transparency and equal
access to information among all
customers and the public, enhancing
customer’s ability to make comparisons
in choosing the FCMs with which they
do business. The specific benefits of
each disclosure required by the
amendments were described in the
NPRM, but the essential benefits
derived from each additional required
disclosure, and the aggregate of all the
additional disclosures, are that they will
result in more educated consumers of
FCM services, and that such consumers
will, through the greater transparency
resulting from the additional
disclosures, be better able to enforce
market discipline on aspects of FCM
business that are directly relevant to the
risks customers accept in dealing with
and depositing funds with FCMs.
The Commission quantitatively
estimated expected costs of providing
the additional general and firm specific
disclosures in the NPRM and did not
receive any comments about its specific
estimates. However, the Commission

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did receive many comments that
supported the amendments to § 1.55
reiterating the benefits perceived from
transparency resulting from the
additional disclosures as are described
at section II.P. and noting that these
amendments were particularly cost
effective at providing such benefits.
FHLB stated ‘‘[p]erhaps the most
compelling argument for additional
public disclosure of certain information
addressed in the Proposed Customer
Protection Rules is that the benefits
should far exceed the additional cost
associated with mandating such public
disclosures.’’ 766 ACLI and the
Commercial Energy Working Group
both stated ‘‘the Proposed Customer
Protection Rules represent a very costeffective approach/means to making
FCMs more accountable to their
customers by providing current
information that will enable customers
to conduct appropriate due diligence
regarding prospective FCMs and to
actively monitor the financial condition
and regulatory compliance of the FCMs
to which they have entrusted funds.’’ 767
FIA specifically commented with
respect to the disclosures required
under § 1.55(k) that FCMs that are part
of public companies, or dually
registered BDs, or are part of a bank
holding company, already have
disclosure requirements and that the
Commission should confirm that such
an FCM may comply with this rule by
making the annual reports and
amendments thereto available on its
Web site, in order to avoid duplicative
or conflicting disclosure
requirements.768 FIA further
commented that the level of detail
required of privately owned FCM’s
disclosure should be consistent with
that provided in the annual reports of
publicly-traded companies.769 Newedge
commented that all FCMs should be
required to disclose similar information
in a standard format, and the proposal
of FIA to satisfy disclosure requirements
by linking to the annual report of a
public company places firms without
annual report preparation requirements
at a competitive disadvantage and
discriminates against smaller to midsize FCMs.770
In the preamble discussion at section
II.P., the Commission clarified both that
disclosures could be satisfied by linking
to appropriate existing relevant
disclosures that were already required
766 See

FHLB Comment Letter at 3 (Feb. 15, 2013).
ACLI Comment Letter at 2 (Feb. 15, 2013);
Commercial Energy Working Group Comment
Letter at 2 (Feb. 13, 2013).
768 See FIA Comment Letter at 43 (Feb. 15, 2013).
769 Id. at 44.
770 Newedge Comment Letter at 4 (Feb. 15, 2013).
767 See

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for the same matters, but that the
disclosures required by the amendments
are specific to the FCM and cannot be
satisfied with more general disclosure at
a holding company level. The
Commission believes this clarification
addresses the duplication concern
raised by commenters.
Several commenters posited concerns
regarding the benefit of various aspects
of the mandated disclosures. The
comments addressed the disclosures of
leverage, the targeted residual interest,
customer write-offs, and that such
disclosures could in certain
circumstances be potentially misleading
to customers.771 With respect to these
comments the Commission notes that
with all aspects of the mandated
additional disclosures, appropriate
explanations and additional information
to ensure sufficient context should be
provided if necessary to clarify anything
that an FCM may regard as otherwise
being misleading. Concerns raised by
commenters that customers may
inadequately assess risks particular to
their FCM by inappropriately focusing
on only one aspect of disclosure, such
as leverage, or targeted residual interest,
cannot be mitigated by declining
wholesale to make relevant information
publicly available. Furthermore, FCMs
are free to supply additional context and
information when they believe that any
Firm Specific Disclosure is misleading.
Certain commenters have requested
that the Commission consider the
alternative to further require all § 1.12
notices to be made publicly available,
which the Commission has declined to
do as is discussed in the costs and
benefits discussion of § 1.12. By
requiring FCMs to update the
disclosures annually, as well as any
time there is a ‘‘material change to its
business operation, financial condition
and other factors material to the
customer’s decision to entrust the
customer’s funds and otherwise do
business with the futures commission
merchant,’’ and requiring the FCM to
provide each updated disclosure to its
customers, § 1.55(i) makes FCMs
responsible to communicate with
customers whenever such events occur.
The Commission notes that there may
be overlap in circumstances which give
rise to notice obligations under § 1.12
and which require updated public
disclosure, although the two are distinct
771 See

FCStone Comment Letter at 4 (Feb. 15,
2013); Phillip Futures Inc. Comment Letter at 2
(Feb. 14, 2013); CHS Hedging Comment Letter at 2
(Feb. 15, 2013); RJ O’Brien Comment Letter at 6–
9 (Feb. 15, 2013); TD Ameritrade Comment Letter
at 4 (Feb. 15, 2013); Advantage Comment Letter at
4 (Feb. 15, 2013); RCG Comment Letter at 5–6 (Feb.
12, 2013).

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68607

and separate requirements. This
requirement helps to ensure that the
FCM’s financial condition, business
operations, or other important factors do
not change in material ways without
customers being able to ascertain such
changes, and would likely prompt some
customers to conduct additional due
diligence in such situations in order to
determine whether their funds are at
risk, which would provide additional
accountability for FCMs.
By requiring each FCM to adopt
policies and procedures reasonably
designed to ensure that its advertising
and solicitation activities are not
misleading to its FCM customers under
§ 1.55(l), the Commission is
strengthening accountability for
communication related to an FCM’s
sales and solicitation activities which
helps to ensure the purposes of the
other requirements for disclosure are
not frustrated.
By requiring FCMs to provide their
daily Segregation Schedules, daily
Secured Amount Schedules, and daily
Cleared Swaps Segregation Schedules,
as well as the same schedules from the
most recent certified annual report, the
requirements under § 1.55(o) facilitate
transparency. Requiring each FCM to
post the above schedules and data on its
Web site will help to ensure that market
participants are aware that it is
available, and will improve the speed
and efficiency of obtaining it. Similarly,
by requiring FCMs to provide a link to
the Web site of the NFA’s Basic System
facilitate transparency by promoting
awareness of the additional information
that is public regarding each FCM’s
investment of customer funds and by
reducing the search costs for obtaining
that information.
Section 22.2 Futures Commission
Merchants: Treatment of Cleared Swaps
and Associated Cleared Swap Customer
Collateral
The adopted amendments to § 22.2
incorporate changes with respect to
protection of funds for customers
trading cleared swaps that are identical
to the changes proposed for protection
of futures customer funds.772 Those
changes include: (1) Incorporating the
same change to haircutting procedures
as adopted in § 1.17 and § 1.32 but for
Cleared Swaps; (2) requiring the FCM to
772 As noted in section II.Q. above, the revisions
to §§ 22.2(a) and (f) merely clarify that the
calculation set forth therein is the Net Liquidating
Equity Method and thus, the revision is not
intended to, and should not be read to, change
current practice with respect to an FCM’s residual
interest requirements for Cleared Swaps as set forth
in Commission regulations and JAC Update 12–03,
and consistent with Staff Interpretation 12–31.

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send daily Segregation Calculations for
Cleared Swaps to the Commission and
DSROs; and (3) requiring that segregated
investment detail reports be produced
twice per month, listing assets on
deposit at each depository, and sent to
Commission and DSROs electronically
by 11:59 p.m. the following business
day. Records of both reports are
required to be maintained in accordance
with § 1.31.
Costs and Benefits
As discussed above, amendments to
§ 22.2(a) and (f) are not intended to
change existing practice and thus do not
introduce new costs. The other
amendments to § 22.2 noted above are
substantively similar to amendments to
corresponding part 1 regulations and the
relevant costs and benefits are similar to
the costs and benefits discussed in those
sections.
The amendments to § 22.2 have the
benefits of harmonizing the protection
of customer funds between Cleared
Swaps and futures and clarifying further
the regulatory requirements for Cleared
Swaps.
Section 22.17 Policies and Procedures
Governing Disbursements of Cleared
Swaps Customer Collateral From
Cleared Swap Customer Accounts
The newly adopted § 22.17 imposes
restrictions on an FCM’s withdrawal of
its residual interest, and requires that if
a withdrawal of residual interest not for
the benefit of customers causes the FCM
to fall below its targeted residual
interest, that the funds be replenished
the following business day or the
residual interest target be lowered in
accordance with its policies and
procedures established under § 1.11.

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Costs and Benefits
The costs and benefits are similar to
those created by §§ 1.23 and 1.11 but
apply to customer funds in Cleared
Swaps Customer Accounts rather than
customer segregated accounts, and
therefore are as described in §§ 1.23 and
1.11, but incremental thereto with
respect to Cleared Swaps Customer
Accounts.
Section 30.1 Definitions
Amendments adopted to § 30.1
establishes new definitions for ‘‘30.7
customer,’’ ‘‘30.7 account,’’ and ‘‘30.7
customer funds.’’ The first is defined as
any foreign futures or foreign option
customer, together with any foreigndomiciled person who trades in foreign
futures or foreign options trough an
FCM. ‘‘30.7 account’’ and ‘‘30.7
customer funds’’ are then defined
accordingly. These definitions relate to

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the existing terms ‘‘foreign futures or
foreign options customer,’’ ‘‘foreign
futures or foreign options customer
account,’’ and ‘‘foreign futures or
foreign options customer funds,’’
respectively. The term ‘‘foreign futures
or foreign options customer’’ only
includes U.S.-domiciled customers that
deposit funds with an FCM for use in
trading foreign futures or foreign
options. The new definitions, on the
other hand, include both U.S. and
foreign-domiciled customers that
deposit funds with an FCM for use in
trading foreign futures or foreign
options.
Costs and Benefits
These definitions play a ‘gatekeeping’
function with respect to other rules by
determining what customers are
included as ‘‘30.7 customers.’’ However,
the costs and benefits of these changes
are attributable to the substantive
requirements related to the definitions,
and therefore are discussed in the cost
benefit considerations related to § 30.7.
Section 30.7 Treatment of Foreign
Futures or Foreign Options Secured
Amount
The adopted amendments to § 30.7 (1)
Incorporate the funds of foreigndomiciled investors deposited with an
FCM for investment in foreign futures
and foreign options within the
protections provided in § 30.7; (2)
eliminate the Alternative Method and
require the Net Equity Liquidation
Method for calculating 30.7 customer
segregation requirements; (3) add
specificity to the written
acknowledgments that FCMs and DCOs
must obtain from their depositories by
providing required templates; 773 (4) add
restrictions on withdrawing from
residual interest not for the benefit of
customers; 774 (5) require that 30.7
customer funds deposited in a bank
must be available for immediate
withdrawal at the request of the FCM;
(6) clarify that the FCM is responsible
for any losses related to investing 30.7
customer funds in investments that
comply with § 1.25; (7) add a
prohibition against making unsecured
loans to customers or using the funds in
the customer’s trading account as
security for a loan; (8) require daily
segregation reports and a detailed list of
773 The additional specificity incorporates the
same requirements for acknowledgment and
agreement that are contained in the templates in the
appendices of §§ 1.20 and 1.26.
774 The same requirements as are adopted for
futures customers’ funds and Cleared Swaps
Customers’ Collateral, including a requirement for
the FCM to abide by its policies and procedures
required by new § 1.11.

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depositories to be submitted to the
Commission and DSRO, and that
targeted residual interest be included in
both of those reports; (9) allow FCMs
that are not dual registrants to use the
BD procedure for assigning a smaller net
capital haircut to investments of 30.7
customer funds in certain types of
instruments with low default risk; (10)
establish a limit on the amount of funds
in a 30.7 account that can be held
outside the U.S.; and (11) require FCMs
to, at a specified point in time, maintain
residual interest in 30.7 accounts that is
at least equal to the sum of all
undermargined amounts for 30.7
customers. With the exception of the
requirements with respect to limiting
funds held outside the U.S., the
permissibility of certain depositories
outside the U.S., and the requirement
that FCMs comply with the highest
equivalent custody requirement relevant
in a different country, these
requirements are substantially similar to
equivalent requirements adopted in
§§ 1.20, 1.22, 1.23, 1.29, 1.30, 1.32 and
22.2 and 22.17. As a result of the
adopted changes with the noted
exceptions, the rules in § 30.7 for the
protection of 30.7 customer funds are
substantially similar to the rules for the
protection of segregated customer funds
under 4d(a) and §§ 1.11–1.32, and the
rules for the protection of cleared swaps
customer funds under 4d(f) and in part
22. However, portions of § 30.7 are
notably different from rules protecting
futures customer funds and cleared
swap customer funds. These are: (1) the
definition of the minimum amount that
must be deposited in a 30.7 account for
each 30.7 customer is different than in
the corresponding requirements in
§§ 1.20 and 22.2, due to the possibility
of a higher requirement under a foreign
regulatory regime; (2) the list of
acceptable depositories for 30.7
customer funds includes banks or trusts
outside of the U.S. with more than $1
billion in regulatory capital, and various
other participants of foreign boards of
trade and their depositories; (3) § 30.7
limits the amount of funds from a 30.7
account that can be held outside the
U.S; and (4) the Residual Interest
Deadline for 30.7 funds is 6:00 p.m.
Eastern Time, whereas the Residual
Interest Deadline for futures customer
funds will, after the phase-in period and
absent further Commission action, move
back to the time of the daily settlement.
The third and fourth are the only
substantive differences in the custody
regime created by the adopted
amendments compared to the custody
regimes put in place in the
corresponding sections for domestic

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futures customer funds and cleared
swaps customer funds.
Costs and Benefits
In the NPRM, the Commission stated
it believed a significant benefit of the
amendments adopted to § 30.7 would be
the likelihood that in an FCM
insolvency, the full amount owed to
customers trading foreign futures and
foreign options, whether such customers
were foreign or domestic domiciled,
would be intact as required to be held
separately in 30.7 accounts. The
Commission did not receive comments
objecting to the changes to the
calculations or the required inclusion of
foreign-domiciled customers. The
adopted changes also established new
regulations for the protection of
customer funds deposited for trading in
foreign futures and options that, with
limited exceptions, are substantively
identical to the new protections adopted
for futures customer funds and cleared
swaps customer funds. Therefore, many
of the costs and benefits of the changes
that are proposed are identical to those
described above in the cost-benefit
considerations related to §§ 1.11–1.32
and part 22.
Various regulations designed to
ensure that the new calculation
requirement for the segregation of 30.7
funds is met at all times would also
apply, including the § 30.7(g)
restrictions on an FCM’s withdrawal of
its residual interest which is
commingled with 30.7 customer funds,
and policies and procedures developed
by the FCM pursuant to § 1.11 that are
designed to ensure safe handling of such
funds. Application of the additional
protections designed for customer funds
will further ensure the protection of
market participants and provide, as
much as possible, equivalent
protections between domestic and
foreign futures trading with respect to
the treatment of funds held by the
FCMs. The Commission did not
quantitatively estimate costs of the
amendments to § 30.7, but requested
comment as to any costs to FCMs,
including whether FCMs would need to
obtain additional capital or obtain
additional liquidity as a result of
formally foreclosing their abilities to
utilize the Alternative Method versus
the Net Liquidating Equity segregation
method in funding operations. The
Commission did not receive comments
addressing these questions, or
addressing its analysis that costs and
benefits would be incremental to the
costs and benefits analyzed with respect
to the same substantive provisions
applicable to both 4d(a) (futures) and
4d(f) (Cleared Swaps) segregated funds.

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Moreover, the Commission believes any
incremental costs associated with
complying with these changes to be
minimal, since much of the industry is
already held to these standards as a
result of previous rule changes made by
NFA to its rulebook.775
In the NPRM, the Commission
proposed in § 30.7(c) a limitation on the
amount of funds from a 30.7 account
that can be held outside the U.S. Funds
held overseas are subject to different
regulatory and bankruptcy regimes that
may not offer comparable protections
for customer funds, creating additional
repatriation risks to those funds. For
example, if an FCM carrying 30.7 funds,
some of which were held in depositories
outside the U.S., were to default, it is
possible that the Trustee would not be
able to promptly recover sufficient
funds to repay all the FCM’s obligations
to 30.7 customers. As noted above, this
is especially true if the funds are
deposited with a foreign affiliate of the
FCM, as the likelihood of coincident
bankruptcies of affiliated financial firms
has been observed to be exceedingly
high.776 In such an event, the funds held
at the foreign affiliate would be
distributed in accordance with the
insolvency rules of the foreign
jurisdiction. In such a case each 30.7
customer would likely receive a pro-rata
share of the funds that the Trustee is
able recover, when the Trustee is able to
recover them. The proposed limit on the
amount of funds that can be held
outside the U.S. was intended to assure
that as much of the customers’ funds as
possible remain subject to the U.S.
regulatory and bankruptcy regimes,
eliminating repatriation risk to those
funds. By eliminating this risk for a
larger percentage of the 30.7 funds, the
proposed rule promotes higher recovery
rates for 30.7 account funds if the FCM
defaults, which helps ensure that 30.7
customers receive the largest (and most
prompt) pro rata distribution possible.
The Commission received comments
from FIA, as well as others, that the
proposed percentage limitation of 10%
of required margin was not adequate in
light of account volatility and other
factors, and that the limitation should
only be applicable to funds deposited
with foreign brokers and that otherwise
FCMs should be permitted to hold funds
in a bank or trust company outside the
U.S. to the same extent that an FCM
may hold other customer segregated and
Cleared Swaps Customer collateral
775 See NFA Interpretive Notice 9066 (Revised,
July 1, 2013).
776 See, e.g., Lehman, MFGI.

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outside the U.S.777 Commenters
including Jefferies and Advantage stated
that the limitations may inhibit FCMs
from trading foreign futures and that
customers may need to utilize non-U.S.
brokers for their foreign futures business
as a result, because they would not be
able to accept customer securities
outside the U.S. and customers would
have to pre-fund with cash instead.778
In response to commenters and upon
consideration, the Commission is
increasing the limitation from 10% to
20%, but is declining to further expand
the permissibility of holding 30.7 funds
outside the U.S. due to the increased
repatriation risk applicable to excess
margin deposited outside the U.S. for
30.7 funds for foreign futures and
foreign options.
For 30.7 accounts, an FCM must
maintain residual interest that is at least
equal to undermargined amounts by
6:00 p.m. Eastern Time on the following
business day, which is substantively
similar to the Industry Commenters’
Alternative discussed above in the cost
and benefit considerations related to
§ 1.22. As noted there, FIA and ISDA
estimated that more than 90% of
customer’s margin deficits are collected
by FCMs by 6:00 p.m. Eastern Time on
the next trading day.
Thus, the Commission estimates the
additional requisite residual interest
needed for 30.7 accounts using the
analysis described above for futures
customer accounts. As of November 30,
2012, there was approximately $30
billion in 30.7 accounts (excluding,
here, and in the following amounts,
excess amounts contributed by
FCMs).779 At the top-10 FCMs, there
was approximately $27.7 billion in 30.7
accounts.780 For the remaining FCMs,
there was approximately $2.3 billion in
30.7 accounts.781 Using ISDA’s point
estimate for excess collateral deposited
by customers,782 the Commission
estimates that there was, at the top-10
FCMs, approximately $8.6 billion (31%
of $27.7 billion) of existing customer
excess in 30.7 accounts. Similarly, for
the remaining FCMs, the Commission
estimates that there was approximately
777 FIA Comment Letter at 36–37 (Feb. 15, 2013);
RJ O’Brien Comment Letter at 11 (Feb. 15, 2013).
778 Jefferies Comment Letter at 6 (Feb. 15, 2013);
Advantage Comment Letter at 9 (Feb. 15, 2013).
779 See http://www.cftc.gov/MarketReports/
FinancialDataforFCMs/HistoricalFCMReports/
index.htm.
780 See id.
781 See id.
782 As discussed in the analysis of § 1.22(c) above,
ISDA estimated the excess to be between $40 and
$70 billion and employed the midpoint of this
range, $55 billion in its calculations. $55 billion is
31% of the total 177.1 billion held in both section
4d(a)(2) and part 30 secured accounts.

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$0.7 billion (31% of $2.3 billion) of
customer excess corresponding to 30.7
accounts.
For the top-10 FCMs, the Commission
subtracts $8.6 billion (existing customer
excess for these accounts) from $27.7
billion (total funds held in these
accounts) leaving approximately $19.1
billion in required margin for 30.7
accounts for these FCMs. Multiplying
ISDA’s 60% required margin estimate
(which assumed that the residual
interest requirement applies at all times)
by 10% (i.e., 1–90%) gives 6% of the
required margin being needed in
residual interest, or $1.1 billion for
these FCMs. As of November 30, 2012,
the top-10 FCMs were holding
approximately $3.3 billion in residual
interest in 30.7 accounts.783 Thus, it
would appear that the top-10 FCMs are
already holding sufficient residual
interest for 30.7 accounts. For the
remaining FCMs, the Commission
subtracts $0.7 billion (existing customer
excess for these accounts) from $2.3
billion (total funds held in these
accounts) giving approximately $1.6
billion in required margin. Multiplying
$1.6 billion by 6% gives approximately
$96 million, but FCMs already maintain
over $1 billion in residual interest.
Consequently, it would appear that the
remaining FCMs also already maintain
enough residual interest for 30.7
accounts.

of customers’ segregated funds and
protect the financial condition of FCMs
generally.787 The Commission also has
previously determined that DCOs are
not small entities for the purpose of the
RFA.788 Accordingly, the Chairman, on
behalf of the Commission, certified
pursuant to 5 U.S.C. 605(b) that the
proposed regulations would not have a
significant economic impact on a
substantial number of small entities.
The Commission then invited public
comment on this determination. The
Commission received no comments.

B. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’) provides that a federal 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 issued by the Office of
Management and Budget (‘‘OMB’’).789
This final rulemaking contains several
collections of information that were
submitted to OMB in the form of
proposed amendments to existing
collection 3038–0024 and proposed
revisions thereto, as well as pre-existing
collections 3038–0052 and 3038–0091.
There have been no substantive changes
from the proposed rulemaking to this
final rulemaking that would require any
adjustment to the information collection
burdens as they were originally
proposed. As required by OMB
regulations, the Commission shall
V. Related Matters
submit to OMB this final rulemaking,
A. Regulatory Flexibility Act
together with ICRs that have been
The Regulatory Flexibility Act
updated to include the comment
(‘‘RFA’’) 784 requires Federal agencies, in summary contained herein.
The collections contained in this
promulgating regulations, to consider
the impact of those regulations on small rulemaking are mandatory collections.
In formulating burden estimates for the
entities. As stated in the NPRM, the
collections in this rulemaking, to avoid
Commission has previously established
certain definitions of ‘‘small entities’’ to double accounting of information
collections that already have been
be used by the Commission in
assigned control numbers by OMB, or
evaluating the impact of its rules on
are covered as burden hours in
small entities in accordance with the
collections of information pending
RFA.785 The proposed regulations
before OMB, the PRA analysis provided
would affect FCMs and DCOs.
in the proposed rulemaking, along with
The Commission previously has
the information collection request
determined that FCMs are not small
(‘‘ICR’’) with burden estimates that were
entities for purposes of the RFA, and,
incorporated into the rulemaking by
thus, the requirements of the RFA do
reference and submitted to OMB,
not apply to FCMs.786 The
Commission’s determination was based, accounted only burden estimates for
collections of information that have not
in part, upon the obligation of FCMs to
previously been submitted to OMB. The
meet the minimum financial
Commission sought comment on the
requirements established by the
collections of information contained in
Commission to enhance the protection
784 5

787 Id.

785 47

U.S.C. 601 et seq.
FR 18618 (Apr. 30, 1982).
786 Id. at 18619.

788 See

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66 FR 45605, 45609 (Aug. 29, 2001).
U.S.C. 3501 et seq.

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the proposed rulemaking only to the
extent that the collections in the
proposed rulemaking would increase
the burden hours contained with respect
to each of the related currently valid or
proposed collections.
The Commission received over 120
written submissions on the proposed
rulemaking. Many of these comments
discussed in general the need for,
effectiveness of, and practicality of
various proposed rules. However, none
of the commenters questioned the
burden estimates provided in the
proposed rulemaking or the ICR that
was submitted. To the extent that there
were comments on the need for,
effectiveness and practicality of various
proposed rules, they related to the
rulemaking as a whole rather than the
collections in particular. Accordingly,
those comments were addressed above,
in the sections of the preamble of this
final rulemaking that relate specifically
to the proposed rules at issue.
As required by the PRA, the
Commission submitted the proposed
amendments, in the form of information
collection requests related to collections
3038–0024, 3038–0052, and 3038–0091
on November 14, 2012, the same date
that the proposed rulemaking was
published in the Federal Register.790
The Commission did not receive public
comments on any of the proposed
collections from OMB on or before
January 13, 2013, within the 60 days
established for such comments in the
PRA after the notice of proposed
rulemaking and the submission of the
certified ICR to OMB.791 Accordingly,
the proposed amendments to collections
3038–0024, 3038–0052, and 3038–0091
are deemed to be approved by operation
of the PRA.792 The Commission
therefore, pursuant to OMB
regulations,793 requests the assignment
of OMB control numbers to the
proposed amendments to collections
3038–0024, 3038–0052, and 3038–0091,
which were submitted to OMB for
approval on November 14, 2012.
790 See 44 U.S.C. 3507(d)(1)(A), providing for an
agency to forward to the Director of OMB or his or
her designee a notice of proposed rulemaking with
a collection of information subject to notice and
comment pursuant to the provisions of 44 U.S.C.
3506(c)(2)(B), on or before the date that the
proposed rulemaking is published in the Federal
Register, together with the ICR in the form required
by OMB in 5 CFR 1320.8 and 1320.9.
791 See 44 U.S.C. 3507(d)(1)(B), cross-referencing
44 U.S.C. 3508. See also 5 CFR 1320.11(c).
792 See 44 U.S.C. 3507(3).
793 See 5 CFR 1320.11(i), implementing 44 U.S.C.
3507(d)(3).

E:\FR\FM\14NOR2.SGM

14NOR2

Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

68611

APPENDIX 1 TO SUPPLEMENTARY INFORMATION—TABLE OF COMMENT LETTERS
Abbreviation used
(if applicable)

Full name

Advantage ..........................
AFMP Group ......................

Advantage Futures LLC.
Agricultural Futures Market Participants: AMCOT, American Cotton Shippers Association, American Farm Bureau
Federation, American Feed Industry Association, American Soybean Association, CoBank, Commodity Markets
Council, National Association of Wheat Growers, National Barley Growers Association, National Cattlemen’s
Beef Association, National Corn Growers Association, National Cotton Council, National Council of Farmer Cooperatives, National Grain and Feed Association, National Pork Producers Council, National Sorghum Producers, National Sunflower Association, North American Millers Association, USA Rice Federation, US Canola
Association, US Dry Bean Council.
Alternative Investment Management Association.
Amarillo Brokerage Co.
American Council of Life Insurers.
American Farm Bureau Federation.
American Institute of Certified Public Accountants.
American Iron & Metal.
BlackRock, Inc.
BMO Harris Bank, Barclays Bank, The Bank of New York Mellon and Brown Brothers Harriman & Co.
Center for Audit Quality.
CFA Institute.
Chris Barnard.
CHS Hedging, Inc.
CME Group Inc.
CoBank.
Commercial Energy Working Group.

TKELleY on DSK3SPTVN1PROD with RULES2

AIMA ...................................
Amarillo ...............................
ACLI ....................................
AFBF ..................................
AICPA .................................
AIM .....................................
BlackRock ...........................
Depository Bank Group ......
Center for Audit Quality ......
CFA ....................................
Chris Barnard .....................
CHS Hedging .....................
CME ....................................
CoBank ...............................
Commercial Energy Working Group.
CIEBA .................................
CCC ....................................
Congressional Committees
Deloitte ...............................
Ernst & Young ....................
Eurex ..................................
FHLB ..................................
Federal Reserve Banks ......
FXCM .................................
Franklin ...............................
Frontier Futures ..................
FIA ......................................
Global Commodity ..............
ISRI .....................................
ISDA ...................................
FCStone .............................
ICI .......................................
ICA ......................................
Jefferies ..............................
JSA .....................................
JAC .....................................
Katten-FIA ..........................
KPMG .................................
Kripke Enterprises ..............
LCH.Clearnet ......................
MFA ....................................
Manitoba .............................
MGEX .................................
NCBA ..................................
NCFC ..................................
NFA ....................................
NGFA ..................................
NIBA ...................................
NPPC ..................................
NEFI/PMAA ........................
NYPC ..................................
Newedge ............................
Nodal ..................................
Paul/Weiss ..........................
Phillip Futures Inc. ..............
Pilot Flying J .......................
Premier Metal Services ......
Prudential ...........................
PWC ...................................
Randy Fritsche ...................
Rice Dairy LLC ...................

VerDate Mar<15>2010

Committee on Investment of Employee Benefit Assets.
Commodity Customer Coalition.
Congress of the United States: Frank D. Lucas, House Committee on Agricultural; Debbie Stabenow, Senate
Committee on Agriculture, Nutrition, and Forestry.
Deloitte & Touche.
Ernst & Young LLP.
Eurex Clearing AG.
Federal Home Loan Banks.
Federal Reserve Banks of New York and Chicago.
Forex Capital Markets LLC.
Franklin Templeton Investments.
Frontier Futures, Inc.
Futures Industry Association (Collectively—Barclays, State Street, Goldman Sachs, others).
Global Commodity Analytics & Consulting LLC.
Institute of Scrap Recycling Industries, Inc.
International Swap Dealers Association, Inc.
INTL FCStone, Inc.
Investment Company Institute.
Iowa Cattlemen’s Association.
Jefferies Bache, LLC.
John Stewart and Associates.
Joint Audit Committee.
Katten Muchin Rosenman LLP on behalf of the Futures Industry Association.
KPMG LLP.
Kripke Enterprises.
LCH.Clearnet Group Limited.
Managed Funds Association.
Manitoba Corporation.
Minneapolis Grain Exchange, Inc.
National Cattlemen’s Beef Association.
National Council of Farmer Cooperatives.
National Futures Association.
National Grain and Feed Association.
National Introducing Brokers Association.
National Pork Producers Council.
New England Fuel Institute Petroleum Marketers Association of America.
New York Portfolio Clearing, LLC.
Newedge USA, LLC.
Nodal Exchange, LLC.
Paul, Weiss, Rifkind, Wharton & Garrison LLP.
Phillip Futures Inc.
Pilot Travel Centers, LLC.
Premier Metal Services, LLC.
The Prudential Insurance Company of America.
PWC LLP.
Randy Fritsche.
Rice Dairy LLC.

19:24 Nov 13, 2013

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14NOR2

68612

Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
APPENDIX 1 TO SUPPLEMENTARY INFORMATION—TABLE OF COMMENT LETTERS—Continued

Abbreviation used
(if applicable)
RJ O’Brien ..........................
RCG ....................................
Schippers ............................
Schwartz & Ballen ..............
Security Benefit ..................
SIFMA .................................
Solomon Metals Corp. ........
State Street ........................
Steve Jones ........................
SUNY Buffalo .....................
TD Ameritrade ....................
TCFA ..................................
TIAA–CREF ........................
Strelitz/California Metal X ...
Vanguard ............................

Full name
R.J. O’Brien & Associates, LLC.
Rosenthal Collins Group.
Schippers Trading.
Schwartz & Ballen LLP.
Security Benefit Life Insurance Company.
SIFMA Asset Management Group.
Solomon Metals Corp.
State Street Corporation.
Steve Jones.
State University of New York at Buffalo Law School.
TD Ameritrade, Inc.
Texas Cattle Feeder Association.
TIAA–CREF.
Tim Strelitz/California Metal X.
Vanguard.

TKELleY on DSK3SPTVN1PROD with RULES2

BILLING CODE 6351–01–P

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

68613

ER14NO13.000

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68614

Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
9. ftecIIvabieellan lradel'soo U.S.
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8. Noncustomerand P!tIPlietary IltlClOUms
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work In progress and lInilihed goods
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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

68615

Nl'A·IONo:

CFTC fORM HR-I'CM

STATEMENT OF FINANCIAl. OOHDmON
ASOF-1-1_

21.

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68616

Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
NPA ID No:
CFlC FORM 1.FR..j::CM
STATEMENT OF SEGREGATION REQUIREMENTSANO FUI'IOS IN SEGREGATION
FOR CUStOMERS TRADING ON U.S. COMMODIlYEXCHANGES

AS OF:ot.IJoolrlOoc

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C. SeouriIInlIoId IDrporil...Ior..................................In lieu of ou/I (IIIm.lIia)

Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

68617

NFAIOHo:
CFTe FORM 1·FR-FCM.
STATEMeNT OF SECUReD AMOUNTS AND FUNOS HelD IN SEPARATE ACOOUNTS
PURSUANTTO COMMISSION REGULATION 30.7

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FOBSGNfUWflES8ID FOREIGN OpngNS SECURipAMoUNI§
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68618

Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
~IONo:

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CFTC FORM 1-FR-FCM
STATeMENT OF SECUAeOAMOUH'TS AND FUNDS HeLD lit SEPARATeAeCOUH'TS
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AS OF lOIbodloooI:.

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

BILLING CODE 6351–01–C

17 CFR Part 140

List of Subjects

Authority delegations (Government
agencies), Organization and functions
(Government agencies).
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission amends 17 CFR
parts 1, 3, 22, 30, and 140 as follows:

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

TKELleY on DSK3SPTVN1PROD with RULES2

17 CFR Part 3
Associated persons, Brokers,
Commodity futures, Customer
protection, Major swap participants,
Registration, Swap dealers.

PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT

17 CFR Part 22

■

Brokers, Clearing, Consumer
protection, Reporting and recordkeeping
requirements, Swaps.
17 CFR Part 30
Commodity futures, Consumer
protection, Currency, Reporting and
recordkeeping requirements.

VerDate Mar<15>2010

19:24 Nov 13, 2013

Jkt 232001

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

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p,
6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12,
12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and
24, as amended by Title VII of the DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat.
1376 (2010).

PO 00000

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Fmt 4701

2. Amend § 1.3 to revise paragraph (rr)
to read as follows:

■

Sfmt 4700

§ 1.3

Definitions.

*

*
*
*
*
(rr) Foreign futures or foreign options
secured amount. This term means all
money, securities and property received
by a futures commission merchant from,
for, or on behalf of 30.7 customers as
defined in § 30.1 of this chapter:
(1) To margin, guarantee, or secure
foreign futures contracts and all money
accruing to such 30.7 customers as the
result of such contracts;
(2) In connection with foreign options
transactions representing premiums
payable or premiums received, or to
guarantee or secure performance on
such transactions; and
(3) All money accruing to such 30.7
customers as the result of trading in

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14NOR2

ER14NO13.006

17 CFR Part 1

68619

68620

Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

foreign futures contracts or foreign
options.
*
*
*
*
*
■ 3. Amend § 1.10 to:
■ a. Revise paragraph (b)(1)(ii);
■ b. Add paragraph (b)(5); and
■ c. Revise paragraphs (c)(1), (c)(2)(i),
(d)(1)(v), (d)(2)(iv), (d)(2)(vi), and
(g)(2)(ii).
The revisions and addition read as
follows:
§ 1.10 Financial reports of futures
commission merchants and introducing
brokers.

TKELleY on DSK3SPTVN1PROD with RULES2

*

*
*
*
*
(b) * * *
(1) * * *
(ii) In addition to the monthly
financial reports required by paragraph
(b)(1)(i) of this section, each person
registered as a futures commission
merchant must file a Form 1–FR–FCM
as of the close of its fiscal year, which
must be certified by an independent
public accountant in accordance with
§ 1.16, and must be filed no later than
60 days after the close of the futures
commission merchant’s fiscal year:
Provided, however, that a registrant
which is registered with the Securities
and Exchange Commission as a
securities broker or dealer must file this
report not later than the time permitted
for filing an annual audit report under
§ 240.17a–5(d)(5) of this title.
*
*
*
*
*
(5) Each futures commission merchant
must file with the Commission the
measure of the future commission
merchant’s leverage as of the close of
the business each month. For purpose of
this section, the term ‘‘leverage’’ shall be
defined by a registered futures
association of which the futures
commission merchant is a member. The
futures commission merchant is
required to file the leverage information
with the Commission within 17
business days of the close of the futures
commission merchant’s month end.
(c) Where to file reports. (1) Form 1–
FR filed by an introducing broker
pursuant to paragraph (b)(2) of this
section need be filed only with, and will
be considered filed when received by,
the National Futures Association. Other
reports or information provided for in
this section will be considered filed
when received by the Regional office of
the Commission with jurisdiction over
the state in which the registrant’s
principal place of business is located (as
set forth in § 140.02 of this chapter) and
by the designated self-regulatory
organization, if any; and reports or other
information required to be filed by this
section by an applicant for registration

VerDate Mar<15>2010

19:24 Nov 13, 2013

Jkt 232001

will be considered filed when received
by the National Futures Association.
Any report or information filed with the
National Futures Association pursuant
to this paragraph shall be deemed for all
purposes to be filed with, and to be the
official record of, the Commission.
(2)(i) All filings or other notices
prepared by a futures commission
merchant pursuant to this section must
be submitted to the Commission in
electronic form using a form of user
authentication assigned in accordance
with procedures established by or
approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission, if the futures
commission merchant or a designated
self-regulatory organization has
provided the Commission with the
means necessary to read and to process
the information contained in such
report. A Form 1–FR required to be
certified by an independent public
accountant in accordance with § 1.16
which is filed by a futures commission
merchant must be filed electronically.
*
*
*
*
*
(d) * * *
(1) * * *
(v) For a futures commission
merchant only, the statements of
segregation requirements and funds in
segregation for customers trading on
U.S. commodity exchanges and for
customers’ dealer options accounts, the
statement of secured amounts and funds
held in separate accounts for 30.7
customers (as defined in § 30.1 of this
chapter) in accordance with § 30.7 of
this chapter, and the statement of
cleared swaps customer segregation
requirements and funds in cleared
swaps customer accounts under section
4d(f) of the Act as of the date for which
the report is made; and
*
*
*
*
*
(2) * * *
(iv) For a futures commission
merchant only, the statements of
segregation requirements and funds in
segregation for customers trading on
U.S. commodity exchanges and for
customers’ dealer options accounts, the
statement of secured amounts and funds
held in separate accounts for 30.7
customers (as defined in § 30.1 of this
chapter) in accordance with § 30.7 of the
chapter, and the statement of cleared
swaps customers segregation
requirements and funds in cleared
swaps customer accounts under section
4d(f) of the Act as of the date for which
the report is made;
*
*
*
*
*
(vi) A reconciliation, including
appropriate explanations, of the

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statement of the computation of the
minimum capital requirements pursuant
to § 1.17 and, for a futures commission
merchant only, the statements of
segregation requirements and funds in
segregation for customers trading on
U.S. commodity exchanges and for
customers’ dealer option accounts, the
statement of secured amounts and funds
held in separate accounts for 30.7
customers (as defined in § 30.1 of this
chapter) in accordance with § 30.7 of
this chapter, and the statement of
cleared swaps customer segregation
requirements and funds in cleared
swaps customer accounts under section
4d(f) of the Act, in the certified Form 1–
FR with the applicant’s or registrant’s
corresponding uncertified most recent
Form 1–FR filing when material
differences exist or, if no material
differences exist, a statement so
indicating; and
*
*
*
*
*
(g) * * *
(2) * * *
(ii) The following statements and
footnote disclosures thereof: the
Statement of Financial Condition in the
certified annual financial reports of
futures commission merchants and
introducing brokers; the Statements (to
be filed by a futures commission
merchant only) of Segregation
Requirements and Funds in Segregation
for customers trading on U.S.
commodity exchanges and for
customers’ dealer options accounts, the
Statement (to be filed by a futures
commission merchant only) of Secured
Amounts and Funds held in Separate
Accounts for 30.7 Customers (as defined
in § 30.1 of this chapter) in accordance
with § 30.7 of this chapter, and the
Statement (to be filed by futures
commission merchants only) of Cleared
Swaps Customer Segregation
Requirements and Funds in Cleared
Swaps Customer Accounts under
section 4d(f) of the Act.
*
*
*
*
*
■ 4. Add § 1.11 to read as follows:
§ 1.11 Risk Management Program for
futures commission merchants.

(a) Applicability. Nothing in this
section shall apply to a futures
commission merchant that does not
accept any money, securities, or
property (or extend credit in lieu
thereof) to margin, guarantee, or secure
any trades or contracts that result from
soliciting or accepting orders for the
purchase or sale of any commodity
interest.
(b) Definitions. For purposes of this
section:
(1) Business unit means any
department, division, group, or

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personnel of a futures commission
merchant or any of its affiliates, whether
or not identified as such that:
(i) Engages in soliciting or in
accepting orders for the purchase or sale
of any commodity interest and that, in
or in connection with such solicitation
or acceptance of orders, accepts any
money, securities, or property (or
extends credit in lieu thereof) to margin,
guarantee, or secure any trades or
contracts that result or may result
therefrom; or
(ii) Otherwise handles segregated
funds, including managing, investing,
and overseeing the custody of
segregated funds, or any documentation
in connection therewith, other than for
risk management purposes; and
(iii) Any personnel exercising direct
supervisory authority of the
performance of the activities described
in paragraph (b)(1)(i) or (ii) of this
section.
(2) Customer means a futures
customer as defined in § 1.3, Cleared
Swaps Customer as defined in § 22.1 of
this chapter, and 30.7 customer as
defined in § 30.1 of this chapter.
(3) Governing body means the
proprietor, if the futures commission
merchant is a sole proprietorship; a
general partner, if the futures
commission merchant is a partnership;
the board of directors if the futures
commission merchant is a corporation;
the chief executive officer, the chief
financial officer, the manager, the
managing member, or those members
vested with the management authority if
the futures commission merchant is a
limited liability company or limited
liability partnership.
(4) Segregated funds means money,
securities, or other property held by a
futures commission merchant in
separate accounts pursuant to § 1.20 for
futures customers, pursuant to § 22.2 of
this chapter for Cleared Swaps
Customers, and pursuant to § 30.7 of
this chapter for 30.7 customers.
(5) Senior management means, any
officer or officers specifically granted
the authority and responsibility to fulfill
the requirements of senior management
by the governing body.
(c) Risk Management Program. (1)
Each futures commission merchant shall
establish, maintain, and enforce a
system of risk management policies and
procedures designed to monitor and
manage the risks associated with the
activities of the futures commission
merchant as such. For purposes of this
section, such policies and procedures
shall be referred to collectively as a
‘‘Risk Management Program.’’
(2) Each futures commission merchant
shall maintain written policies and

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procedures that describe the Risk
Management Program of the futures
commission merchant.
(3) The Risk Management Program
and the written risk management
policies and procedures, and any
material changes thereto, shall be
approved in writing by the governing
body of the futures commission
merchant.
(4) Each futures commission merchant
shall furnish a copy of its written risk
management policies and procedures to
the Commission and its designated selfregulatory organization upon
application for registration and
thereafter upon request.
(d) Risk management unit. As part of
the Risk Management Program, each
futures commission merchant shall
establish and maintain a risk
management unit with sufficient
authority; qualified personnel; and
financial, operational, and other
resources to carry out the risk
management program established
pursuant to this section. The risk
management unit shall report directly to
senior management and shall be
independent from the business unit.
(e) Elements of the Risk Management
Program. The Risk Management
Program of each futures commission
merchant shall include, at a minimum,
the following elements:
(1) Identification of risks and risk
tolerance limits. (i) The Risk
Management Program shall take into
account market, credit, liquidity, foreign
currency, legal, operational, settlement,
segregation, technological, capital, and
any other applicable risks together with
a description of the risk tolerance limits
set by the futures commission merchant
and the underlying methodology in the
written policies and procedures. The
risk tolerance limits shall be reviewed
and approved quarterly by senior
management and annually by the
governing body. Exceptions to risk
tolerance limits shall be subject to
written policies and procedures.
(ii) The Risk Management Program
shall take into account risks posed by
affiliates, all lines of business of the
futures commission merchant, and all
other trading activity engaged in by the
futures commission merchant. The Risk
Management Program shall be
integrated into risk management at the
consolidated entity level.
(iii) The Risk Management Program
shall include policies and procedures
for detecting breaches of risk tolerance
limits set by the futures commission
merchant, and alerting supervisors
within the risk management unit and
senior management, as appropriate.

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68621

(2) Periodic Risk Exposure Reports. (i)
The risk management unit of each
futures commission merchant shall
provide to senior management and to its
governing body quarterly written reports
setting forth all applicable risk
exposures of the futures commission
merchant; any recommended or
completed changes to the Risk
Management Program; the
recommended time frame for
implementing recommended changes;
and the status of any incomplete
implementation of previously
recommended changes to the Risk
Management Program. For purposes of
this section, such reports shall be
referred to as ‘‘Risk Exposure Reports.’’
The Risk Exposure Reports also shall be
provided to the senior management and
the governing body immediately upon
detection of any material change in the
risk exposure of the futures commission
merchant.
(ii) Furnishing to the Commission.
Each futures commission merchant shall
furnish copies of its Risk Exposure
Reports to the Commission within five
(5) business days of providing such
reports to its senior management.
(3) Specific risk management
considerations. The Risk Management
Program of each futures commission
merchant shall include, but not be
limited to, policies and procedures
necessary to monitor and manage the
following risks:
(i) Segregation risk. The written
policies and procedures shall be
reasonably designed to ensure that
segregated funds are separately
accounted for and segregated or secured
as belonging to customers as required by
the Act and Commission regulations
and must, at a minimum, include or
address the following:
(A) A process for the evaluation of
depositories of segregated funds,
including, at a minimum, documented
criteria that any depository that will
hold segregated funds, including an
entity affiliated with the futures
commission merchant, must meet,
including criteria addressing the
depository’s capitalization,
creditworthiness, operational reliability,
and access to liquidity. The criteria
should further consider the extent to
which segregated funds are
concentrated with any depository or
group of depositories. The criteria also
should include the availability of
deposit insurance and the extent of the
regulation and supervision of the
depository;
(B) A program to monitor an approved
depository on an ongoing basis to assess
its continued satisfaction of the futures
commission merchant’s established

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criteria, including a thorough due
diligence review of each depository at
least annually;
(C) An account opening process for
depositories, including documented
authorization requirements, procedures
that ensure that segregated funds are not
deposited with a depository prior to the
futures commission merchant receiving
the acknowledgment letter required
from such depository pursuant to § 1.20,
and §§ 22.2 and 30.7 of this chapter, and
procedures that ensure that such
account is properly titled to reflect that
it is holding segregated funds pursuant
to the Act and Commission regulations;
(D) A process for establishing a
targeted amount of residual interest that
the futures commission merchant seeks
to maintain as its residual interest in the
segregated funds accounts and such
process must be designed to reasonably
ensure that the futures commission
merchant maintains the targeted
residual amounts and remains in
compliance with the segregated funds
requirements at all times. The policies
and procedures must require that senior
management, in establishing the total
amount of the targeted residual interest
in the segregated funds accounts,
perform appropriate due diligence and
consider various factors, as applicable,
relating to the nature of the futures
commission merchant’s business
including, but not limited to, the
composition of the futures commission
merchant’s customer base, the general
creditworthiness of the customer base,
the general trading activity of the
customers, the types of markets and
products traded by the customers, the
proprietary trading of the futures
commission merchant, the general
volatility and liquidity of the markets
and products traded by customers, the
futures commission merchant’s own
liquidity and capital needs, and the
historical trends in customer segregated
fund balances, including
undermargined amounts and net deficit
balances in customers’ accounts. The
analysis and calculation of the targeted
amount of the future commission
merchant’s residual interest must be
described in writing with the specificity
necessary to allow the Commission and
the futures commission merchant’s
designated self-regulatory organization
to duplicate the analysis and calculation
and test the assumptions made by the
futures commission merchant. The
adequacy of the targeted residual
interest and the process for establishing
the targeted residual interest must be
reassessed periodically by Senior
Management and revised as necessary;
(E) A process for the withdrawal of
cash, securities, or other property from

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accounts holding segregated funds,
where the withdrawal is not for the
purpose of payments to or on behalf of
the futures commission merchant’s
customers. Such policies and
procedures must satisfy the
requirements of § 1.23, § 22.17 of this
chapter, or § 30.7 of this chapter, as
applicable;
(F) A process for assessing the
appropriateness of specific investments
of segregated funds in permitted
investments in accordance with § 1.25.
Such policies and procedures must take
into consideration the market, credit,
counterparty, operational, and liquidity
risks associated with such investments,
and assess whether such investments
comply with the requirements in § 1.25
including that the futures commission
merchant manage the permitted
investments consistent with the
objectives of preserving principal and
maintaining liquidity;
(G) 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, including the separation of duties
among personnel that are responsible
for advising customers on trading
activities, approving or overseeing cash
receipts and disbursements (including
investment operations), and recording
and reporting financial transactions.
The policies and procedures must
require that any movement of funds to
affiliated companies and parties are
properly approved and documented;
(H) A process for the timely recording
of all transactions, including
transactions impacting customers’
accounts, in the firm’s books of record;
(I) A program for conducting annual
training of all finance, treasury,
operations, regulatory, compliance,
settlement, and other relevant officers
and employees regarding the segregation
requirements for segregated funds
required by the Act and regulations, the
requirements for notices under § 1.12,
procedures for reporting suspected
breaches of the policies and procedures
required by this section to the chief
compliance officer, without fear of
retaliation, and the consequences of
failing to comply with the segregation
requirements of the Act and regulations;
and
(J) Policies and procedures for
assessing the liquidity, marketability
and mark-to-market valuation of all
securities or other non-cash assets held
as segregated funds, including permitted
investments under § 1.25, to ensure that
all non-cash assets held in the customer
segregated accounts, both customer-

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owned securities and investments in
accordance with § 1.25, are readily
marketable and highly liquid. Such
policies and procedures must require
daily measurement of liquidity needs
with respect to customers; assessment of
procedures to liquidate all non-cash
collateral in a timely manner and
without significant effect on price; and
application of appropriate collateral
haircuts that accurately reflect market
and credit risk.
(ii) Operational risk. The Risk
Management Program shall include
automated financial risk management
controls reasonably designed to prevent
the placing of erroneous orders,
including those that exceed pre-set
capital, credit, or volume thresholds.
The Risk Management Program shall
ensure that the use of automated trading
programs is subject to policies and
procedures governing the use,
supervision, maintenance, testing, and
inspection of such programs.
(iii) Capital risk. The written policies
and procedures shall be reasonably
designed to ensure that the futures
commission merchant has sufficient
capital to be in compliance with the Act
and the regulations, and sufficient
capital and liquidity to meet the
reasonably foreseeable needs of the
futures commission merchant.
(4) Supervision of the Risk
Management Program. The Risk
Management Program shall include a
supervisory system that is reasonably
designed to ensure that the policies and
procedures required by this section are
diligently followed.
(f) Review and testing. (1) The Risk
Management Program of each futures
commission merchant shall be reviewed
and tested on at least an annual basis,
or upon any material change in the
business of the futures commission
merchant that is reasonably likely to
alter the risk profile of the futures
commission merchant.
(2) The annual reviews of the Risk
Management Program shall include an
analysis of adherence to, and the
effectiveness of, the risk management
policies and procedures, and any
recommendations for modifications to
the Risk Management Program. The
annual testing shall be performed by
qualified internal audit staff that are
independent of the business unit, or by
a qualified third party audit service
reporting to staff that are independent of
the business unit. The results of the
annual review of the Risk Management
Program shall be promptly reported to
and reviewed by the chief compliance
officer, senior management, and
governing body of the futures
commission merchant.

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(3) Each futures commission merchant
shall document all internal and external
reviews and testing of its Risk
Management Program and written risk
management policies and procedures
including the date of the review or test;
the results; any deficiencies identified;
the corrective action taken; and the date
that corrective action was taken. Such
documentation shall be provided to
Commission staff, upon request.
(g) Distribution of risk management
policies and procedures. The Risk
Management Program shall include
procedures for the timely distribution of
its written risk management policies
and procedures to relevant supervisory
personnel. Each futures commission
merchant shall maintain records of the
persons to whom the risk management
policies and procedures were
distributed and when they were
distributed.
(h) Recordkeeping. (1) Each futures
commission merchant shall maintain
copies of all written approvals required
by this section.
(2) All records or reports, including,
but not limited to, the written policies
and procedures and any changes thereto
that a futures commission merchant is
required to maintain pursuant to this
regulation shall be maintained in
accordance with § 1.31 and shall be
made available promptly upon request
to representatives of the Commission.
■ 5. Amend § 1.12 to:
■ a. Revise paragraphs (a)(1) and (a)(2);
(b)(1), (b)(2), and (b)(4); (c); (d); (e); (f)(2)
through (f)(4) and (f)(5)(i); (g); (h); and
(i); and
■ b. Add paragraphs (j), (k), (l), (m), and
(n).
The revisions and additions read as
follows:

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§ 1.12 Maintenance of minimum financial
requirements by futures commission
merchants and introducing brokers.

(a) * * *
(1) Give notice, as set forth in
paragraph (n) of this section, that the
applicant’s or registrant’s adjusted net
capital is less than required by § 1.17 or
by other capital rule, identifying the
applicable capital rule. The notice must
be given immediately after the applicant
or registrant knows or should have
known that its adjusted net capital is
less than required by any of the
aforesaid rules to which the applicant or
registrant is subject; and
(2) Provide together with such notice
documentation, in such form as
necessary, to adequately reflect the
applicant’s or registrant’s capital
condition as of any date on which such
person’s adjusted net capital is less than
the minimum required; Provided,

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however, that if the applicant or
registrant cannot calculate or otherwise
immediately determine its financial
condition, it must provide the notice
required by paragraph (a)(1) of this
section and include in such notice a
statement that the entity cannot
presently calculate its financial
condition. The applicant or registrant
must provide similar documentation of
its financial condition for other days as
the Commission may request.
(b) * * *
(1) 150 percent of the minimum dollar
amount required by § 1.17(a)(1)(i)(A);
(2) 110 percent of the amount
required by § 1.17(a)(1)(i)(B);
*
*
*
*
*
(4) For securities brokers or dealers,
the amount of net capital specified in
Rule 17a-11(c) of the Securities and
Exchange Commission (17 CFR 240.17a11(c)), must file notice to that effect, as
set forth in paragraph (n) of this section,
as soon as possible and no later than
twenty-four (24) hours of such event.
(c) If an applicant or registrant at any
time fails to make or keep current the
books and records required by these
regulations, such applicant or registrant
must, on the same day such event
occurs, provide notice of such fact as
specified in paragraph (n) of this
section, specifying the books and
records which have not been made or
which are not current, and as soon as
possible, but not later than forty-eight
(48) hours after giving such notice, file
a report as required by paragraph (n) of
this section stating what steps have been
and are being taken to correct the
situation.
(d) Whenever any applicant or
registrant discovers or is notified by an
independent public accountant,
pursuant to § 1.16(e)(2), of the existence
of any material inadequacy, as specified
in § 1.16(d)(2), such applicant or
registrant must give notice of such
material inadequacy, as provided in
paragraph (n) of this section, as soon as
possible but not later than twenty-four
(24) hours of discovering or being
notified of the material inadequacy. The
applicant or registrant must file, in the
manner provided for under paragraph
(n) of this section, a report stating what
steps have been and are being taken to
correct the material inadequacy within
forty-eight (48) hours of filing its notice
of the material inadequacy.
(e) Whenever any self-regulatory
organization learns that a member
registrant has failed to file a notice or
report as required by this section, that
self-regulatory organization must
immediately report this failure by
notice, as provided in paragraph (n) of
this section.

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68623

(f) * * *
(2) Whenever a registered futures
commission merchant determines that
any position it carries for another
registered futures commission merchant
or for a registered leverage transaction
merchant must be liquidated
immediately, transferred immediately or
that the trading of any account of such
futures commission merchant or
leverage transaction merchant shall be
only for purposes of liquidation,
because the other futures commission
merchant or the leverage transaction
merchant has failed to meet a call for
margin or to make other required
deposits, the carrying futures
commission merchant must
immediately give notice, as provided in
paragraph (n) of this section, of such a
determination.
(3) Whenever a registered futures
commission merchant determines that
an account which it is carrying is
undermargined by an amount which
exceeds the futures commission
merchant’s adjusted net capital
determined in accordance with § 1.17,
the futures commission merchant must
immediately provide notice, as provided
in paragraph (n) of this section, of such
a determination to the designated selfregulatory organization and the
Commission. This paragraph (f)(3) shall
apply to any account carried by the
futures commission merchant, whether
a customer, noncustomer, omnibus or
proprietary account. For purposes of
this paragraph, if any person has an
interest of 10 percent or more in
ownership or equity in, or guarantees,
more than one account, or has
guaranteed an account in addition to its
own account, all such accounts shall be
combined.
(4) A futures commission merchant
shall provide immediate notice, as
provided in paragraph (n) of this
section, whenever any commodity
interest account it carries is subject to a
margin call, or call for other deposits
required by the futures commission
merchant, that exceeds the futures
commission merchant’s excess adjusted
net capital, determined in accordance
with § 1.17, and such call has not been
answered by the close of business on the
day following the issuance of the call.
This applies to all accounts carried by
the futures commission merchant,
whether customer, noncustomer, or
omnibus, that are subject to margining,
including commodity futures, cleared
swaps, and options. In addition to
actual margin deposits by an account
owner, a futures commission merchant
may also take account of favorable
market moves in determining whether

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the margin call is required to be
reported under this paragraph.
(5)(i) A futures commission merchant
shall provide immediate notice, as
provided in paragraph (n) of this
section, whenever its excess adjusted
net capital is less than six percent of the
maintenance margin required by the
futures commission merchant on all
positions held in accounts of a
noncustomer other than a noncustomer
who is subject to the minimum financial
requirements of:
(A) A futures commission merchant,
or
(B) The Securities and Exchange
Commission for a securities broker or
dealer.
*
*
*
*
*
(g) A futures commission merchant
shall provide notice, as provided in
paragraph (n) of this section, of a
substantial reduction in capital as
compared to that last reported in a
financial report filed with the
Commission pursuant to § 1.10. This
notice shall be provided as follows:
(1) If any event or series of events,
including any withdrawal, advance,
loan or loss cause, on a net basis, a
reduction in net capital (or, if the
futures commission merchant is
qualified to use the filing option
available under § 1.10(h), tentative net
capital as defined in the rules of the
Securities and Exchange Commission)
of 20 percent or more, notice must be
provided as provided in paragraph (n) of
this section within two business days of
the event or series of events causing the
reduction stating the reason for the
reduction and steps the futures
commission merchant will be taking to
ensure an appropriate level of net
capital is maintained by the futures
commission merchant; and
(2) If equity capital of the futures
commission merchant or a subsidiary or
affiliate of the futures commission
merchant consolidated pursuant to
§ 1.17(f) (or 17 CFR 240.15c3–1e) would
be withdrawn by action of a stockholder
or a partner or a limited liability
company member or by redemption or
repurchase of shares of stock by any of
the consolidated entities or through the
payment of dividends or any similar
distribution, or an unsecured advance or
loan would be made to a stockholder,
partner, sole proprietor, limited liability
company member, employee or affiliate,
such that the withdrawal, advance or
loan would cause, on a net basis, a
reduction in excess adjusted net capital
(or, if the futures commission merchant
is qualified to use the filing option
available under § 1.10(h), excess net
capital as defined in the rules of the

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Securities and Exchange Commission)
of 30 percent or more, notice must be
provided as provided in paragraph (n) of
this section at least two business days
prior to the withdrawal, advance or loan
that would cause the reduction:
Provided, however, That the provisions
of paragraphs (g)(1) and (g)(2) of this
section do not apply to any futures or
securities transaction in the ordinary
course of business between a futures
commission merchant and any affiliate
where the futures commission merchant
makes payment to or on behalf of such
affiliate for such transaction and then
receives payment from such affiliate for
such transaction within two business
days from the date of the transaction.
(3) Upon receipt of such notice from
a futures commission merchant, or upon
a reasonable belief that a substantial
reduction in capital has occurred or will
occur, the Director of the Division of
Swap Dealer and Intermediary
Oversight or the Director’s designee may
require that the futures commission
merchant provide or cause a Material
Affiliated Person (as that term is defined
in § 1.14(a)(2)) to provide, within three
business days from the date of request
or such shorter period as the Division
Director or designee may specify, such
other information as the Division
Director or designee determines to be
necessary based upon market
conditions, reports provided by the
futures commission merchant, or other
available information.
(h) Whenever a person registered as a
futures commission merchant knows or
should know that the total amount of its
funds on deposit in segregated accounts
on behalf of customers trading on
designated contract markets, or the
amount of funds on deposit in
segregated accounts for customers
transacting in Cleared Swaps under part
22 of this chapter, or the total amount
set aside on behalf of customers trading
on non-United States markets under
part 30 of this chapter, is less than the
total amount of such funds required by
the Act and the regulations to be on
deposit in segregated or secured amount
accounts on behalf of such customers,
the registrant must report such
deficiency immediately by notice to the
registrant’s designated self-regulatory
organization and the Commission, as
provided in paragraph (n) of this
section.
(i) A futures commission merchant
must provide immediate notice, as set
forth in paragraph (n) of this section,
whenever it discovers or is informed
that it has invested funds held for
futures customers trading on designated
contract markets pursuant to § 1.20,
Cleared Swaps Customer Collateral, as

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defined in § 22.1 of this chapter, or 30.7
customer funds, as defined in § 30.1 of
this chapter, in instruments that are not
permitted investments under § 1.25, or
has otherwise violated the requirements
governing the investment of funds
belonging to customers under § 1.25.
(j) A futures commission merchant
must provide immediate notice, as
provided in paragraph (n) of this
section, whenever the futures
commission merchant does not hold a
sufficient amount of funds in segregated
accounts for futures customers under
§ 1.20, in segregated accounts for
Cleared Swaps Customers under part 22
of this chapter, or in secured amount
accounts for customers trading on
foreign markets under part 30 of this
chapter to meet the futures commission
merchant’s targeted residual interest in
the segregated or secured amount
accounts pursuant to its policies and
procedures required under § 1.11, or
whenever the futures commission
merchant’s amount of residual interest
is less than the sum of the
undermargined amounts in its customer
accounts as determined at the point in
time that the firm is required to
maintain the undermargined amounts
under § 1.22, and §§ 22.2 and 30.7 of
this chapter.
(k) A futures commission merchant
must provide immediate notice, as
provided in paragraph (n) of this
section, whenever the futures
commission merchant, or the futures
commission merchant’s parent or
material affiliate, experiences a material
adverse impact to its creditworthiness
or ability to fund its obligations,
including any change that could
adversely impact the firm’s liquidity
resources.
(l) A futures commission merchant
must provide prompt notice, but in no
event later than 24 hours, as provided
in paragraph (n) of this section,
whenever the futures commission
merchant experiences a material change
in its operations or risk profile,
including a change in the senior
management of the futures commission
merchant, the establishment or
termination of a line of business, or a
material adverse change in the futures
commission merchant’s clearing
arrangements.
(m) A futures commission merchant
must provide notice, if the futures
commission merchant has been notified
by the Securities and Exchange
Commission, a securities self-regulatory
organization, or a futures self-regulatory
organization, that it is the subject of a
formal investigation. A futures
commission merchant must provide a
copy of any examination report issued

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
to the futures commission merchant by
the Securities and Exchange
Commission or a securities selfregulatory organization. A futures
commission merchant must provide the
Commission with notice of any
correspondence received from the
Securities and Exchange Commission or
a securities self-regulatory organization
that raises issues with the adequacy of
the futures commission merchant’s
capital position, liquidity to meet its
obligations or otherwise operate its
business, or internal controls. The
notices and examination reports
required by this section must be filed in
a prompt manner, but in no event later
than 24 hours of the reportable event,
and must be filed in accordance with
paragraph (n) of the section; Provided,
however, that a futures commission
merchant is not required to file a notice
or copy of an examination report with
the Securities and Exchange
Commission, a securities self-regulatory
organization, or a futures self-regulatory
organization if such entity originally
provided the communication or report
to the futures commission merchant.
(n) Notice. (1) Every notice and report
required to be filed by this section by a
futures commission merchant or a selfregulatory organization must be filed
with the Commission, with the
designated self-regulatory organization,
if any, and with the Securities and
Exchange Commission, if such registrant
is a securities broker or dealer. Every
notice and report required to be filed by
this section by an applicant for
registration as a futures commission
merchant must be filed with the
National Futures Association (on behalf
of the Commission), with the designated
self-regulatory organization, if any, and
with the Securities and Exchange
Commission, if such applicant is a
securities broker or dealer. Every notice
or report that is required to be filed by
this section by a futures commission
merchant or a self-regulatory
organization must include a discussion
of how the reporting event originated
and what steps have been, or are being
taken, to address the reporting event.
(2) Every notice and report which an
introducing broker or applicant for
registration as an introducing broker is
required to file by paragraphs (a), (c),
and (d) of this section must be filed with
the National Futures Association (on
behalf of the Commission), with the
designated self-regulatory organization,
if any, and with every futures
commission merchant carrying or
intending to carry customer accounts for
the introducing broker or applicant for
registration as an introducing broker.
Any notice or report filed with the

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National Futures Association pursuant
to this paragraph shall be deemed for all
purposes to be filed with, and to be the
official record of, the Commission.
Every notice or report that is required to
be filed by this section by an
introducing broker or applicant for
registration as an introducing broker
must include a discussion of how the
reporting event originated and what
steps have been, or are being taken, to
address the reporting event.
(3) Every notice or report that is
required to be filed by a futures
commission merchant with the
Commission or with a designated selfregulatory organization under this
section must be in writing and must be
filed via electronic transmission using a
form of user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission; Provided, however,
that if the registered futures commission
merchant cannot file the notice or report
using the electronic transmission
approved by the Commission due to a
transmission or systems failure, the
futures commission merchant must
immediately contact the Commission’s
regional office with jurisdiction over the
futures commission merchant as
provided in § 140.02 of this chapter, and
by email to FCMNotice@CFTC.gov. Any
such electronic submission must clearly
indicate the futures commission
merchant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer.
■ 6. Amend § 1.15 to revise paragraph
(a)(4) to read as follows:
§ 1.15 Risk assessment reporting
requirements for futures commission
merchants.

(a) * * *
(4) The reports required to be filed
pursuant to paragraphs (a)(1) and (2) of
this section must be filed via electronic
transmission using a form of user
authentication assigned in accordance
with procedures established by or
approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer.
*
*
*
*
*

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68625

7. Amend § 1.16 to:
a. Revise paragraphs (a)(4), (b)(1),
(c)(1) and (c)(2), and (f)(1)(i)(C); and
■ b. Add paragraph (b)(4).
The revisions and addition read as
follows:
■
■

§ 1.16 Qualifications and reports of
accountants.

(a) * * *
(4) Customer. The term ‘‘customer’’
means customer, as defined in § 1.3, and
30.7 customer, as defined in § 30.1 of
this chapter.
(b) Qualifications of accountants. (1)
The Commission will recognize any
person as a certified public accountant
who is duly registered and in good
standing as such under the laws of the
place of his residence or principal
office; Provided, however, that a
certified public accountant engaged to
conduct an examination of a futures
commission merchant must be
registered with the Public Company
Accounting Oversight Board and must
have undergone an examination by the
Public Company Accounting Oversight
Board, and may not be subject to a
permanent or temporary bar to engage in
the examination of public issuers or
brokers or dealers registered with the
Securities and Exchange Commission as
a result of a Public Company
Accounting Oversight Board
disciplinary hearing.
*
*
*
*
*
(4) The governing body of each
futures commission merchant must
ensure that the certified public
accountant engaged is duly qualified to
perform an audit of the futures
commission merchant. Such an
evaluation of the qualifications of the
certified public accountant should
include, among other issues, the
certified public accountant’s experience
in auditing futures commission
merchants, the depth of the certified
public accountant’s staff, the certified
public accountant’s knowledge of the
Act and Regulations, the size and
geographic location of the futures
commission merchant, and the
independence of the certified public
accountant. The governing body should
also review and consider the inspection
reports issued by the Public Company
Accounting Oversight Board as part of
the assessment of the qualifications of
the public accountant to perform an
audit of the futures commission
merchant.
(c) * * *
(1) Technical requirements. The
accountant’s report must:
(i) Be dated;
(ii) Indicate the city and State where
issued; and

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(iii) Identify without detailed
enumeration the financial statements
covered by the report.
(2) Representations as to the audit.
The accountant’s report must state
whether the audit was made in
accordance with the auditing standards
adopted by the Public Company
Accounting Oversight Board, and must
designate any auditing procedures
deemed necessary by the accountant
under the circumstances of the
particular case which have been omitted
and the reasons for their omission.
However, nothing in this paragraph
shall be construed to imply authority for
the omission of any procedure which
independent accountants would
ordinarily employ in the course of an
audit made for the purposes of
expressing the opinion required by
paragraph (c)(3) of this section.
*
*
*
*
*
(f)(1) * * *
(i) * * *
(C) Any copy that under this
paragraph is required to be filed with
the Commission must be filed via
electronic transmission using a form of
user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer.
*
*
*
*
*
■ 8. Amend § 1.17 to revise paragraphs
(a)(4), (b)(2), (b)(7), (c)(5)(v), (c)(5)(viii),
and (c)(5)(ix) to read as follows:

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§ 1.17 Minimum financial requirements for
futures commission merchants and
introducing brokers.

(a) * * *
(4) A futures commission merchant
who is not in compliance with this
section, or is unable to demonstrate
such compliance as required by
paragraph (a)(3) of this section, or who
cannot certify to the Commission
immediately upon request and
demonstrate with verifiable evidence
that it has sufficient access to liquidity
to continue operating as a going
concern, must transfer all customer
accounts and immediately cease doing
business as a futures commission
merchant until such time as the firm is
able to demonstrate such compliance;
Provided, however, The registrant may
trade for liquidation purposes only

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unless otherwise directed by the
Commission and/or the designated selfregulatory organization; And, Provided
further, That if such registrant
immediately demonstrates to the
satisfaction of the Commission or the
designated self-regulatory organization
the ability to achieve compliance, the
Commission or the designated selfregulatory organization may in its
discretion allow such registrant up to a
maximum of 10 business days in which
to achieve compliance without having
to transfer accounts and cease doing
business as required above. Nothing in
this paragraph shall be construed as
preventing the Commission or the
designated self-regulatory organization
from taking action against a registrant
for non-compliance with any of the
provisions of this section.
*
*
*
*
*
(b) * * *
(2) Customer. This term means a
futures customer as defined in § 1.3, a
cleared over the counter customer as
defined in paragraph (b)(10) of this
section, and a 30.7 customer as defined
in § 30.1 of this chapter.
*
*
*
*
*
(7) Customer account. This term
means an account in which commodity
futures, options or cleared over the
counter derivative positions are carried
on the books of the applicant or
registrant which is an account that is
included in the definition of customer
as defined in § 1.17(b)(2).
*
*
*
*
*
(c) * * *
(5) * * *
(v) In the case of securities and
obligations used by the applicant or
registrant in computing net capital, and
in the case of a futures commission
merchant that invests funds deposited
by futures customers as defined in § 1.3,
Cleared Swaps Customers as defined in
§ 22.1 of this chapter, and 30.7
customers as defined in § 30.1 of this
chapter in securities as permitted
investments under § 1.25, the
deductions specified in Rule 240.15c3–
1(c)(2)(vi) or Rule 240.15c3–1(c)(2)(vii)
of the Securities and Exchange
Commission (17 CFR 240.15c3–
1(c)(2)(vi) and 17 CFR 240.15c3–
1(c)(2)(vii)) (‘‘securities haircuts’’).
Futures commission merchants that
establish and enforce written policies
and procedures to assess the credit risk
of commercial paper, convertible debt
instruments, or nonconvertible debt
instruments in accordance with Rule
240.15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)) may apply the
lower haircut percentages specified in

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Rule 240.15c3–1(c)(2)(vi) for such
commercial paper, convertible debt
instruments and nonconvertible debt
instruments. Futures commission
merchants must maintain their written
policies and procedures in accordance
with § 1.31;
*
*
*
*
*
(viii) In the case of a futures
commission merchant, for
undermargined customer commodity
futures accounts and commodity option
customer accounts the amount of funds
required in each such account to meet
maintenance margin requirements of the
applicable board of trade or if there are
no such maintenance margin
requirements, clearing organization
margin requirements applicable to such
positions, after application of calls for
margin or other required deposits which
are outstanding no more than one
business day. If there are no such
maintenance margin requirements or
clearing organization margin
requirements, then the amount of funds
required to provide margin equal to the
amount necessary, after application of
calls for margin or other required
deposits outstanding no more than one
business day, to restore original margin
when the original margin has been
depleted by 50 percent or more:
Provided, To the extent a deficit is
excluded from current assets in
accordance with paragraph (c)(2)(i) of
this section such amount shall not also
be deducted under this paragraph. In
the event that an owner of a customer
account has deposited an asset other
than cash to margin, guarantee or secure
his account, the value attributable to
such asset for purposes of this
subparagraph shall be the lesser of:
(A) The value attributable to the asset
pursuant to the margin rules of the
applicable board of trade, or
(B) The market value of the asset after
application of the percentage
deductions specified in paragraph (c)(5)
of this section;
(ix) In the case of a futures
commission merchant, for
undermargined commodity futures and
commodity option noncustomer and
omnibus accounts the amount of funds
required in each such account to meet
maintenance margin requirements of the
applicable board of trade or if there are
no such maintenance margin
requirements, clearing organization
margin requirements applicable to such
positions, after application of calls for
margin or other required deposits which
are outstanding no more than one
business day. If there are no such
maintenance margin requirements or
clearing organization margin

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requirements, then the amount of funds
required to provide margin equal to the
amount necessary after application of
calls for margin or other required
deposits outstanding no more than one
business day to restore original margin
when the original margin has been
depleted by 50 percent or more:
Provided, To the extent a deficit is
excluded from current assets in
accordance with paragraph (c)(2)(i) of
this section such amount shall not also
be deducted under this paragraph. In
the event that an owner of a
noncustomer or omnibus account has
deposited an asset other than cash to
margin, guarantee or secure his account
the value attributable to such asset for
purposes of this paragraph shall be the
lesser of the value attributable to such
asset pursuant to the margin rules of the
applicable board of trade, or the market
value of such asset after application of
the percentage deductions specified in
paragraph (c)(5) of this section;
*
*
*
*
*
■ 9. Revise § 1.20 to read as follows:

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

(a) General. A futures commission
merchant must separately account for
all futures customer funds and segregate
such funds as belonging to its futures
customers. A futures commission
merchant shall deposit futures customer
funds under an account name that
clearly identifies them as futures
customer funds and shows that such
funds are segregated as required by
sections 4d(a) and 4d(b) of the Act and
by this part. A futures commission
merchant must at all times maintain in
the separate account or accounts money,
securities and property in an amount at
least sufficient in the aggregate to cover
its total obligations to all futures
customers as computed under paragraph
(i) of this section. The futures
commission merchant must perform
appropriate due diligence as required by
§ 1.11 on any and all locations of futures
customer funds, as specified in
paragraph (b) of this section, to ensure
that the location in which the futures
commission merchant has deposited
such funds is a financially sound entity.
(b) Location of futures customer
funds. A futures commission merchant
may deposit futures customer funds,
subject to the risk management policies
and procedures of the futures
commission merchant required by
§ 1.11, with the following depositories:
(1) A bank or trust company;
(2) A derivatives clearing
organization; or
(3) Another futures commission
merchant.

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(c) Limitation on the holding of
futures customer funds outside of the
United States. A futures commission
merchant may hold futures customer
funds with a depository outside of the
United States only in accordance with
§ 1.49.
(d) Written acknowledgment from
depositories. (1) A futures commission
merchant must obtain a written
acknowledgment from each bank, trust
company, derivatives clearing
organization, or futures commission
merchant prior to or contemporaneously
with the opening of an account by the
futures commission merchant with such
depositories; provided, however, that a
written acknowledgment need not be
obtained from a derivatives clearing
organization that has adopted and
submitted to the Commission rules that
provide for the segregation of futures
customer funds in accordance with all
relevant provisions of the Act and the
rules and orders promulgated
thereunder.
(2) The written acknowledgment must
be in the form as set out in Appendix
A to this part.
(3)(i) A futures commission merchant
shall deposit futures customer funds
only with a depository that agrees to
provide the director of the Division of
Swap Dealer and Intermediary
Oversight, or any successor division, or
such director’s designees, with direct,
read-only electronic access to
transaction and account balance
information for futures customer
accounts.
(ii) The written acknowledgment must
contain the futures commission
merchant’s authorization to the
depository to provide direct, read-only
electronic access to futures customer
account transaction and account balance
information to the director of the
Division of Swap Dealer and
Intermediary Oversight, or any
successor division, or such director’s
designees, without further notice to or
consent from the futures commission
merchant.
(4) A futures commission merchant
shall deposit futures customer funds
only with a depository that agrees to
provide the Commission and the futures
commission merchant’s designated selfregulatory organization with a copy of
the executed written acknowledgment
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. The Commission
must receive the written
acknowledgment from the depository
via electronic means, in a format and
manner determined by the Commission.

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68627

The written acknowledgment must
contain the futures commission
merchant’s authorization to the
depository to provide the written
acknowledgment to the Commission
and to the futures commission
merchant’s designated self-regulatory
organization without further notice to or
consent from the futures commission
merchant.
(5) A futures commission merchant
shall deposit futures customer funds
only with a depository that agrees that
accounts containing customer funds
may be examined at any reasonable time
by the director of the Division of Swap
Dealer and Intermediary Oversight or
the director of the Division of Clearing
and Risk, or any successor divisions, or
such directors’ designees, or an
appropriate officer, agent or employee of
the futures commission merchant’s
designated self-regulatory organization.
The written acknowledgment must
contain the futures commission
merchant’s authorization to the
depository to permit any such
examination to take place without
further notice to or consent from the
futures commission merchant.
(6) A futures commission merchant
shall deposit futures customer funds
only with a depository that agrees to
reply promptly and directly to any
request from the director of the Division
of Swap Dealer and Intermediary
Oversight or the director of the Division
of Clearing and Risk, or any successor
divisions, or such directors’ designees,
or an appropriate officer, agent or
employee of the futures commission
merchant’s designated self-regulatory
organization for confirmation of account
balances or provision of any other
information regarding or related to an
account. The written acknowledgment
must contain the futures commission
merchant’s authorization to the
depository to reply promptly and
directly as required by this paragraph
without further notice to or consent
from the futures commission merchant.
(7) The futures commission merchant
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.
(8) A futures commission merchant
shall obtain a new written
acknowledgment within 120 days of any
changes in the following:
(i) The name or business address of
the futures commission merchant;
(ii) The name or business address of
the bank, trust company, derivatives

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clearing organization or futures
commission merchant receiving futures
customer funds; or
(iii) The account number(s) under
which futures customer funds are held.
(9) A futures commission merchant
shall maintain each written
acknowledgment readily accessible in
its files in accordance with § 1.31, for as
long as the account remains open, and
thereafter for the period provided in
§ 1.31.
(e) Commingling. (1) A futures
commission merchant may for
convenience commingle the futures
customer funds that it receives from, or
on behalf of, multiple futures customers
in a single account or multiple accounts
with one or more of the depositories
listed in paragraph (b) of this section.
(2) A futures commission merchant
shall not commingle futures customer
funds with the money, securities or
property of such futures commission
merchant, or with any proprietary
account of such futures commission
merchant, or use such funds to secure
or guarantee the obligation of, or extend
credit to, such futures commission
merchant or any proprietary account of
such futures commission merchant;
provided, however, a futures
commission merchant may deposit
proprietary funds in segregated accounts
as permitted under § 1.23.
(3) A futures commission merchant
may not commingle futures customer
funds with funds deposited by 30.7
customers as defined in § 30.1 of this
chapter and set aside in separate
accounts as required by part 30 of this
chapter, or with funds deposited by
Cleared Swaps Customers as defined in
§ 22.1 of this chapter and held in
segregated accounts pursuant to section
4d(f) of the Act; provided, however, that
a futures commission merchant may
commingle futures customer funds with
funds deposited by 30.7 customers or
Cleared Swaps Customers if expressly
permitted by a Commission regulation
or order, or by a derivatives clearing
organization rule approved in
accordance with § 39.15(b)(2) of this
chapter.
(f) Limitation on use of futures
customer funds. (1) A futures
commission merchant shall treat and
deal with the funds of a futures
customer as belonging to such futures
customer. A futures commission
merchant shall not use the funds of a
futures customer to secure or guarantee
the commodity interests, or to secure or
extend the credit, of any person other
than the futures customer for whom the
funds are held.
(2) A futures commission merchant
shall obligate futures customer funds to

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a derivatives clearing organization, a
futures commission merchant, or any
depository solely to purchase, margin,
guarantee, secure, transfer, adjust or
settle trades, contracts or commodity
option transactions of futures
customers; provided, however, that a
futures commission merchant is
permitted to use the funds belonging to
a futures customer that are necessary in
the normal course of business to pay
lawfully accruing fees or expenses on
behalf of the futures customer’s
positions including commissions,
brokerage, interest, taxes, storage and
other fees and charges.
(3) No person, including any
derivatives clearing organization or any
depository, that has received futures
customer funds for deposit in a
segregated account, as provided in this
section, may hold, dispose of, or use any
such funds as belonging to any person
other than the futures customers of the
futures commission merchant which
deposited such funds.
(g) Derivatives clearing organizations.
(1) General. All futures customer funds
received by a derivatives clearing
organization from a member to
purchase, margin, guarantee, secure or
settle the trades, contracts or commodity
options of the clearing member’s futures
customers and all money accruing to
such futures customers as the result of
trades, contracts or commodity options
so carried shall be separately accounted
for and segregated as belonging to such
futures customers, and a derivatives
clearing organization shall not hold, use
or dispose of such futures customer
funds except as belonging to such
futures customers. A derivatives
clearing organization shall deposit
futures customer funds under an
account name that clearly identifies
them as futures customer funds and
shows that such funds are segregated as
required by sections 4d(a) and 4d(b) of
the Act and by this part.
(2) Location of futures customer
funds. A derivatives clearing
organization may deposit futures
customer funds with a bank or trust
company, which may include a Federal
Reserve Bank with respect to deposits of
a derivatives clearing organization that
is designated by the Financial Stability
Oversight Council to be systemically
important.
(3) Limitation on the holding of
futures customer funds outside of the
United States. A derivatives clearing
organization may hold futures customer
funds with a depository outside of the
United States only in accordance with
§ 1.49.
(4) Written acknowledgment from
depositories. (i) A derivatives clearing

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organization must obtain a written
acknowledgment from each depository
prior to or contemporaneously with the
opening of a futures customer funds
account.
(ii) The written acknowledgment must
be in the form as set out in Appendix
B to this part; provided, however, that a
derivatives clearing organization shall
obtain from a Federal Reserve Bank only
a written acknowledgment that:
(A) The Federal Reserve Bank was
informed that the customer funds
deposited therein are those of customers
who trade commodities, options, swaps,
and other products and are being held
in accordance with the provisions of
section 4d of the Act and Commission
regulations thereunder; and
(B) The Federal Reserve Bank agrees
to reply promptly and directly to any
request from the director of the Division
of Clearing and Risk or the director of
the Division of Swap Dealer and
Intermediary Oversight, 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.
(iii) A derivatives clearing
organization shall deposit futures
customer funds only with a depository
that agrees to provide the Commission
with a copy of the executed written
acknowledgment 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. The Commission
must receive the written
acknowledgment from the depository
via electronic means, in a format and
manner determined by the Commission.
The written acknowledgment must
contain the derivatives clearing
organization’s authorization to the
depository to provide the written
acknowledgment to the Commission
without further notice to or consent
from the derivatives clearing
organization.
(iv) A derivatives clearing
organization shall deposit futures
customer funds only with a depository
that agrees to reply promptly and
directly to any request from the director
of the Division of Clearing and Risk or
the director of the Division of Swap
Dealer and Intermediary Oversight, 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. The written
acknowledgment must contain the
derivatives clearing organization’s
authorization to the depository to reply
promptly and directly as required by

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this paragraph without further notice to
or consent from the derivatives clearing
organization.
(v) 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.
(vi) 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 futures
customer funds; or
(C) The account number(s) under
which futures customer funds are held.
(vii) A derivatives clearing
organization shall maintain each written
acknowledgment readily accessible in
its files in accordance with § 1.31, for as
long as the account remains open, and
thereafter for the period provided in
§ 1.31.
(5) Commingling. (i) A derivatives
clearing organization may for
convenience commingle the futures
customer funds that it receives from, or
on behalf of, multiple futures
commission merchants in a single
account or multiple accounts with one
or more of the depositories listed in
paragraph (g)(2) of this section.
(ii) A derivatives clearing organization
shall not commingle futures customer
funds with the money, securities or
property of such derivatives clearing
organization or with any proprietary
account of any of its clearing members,
or use such funds to secure or guarantee
the obligations of, or extend credit to,
such derivatives clearing organization or
any proprietary account of any of its
clearing members.
(iii) A derivatives clearing
organization may not commingle funds
held for futures customers with funds
deposited by clearing members on
behalf of their 30.7 customers as defined
in § 30.1 of this chapter and set aside in
separate accounts as required by part 30
of this chapter, or with funds deposited
by clearing members on behalf of their
Cleared Swaps Customers as defined in
§ 22.1 of this chapter and held in
segregated accounts pursuant section
4d(f) of the Act; provided, however, that
a derivatives clearing organization may
commingle futures customer funds with
funds deposited by clearing members on
behalf of their 30.7 customers or Cleared
Swaps Customers if expressly permitted
by a Commission regulation or order, or

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by a derivatives clearing organization
rule approved in accordance with
§ 39.15(b)(2) of this chapter.
(h) Immediate availability of bank
and trust company deposits. All futures
customer funds deposited by a futures
commission merchant or a derivatives
clearing organization with a bank or
trust company must be immediately
available for withdrawal upon the
demand of the futures commission
merchant or derivatives clearing
organization.
(i) Requirements as to amount. (1) For
purposes of this paragraph (i), the term
‘‘account’’ shall mean the entries on the
books and records of a futures
commission merchant pertaining to the
futures customer funds of a particular
futures customer.
(2) The futures commission merchant
must reflect in the account that it
maintains for each futures customer the
net liquidating equity for each such
customer, calculated as follows: The
market value of any futures customer
funds that it receives from such
customer, as adjusted by:
(i) Any uses permitted under
paragraph (f) of this section;
(ii) Any accruals on permitted
investments of such collateral under
§ 1.25 that, pursuant to the futures
commission merchant’s customer
agreement with that customer, are
creditable to such customer;
(iii) Any gains and losses with respect
to contracts for the purchase or sale of
a commodity for future delivery and any
options on such contracts;
(iv) Any charges lawfully accruing to
the futures customer, including any
commission, brokerage fee, interest, tax,
or storage fee; and
(v) Any appropriately authorized
distribution or transfer of such
collateral.
(3) If the market value of futures
customer funds in the account of a
futures customer is positive after
adjustments, then that account has a
credit balance. If the market value of
futures customer funds in the account of
a futures customer is negative after
adjustments, then that account has a
debit balance.
(4) The futures commission merchant
must maintain in segregation an amount
equal to the sum of any credit balances
that the futures customers of the futures
commission merchant have in their
accounts. This balance may not be
reduced by any debit balances that the
futures customers of the futures
commission merchants have in their
accounts.

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68629

Appendix A to § 1.20—Futures
Commission Merchant
Acknowledgment Letter for CFTC
Regulation 1.20 Customer Segregated
Account
[Date]
[Name and Address of Bank, Trust Company,
Derivatives Clearing Organization or
Futures Commission Merchant]
We refer to the Segregated Account(s)
which [Name of Futures Commission
Merchant] (‘‘we’’ or ‘‘our’’) have opened or
will open with [Name of Bank, Trust
Company, Derivatives Clearing Organization
or Futures Commission Merchant] (‘‘you’’ or
‘‘your’’) entitled:
[Name of Futures Commission Merchant] [if
applicable, add ‘‘FCM Customer Omnibus
Account’’] CFTC Regulation 1.20 Customer
Segregated Account under Sections 4d(a)
and 4d(b) 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 customers who
trade commodities, options, swaps, and other
products, as required by Commodity Futures
Trading Commission (‘‘CFTC’’) Regulations,
including Regulation 1.20, 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 1 of the
CFTC’s regulations, as amended; and that the
Funds must otherwise be treated in
accordance with the provisions of Section 4d
of the Act and CFTC regulations thereunder.
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.
In addition, you agree that the Account(s)
may be examined at any reasonable time by
the director of the Division of Swap Dealer
and Intermediary Oversight of the CFTC or
the director of the Division of Clearing and
Risk of the CFTC, or any successor divisions,
or such directors’ designees, or an
appropriate officer, agent or employee of our

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designated self-regulatory organization
(‘‘DSRO’’), [Name of DSRO], and this letter
constitutes the authorization and direction of
the undersigned on our behalf to permit any
such examination to take place without
further notice to or consent from us.
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 Swap Dealer and Intermediary Oversight
of the CFTC or the director of the Division
of Clearing and Risk of the CFTC, or any
successor divisions, or such directors’
designees, or an appropriate officer, agent, or
employee of [Name of DSRO], acting in its
capacity as our DSRO, 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.
You further acknowledge and agree that,
pursuant to authorization granted by us to
you previously or herein, you have provided,
or will promptly provide following the
opening of the Account(s), the director of the
Division of Swap Dealer and Intermediary
Oversight of the CFTC, or any successor
division, or such director’s designees, with
technological connectivity, which may
include provision of hardware, software, and
related technology and protocol support, to
facilitate direct, read-only electronic access
to transaction and account balance
information for the Account(s). This letter
constitutes the authorization and direction of
the undersigned on our behalf for you to
establish this connectivity and access if not
previously established, without further
notice to or consent from us.
The parties agree that all actions on your
part to respond to the above information and
access 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
or access request, in order to provide for the
secure transmission and delivery of the
requested information or access to the
appropriate recipient(s). We will not hold
you responsible for acting pursuant to any
information or access request from the
director of the Division of Swap Dealer and
Intermediary Oversight of the CFTC or the
director of the Division of Clearing and Risk
of the CFTC, or any successor divisions, or
such directors’ designees, or an appropriate
officer, agent, or employee of [Name of
DSRO], acting in its capacity as our DSRO,
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.

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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
proprietary account maintained by us with
you. 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 customer 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
the parties in connection with the
Account(s), this letter agreement shall govern
with respect to matters specific to Section 4d
of the Act and the CFTC’s regulations
thereunder, 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

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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) and to
[Name of DSRO], acting in its capacity as our
DSRO. We hereby authorize and direct you
to provide such copies 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 Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Bank, Trust Company, Derivatives
Clearing Organization or Futures
Commission Merchant]
By:
Print Name:
Title:
Contact Information: [Insert phone number
and email address]
DATE:

Appendix B to § 1.20—Derivatives
Clearing Organization
Acknowledgment Letter for CFTC
Regulation 1.20 Customer Segregated
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]
Futures Customer Omnibus Account, CFTC
Regulation 1.20 Customer Segregated
Account under Sections 4d(a) and 4d(b) 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 customers who
trade commodities, options, swaps, and other
products, as required by Commodity Futures
Trading Commission (‘‘CFTC’’) Regulations,
including Regulation 1.20, 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 1 of the
CFTC’s regulations, as amended; and that the
Funds must otherwise be treated in
accordance with the provisions of Section 4d
of the Act and CFTC regulations thereunder.
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

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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 the
director of the Division of Swap Dealer and
Intermediary Oversight of the CFTC, or any
successor divisions, or such directors’
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
the director of the Division of Swap Dealer
and Intermediary Oversight of the CFTC, or
any successor divisions, or such directors’
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 or any of our futures
commission merchant clearing members
become(s) 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
proprietary account maintained by us with
you. 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

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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 customer 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
the parties in connection with the
Account(s), this letter agreement shall govern
with respect to matters specific to Section 4d
of the Act and the CFTC’s regulations
thereunder, 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:

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68631

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:
■

10. Revise § 1.22 to read as follows:

§ 1.22 Use of futures customer funds
restricted.

(a) No futures commission merchant
shall use, or permit the use of, the
futures customer funds of one futures
customer to purchase, margin, or settle
the trades, contracts, or commodity
options of, or to secure or extend the
credit of, any person other than such
futures customer.
(b) Futures customer funds shall not
be used to carry trades or positions of
the same futures customer other than in
contracts for the purchase of sale of any
commodity for future delivery or for
options thereon traded through the
facilities of a designated contract
market.
(c)(1) The undermargined amount for
a futures customer’s account is the
amount, if any, by which:
(i) The total amount of collateral
required for that futures customer’s
positions in that account, at the time or
times referred to in paragraph (c)(2) of
this section, exceeds
(ii) The value of the futures customer
funds for that account, as calculated in
§ 1.20(i)(2).
(2) Each futures commission merchant
must compute, based on the information
available to the futures commission
merchant as of the close of each
business day,
(i) The undermargined amounts,
based on the clearing initial margin that
will be required to be maintained by
that futures commission merchant for its
futures customers, at each derivatives
clearing organization of which the
futures commission merchant is a
member, at the point of the daily
settlement (as described in § 39.14 of
this chapter) that will complete during
the following business day for each such
derivatives clearing organization less
(ii) Any debit balances referred to in
§ 1.20(i)(4) included in such
undermargined amounts.
(3)(i) Prior to the Residual Interest
Deadline, such futures commission
merchant must maintain residual
interest in segregated funds that is at
least equal to the computation set forth
in paragraph (c)(2) of this section.
Where a futures commission merchant
is subject to multiple Residual Interest

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Deadlines, prior to each Residual
Interest Deadline, such futures
commission merchant must maintain
residual interest in segregated funds that
is at least equal to the portion of the
computation set forth in paragraph (c)(2)
of this section attributable to the
clearing initial margin required by the
derivatives clearing organization making
such settlement.
(ii) A futures commission merchant
may reduce the amount of residual
interest required in paragraph (c)(3)(i) of
this section to account for payments
received from or on behalf of
undermargined futures customers (less
the sum of any disbursements made to
or on behalf of such customers) between
the close of the previous business day
and the Residual Interest Deadline.
(4) For purposes of paragraph (c)(2) of
this section, a futures commission
merchant should include, as clearing
initial margin, customer initial margin
that the futures commission merchant
will be required to maintain, for that
futures commission merchant’s futures
customers, at another futures
commission merchant.
(5) Residual Interest Deadline defined.
(i) Except as provided in paragraph
(c)(5)(ii) of this section, the Residual
Interest Deadline shall be the time of the
settlement referenced in paragraph
(c)(2)(i) or, as appropriate, (c)(4), of this
section.
(ii) Starting on November 14, 2014
and during the phase-in period
described in paragraph (c)(5)(iii) of this
section, the Residual Interest Deadline
shall be 6:00 p.m. Eastern Time on the
date of the settlement referenced in
paragraph (c)(2)(i) or, as appropriate,
(c)(4), of this section.
(iii)(A) No later than May 16, 2016,
the staff of the Commission shall
complete and publish for public
comment a report addressing, to the
extent information is practically
available, the practicability (for both
futures commission merchants and
customers) of moving that deadline from
6:00 p.m. Eastern Time on the date of
the settlement referenced in paragraph
(c)(2)(i) or, as appropriate, (c)(4), of this
section to the time of that settlement (or
to some other time of day), including
whether and on what schedule it would
be feasible to do so, and the costs and
benefits of such potential requirements.
Staff shall, using the Commission’s Web
site, solicit public comment and shall
conduct a public roundtable regarding
specific issues to be covered by such
report.
(B) Nine months after publication of
the report required by paragraph
(c)(5)(iii)(A) of this section, the
Commission may (but shall not be

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required to) do either or both of the
following:
(1) Terminate the phase-in period, in
which case the phase-in period shall
end as of a date established by order
published in the Federal Register,
which date shall be no less than one
year after the date such order is
published; or
(2) Determine that it is necessary or
appropriate in the public interest to
propose through rulemaking a different
Residual Interest Deadline. In that
event, the Commission shall establish,
by order published in the Federal
Register, a phase-in schedule.
(C) If the phase-in schedule has not
been amended pursuant to paragraph
(c)(5)(iii)(B) of this section, then the
phase-in period shall end on December
31, 2018.
■ 11. Revise § 1.23 to read as follows:
§ 1.23 Interest of futures commission
merchant in segregated futures customer
funds; additions and withdrawals.

(a)(1) The provision in sections
4d(a)(2) and 4d(b) of the Act and the
provision in § 1.20 that prohibit the
commingling of futures customer funds
with the funds of a futures commission
merchant, shall not be construed to
prevent a futures commission merchant
from having a residual financial interest
in the futures customer funds segregated
as required by the Act and the
regulations in this part and set apart for
the benefit of futures customers; nor
shall such provisions be construed to
prevent a futures commission merchant
from adding to such segregated futures
customer funds such amount or
amounts of money, from its own funds
or unencumbered securities from its
own inventory, of the type set forth in
§ 1.25 of this part, as it may deem
necessary to ensure any and all futures
customers’ accounts from becoming
undersegregated at any time.
(2) If a futures commission merchant
discovers at any time that it is holding
insufficient funds in segregated
accounts to meet its obligations under
§§ 1.20 and 1.22, the futures
commission merchant shall
immediately deposit sufficient funds
into segregation to bring the account
into compliance.
(b) A futures commission merchant
may not withdraw funds, except
withdrawals that are made to or for the
benefit of futures customers, from an
account or accounts holding futures
customer funds unless the futures
commission merchant has prepared the
daily segregation calculation required
by § 1.32 as of the close of business on
the previous business day. A futures
commission merchant that has

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completed its daily segregation
calculation may make withdrawals, in
addition to withdrawals that are made
to or for the benefit of futures
customers, to the extent of its actual
residual financial interest in funds held
in segregated futures accounts, adjusted
to reflect market activity and other
events that may have decreased the
amount of the firm’s residual financial
interest since the close of business on
the previous business day, including the
withdrawal of securities held in
segregated safekeeping accounts held by
a bank, trust company, derivatives
clearing organization or other futures
commission merchant. Such
withdrawal(s), however, shall not result
in the funds of one futures customer
being used to purchase, margin or carry
the trades, contracts or commodity
options, or extend the credit of any
other futures customer or other person.
(c) Notwithstanding paragraphs (a)
and (b) of this section, each futures
commission merchant shall establish a
targeted residual interest (i.e., excess
funds) that is in an amount that, when
maintained as its residual interest in the
segregated funds accounts, reasonably
ensures that the futures commission
merchant shall remain in compliance
with the segregated funds requirements
at all times. Each futures commission
merchant shall establish policies and
procedures designed to reasonably
ensure that the futures commission
merchant maintains the targeted
residual amounts in segregated funds at
all times. The futures commission
merchant shall maintain sufficient
capital and liquidity, and take such
other appropriate steps as are necessary,
to reasonably ensure that such amount
of targeted residual interest is
maintained as the futures commission
merchant’s residual interest in the
segregated funds accounts at all times.
In determining the amount of the
targeted residual interest, the futures
commission merchant shall analyze all
relevant factors affecting the amounts in
segregated funds from time to time,
including without limitation various
factors, as applicable, relating to the
nature of the futures commission
merchant’s business including, but not
limited to, the composition of the
futures commission merchant’s
customer base, the general
creditworthiness of the customer base,
the general trading activity of the
customers, the types of markets and
products traded by the customers, the
proprietary trading of the futures
commission merchant, the general
volatility and liquidity of the markets
and products traded by customers, the

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
futures commission merchant’s own
liquidity and capital needs, and the
historical trends in customer segregated
fund balances and debit balances in
customers’ and undermargined
accounts. The analysis and calculation
of the targeted amount of the future
commission merchant’s residual interest
must be described in writing with the
specificity necessary to allow the
Commission and the futures
commission merchant’s designated selfregulatory organization to duplicate the
analysis and calculation and test the
assumptions made by the futures
commission merchant. The adequacy of
the targeted residual interest and the
process for establishing the targeted
residual interest must be reassessed
periodically by the futures commission
merchant and revised as necessary.
(d) Notwithstanding any other
paragraph of this section, a futures
commission merchant may not
withdraw funds, in a single transaction
or a series of transactions, that are not
made to or for the benefit of futures
customers from futures accounts if such
withdrawal(s) would exceed 25 percent
of the futures commission merchant’s
residual interest in such accounts as
reported on the daily segregation
calculation required by § 1.32 and
computed as of the close of business on
the previous business day, unless:
(1) The futures commission
merchant’s chief executive officer, chief
finance officer or other senior official
that is listed as a principal of the futures
commission merchant on its Form 7–R
and is knowledgeable about the futures
commission merchant’s financial
requirements and financial position preapproves in writing the withdrawal, or
series of withdrawals;
(2) The futures commission merchant
files written notice of the withdrawal or
series of withdrawals, with the
Commission and with its designated
self-regulatory organization immediately
after the chief executive officer, chief
finance officer or other senior official as
described in paragraph (c)(1) of this
section pre-approves the withdrawal or
series of withdrawals. The written
notice must:
(i) Be signed by the chief executive
officer, chief finance officer or other
senior official as described in paragraph
(c)(1) of this section that pre-approved
the withdrawal, and give notice that the
futures commission merchant has
withdrawn or intends to withdraw more
than 25 percent of its residual interest
in segregated accounts holding futures
customer funds;
(ii) Include a description of the
reasons for the withdrawal or series of
withdrawals;

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(iii) List the amount of funds provided
to each recipient and each recipient’s
name;
(iv) Include the current estimate of the
amount of the futures commission
merchant’s residual interest in the
futures accounts after the withdrawal;
(v) Contain a representation by the
chief executive officer, chief finance
officer or other senior official as
described in paragraph (c)(1) of this
section that pre-approved the
withdrawal, or series of withdrawals,
that, after due diligence, to such
person’s knowledge and reasonable
belief, the futures commission merchant
remains in compliance with the
segregation requirements after the
withdrawal. The chief executive officer,
chief finance officer or other senior
official as described in paragraph (c)(1)
of this section must consider the daily
segregation calculation as of the close of
business on the previous business day
and any other factors that may cause a
material change in the futures
commission merchant’s residual interest
since the close of business the previous
business day, including known
unsecured futures customer debits or
deficits, current day market activity and
any other withdrawals made from the
futures accounts; and
(vi) Any such written notice filed
with the Commission must be filed via
electronic transmission using a form of
user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instruction issued by or approved by the
Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer. Any written notice
filed must be followed up with direct
communication to the Regional office of
the Commission that has supervisory
authority over the futures commission
merchant whereby the Commission
acknowledges receipt of the notice; and
(3) After making a withdrawal
requiring the approval and notice
required in paragraphs (c)(1) and (2) of
this section, and before the completion
of its next daily segregated funds
calculation, no futures commission
merchant may make any further
withdrawals from accounts holding
futures customer funds, except to or for
the benefit of futures customers,
without, for each withdrawal, obtaining
the approval required under paragraph
(c)(1) of this section and filing a written
notice in the manner specified under

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68633

paragraph (c)(2) of this section with the
Commission and its designated selfregulatory organization signed by the
chief executive officer, chief finance
officer, or other senior official. The
written notice must:
(i) List the amount of funds provided
to each recipient and each recipient’s
name;
(ii) Disclose the reason for each
withdrawal;
(iii) Confirm that the chief executive
officer, chief finance officer, or other
senior official (and identify of the
person if different from the person who
signed the notice) pre-approved the
withdrawal in writing;
(iv) Disclose the current estimate of
the futures commission merchant’s
remaining total residual interest in the
segregated accounts holding futures
customer funds after the withdrawal;
and
(v) Include a representation that, after
due diligence, to the best of the notice
signatory’s knowledge and reasonable
belief the futures commission merchant
remains in compliance with the
segregation requirements after the
withdrawal.
(e) If a futures commission merchant
withdraws funds from futures accounts
that are not made to or for the benefit
of futures customers, and the
withdrawal causes the futures
commission merchant to not hold
sufficient funds in the futures accounts
to meet its targeted residual interest, as
required to be computed under § 1.11,
the futures commission merchant
should deposit its own funds into the
futures accounts to restore the account
balance to the targeted residual interest
amount by the close of business on the
next business day, or, if appropriate,
revise the futures commission
merchant’s targeted amount of residual
interest pursuant to the policies and
procedures required by § 1.11.
Notwithstanding the foregoing, if a the
futures commission merchant’s residual
interest in customer accounts is less
than the amount required by § 1.22 at
any particular point in time, the futures
commission merchant must
immediately restore the residual interest
to exceed the sum of such amounts. Any
proprietary funds deposited in the
futures accounts must be unencumbered
and otherwise compliant with § 1.25, as
applicable.
■ 12. Amend § 1.25 to:
■ a. Remove paragraph (b)(6); and
■ b. Revise paragraphs (b)(3)(v), (c)(3),
(d)(7), (d)(11), and (e).
The revisions read as follows:
§ 1.25

*

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(b) * * *
(3) * * *
(v) Counterparty concentration limits.
Securities purchased by a futures
commission merchant or derivatives
clearing organization from a single
counterparty, or from one or more
counterparties under common
ownership or control, subject to an
agreement to resell the securities to the
counterparty or counterparties, shall not
exceed 25 percent of total assets held in
segregation or under § 30.7 of this
chapter by the futures commission
merchant or derivatives clearing
organization.
*
*
*
*
*
(c) * * *
(3) A futures commission merchant or
derivatives clearing organization shall
maintain the confirmation relating to
the purchase in its records in
accordance with § 1.31 and note the
ownership of fund shares (by book-entry
or otherwise) in a custody account of
the futures commission merchant or
derivatives clearing organization in
accordance with § 1.26. The futures
commission merchant or the derivatives
clearing organization shall obtain the
acknowledgment letter required by
§ 1.26 from an entity that has substantial
control over the fund shares purchased
with customer funds and has the
knowledge and authority to facilitate
redemption and payment or transfer of
the customer funds. Such entity may
include the fund sponsor or depository
acting as custodian for fund shares.
*
*
*
*
*
(d) * * *
(7) Securities transferred to the
futures commission merchant or
derivatives clearing organization under
the agreement are held in a safekeeping
account with a bank as referred to in
paragraph (d)(2) of this section, a
Federal Reserve Bank, a derivatives
clearing organization, or the Depository
Trust Company in an account that
complies with the requirements of
§ 1.26.
*
*
*
*
*
(11) The transactions effecting the
agreement are recorded in the record
required to be maintained under § 1.27
of investments of customer funds, and
the securities subject to such
transactions are specifically identified
in such record as described in paragraph
(d)(1) of this section and further
identified in such record as being
subject to repurchase and reverse
repurchase agreements.
*
*
*
*
*
(e) Deposit of firm-owned securities
into segregation. A futures commission
merchant may deposit unencumbered

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securities of the type specified in this
section, which it owns for its own
account, into a customer account. A
futures commission merchant must
include such securities, transfers of
securities, and disposition of proceeds
from the sale or maturity of such
securities in the record of investments
required to be maintained by § 1.27. All
such securities may be segregated in
safekeeping only with a bank, trust
company, derivatives clearing
organization, or other registered futures
commission merchant in accordance
with the provisions of § 1.20 part. For
purposes of this section and §§ 1.27,
1.28, 1.29, and 1.32, securities of the
type specified by this section that are
owned by the futures commission
merchant and deposited into a customer
account shall be considered customer
funds until such investments are
withdrawn from segregation in
accordance with the provisions of
§ 1.23. Investments permitted by § 1.25
that are owned by the futures
commission merchant and deposited
into a futures customer account
pursuant to § 1.26 shall be considered
futures customer funds until such
investments are withdrawn from
segregation in accordance with § 1.23.
Investments permitted by § 1.25 that are
owned by the futures commission
merchant and deposited into a Cleared
Swaps Customer Account, as defined in
§ 22.1 of this chapter, shall be
considered Cleared Swaps Customer
Collateral, as defined in § 22.1 of this
chapter, until such investments are
withdrawn from segregation in
accordance with § 22.17 of this chapter.
*
*
*
*
*
■ 13. Revise § 1.26 to read as follows:
§ 1.26 Deposit of instruments purchased
with futures customer funds.

(a) Each futures commission merchant
who invests futures customer funds in
instruments described in § 1.25, except
for investments in money market
mutual funds, shall separately account
for such instruments as futures
customer funds and segregate such
instruments as funds belonging to such
futures customers in accordance with
the requirements of § 1.20. Each
derivatives clearing organization which
invests money belonging or accruing to
futures customers of its clearing
members in instruments described in
§ 1.25, except for investments in money
market mutual funds, shall separately
account for such instruments as
customer funds and segregate such
instruments as customer funds
belonging to such futures customers in
accordance with § 1.20.

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(b) Each futures commission merchant
or derivatives clearing organization
which invests futures customer funds in
money market mutual funds, as
permitted by § 1.25, shall separately
account for such funds and segregate
such funds as belonging to such futures
customers. Such funds shall be
deposited under an account name that
clearly shows that they belong to futures
customers and are segregated as
required by sections 4d(a) and 4d(b) of
the Act and by this part. Each futures
commission merchant or derivatives
clearing organization, upon opening
such an account, shall obtain and
maintain readily accessible in its files in
accordance with § 1.31, for as long as
the account remains open, and
thereafter for the period provided in
§ 1.31, a written acknowledgment and
shall file such acknowledgment in
accordance with the requirements of
§ 1.20. In the event such funds are held
directly with the money market mutual
fund or its affiliate, the written
acknowledgment shall be in the form as
set out in Appendix A or B to this
section. In the event such funds are held
with a depository, the written
acknowledgment shall be in the form as
set out in Appendix A or B to § 1.20. In
either case, the written acknowledgment
shall be obtained, provided to the
Commission and designated selfregulatory organizations, and retained as
required under § 1.20.
Appendix A to § 1.26—Futures
Commission Merchant
Acknowledgment Letter for CFTC
Regulation 1.26 Customer Segregated
Money Market Mutual Fund Account
[Date]
[Name and Address of Money Market Mutual
Fund]
We propose to invest funds held by [Name
of Futures Commission Merchant] (‘‘we’’ or
‘‘our’’) on behalf of our customers in shares
of [Name of Money Market Mutual Fund]
(‘‘you’’ or ‘‘your’’) under account(s) entitled
(or shares issued to):
[Name of Futures Commission Merchant] [if
applicable, add ‘‘FCM Customer Omnibus
Account’’] CFTC Regulation 1.26 Customer
Segregated Money Market Mutual Fund
Account under Sections 4d(a) and 4d(b) 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 are holding these
funds, including any shares issued and
amounts accruing in connection therewith
(collectively, the ‘‘Shares’’), for the benefit of
customers who trade commodities, options,
swaps and other products (‘‘Commodity
Customers’’), as required by Commodity
Futures Trading Commission (‘‘CFTC’’)

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Regulation 1.26, as amended; that the Shares
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 1 of the CFTC’s
regulations, as amended; and that the Shares
must otherwise be treated in accordance with
the provisions of Section 4d of the Act and
CFTC regulations thereunder.
Furthermore, you acknowledge and agree
that such Shares 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 Shares 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.
In addition, you agree that the Account(s)
may be examined at any reasonable time by
the director of the Division of Swap Dealer
and Intermediary Oversight of the CFTC or
the director of the Division of Clearing and
Risk of the CFTC, or any successor divisions,
or such directors’ designees, or an
appropriate officer, agent or employee of our
designated self-regulatory organization
(‘‘DSRO’’), [Name of DSRO], and this letter
constitutes the authorization and direction of
the undersigned on our behalf to permit any
such examination to take place without
further notice to or consent from us.
You agree to reply promptly and directly
to any request for confirmation of account
balances or provision of any other account
information regarding or related to the
Account(s) from the director of the Division
of Swap Dealer and Intermediary Oversight
of the CFTC or the director of the Division
of Clearing and Risk of the CFTC, or any
successor divisions, or such directors’
designees, or an appropriate officer, agent, or
employee of [Name of DSRO], acting in its
capacity as our DSRO, 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.
You further acknowledge and agree that,
pursuant to the authorization granted by us
to you previously or herein, you have
provided, or will provide following the
opening of the Account(s), the director of the
Division of Swap Dealer and Intermediary
Oversight of the CFTC, or any successor
division, or such director’s designees, with
technological connectivity, which may
include provision of hardware, software, and
related technology and protocol support, to
facilitate direct, read-only electronic access
to transaction and account balance
information for the Account(s). This letter
constitutes the authorization and direction of
the undersigned on our behalf for you to
establish this connectivity and access if not
previously established, without further
notice to or consent from us.
The parties agree that all actions on your
part to respond to the above information and
access requests will be made in accordance

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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
or access request, in order to provide for the
secure transmission and delivery of the
requested information or access to the
appropriate recipient(s).
We will not hold you responsible for acting
pursuant to any information or access request
from the director of the Division of Swap
Dealer and Intermediary Oversight of the
CFTC or the director of the Division of
Clearing and Risk of the CFTC, or any
successor divisions, or such directors’
designees, or an appropriate officer, agent, or
employee of [Name of DSRO], acting in its
capacity as our DSRO, 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 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 Shares 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 Shares maintained in the Account(s),
or to impose such charges against us or any
proprietary account maintained by us with
you. 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 customer 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,

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68635

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 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.
We are permitted to invest customers’
funds in money market mutual funds
pursuant to CFTC Regulation 1.25. That rule
sets forth the following conditions, among
others, with respect to any investment in a
money market mutual fund:
(1) The net asset value of the fund must be
computed by 9:00 a.m. of the business day
following each business day and be made
available to us by that time;
(2) The fund must be legally obligated to
redeem an interest in the fund and make
payment in satisfaction thereof by the close
of the business day following the day on
which we make a redemption request except
as otherwise specified in CFTC Regulation
1.25(c)(5)(ii); and,
(3) The agreement under which we invest
customers’ funds must not contain any
provision that would prevent us from
pledging or transferring fund shares.
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
the parties in connection with the
Account(s), this letter agreement shall govern
with respect to matters specific to Section 4d
of the Act and the CFTC’s regulations
thereunder, 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) and to
[Name of DSRO], acting in its capacity as our
DSRO, in accordance with CFTC Regulation
1.20. We hereby authorize and direct you to
provide such copies 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 Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Money Market Mutual Fund]
By:
Print Name:
Title:

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Contact Information: [Insert phone number
and email address]
Date:

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Appendix B to § 1.26—Derivatives
Clearing Organization
Acknowledgment Letter for CFTC
Regulation 1.26 Customer Segregated
Money Market Mutual Fund Account
[Date]
[Name and Address of Money Market Mutual
Fund]
We propose to invest funds held by [Name
of Derivatives Clearing Organization] (‘‘we’’
or ‘‘our’’) on behalf of customers in shares of
[Name of Money Market Mutual Fund]
(‘‘you’’ or ‘‘your’’) under account(s) entitled
(or shares issued to):
[Name of Derivatives Clearing Organization]
Futures Customer Omnibus Account, CFTC
Regulation 1.26 Customer Segregated
Money Market Mutual Fund Account
under Sections 4d(a) and 4d(b) 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 are holding these
funds, including any shares issued and
amounts accruing in connection therewith
(collectively, the ‘‘Shares’’), for the benefit of
customers who trade commodities, options,
swaps and other products, as required by
Commodity Futures Trading Commission
(‘‘CFTC’’) Regulation 1.26, as amended; that
the Shares 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 1 of the
CFTC’s regulations, as amended; and that the
Shares must otherwise be treated in
accordance with the provisions of Section 4d
of the Act and CFTC regulations thereunder.
Furthermore, you acknowledge and agree
that such Shares 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 Shares 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.
You agree to reply promptly and directly
to any request for confirmation of account
balances or provision of any other account
information regarding or related to the
Account(s) from the director of the Division
of Clearing and Risk of the CFTC or the
director of the Division of Swap Dealer and
Intermediary Oversight of the CFTC, or any
successor divisions, or such directors’
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

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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 the director of the Division
of Swap Dealer and Intermediary Oversight
of the CFTC, or any successor divisions, or
such directors’ 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 or any of our futures
commission merchant clearing members
become(s) 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 Shares
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 Shares maintained in the Account(s),
or to impose such charges against us or any
proprietary account maintained by us with
you. 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 customer 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

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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.
We are permitted to invest customers’
funds in money market mutual funds
pursuant to CFTC Regulation 1.25. That rule
sets forth the following conditions, among
others, with respect to any investment in a
money market mutual fund:
(1) The net asset value of the fund must be
computed by 9:00 a.m. of the business day
following each business day and be made
available to us by that time;
(2) The fund must be legally obligated to
redeem an interest in the fund and make
payment in satisfaction thereof by the close
of the business day following the day on
which we make a redemption request except
as otherwise specified in CFTC Regulation
1.25(c)(5)(ii); and,
(3) The agreement under which we invest
customers’ funds must not contain any
provision that would prevent us from
pledging or transferring fund shares.
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
the parties in connection with the
Account(s), this letter agreement shall govern
with respect to matters specific to Section 4d
of the Act and the CFTC’s regulations
thereunder, 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
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) in
accordance with CFTC Regulation 1.20. We
hereby authorize and direct you to provide
such copies 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 Money Market Mutual Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number
and email address]

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
Date:
■

14. Revise § 1.29 to read as follows:

§ 1.29 Gains and losses resulting from
investment of customer funds.

(a) The investment of customer funds
in instruments described in § 1.25 shall
not prevent the futures commission
merchant or derivatives clearing
organization so investing such funds
from receiving and retaining as its own
any incremental income or interest
income resulting therefrom.
(b) The futures commission merchant
or derivatives clearing organization, as
applicable, shall bear sole responsibility
for any losses resulting from the
investment of customer funds in
instruments described in § 1.25. No
investment losses shall be borne or
otherwise allocated to the customers of
the futures commission merchant and, if
customer funds are invested by a
derivatives clearing organization in its
discretion, to the futures commission
merchant.
■ 15. Revise § 1.30 to read as follows:
§ 1.30 Loans by futures commission
merchants; treatment of proceeds.

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Nothing in the regulations in this
chapter shall prevent a futures
commission merchant from lending its
own funds to customers on securities
and property pledged by such
customers, or from repledging or selling
such securities and property pursuant to
specific written agreement with such
customers. The proceeds of such loans
used to purchase, margin, guarantee, or
secure the trades, contracts, or
commodity options of customers shall
be treated and dealt with by a futures
commission merchant as belonging to
such customers, in accordance with and
subject to the provisions of the Act and
these regulations. A futures commission
merchant may not loan funds on an
unsecured basis to finance customers’
trading, nor may a futures commission
merchant loan funds to customers
secured by the customer accounts of
such customers.
■ 16. Amend § 1.32 to:
■ a. Revise the section heading;
■ b. Revise paragraphs (b) and (c); and
■ c. Add paragraphs (d), (e), (f), (g), (h),
(i), (j), and (k).
The revisions and additions to read as
follows:
§ 1.32 Reporting of segregated account
computation and details regarding the
holding of futures customer funds

*

*
*
*
*
(b) In computing the amount of
futures customer funds required to be in
segregated accounts, a futures
commission merchant may offset any

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net deficit in a particular futures
customer’s account against the current
market value of readily marketable
securities, less applicable deductions
(i.e., ‘‘securities haircuts’’) as set forth in
Rule 15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (17 CFR
241.15c3–1(c)(2)(vi)), held for the same
futures customer’s account. Futures
commission merchants that establish
and enforce written policies and
procedures to assess the credit risk of
commercial paper, convertible debt
instruments, or nonconvertible debt
instruments in accordance with Rule
240.15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)) may apply the
lower haircut percentages specified in
Rule 240.15c3–1(c)(2)(vi) for such
commercial paper, convertible debt
instruments and nonconvertible debt
instruments. The futures commission
merchant must maintain a security
interest in the securities, including a
written authorization to liquidate the
securities at the futures commission
merchant’s discretion, and must
segregate the securities in a safekeeping
account with a bank, trust company,
derivatives clearing organization, or
another futures commission merchant.
For purposes of this section, a security
will be considered readily marketable if
it is traded on a ‘‘ready market’’ as
defined in Rule 15c3–1(c)(11)(i) of the
Securities and Exchange Commission
(17 CFR 240.15c3–1(c)(11)(i)).
(c) Each futures commission merchant
is required to document its segregation
computation required by paragraph (a)
of this section by preparing a Statement
of Segregation Requirements and Funds
in Segregation for Customers Trading on
U.S. Commodity Exchanges contained
in the Form 1–FR–FCM as of the close
of each business day. Nothing in this
paragraph shall affect the requirement
that a futures commission merchant at
all times maintain sufficient money,
securities and property to cover its total
obligations to all futures customers, in
accordance with § 1.20.
(d) Each futures commission
merchant is required to submit to the
Commission and to the firm’s
designated self-regulatory organization
the daily Statement of Segregation
Requirements and Funds in Segregation
for Customers Trading on U.S.
Commodity Exchanges required by
paragraph (c) of this section by noon the
following business day.
(e) Each futures commission merchant
shall file the Statement of Segregation
Requirements and Funds in Segregation
for Customers Trading on U.S.
Commodity Exchanges required by
paragraph (c) of this section in an

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electronic format using a form of user
authentication assigned in accordance
with procedures established or
approved by the Commission.
(f) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization a report listing
the names of all banks, trust companies,
futures commission merchants,
derivatives clearing organizations, or
any other depository or custodian
holding futures customer funds as of the
fifteenth day of the month, or the first
business day thereafter, and the last
business day of each month. This report
must include:
(1) The name and location of each
entity holding futures customer funds;
(2) The total amount of futures
customer funds held by each entity
listed in paragraph (f)(1) of this section;
and
(3) The total amount of cash and
investments that each entity listed in
paragraph (f)(1) of this section holds for
the futures commission merchant. The
futures commission merchant must
report the following investments:
(i) Obligations of the United States
and obligations fully guaranteed as to
principal and interest by the United
States (U.S. government securities);
(ii) General obligations of any State or
of any political subdivision of a State
(municipal securities);
(iii) General obligation issued by any
enterprise sponsored by the United
States (government sponsored enterprise
securities);
(iv) Certificates of deposit issued by a
bank;
(v) Commercial paper fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation;
(vi) Corporate notes or bonds fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation; and
(vii) Interests in money market mutual
funds.
(g) Each futures commission merchant
must report the total amount of futures
customer-owned securities held by the
futures commission merchant as margin
collateral and must list the names and
locations of the depositories holding
such margin collateral.
(h) Each futures commission
merchant must report the total amount
of futures customer funds that have
been used to purchase securities under
agreements to resell the securities
(reverse repurchase transactions).

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations

(i) Each futures commission merchant
must report which, if any, of the
depositories holding futures customer
funds under paragraph (f)(1) of this
section are affiliated with the futures
commission merchant.
(j) Each futures commission merchant
shall file the detailed list of depositories
required by paragraph (f) of this section
by 11:59 p.m. the next business day in
an electronic format using a form of user
authentication assigned in accordance
with procedures established or
approved by the Commission.
(k) Each futures commission merchant
shall retain its daily segregation
computation and the Statement of
Segregation Requirements and Funds in
Segregation for Customers Trading on
U.S. Commodity Exchanges required by
paragraph (c) of this section, and its
detailed list of depositories required by
paragraph (f) of this section, together
with all supporting documentation, in
accordance with the requirements of
§ 1.31.
■ 17. Revise § 1.52 to read as follows:

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§ 1.52 Self-regulatory organization
adoption and surveillance of minimum
financial requirements.

(a) For purposes of this section, the
following terms are defined as follows:
(1) Examinations expert is defined as
a Nationally recognized accounting and
auditing firm with substantial expertise
in audits of futures commission
merchants, risk assessment and internal
control reviews, and is an accounting
and auditing firm that is acceptable to
the Commission; and
(2) Self-regulatory organization means
a contract market (as defined in § 1.3(h))
or a registered futures association under
section 17 of the Act. The term ‘‘selfregulatory organization’’ for purpose of
this section does not include a swap
execution facility (as defined in
§ 1.3(rrrr)).
(b)(1) Each self-regulatory
organization must adopt rules
prescribing minimum financial and
related reporting requirements for
members who are registered futures
commission merchants or registered
retail foreign exchange dealers. Each
self-regulatory organization other than a
contract market must adopt rules
prescribing minimum financial and
related reporting requirements for
members who are registered introducing
brokers. The self-regulatory
organization’s minimum financial and
related reporting requirements must be
the same as, or more stringent than, the
requirements contained in §§ 1.10 and
1.17, for futures commission merchants
and introducing brokers, and §§ 5.7 and
5.12 of this chapter for retail foreign

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exchange dealers; provided, however,
that a self-regulatory organization may
permit its member registrants that are
registered with the Securities and
Exchange Commission as securities
brokers or dealers to file (in accordance
with § 1.10(h)) a copy of their Financial
and Operational Combined Uniform
Single Report under the Securities
Exchange Act of 1934 (‘‘FOCUS
Report’’), Part II, Part IIA, or Part II CSE,
as applicable, in lieu of Form 1–FR;
provided, further, that such selfregulatory organization must require
such member registrants to provide all
information in Form 1–FR that is not
included in the FOCUS Report Part II,
Part IIA, or Part CSE provided by such
member registrant. The definition of
adjusted net capital must be the same as
that prescribed in § 1.17(c) for futures
commission merchants and introducing
brokers, and § 5.7(b)(2) of this chapter
for futures commission merchants
offering or engaging in retail forex
transactions and for retail foreign
exchange dealers.
(2) In addition to the requirements set
forth in paragraph (b)(1) of this section,
each self-regulatory organization that
has a futures commission merchant
member registrant must adopt rules
prescribing risk management
requirements for futures commission
merchant member registrants that shall
be the same as, or more stringent than,
the requirements contained in § 1.11.
(c)(1) Each self-regulatory
organization must establish and operate
a supervisory program that includes
written policies and procedures
concerning the application of such
supervisory program in the examination
of its member registrants for the purpose
of assessing whether each member
registrant is in compliance with the
applicable self-regulatory organization
and Commission regulations governing
minimum net capital and related
financial requirements, the obligation to
segregate customer funds, risk
management requirements, financial
reporting requirements, recordkeeping
requirements, and sales practice and
other compliance requirements. The
supervisory program also must address
the following elements:
(i) Adequate levels and independence
of examination staff. A self-regulatory
organization must maintain staff of an
adequate size, training, and experience
to effectively implement a supervisory
program. Staff of the self-regulatory
organization, including officers,
directors, and supervising committee
members, must maintain independent
judgment and its actions must not
impair its independence nor appear to
impair its independence in matters

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related to the supervisory program. The
self-regulatory organization must
provide annual ethics training to all
staff with responsibilities for the
supervisory program.
(ii) Ongoing surveillance. A selfregulatory organization’s ongoing
surveillance of member registrants must
include the review and analysis of
financial reports and regulatory notices
filed by member registrants with the
designated self-regulatory organization.
(iii) High-risk firms. A self-regulatory
organization’s supervisory program
must include procedures for identifying
member registrants that are determined
to pose a high degree of potential
financial risk, including the potential
risk of loss of customer funds. High-risk
member registrants must include firms
experiencing financial or operational
difficulties, failing to meet segregation
or net capital requirements, failing to
maintain current books and records, or
experiencing material inadequacies in
internal controls. Enhanced monitoring
for high risk firms should include, as
appropriate, daily review of net capital,
segregation, and secured calculations, to
assess compliance with self-regulatory
organization and Commission
requirements.
(iv) On-site examinations. (A) A selfregulatory organization must conduct
routine periodic on-site examinations of
member registrants. Member futures
commission merchants and retail
foreign exchange dealers must be
subject to on-site examinations no less
frequently than once every eighteen
months. A self-regulatory organization
shall establish a risk-based method of
establishing the scope of each on-site
examination; provided, however, that
the scope of each on-site examination of
a futures commission merchant or retail
foreign exchange dealer must include an
assessment of whether the registrant is
in compliance with applicable
Commission and self-regulatory
organization minimum capital,
customer fund protection,
recordkeeping, and reporting
requirements.
(B) A self-regulatory organization
other than a contract market must
establish the frequency of on-site
examinations of member introducing
brokers that do not operate pursuant to
guarantee agreements with futures
commission merchants or retail foreign
exchange dealers using a risk-based
approach, which takes into
consideration the time elapsed since the
self-regulatory organization’s previous
examination of the introducing broker.
(C) A self-regulatory organization
must conduct on-site examinations of
member registrants in accordance with

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Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations
uniform examination programs and
procedures that have been submitted to
the Commission.
(v) Adequate documentation. A selfregulatory organization must adequately
document all aspects of the operation of
the supervisory program, including the
conduct of risk-based scope setting and
the risk-based surveillance of high-risk
member registrants, and the imposition
of remedial and punitive action(s) for
material violations.
(2) In addition to the requirements set
forth in paragraph (c)(1) of this section,
the supervisory program of a selfregulatory organization that has a
registered futures commission merchant
member must satisfy the following
requirements:
(i) The supervisory program must set
forth in writing the examination
standards that the self-regulatory
organization must apply in its
examination of its registered futures
commission merchant member. The
supervisory program must be based on
controls testing and substantive testing,
and must address all areas of risk to
which the futures commission merchant
can reasonably be foreseen to be subject.
The supervisory program must be based
on an understanding of the internal
control environment to determine the
nature, timing and extent of the controls
and substantive testing to be performed.
The determination as to which elements
of the supervisory program are to be
performed on any examination must be
based on the risk profile of each
registered futures commission merchant
member.
(ii) All aspects of the supervisory
program, including the standards
pursuant to paragraph (c)(2)(iii) of this
section, must, at minimum, conform to
auditing standards issued by the Public
Company Accounting Oversight Board
as such standards would be applicable
to a non-financial statement audit.
These standards would include the
training and proficiency of the auditor,
due professional care in the
performance of work, consideration of
fraud in an audit, audit risk and
materiality in conducting an audit,
planning and supervision,
understanding the entity and its
environment and assessing the risks of
material misstatement, performing audit
procedures in response to assessed risk
and evaluating the audit evidence
obtained, auditor’s communication with
those charged with governance, and
communicating internal control matters
identified in an audit.
(iii) The supervisory program must, at
a minimum, have standards addressing
the following:
(A) The ethics of an examiner;

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(B) The independence of an examiner;
(C) The supervision, review, and
quality control of an examiner’s work
product;
(D) The evidence and documentation
to be reviewed and retained in
connection with an examination;
(E) The sampling size and techniques
used in an examination;
(F) The examination risk assessment
process;
(G) The examination planning
process;
(H) Materiality assessment;
(I) Quality control procedures to
ensure that the examinations maintain
the level of quality expected;
(J) Communications between an
examiner and the regulatory oversight
committee, or the functional equivalent
of the regulatory oversight committee, of
the self-regulatory organization of which
the futures commission merchant is a
member;
(K) Communications between an
examiner and a futures commission
merchant’s audit committee of the board
of directors or other similar governing
body;
(L) Analytical review procedures;
(M) Record retention; and
(N) Required items for inclusion in
the examination report, such as repeat
violations, material items, and high risk
issues. The examination report is
intended solely for the information and
use of the self-regulatory organizations
and the Commission, and is not
intended to be and should not be used
by any other person or entity.
(iv) A self-regulatory organization
must cause an examinations expert to
evaluate the supervisory program and
such self-regulatory organization’s
application of the supervisory program
at least once every three years.
(A) The self-regulatory organization
must obtain from such examinations
expert a written report on findings and
recommendations issued under the
consulting services standards of the
American Institute of Certified Public
Accountants that includes the
following:
(1) A statement that the examinations
expert has evaluated the supervisory
program, including the sufficiency of
the risk-based approach and the internal
controls testing thereof, and comments
and recommendations in connection
with such evaluation from such
examinations expert;
(2) A statement that the examinations
expert has evaluated the application of
the supervisory program by the selfregulatory organization, and comments
and recommendations in connection
with such evaluation from such
examinations expert; and

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(3) The examinations expert’s report
should include an analysis of the
supervisory program’s design to detect
material weaknesses in an entity’s
internal control environment;
(4) A discussion and recommendation
of any new or best practices as
prescribed by industry sources,
including, but not limited to, those from
the American Institute of Certified
Public Accountants, the Public
Company Accounting Oversight Board,
the Institute of Internal Auditors, and
The Risk Management Association.
(B) The self-regulatory organization
must provide the written report to the
Commission no later than thirty days
following the receipt thereof. The selfregulatory organization may also
provide to the Commission a response,
in writing, to any of the findings,
comments or recommendations made by
the examinations expert. Upon
resolution of any questions or comments
raised by the Commission, and upon
written notice from the Commission that
it has no further comments or questions
on the supervisory program as amended
(by reason of the examinations expert’s
proposals, considerations of the
Commission’s questions or comments,
or otherwise), the self-regulatory
organization shall commence applying
such supervisory program as the
standard for examining its registered
futures commission merchant members
for all examinations conducted with an
‘‘as-of’’ date later than the date of the
Commission’s written notification.
(v) The supervisory program must
require the self-regulatory organization
to report to its risk and/or audit
committee of the board of directors, or
a functional equivalent committee, with
timely reports of the activities and
findings of the supervisory program to
assist the risk and/or audit committee of
the board of directors, or a functional
equivalent committee, to fulfill its
responsibility of overseeing the
examination function.
(vi) The initial supervisory program
shall be established as follows. Within
180 days following the effective date of
this section, or such other time as the
Commission may approve, the selfregulatory organization shall submit a
proposed supervisory program to the
Commission for its review and
comment, together with a written report
that includes the elements found in
paragraphs (c)(2)(iv)(A)(1) and (3) of this
section from an examinations expert
who has evaluated the supervisory
program. The self-regulatory
organization may provide the
Commission a written response to any
findings, comments or
recommendations made by the

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examinations expert. Upon resolution of
any questions or comments raised by
the Commission, and upon written
notice from the Commission that it has
no further comments or questions on the
proposed supervisory program as
amended (by reason of the
considerations of the Commission’s
questions or comments or otherwise),
the self-regulatory organizations shall
commence applying such supervisory
program as the standard for examining
its members that are registered as
futures commission merchants for all
examinations conducted with an ‘‘as-of’’
date later than the date of the
Commission’s written notification.
(vii) The examinations expert’s report,
the self-regulatory organization’s
response, as well as any information
concerning the supervisory program or
any review conducted pursuant to the
program that is obtained by the
examinations expert, is confidential.
Except as expressly provided for in this
section, such information may not be
disclosed to anyone not involved in the
review process.
(d)(1) Any two or more self-regulatory
organizations may file with the
Commission a plan for delegating to a
designated self-regulatory organization,
for any registered futures commission
merchant, retail foreign exchange
dealer, or introducing broker that is a
member of more than one such selfregulatory organization, the function of:
(i) Monitoring and examining for
compliance with the minimum financial
and related reporting requirements and
risk management requirements,
including policies and procedures
relating to the receipt, holding,
investing and disbursement of customer
funds, adopted by such self-regulatory
organizations and the Commission in
accordance with paragraphs (b) and (c)
of this section; and
(ii) Receiving the financial reports and
notices necessitated by such minimum
financial and related reporting
requirements; provided, however, that
the self-regulatory organization that
delegates the functions set forth in this
paragraph (d)(1) shall remain
responsible for its member registrants’
compliance with the regulatory
obligations, and if such self-regulatory
organization becomes aware that a
delegated function is not being
performed as required under this
section, the self-regulatory organization
shall promptly take any necessary steps
to address any noncompliance.
(2) If a plan established pursuant to
paragraph (d)(1) of this section applies
to any registered futures commission
merchant, then such plan must include
the following elements:

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(i) The Joint Audit Committee. The
self-regulatory organizations that choose
to participate in the plan shall form a
Joint Audit Committee, consisting of all
self-regulatory organizations in the plan
as members. The members of the Joint
Audit Committee shall establish,
operate and maintain a Joint Audit
Program in accordance with the
requirements of this section to ensure an
effective and a high quality program for
examining futures commission
merchants, to designate the designated
self-regulatory organizations that will be
responsible for the examinations of
futures commission merchants pursuant
to the Joint Audit Program, and to
satisfy such additional obligations set
forth in this section in order to facilitate
the examinations of futures commission
merchants by their respective
designated self-regulatory organizations.
(ii) The Joint Audit Program. The Joint
Audit Program must, at minimum,
satisfy the following requirements.
(A) The purpose of the Joint Audit
Program must be to assess whether each
registered futures commission merchant
member of the Joint Audit Committee
self-regulatory organization members is
in compliance with the Joint Audit
Program and Commission regulations
governing minimum net capital and
related financial requirements, the
obligation to segregate customer funds,
risk management requirements,
including policies and procedures
relating to the receipt, holding,
investment, and disbursement of
customer funds, financial reporting
requirements, recordkeeping
requirements, and sales practice and
other compliance requirements.
(B) The Joint Audit Program must
include written policies and procedures
concerning the application of the Joint
Audit Program in the examination of the
registered futures commission merchant
members of the Joint Audit Committee
self-regulatory organization members.
(C)(1) Adequate levels and
independence of examination staff. A
designated self-regulatory organization
must maintain staff of an adequate size,
training, and experience to effectively
implement the Joint Audit Program.
Staff of the designated self-regulatory
organization, including officers,
directors, and supervising committee
members, must maintain independent
judgment and its actions must not
impair its independence nor appear to
impair its independence in matters
related to the Joint Audit Program. The
designated self-regulatory organization
must provide annual ethics training to
all staff with responsibilities for the
Joint Audit Program.

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(2) Ongoing surveillance. A
designated self-regulatory organization’s
ongoing surveillance of futures
commission merchant member
registrants over which it has oversight
responsibilities must include the review
and analysis of financial reports and
regulatory notices filed by such member
registrants with the designated selfregulatory organization.
(3) High-risk firms. The Joint Audit
Program must include procedures for
identifying futures commission
merchant member registrants over
which it has oversight responsibilities
that are determined to pose a high
degree of potential financial risk,
including the potential risk of loss of
customer funds. High-risk member
registrants must include firms
experiencing financial or operational
difficulties, failing to meet segregation
or net capital requirements, failing to
maintain current books and records, or
experiencing material inadequacies in
internal controls. Enhanced monitoring
for high risk firms should include, as
appropriate, daily review of net capital,
segregation, and secured calculations, to
assess compliance with self-regulatory
and Commission requirements.
(4) On-site examinations. A
designated self-regulatory organization
must conduct routine periodic on-site
examinations of futures commission
merchant member registrants over
which it has oversight responsibilities.
Such member registrants must be
subject to on-site examinations no less
frequently than once every eighteen
months. A designated self-regulatory
organization shall establish a risk-based
method of establishing the scope of each
on-site examination, provided, however,
that the scope of each on-site
examination of a futures commission
merchant must include an assessment of
whether the registrant is in compliance
with applicable Commission and selfregulatory organization minimum
capital, customer fund protection,
recordkeeping, and reporting
requirements. A designated selfregulatory organization must conduct
on-site examinations of futures
commission merchant registrants in
accordance with the Joint Audit
Program.
(D) The Joint Audit Committee
members must adequately document all
aspects of the operation of the Joint
Audit Program, including the conduct of
risk-based scope setting and the riskbased surveillance of high-risk member
registrants, and the imposition of
remedial and punitive action(s) for
material violations.
(E) The Joint Audit Program must set
forth in writing the examination

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standards that a designated selfregulatory organization must apply in
its examination of a registered futures
commission merchant. The Joint Audit
Program must be based on controls
testing and substantive testing, and
must address all areas of risk to which
the futures commission merchant can
reasonably be foreseen to be subject.
The Joint Audit Program must be based
on an understanding of the internal
control environment to determine the
nature, timing and extent of the controls
and substantive testing to be performed.
The determination as to which elements
of the Joint Audit Program are to be
performed on any examination must be
based on the risk profile of each
registered futures commission
merchant.
(F) All aspects of the Joint Audit
Program, including the standards
required pursuant to paragraph
(d)(2)(ii)(G) of this section, must, at
minimum, conform to auditing
standards issued by the Public Company
Accounting Oversight Board as such
standards would be applicable to a nonfinancial statement audit. These
standards would include the training
and proficiency of the auditor, due
professional care in the performance of
work, consideration of fraud in an audit,
audit risk and materiality in conducting
an audit, planning and supervision,
understanding the entity and its
environment and assessing the risks of
material misstatement, performing audit
procedures in response to assessed risk
and evaluating the audit evidence
obtained, auditor’s communication with
those charged with governance, and
communicating internal control matters
identified in an audit.
(G) The Joint Audit Program must
have standards addressing those items
listed in paragraph (c)(2)(iii) of this
section.
(H) The initial Joint Audit Program
shall be established as follows. Within
180 days following the effective date of
this section, or such other time as the
Commission may approve, the Joint
Audit Committee members shall submit
a proposed initial Joint Audit Program
to the Commission for its review and
comment, together with a written report
that includes the elements found in
paragraphs (d)(2)(ii)(I)(1) and
(d)(2)(ii)(I)(3) of this section from an
examinations expert who has evaluated
the Joint Audit Program. The Joint Audit
Committee members may also provide
to the Commission a response, in
writing, to any of the findings,
comments or recommendations made by
the examinations expert. Upon
resolution of any questions or comments
raised by the Commission, and upon

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written notice from the Commission that
it has no further comments or questions
on the proposed Joint Audit Program as
amended (by reason of the
considerations of the Commission’s
questions or comments or otherwise),
the designated self-regulatory
organizations shall commence applying
such Joint Audit Program as the
standard for examining their respective
registered futures commission
merchants for all examinations
conducted with an ‘‘as-of’’ date later
than the date of the Commission’s
written notification.
(I) Following the establishment of the
Joint Audit Program, no less frequently
than once every three years, the Joint
Audit Committee members must cause
an examinations expert to evaluate the
Joint Audit Program and each
designated self-regulatory organization’s
application of the Joint Audit Program.
The Joint Audit Committee members
must obtain from such examinations
expert a written report, and must
provide the written report to the
Commission no later than forty-five
days prior to the annual meeting of the
members of the Joint Audit Committee
to be held in that year pursuant to
paragraph (d)(2)(iii)(A) of this section.
The Joint Audit Committee members
may also provide to the Commission a
response, in writing, to any of the
findings, comments or
recommendations made by the
examinations expert. The examinations
expert’s written report must include the
following:
(1) A statement that the examinations
expert has evaluated the Joint Audit
Program, including the sufficiency of
the risk-based approach and the internal
controls testing thereof, and comments
and recommendations in connection
with such evaluation from such
examinations expert;
(2) A statement that the examinations
expert has evaluated the application of
the Joint Audit Program by each
designated self-regulatory organization,
and comments and recommendations in
connection with such evaluation from
such examinations expert;
(3) The examinations expert’s report
on findings and recommendations
issued under the consulting services
standards of the American Institute of
Certified Public Accountants and
should include an analysis of the
supervisory program’s design to detect
material weaknesses in an entities
internal control environment; and
(4) A discussion and recommendation
of any new or best practices as
prescribed by industry sources,
including, but not limited to, those from
the American Institute of Certified

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68641

Public Accountants, the Public
Company Accounting Oversight Board,
the Internal Audit Association and The
Risk Management Association.
(J) The examinations expert’s report,
the Joint Audit Committee’s response, as
well as any information concerning the
supervisory program or any review
conducted pursuant to the program that
is obtained by the examinations expert,
is confidential. Except as expressly
provided for in paragraphs (d)(2)(ii)(G)
or (d)(2)(ii)(H) of this section, such
information may not be disclosed to
anyone not involved in the review
process.
(K) The Joint Audit Program must
require each Joint Audit Committee
member to provide to its risk and/or
audit committee of the board of
directors, or a functionally equivalent
committee, with timely reports of the
activities and findings of the Joint Audit
Program to assist the risk and/or audit
committee of the board of directors, or
a functionally equivalent committee, in
fulfilling its responsibility of overseeing
the examination function.
(iii) Meetings of the Joint Audit
Committee. (A) No less frequently than
once every year, the Joint Audit
Committee members must meet to
consider whether changes to the Joint
Audit Program are appropriate, and in
considering such, in meetings
corresponding to the written report
obtained from an examinations expert
pursuant to paragraph (d)(2)(ii)(I) of this
section, the Joint Audit Committee
members must consider such written
report, including the results of the
examinations expert’s assessment of the
Joint Audit Program and any additional
recommendations. The Commission’s
questions, comments and proposals
must also be considered. Upon written
notice from the Commission that it has
no further comments or questions on the
Joint Audit Program as amended (by
reason of the examinations expert’s
proposals, considerations of the
Commission’s questions, comments and
proposals, or otherwise), the designated
self-regulatory organizations shall
commence applying such Joint Audit
Program as the standard for examining
their respective registered futures
commission merchants for all
examinations conducted with an ‘‘as-of’’
date later than the date of the
Commission’s written notification.
(B) In addition to the items
considered in paragraph (d)(2)(iii)(A) of
this section, the Joint Audit Committee
members must consider the following
items during the annual meeting:
(1) The role of the Joint Audit
Committee and its members as it relates

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to self-regulatory organization
responsibilities;
(2) Developing and maintaining the
Joint Audit Program for all designated
self-regulatory organizations to follow
with no exceptions;
(3) Coordinating self-regulatory
organization responsibilities with those
of independent certified public
accountants, the Commission and other
regulators and self-regulatory
organizations (e.g., the Securities and
Exchange Commission, the Financial
Industry Regulatory Authority, and
others, as the case may be for futures
commission merchants subject to
regulation by multiple regulators and
self-regulatory organizations);
(4) Coordinating and sharing
information between the Joint Audit
Committee members, including issues
and industry concerns in connection
with examinations of futures
commission merchants;
(5) Identifying industry regulatory
reporting issues and financial and
operational internal control issues and
modifying the Joint Audit Program
accordingly;
(6) Issuing risk alerts for futures
commission merchants and/or
designated self-regulatory organization
examiners on an as-needed basis as
issues arise;
(7) Issuing an annual examination
alert for certified public accountants
and designated self-regulatory
organization examiners;
(8) Responding to industry issues;
(9) Providing industry feedback to
Commission proposals; and
(10) Developing and maintaining a
standard of ethics and independence
with which all examination units of the
Joint Audit Committee members must
comply.
(C) Minutes must be taken of all
meetings and distributed to all members
on a timely basis.
(D) The Commission must receive
timely prior notice of each meeting,
have to right to attend and participate in
each meeting and receive written copies
of the reports and minutes required
pursuant to paragraphs (d)(2)(ii)(J) and
(d)(2)(iii)(C) of this section, respectively.
(3) The plan referenced in paragraph
(d)(1) of this section shall not be
effective without Commission approval
pursuant to paragraph (h) of this
section.
(e) Any plan filed under this section
may contain provisions for the
allocation of expenses reasonably
incurred by designated self-regulatory
organizations among the self-regulatory
organizations participating in such a
plan.

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(f) A plan’s designated self-regulatory
organizations must report to:
(1) That plan’s other self-regulatory
organizations any violation of such
other self-regulatory organizations’ rules
and regulations for which the
responsibility to monitor or examine has
been delegated to such designated selfregulatory organization under this
section; and
(2) The Director of the Division of
Swap Dealer and Intermediary
Oversight of the Commission any
violation of a self-regulatory
organization’s rules and regulations or
any violation of the Commission’s
regulations for which the responsibility
to monitor, audit, or examine has been
delegated to such designated selfregulatory organization under this
section.
(g) The Joint Audit Committee
members may, among themselves,
establish programs to provide access to
any necessary financial or related
information.
(h) After appropriate notice and
opportunity for comment, the
Commission may, by written notice,
approve such a plan, or any part of the
plan, if it finds that the plan, or any part
of it:
(1) Is necessary or appropriate to serve
the public interest;
(2) Is for the protection and in the
interest of customers;
(3) Reduces multiple monitoring and
multiple examining for compliance with
the minimum financial rules of the
Commission and of the self-regulatory
organizations submitting the plan of any
futures commission merchant, retail
foreign exchange dealer, or introducing
broker that is a member of more than
one self-regulatory organization;
(4) Reduces multiple reporting of the
financial information necessitated by
such minimum financial and related
reporting requirements by any futures
commission merchant, retail foreign
exchange dealer, or introducing broker
that is a member of more than one selfregulatory organization;
(5) Fosters cooperation and
coordination among the self-regulatory
organizations; and
(6) Does not hinder the development
of a registered futures association under
section 17 of the Act.
(i) After the Commission has
approved a plan, or part thereof, under
paragraph (h) of this section, a selfregulatory organization delegating the
functions described in paragraph (d)(1)
of this section must notify each of its
members that are subject to such a plan:
(1) Of the limited scope of the
delegating self-regulatory organization’s
responsibility for such a member’s

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compliance with the Commission’s and
self-regulatory organization’s minimum
financial and related reporting
requirements; and
(2) Of the identity of the designated
self-regulatory organization that has
been delegated responsibility for such a
member; provided, however, that the
self-regulatory organization that
delegates, pursuant to paragraph (d) of
this section, the functions set forth in
paragraphs (b) and (c) of this section
shall remain responsible for its member
registrants’ compliance with the
regulatory obligations, and if such selfregulatory organization becomes aware
that a delegated function is not being
performed as required under this
section, the self-regulatory organization
shall promptly take any necessary steps
to address any noncompliance.
(j) The Commission may at any time,
after appropriate notice and opportunity
for hearing, withdraw its approval of
any plan, or part thereof, established
under this section, if such plan, or part
thereof, ceases to adequately effectuate
the purposes of section 4f(b) of the Act
or of this section.
(k) Whenever a registered futures
commission merchant, a registered retail
foreign exchange dealer, or a registered
introducing broker holding membership
in a self-regulatory organization ceases
to be a member in good standing of that
self-regulatory organization, such selfregulatory organization must, on the
same day that event takes place, give
electronic notice of that event to the
Commission at its Washington, DC,
headquarters and send a copy of that
notification to such futures commission
merchant, retail foreign exchange
dealer, or introducing broker.
(l) Nothing in this section shall
preclude the Commission from
examining any futures commission
merchant, retail foreign exchange
dealer, or introducing broker for
compliance with the minimum financial
and related reporting requirements, and
the risk management requirements, as
applicable, to which such futures
commission merchant, retail foreign
exchange dealer, or introducing broker
is subject.
(m) In the event a plan is not filed
and/or approved for each registered
futures commission merchant, retail
foreign exchange dealer, or introducing
broker that is a member of more than
one self-regulatory organization, the
Commission may design and, after
notice and opportunity for comment,
approve a plan for those futures
commission merchants, retail foreign
exchange dealers, or introducing brokers
that are not the subject of an approved
plan (under paragraph (h) of this

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section), delegating to a designated selfregulatory organization the
responsibilities described in paragraph
(d) of this section.
■ 18. Amend § 1.55 to:
■ a. Revise the section heading;
■ b. Revise paragraphs (b)(2) through
(b)(8) and (c); and
■ c. Add paragraphs (b)(9) through
(b)(14), (i), (j), (k), (l), (m), (n), and (o).
The revisions and additions to read as
follows:
§ 1.55 Public disclosures by futures
commission merchants.

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*

*
*
*
*
(b) * * *
(2) The funds you deposit with a
futures commission merchant for
trading futures positions are not
protected by insurance in the event of
the bankruptcy or insolvency of the
futures commission merchant, or in the
event your funds are misappropriated.
(3) The funds you deposit with a
futures commission merchant for
trading futures positions are not
protected by the Securities Investor
Protection Corporation even if the
futures commission merchant is
registered with the Securities and
Exchange Commission as a broker or
dealer.
(4) The funds you deposit with a
futures commission merchant are
generally not guaranteed or insured by
a derivatives clearing organization in
the event of the bankruptcy or
insolvency of the futures commission
merchant, or if the futures commission
merchant is otherwise unable to refund
your funds. Certain derivatives clearing
organizations, however, may have
programs that provide limited insurance
to customers. You should inquire of
your futures commission merchant
whether your funds will be insured by
a derivatives clearing organization and
you should understand the benefits and
limitations of such insurance programs.
(5) The funds you deposit with a
futures commission merchant are not
held by the futures commission
merchant in a separate account for your
individual benefit. Futures commission
merchants commingle the funds
received from customers in one or more
accounts and you may be exposed to
losses incurred by other customers if the
futures commission merchant does not
have sufficient capital to cover such
other customers’ trading losses.
(6) The funds you deposit with a
futures commission merchant may be
invested by the futures commission
merchant in certain types of financial
instruments that have been approved by
the Commission for the purpose of such
investments. Permitted investments are

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listed in Commission Regulation 1.25
and include: U.S. government securities;
municipal securities; money market
mutual funds; and certain corporate
notes and bonds. The futures
commission merchant may retain the
interest and other earnings realized from
its investment of customer funds. You
should be familiar with the types of
financial instruments that a futures
commission merchant may invest
customer funds in.
(7) Futures commission merchants are
permitted to deposit customer funds
with affiliated entities, such as affiliated
banks, securities brokers or dealers, or
foreign brokers. You should inquire as
to whether your futures commission
merchant deposits funds with affiliates
and assess whether such deposits by the
futures commission merchant with its
affiliates increases the risks to your
funds.
(8) You should consult your futures
commission merchant concerning the
nature of the protections available to
safeguard funds or property deposited
for your account.
(9) Under certain market conditions,
you may find it difficult or impossible
to liquidate a position. This can occur,
for example, when the market reaches a
daily price fluctuation limit (‘‘limit
move’’).
(10) All futures positions involve risk,
and a ‘‘spread’’ position may not be less
risky than an outright ‘‘long’’ or ‘‘short’’
position.
(11) The high degree of leverage
(gearing) that is often obtainable in
futures trading because of the small
margin requirements can work against
you as well as for you. Leverage
(gearing) can lead to large losses as well
as gains.
(12) In addition to the risks noted in
the paragraphs enumerated above, you
should be familiar with the futures
commission merchant you select to
entrust your funds for trading futures
positions. The Commodity Futures
Trading Commission requires each
futures commission merchant to make
publicly available on its Web site firm
specific disclosures and financial
information to assist you with your
assessment and selection of a futures
commission merchant. Information
regarding this futures commission
merchant may be obtained by visiting
our Web site, www.[Web site address].
ALL OF THE POINTS NOTED ABOVE
APPLY TO ALL FUTURES TRADING
WHETHER FOREIGN OR DOMESTIC.
IN ADDITION, IF YOU ARE
CONTEMPLATING TRADING FOREIGN
FUTURES OR OPTIONS CONTRACTS,

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YOU SHOULD BE AWARE OF THE
FOLLOWING ADDITIONAL RISKS:
(13) Foreign futures transactions
involve executing and clearing trades on
a foreign exchange. This is the case even
if the foreign exchange is formally
‘‘linked’’ to a domestic exchange,
whereby a trade executed on one
exchange liquidates or establishes a
position on the other exchange. No
domestic organization regulates the
activities of a foreign exchange,
including the execution, delivery, and
clearing of transactions on such an
exchange, and no domestic regulator has
the power to compel enforcement of the
rules of the foreign exchange or the laws
of the foreign country. Moreover, such
laws or regulations will vary depending
on the foreign country in which the
transaction occurs. For these reasons,
customers who trade on foreign
exchanges may not be afforded certain
of the protections which apply to
domestic transactions, including the
right to use domestic alternative dispute
resolution procedures. In particular,
funds received from customers to
margin foreign futures transactions may
not be provided the same protections as
funds received to margin futures
transactions on domestic exchanges.
Before you trade, you should familiarize
yourself with the foreign rules which
will apply to your particular
transaction.
(14) Finally, you should be aware that
the price of any foreign futures or option
contract and, therefore, the potential
profit and loss resulting therefrom, may
be affected by any fluctuation in the
foreign exchange rate between the time
the order is placed and the foreign
futures contract is liquidated or the
foreign option contract is liquidated or
exercised.
THIS BRIEF STATEMENT CANNOT,
OF COURSE, DISCLOSE ALL THE
RISKS AND OTHER ASPECTS OF THE
COMMODITY MARKETS.
I hereby acknowledge that I have
received and understood this risk
disclosure statement.

lllllllllllllllllllll
Date
lllllllllllllllllllll

Signature of Customer
(c) The Commission may approve for
use in lieu of the risk disclosure
document required by paragraph (b) of
this section a risk disclosure statement
approved by one or more foreign
regulatory agencies or self-regulatory
organizations if the Commission
determines that such risk disclosure
statement is reasonably calculated to
provide the disclosure required by
paragraph (b) of this section. Notice of

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risk disclosure statements that may be
used to satisfy Commission disclosure
requirements, what requirements such
statements meet and the jurisdictions
which accept each format will be set
forth in appendix A to this section;
Provided, however, that an FCM also
provides a customer with the risk
disclosure statement required by
paragraph (b) of this section and obtains
the customer’s acknowledgment that it
has read and understands the disclosure
document.
*
*
*
*
*
(i) Notwithstanding any other
provision of this section, no futures
commission merchant may enter into a
customer account agreement or first
accept funds from a customer, unless
the futures commission merchant
discloses to the customer all
information about the futures
commission merchant, including its
business, operations, risk profile, and
affiliates, that would be material to the
customer’s decision to entrust such
funds to and otherwise do business with
the futures commission merchant and
that is otherwise necessary for full and
fair disclosure. In connection with the
disclosure of such information, the
futures commission merchant shall
provide material information about the
topics described in paragraph (k) of this
section, expanding upon such
information as necessary to keep such
disclosure from being misleading,
whether through omission or otherwise.
The futures commission merchant shall
also disclose the same information
required by this paragraph to all
customers existing on the effective date
of this paragraph even if the futures
commission merchant and such existing
customers have previously entered into
a customer account agreement or the
futures commission merchant has
already accepted funds from such
existing customers. The futures
commission merchant shall update the
information required by this section as
and when necessary, but at least
annually, to keep such information
accurate and complete and shall
promptly disclose such updated
information to all of its customers. In
connection with such obligation to
update information, the futures
commission merchant shall take into
account any material change to its
business operation, financial condition
and other factors material to the
customer’s decision to entrust the
customer’s funds and otherwise do
business with the futures commission
merchant since its most recent
disclosure pursuant to this paragraph,
and for this purpose shall without

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limitation consider events that require
periodic reporting required to be filed
pursuant to § 1.12. For purposes of this
section, the disclosures required
pursuant to this paragraph will be
referred to as the ‘‘Disclosure
Documents.’’ The Disclosure Documents
shall provide a detailed table of contents
referencing and describing the
Disclosure Documents.
(j)(1) Each futures commission
merchant shall make the Disclosure
Documents available to each customer
to whom disclosure is required pursuant
to paragraph (i) of this section (for
purposes of this section, its ‘‘FCM
Customers’’) and to the general public.
(2) A futures commission merchant
shall make the Disclosure Documents
available to FCM Customers and to the
general public by posting a copy of the
Disclosure Documents on the futures
commission merchant’s Web site. A
futures commission merchant, however,
may use an electronic means other than
its Web site to make the Disclosure
Documents available to its FCM
Customers; provided that:
(i) The electronic version of the
Disclosure Documents shall be
presented in a format that is readily
communicated to the FCM Customers.
Information is readily communicated to
the FCM Customers if it is accessible to
the ordinary computer user by means of
commonly available hardware and
software and if the electronically
delivered document is organized in
substantially the same manner as would
be required for a paper document with
respect to the order of presentation and
the relative prominence of information;
and
(ii) A complete paper copy of the
Disclosure Documents shall be provided
to an FCM Customer upon request.
(k) Specific topics. The futures
commission merchant shall provide
material information about the
following specific topics:
(1) The futures commission
merchant’s name, address of its
principal place of business, phone
number, fax number, and email address;
(2) The name, title, business address,
business background, areas of
responsibility, and the nature of the
duties of each person that is defined as
a principal of the futures commission
merchant pursuant to § 3.1 of this
chapter;
(3) The significant types of business
activities and product lines engaged in
by the futures commission merchant,
and the approximate percentage of the
futures commission merchant’s assets
and capital that are used in each type of
activity;

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(4) The futures commission
merchant’s business on behalf of its
customers, including types of
customers, markets traded, international
businesses, and clearinghouses and
carrying brokers used, and the futures
commission merchant’s policies and
procedures concerning the choice of
bank depositories, custodians, and
counterparties to permitted transactions
under § 1.25;
(5) The material risks, accompanied
by an explanation of how such risks
may be material to its customers, of
entrusting funds to the futures
commission merchant, including,
without limitation, the nature of
investments made by the futures
commission merchant (including credit
quality, weighted average maturity, and
weighted average coupon); the futures
commission merchant’s
creditworthiness, leverage, capital,
liquidity, principal liabilities, balance
sheet leverage and other lines of
business; risks to the futures
commission merchant created by its
affiliates and their activities, including
investment of customer funds in an
affiliated entity; and any significant
liabilities, contingent or otherwise, and
material commitments;
(6) The name of the futures
commission merchant’s designated selfregulatory organization and its Web site
address and the location where the
annual audited financial statements of
the futures commission merchant is
made available;
(7) Any material administrative, civil,
enforcement, or criminal complaints or
actions filed against the FCM where
such complaints or actions have not
concluded, and any enforcement
complaints or actions filed against the
FCM during the last three years;
(8) A basic overview of customer fund
segregation, futures commission
merchant collateral management and
investments, futures commission
merchants, and joint futures
commission merchant/broker dealers;
(9) Information on how a customer
may obtain information regarding filing
a complaint about the futures
commission merchant with the
Commission or with the firm’s
designated self-regulatory organization;
and
(10) The following financial data as of
the most recent month-end when the
Disclosure Document is prepared:
(i) The futures commission
merchant’s total equity, regulatory
capital, and net worth, all computed in
accordance with U.S. Generally
Accepted Accounting Principles and
§ 1.17, as applicable;

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(ii) The dollar value of the futures
commission merchant’s proprietary
margin requirements as a percentage of
the aggregate margin requirement for
futures customers, Cleared Swaps
Customers, and 30.7 customers;
(iii) The smallest number of futures
customers, Cleared Swaps Customers,
and 30.7 customers that comprise 50
percent of the futures commission
merchant’s total funds held for futures
customers, Cleared Swaps Customers,
and 30.7 customers, respectively;
(iv) The aggregate notional value, by
asset class, of all non-hedged, principal
over-the-counter transactions into
which the futures commission merchant
has entered;
(v) The amount, generic source and
purpose of any committed unsecured
lines of credit (or similar short-term
funding) the futures commission
merchant has obtained but not yet
drawn upon;
(vi) The aggregated amount of
financing the futures commission
merchant provides for customer
transactions involving illiquid financial
products for which it is difficult to
obtain timely and accurate prices; and
(vii) The percentage of futures
customer, Cleared Swaps Customer, and
30.7 customer receivable balances that
the futures commission merchant had to
write-off as uncollectable during the
past 12-month period, as compared to
the current balance of funds held for
futures customers, Cleared Swaps
Customers, and 30.7 customers; and
(11) A summary of the futures
commission merchant’s current risk
practices, controls and procedures.
(l) In addition to the foregoing, each
futures commission merchant shall
adopt policies and procedures
reasonably designed to ensure that
advertising and solicitation activities by
each such futures commission merchant
and any introducing brokers associated
with such futures commission merchant
are not misleading to its FCM Customers
in connection with their decision to
entrust funds to and otherwise do
business with such futures commission
merchant.
(m) The Disclosure Document
required by paragraph (i) of this section
is in addition to the Risk Disclosure
Statement required under paragraph (a)
of this section.
(n) All Disclosure Documents, with
each Disclosure Document dated the
date of first use, shall be maintained in
accordance with § 1.31 and shall be
made available promptly upon request
to representatives of its designated selfregulatory organization, representatives
of the Commission, and representatives
of applicable prudential regulators.

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(o)(1) Each futures commission
merchant shall make the following
financial information publicly available
on its Web site:
(i) The daily Statement of Segregation
Requirements and Funds in Segregation
for Customers Trading on U.S.
Exchanges for the most current 12month period;
(ii) The daily Statement of Secured
Amounts and Funds Held in Separate
Accounts for 30.7 Customers Pursuant
to Commission Regulation 30.7 for the
most current 12-month period;
(iii) The daily Statement of Cleared
Swaps Customer Segregation
Requirements and Funds in Cleared
Swaps Customer Accounts Under
Section 4d(f) of the Act for the most
current 12-month period;
(iv) A summary schedule of the
futures commission merchant’s adjusted
net capital, net capital, and excess net
capital, all computed in accordance
with § 1.17 and reflecting balances as of
the month-end for the 12 most recent
months;
(v) The Statement of Financial
Condition, the Statement of Segregation
Requirements and Funds in Segregation
for Customers Trading on U.S.
Exchanges, the Statement of Secured
Amounts and Funds Held in Separate
Accounts for 30.7 Customers Pursuant
to Commission Regulation 30.7, the
Statement of Cleared Swaps Customer
Segregation Requirements and Funds in
Cleared Swaps Customer Accounts
Under Section 4d(f) of the Act, an all
related footnotes to the above schedules
that are part of the futures commission
merchant’s most current certified
annual report pursuant to § 1.16; and
(vi) The Statement of Segregation
Requirements and Funds in Segregation
for Customers Trading on U.S.
Exchanges, the Statement of Secured
Amounts and Funds Held in Separate
Accounts for 30.7 Customers Pursuant
to Commission Regulation30.7, and the
Statement of Cleared Swaps Customer
Accounts Under Section 4d(f) of the Act
that are part of the futures commission
merchant’s unaudited Form 1–FR–FCM
or Financial and Operational Combined
Uniform Single Report under the
Securities Exchange Act of 1934
(‘‘FOCUS Report’’) for the most current
12-month period.
(2) To the extent any of the financial
data identified in paragraph (1) of this
section is amended, the FCM must
clearly notate that the data has been
amended.
(3) Each futures commission merchant
must include a statement on its Web site
that is available to the public that
financial information regarding the
futures commission merchant, including

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68645

how the futures commission merchant
invests and holds customer funds, may
be obtained from the National Futures
Association and include a link to the
Web site of the National Futures
Association’s Basic System where
information regarding the futures
commission merchant’s investment of
customer funds is maintained.
(4) Each futures commission merchant
must include a statement on its Web site
that is available to the public that
additional financial information on all
futures commission merchants is
available from the Commodity Futures
Trading Commission, and include a link
to the Commodity Futures Trading
Commission’s Web page for financial
data for futures commission merchants.
PART 3—REGISTRATION
19. The authority citation for part 3
continues to read as follows:

■

Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a,
2, 6a, 6b, 6b–1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k,
6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c,
16a, 18, 19, 21, 23.

20. Amend § 3.3 to revise paragraph
(f)(2) to read as follows:

■

§ 3.3

Chief compliance officer.

*

*
*
*
*
(f) * * *
(2) The annual report shall be
furnished electronically to the
Commission not more than 60 days after
the end of the fiscal year of the futures
commission merchant, swap dealer, or
major swap participant, simultaneously
with the submission of Form 1–FR–
FCM, as required under § 1.10(b)(2)(ii)
of this chapter, simultaneously with the
Financial and Operational Combined
Uniform Single Report, as required
under § 1.10(h) of this chapter, or
simultaneously with the financial
condition report, as required under
section 4s(f) of the Act, as applicable.
*
*
*
*
*
PART 22—CLEARED SWAPS
21. The authority citation for part 22
continues to read as follows:

■

Authority: 7 U.S.C. 1a, 6d, 7a–1 as
amended by Pub. L. 111–203, 124 Stat. 1376.

22. Amend § 22.2 to:
a. Revise paragraphs (d)(1), (e)(1),
(f)(2), (f)(4), (f)(5)(iii)(B), and (g)(2); and
■ c. Add paragraphs (f)(6) and (g)(3)
through (g)(10).
The revisions and additions read as
follows:
■
■

§ 22.2 Futures Commission Merchants:
Treatment of Cleared Swaps and
Associated Cleared Swaps Customer
Collateral.

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(d) Limitations on use. (1) No futures
commission merchant shall use, or
permit the use of, the Cleared Swaps
Customer Collateral of one Cleared
Swaps Customer to purchase, margin, or
settle the Cleared Swaps or any other
trade or contract of, or to secure or
extend the credit of, any person other
than such Cleared Swaps Customer.
Cleared Swaps Customer Collateral shall
not be used to margin, guarantee, or
secure trades or contracts of the entity
constituting a Cleared Swaps Customer
other than in Cleared Swaps, except to
the extent permitted by a Commission
rule, regulation or order.
*
*
*
*
*
(e) * * *
(1) Permitted investments. A futures
commission merchant may invest
money, securities, or other property
constituting Cleared Swaps Customer
Collateral in accordance with § 1.25 of
this chapter, which shall apply to such
money, securities, or other property as
if they comprised customer funds or
customer money subject to segregation
pursuant to section 4d(a) of the Act and
the regulations thereunder; Provided,
however, that the futures commission
merchant shall bear sole responsibility
for any losses resulting from the
investment of customer funds in
instruments described in § 1.25 of this
chapter. No investment losses shall be
borne or otherwise allocated to Cleared
Swaps Customers of the futures
commission merchant.
*
*
*
*
*
(f) * * *
(2) The futures commission merchant
must reflect in the account that it
maintains for each Cleared Swaps
Customer, the net liquidating equity for
each such Cleared Swaps Customer,
calculated as follows: The market value
of any Cleared Swaps Customer
Collateral that it receives from such
customer, as adjusted by:
(i) Any uses permitted under
paragraph (d) of this section;
(ii) Any accruals on permitted
investments of such collateral under
paragraph (e) of this section that,
pursuant to the futures commission
merchant’s customer agreement with
that customer, are creditable to such
customer;
(iii) Any gains and losses with respect
to Cleared Swaps;
(iv) Any charges lawfully accruing to
the Cleared Swaps Customer, including
any commission, brokerage fee, interest,
tax, or storage fee; and
(v) Any appropriately authorized
distribution or transfer of such
collateral.
*
*
*
*
*

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(4) The futures commission merchant
must, at all times, maintain in
segregation, in its FCM Physical
Locations and/or its Cleared Swaps
Customer Accounts at Permitted
Depositories, an amount equal to the
sum of any credit balances that the
Cleared Swaps Customers of the futures
commission merchant have in their
accounts. This balance may not be
reduced by any debit balances that the
Cleared Swaps Customers of the futures
commission merchants have in their
accounts.
(5) * * *
(iii) * * *
(B) Reduce such market value by
applicable percentage deductions (i.e.,
‘‘securities haircuts’’) as set forth in
Rule 15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (§ 240.15c3–
1(c)(2)(vi) of this title). Futures
commission merchants that establish
and enforce written policies and
procedures to assess the credit risk of
commercial paper, convertible debt
instruments, or nonconvertible debt
instruments in accordance with Rule
240.15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (§ 240.15c3–
1(c)(2)(vi) of this title) may apply the
lower haircut percentages specified in
Rule 240.15c3–1(c)(2)(vi) for such
commercial paper, convertible debt
instruments and nonconvertible debt
instruments. The portion of the debit
balance, not exceeding 100 percent, that
is secured by the reduced market value
of such readily marketable securities
shall be included in calculating the sum
referred to in paragraph (f)(4) of this
section.
(6)(i) The undermargined amount for
a Cleared Swaps Customer Account is
the amount, if any, by which:
(A) The total amount of collateral
required for that Cleared Swaps
Customer’s Cleared Swaps, at the time
or times referred to in paragraph
(f)(6)(ii) of this section, exceeds—
(B) The value of the Cleared Swaps
Customer Collateral for that account, as
calculated in paragraph (f)(2) of this
section.
(ii) Each futures commission
merchant must compute, based on the
information available to the futures
commission merchant as of the close of
each business day,
(A) The undermargined amounts,
based on the clearing initial margin that
will be required to be maintained by
that futures commission merchant for its
Cleared Swaps Customers, at each
derivatives clearing organization of
which the futures commission merchant
is a member, at the point of the daily
settlement (as described in § 39.14 of
this chapter) that will complete during

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the following business day for each such
derivatives clearing organization less
(B) Any debit balances referred to in
paragraph (f)(4) of this section included
in such undermargined amounts.
(iii)(A) Prior to the time of settlement
referenced in paragraph (f)(6)(ii)(A) of
this section such futures commission
merchant must maintain residual
interest in segregated funds that is equal
to or exceeds the portion of the
computation set forth in paragraph
(f)(6)(ii) of this section attributable to
the clearing initial margin required by
the derivatives clearing organization
making such settlement.
(B) A futures commission merchant
may reduce the amount of residual
interest required in paragraph
(f)(6)(iii)(A) of this section to account for
payments received from or on behalf of
undermargined Cleared Swaps
Customers (less the sum of any
disbursements made to or on behalf of
such customers) between the close of
the previous business day and the time
of settlement.
(iv) For purposes of paragraph
(f)(6)(ii) of this section, a Depositing
Futures Commission Merchant should
include, as clearing initial margin,
customer initial margin that the
Depositing Futures Commission
Merchant will be required to maintain,
for that Depositing Futures Commission
Merchant’s Cleared Swaps Customers, at
a Collecting Futures Commission
Merchant, and, for purposes of
paragraph (f)(6)(iii) of this section, must
do so prior to the time it must settle
with that Collecting Futures
Commission Merchant.
(g) * * *
(2) Each futures commission merchant
is required to document its segregation
computation required by paragraph
(g)(1) of this section by preparing a
Statement of Cleared Swaps Customer
Segregation Requirements and Funds in
Cleared Swaps Customer Accounts
Under 4d(f) of the CEA contained in the
Form 1–FR–FCM as of the close of
business each business day.
(3) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization the daily
Statement of Cleared Swaps Customer
Segregation Requirements and Funds in
Cleared Swaps Customer Accounts
Under 4d(f) of the CEA required by
paragraph (g)(2) of this section by noon
the following business day.
(4) Each futures commission merchant
shall file the Statement of Cleared
Swaps Customer Segregation
Requirements and Funds in Cleared
Swaps Customer Accounts Under 4d(f)
of the CEA required by paragraph (g)(2)

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of this section in an electronic format
using a form of user authentication
assigned in accordance with procedures
established or approved by the
Commission.
(5) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization a report listing
the names of all banks, trust companies,
futures commission merchants,
derivatives clearing organizations, or
any other depository or custodian
holding Cleared Swaps Customer
Collateral as of the fifteenth day of the
month, or the first business day
thereafter, and the last business day of
each month. This report must include:
(i) The name and location of each
entity holding Cleared Swaps Customer
Collateral;
(ii) The total amount of Cleared
Swaps Customer Collateral held by each
entity listed in paragraph (g)(5) of this
section; and
(iii) The total amount of cash and
investments that each entity listed in
paragraph (g)(5) of this section holds for
the futures commission merchant. The
futures commission merchant must
report the following investments:
(A) Obligations of the United States
and obligations fully guaranteed as to
principal and interest by the United
States (U.S. government securities);
(B) General obligations of any State or
of any political subdivision of a State
(municipal securities);
(C) General obligation issued by any
enterprise sponsored by the United
States (government sponsored enterprise
securities);
(D) Certificates of deposit issued by a
bank;
(E) Commercial paper fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation;
(F) Corporate notes or bonds fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation; and
(G) Interests in money market mutual
funds.
(6) Each futures commission merchant
must report the total amount of
customer owned securities held by the
futures commission merchant as Cleared
Swaps Customer Collateral and must list
the names and locations of the
depositories holding customer owned
securities.
(7) Each futures commission merchant
must report the total amount of Cleared
Swaps Customer Collateral that has

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been used to purchase securities under
agreements to resell the securities
(reverse repurchase transactions).
(8) Each futures commission merchant
must report which, if any, of the
depositories holding Cleared Swaps
Customer Collateral under paragraph
(g)(5) of this section are affiliated with
the futures commission merchant.
(9) Each futures commission merchant
shall file the detailed list of depositories
required by paragraph (g)(5) of this
section by 11:59 p.m. the next business
day in an electronic format using a form
of user authentication assigned in
accordance with procedures established
or approved by the Commission.
(10) Each futures commission
merchant shall retain its daily
segregation computation and the
Statement of Cleared Swaps Customer
Segregation Requirements and Funds in
Cleared Swaps Customer Accounts
under section 4d(f) of the CEA required
by paragraph (g)(2) of this section and
the detailed listing of depositories
required by paragraph (g)(5) of this
section, together with all supporting
documentation, in accordance with
§ 1.31 of this chapter.
■ 23. Add § 22.17 to read as follows:
§ 22.17 Policies and procedures governing
disbursements of Cleared Swaps Customer
Collateral from Cleared Swaps Customer
Accounts.

(a) The provision in section 4d(f)(2) of
the Act that prohibits the commingling
of Cleared Swaps Customer Collateral
with the funds of a futures commission
merchant, shall not be construed to
prevent a futures commission merchant
from having a residual financial interest
in the funds segregated as required by
the Act and the regulations in this part
and set apart for the benefit of Cleared
Swaps Customers; nor shall such
provisions be construed to prevent a
futures commission merchant from
adding to such segregated funds such
amount or amounts of money, from its
own funds or unencumbered securities
from its own inventory, of the type set
forth in § 1.25 of this chapter, as it may
deem necessary to ensure any and all
Cleared Swaps Customer Accounts are
not undersegregated at any time.
(b) A futures commission merchant
may not withdraw funds, except
withdrawals that are made to or for the
benefit of Cleared Swaps Customers,
from a Cleared Swaps Customer
Account unless the futures commission
merchant has prepared the daily
segregation calculation required by
§ 22.2 as of the close of business on the
previous business day. A futures
commission merchant that has
completed its daily segregation

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calculation may make withdrawals, in
addition to withdrawals that are made
to or for the benefit of Cleared Swaps
Customers, to the extent of its actual
residual financial interest in funds held
in segregated accounts, including the
withdrawal of securities held in
segregated safekeeping accounts held by
a bank, trust company, derivatives
clearing organization or other futures
commission merchant. Such
withdrawal(s) shall not result in the
funds of one Cleared Swaps Customer
being used to purchase, margin or carry
the trades, contracts or swaps positions,
or extend the credit of any other Cleared
Swaps Customer or other person.
(c) A futures commission merchant
may not withdraw funds, in a single
transaction or a series of transactions,
that are not made to or for the benefit
of Cleared Swaps Customers from
Cleared Swaps Customer Accounts if
such withdrawal(s) would exceed 25
percent of the futures commission
merchant’s residual interest in such
accounts as reported on the daily
segregation calculation required by
§ 22.2 and computed as of the close of
business on the previous business day,
unless:
(1) The futures commission
merchant’s chief executive officer, chief
finance officer or other senior official
that is listed as a principal of the futures
commission merchant on its Form 7–R
and is knowledgeable about the futures
commission merchant’s financial
requirements and financial position preapproves in writing the withdrawal, or
series of withdrawals;
(2) The futures commission merchant
files written notice of the withdrawal or
series of withdrawals, with the
Commission and with its designated
self-regulatory organization immediately
after the chief executive officer, chief
finance officer or other senior official
pre-approves the withdrawal or series of
withdrawals. The written notice must:
(i) Be signed by the chief executive
officer, chief finance officer or other
senior official that pre-approved the
withdrawal, and give notice that the
futures commission merchant has
withdrawn or intends to withdraw more
than 25 percent of its residual interest
in such accounts holding Cleared Swaps
Customer Accounts funds;
(ii) Include a description of the
reasons for the withdrawal or series of
withdrawals;
(iii) List the amount of funds provided
to each recipient and the name of each
recipient;
(iv) Include the current estimate of the
amount of the futures commission
merchant’s residual interest in the

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swaps customer funds after the
withdrawal;
(v) Contain a representation by the
chief executive officer, chief finance
officer or other senior official that preapproved the withdrawal, or series of
withdrawals, that, after due diligence, to
such person’s knowledge and
reasonable belief, the futures
commission merchant remains in
compliance with the segregation
requirements after the withdrawal. The
chief executive officer, chief finance
officer or other senior official must
consider the daily segregation
calculation as of the close of business on
the previous business day and any other
factors that may cause a material change
in the futures commission’s residual
interest since the close of business the
previous business day, including known
unsecured customer debits or deficits,
current day market activity and any
other withdrawals made from the
Cleared Swaps Customer Accounts; and
(vi) Any such written notice filed
with the Commission must be filed via
electronic transmission using a form of
user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instruction issued by or approved by the
Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer. Any written notice
filed must be followed up with direct
communication to the Regional office of
Commission which has supervisory
authority over the futures commission
merchant whereby the Commission
acknowledges receipt of the notice; and
(3) After making a withdrawal
requiring the approval and notice
required in paragraphs (c)(1) and (c)(2)
of this section, and before the next daily
segregated funds calculation, no futures
commission merchant may make any
further withdrawals from accounts
holding Cleared Swaps Customer
Account funds, except to or for the
benefit of Cleared Swaps Customers,
without complying with paragraph
(c)(1) of this section and filing a written
notice with the Commission under
paragraph (c)(2)(vi) of this section and
its designated self-regulatory
organization signed by the chief
executive officer, chief finance officer,
or other senior official. The written
notice must:
(i) List the amount of funds provided
to each recipient and each recipient’s
name;

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(ii) Disclose the reason for each
withdrawal;
(iii) Confirm that the chief executive
officer, chief finance officer, or other
senior official (and identify of the
person if different from the person who
signed the notice) pre-approved the
withdrawal in writing;
(iv) Disclose the current estimate of
the futures commission merchant’s
remaining total residual interest in the
segregated accounts holding Cleared
Swaps Customer Account funds after
the withdrawal; and
(v) Include a representation that to the
best of the notice signatory’s knowledge
and reasonable belief the futures
commission merchant remains in
compliance with the segregation
requirements after the withdrawal.
(d) If a futures commission merchant
withdraws funds that are not for the
benefit of Cleared Swaps Customers
from Cleared Swaps Customer
Accounts, and the withdrawal causes
the futures commission merchant to not
hold sufficient funds in Cleared Swaps
Customer Accounts to meet its targeted
residual interest, as required to be
computed under § 1.11 of this chapter,
the futures commission merchant must
deposit its own funds into the Cleared
Swaps Customer Accounts to restore the
targeted amount of residual interest on
the next business day, or, if appropriate,
revise the futures commission
merchant’s targeted amount of residual
interest pursuant to the policies and
procedures required by § 1.11 of this
chapter. Notwithstanding the foregoing,
if the futures commission merchant’s
residual interest in Cleared Swaps
Customer Accounts is less than the
amount required to be maintained by
§ 22.2 at any particular point in time,
the futures commission merchant must
immediately restore the residual interest
to exceed the sum of such amounts. Any
proprietary funds deposited in Cleared
Swaps Customer Accounts must be
unencumbered and otherwise compliant
with § 1.25 of this chapter, as
applicable.
(e) Notwithstanding any other
provision of this part, a futures
commission merchant may not
withdraw funds that are not for the
benefit of Cleared Swaps Customers
from a Cleared Swaps Customer
Account unless the futures commission
merchant follows its policies and
procedures required by § 1.11 of this
chapter.
PART 30—FOREIGN FUTURES AND
FOREIGN OPTIONS TRANSACTIONS
24. The authority citation for part 30
continues to read as follows:

■

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Authority: 7 U.S.C. 1a, 2, 6, 6c, and 12a,
unless otherwise noted.

25. Amend § 30.1 to add paragraphs
(f), (g), and (h) to read as follows:

■

§ 30.1

Definitions.

*

*
*
*
*
(f) 30.7 customer means any foreign
futures or foreign options customer as
defined in paragraph (c) of this section
as well as any foreign-domiciled person
who trades in foreign futures or foreign
options through a futures commission
merchant; Provided, however, that an
owner or holder of a proprietary account
as defined in § 1.3(y) of this chapter
shall not be deemed to be a 30.7
customer.
(g) 30.7 account means any account
maintained by a futures commission
merchant for or on behalf of 30.7
customers to hold money, securities, or
other property to margin, guarantee, or
secure foreign futures or foreign option
positions.
(h) 30.7 customer funds means any
money, securities, or other property
received by a futures commission
merchant from, for, or on behalf of 30.7
customers to margin, guarantee, or
secure foreign futures or foreign option
positions, or money, securities, or other
property accruing to 30.7 customers as
a result of foreign futures and foreign
option positions.
■ 26. Revise § 30.7 to read as follows:
§ 30.7 Treatment of foreign futures or
foreign options secured amount.

(a) General. Except as provided in this
section, a futures commission merchant
must at all times maintain in a separate
account or accounts money, securities
and property in an amount at least
sufficient to cover or satisfy all of its
obligations to 30.7 customers
denominated as the foreign futures or
foreign options secured amount. In
computing the foreign futures or foreign
options secured amount, a futures
commission merchant may offset any
net deficit in a particular 30.7
customer’s account against the current
market value of readily marketable
securities held for the same particular
30.7 customer’s account as provided for
in paragraph (l) of this section. The
amount that must be deposited in such
separate account or accounts for 30.7
customers must be no less than the
amount required to be held in a separate
account or accounts for or on behalf of
30.7 customers pursuant to any law, or
rule, regulation or order thereunder, or
any rule of any self-regulatory
organization authorized thereunder, in
the jurisdiction in which the depository
or the 30.7 customer, as appropriate, is
located.

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(b) Location of 30.7 customer funds. A
futures commission merchant shall
deposit the foreign futures or foreign
options secured amount under an
account name that clearly identifies the
funds as belonging to 30.7 customers
and shows that the foreign futures or
foreign options secured amount is set
aside as required by this part. A futures
commission merchant may deposit
funds set aside as the foreign futures or
foreign options secured amount with the
following depositories:
(1) A bank or trust company located
in the United States;
(2) A bank or trust company located
outside the United States that has in
excess of $1 billion of regulatory capital;
(3) A futures commission merchant
registered as such with the Commission;
(4) A derivatives clearing
organization;
(5) The clearing organization of any
foreign board of trade;
(6) A member of any foreign board of
trade; or
(7) Such member’s or clearing
organization’s designated depositories.
(c) Limitation on holding foreign
futures or foreign options secured
amount outside of the United States. A
futures commission merchant may not
deposit or hold the foreign futures or
foreign options secured amount in
accounts maintained outside of the
United States with any of the
depositories listed in paragraph (b) of
this section except to meet margin
requirements, including prefunding
margin requirements, established by
rule, regulation, or order of foreign
boards of trade or foreign clearing
organizations, or to meet margin calls
issued by foreign brokers carrying the
30.7 customers’ foreign futures and
foreign option positions; Provided,
however, that a futures commission
merchant may deposit an additional
amount of up to 20 percent of the total
amount of funds necessary to meet
margin and prefunding margin
requirements to avoid daily transfers of
funds between the futures commission
merchant’s 30.7 accounts maintained in
the United States and those maintained
outside of the United States. A futures
commission merchant must deposit 30.7
customer funds under the laws and
regulations of the foreign jurisdiction
that provide the greatest degree of
protection to such funds. A futures
commission merchant may not by
contract or otherwise waive any of the
protections afforded customer funds
under the laws of the foreign
jurisdiction.
(d) Written acknowledgment from
depositories. (1) A futures commission
merchant must obtain a written

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acknowledgment from each depository
prior to or contemporaneously with the
opening of an account by the futures
commission merchant with such
depository.
(2) The written acknowledgment must
be in the form as set out in appendix E
to this part; Provided, however, that if
the futures commission merchant
invests funds set aside as the foreign
futures or foreign options secured
amount in money market mutual funds
as a permitted investment under
paragraph (h) of this section and in
accordance with the terms and
conditions of § 1.25(c) of this chapter,
the written acknowledgment with
respect to such investment must be in
the form as set out in appendix F to this
part.
(3)(i) A futures commission merchant
shall deposit 30.7 customer funds only
with a depository that agrees to provide
the director of the Division of Swap
Dealer and Intermediary Oversight, or
any successor division, or such
director’s designees, with direct, readonly electronic access to transaction and
account balance information for 30.7
customer accounts.
(ii) The written acknowledgment must
contain the futures commission
merchant’s authorization to the
depository to provide direct, read-only
electronic access to 30.7 customer
account transaction and account balance
information to the director of the
Division of Swap Dealer and
Intermediary Oversight, or any
successor division, or such director’s
designees, without further notice to or
consent from the futures commission
merchant.
(4) A futures commission merchant
shall deposit 30.7 customer funds only
with a depository that agrees to provide
the Commission and the futures
commission merchant’s designated selfregulatory organization with a copy of
the executed written acknowledgment
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. The Commission
must receive the written
acknowledgment from the depository
via electronic means, in a format and
manner determined by the Commission.
The written acknowledgment must
contain the futures commission
merchant’s authorization to the
depository to provide the written
acknowledgment to the Commission
and to the futures commission
merchant’s designated self-regulatory
organization without further notice to or
consent from the futures commission
merchant.

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(5) A futures commission merchant
shall deposit 30.7 customer funds only
with a depository that agrees that
accounts containing 30.7 customer
funds may be examined at any
reasonable time by the director of the
Division of Swap Dealer and
Intermediary Oversight or the director of
the Division of Clearing and Risk, or any
successor divisions, or such directors’
designees, or an appropriate officer,
agent or employee of the futures
commission merchant’s designated selfregulatory organization. The written
acknowledgment must contain the
futures commission merchant’s
authorization to the depository to
permit any such examination to take
place without further notice to or
consent from the futures commission
merchant.
(6) A futures commission merchant
shall deposit 30.7 customer funds only
with a depository that agrees to reply
promptly and directly to any request
from the director of the Division of
Swap Dealer and Intermediary
Oversight or the director of the Division
of Clearing and Risk, or any successor
divisions, or such directors’ designees,
or an appropriate officer, agent or
employee of the futures commission
merchant’s designated self-regulatory
organization for confirmation of account
balances or provision of any other
information regarding or related to an
account. The written acknowledgment
must contain the futures commission
merchant’s authorization to the
depository to reply promptly and
directly as required by this paragraph
without further notice to or consent
from the futures commission merchant.
(7) A futures commission merchant
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.
(8) A futures commission merchant
shall obtain a new written
acknowledgment within 120 days of any
changes in the following:
(i) The name or business address of
the futures commission merchant;
(ii) The name or business address of
the depository; or
(iii) The account number(s) under
which the foreign futures or foreign
options secured amount are held.
(9) A futures commission merchant
shall maintain each written
acknowledgment readily accessible in
its files in accordance with § 1.31 of this
chapter, for as long as the account
remains open, and thereafter for the

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period provided in § 1.31 of this
chapter.
(e) Commingling. (1) A futures
commission merchant may commingle
the funds set aside as the foreign futures
or foreign options secured amount that
it receives from, or on behalf of,
multiple 30.7 customers in a single
account or multiple accounts with one
or more of the depositories listed in
paragraph (b) of this section.
(2) A futures commission merchant
may not commingle the funds set aside
as the foreign futures or foreign options
secured amount held for 30.7 customers
with the money, securities or property
of such futures commission merchant,
with any proprietary account of such
futures commission merchant, or use
such funds to secure or guarantee the
obligations of, or extend credit to, such
futures commission merchant or any
proprietary account of such futures
commission merchant; Provided,
however, a futures commission
merchant may deposit proprietary funds
into 30.7 customer accounts as
permitted under paragraph (g) of this
section.
(3) A futures commission merchant
may not commingle 30.7 customer
funds with funds deposited by futures
customers as defined in § 1.3 of this
chapter and held in segregated accounts
pursuant to section 4d(a) and 4d(b) of
the Act or with funds deposited by
Cleared Swap Customers as defined in
§ 22.1 of this chapter and held in
segregated accounts pursuant to section
4d(f) of the Act, or with funds of any
account holders of the futures
commission merchant unrelated to
trading foreign futures or foreign
options; Provided, however, that a
futures commission merchant may
commingle 30.7 customer funds with
funds deposited by futures customers or
Cleared Swaps Customers pursuant to
the terms of a Commission regulation or
order authorizing such commingling.
(f) Limitations on use of 30.7 customer
funds. (1)(i) A futures commission
merchant shall not use, or permit the
use of, the funds of one 30.7 customer
to purchase, margin or settle the trades,
contracts, or commodity options of, or
to secure or extend credit to, any person
other than such 30.7 customer.
(ii)(A) The undermargined amount for
a 30.7 customer’s account is the amount,
if any, by which
(1) The total amount of collateral
required for that 30.7 customer’s
positions in that account, at the time or
times referred to in paragraph
(f)(1)(ii)(B) of this section, exceeds
(2) The value of the 30.7 customer
funds for that account, as calculated in
paragraph (f)(2)(ii) of this section.

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(B) Each futures commission
merchant must compute, based on the
information available to the futures
commission merchant as of the close of
each business day,
(1) The undermargined amounts,
based on the clearing initial margin that
will be required to be maintained by
that futures commission merchant for its
30.7 customers, at each clearing
organization of which the futures
commission merchant is a member, at
6:00 p.m. Eastern on the following
business day for each such clearing
organization less
(2) Any debit balances referred to in
paragraph (f)(2)(iv) of this section
included in such undermargined
amounts.
(C)(1) Prior to 6:00 p.m. Eastern Time
on the date of the settlement referenced
in paragraph (f)(1)(ii)(B)(1) of this
section, such futures commission
merchant must maintain residual
interest in segregated funds that is at
least equal to the computation set forth
in paragraph (f)(1)(ii)(B) of this section.
(2) A futures commission merchant
may reduce the amount of residual
interest required in paragraph
(f)(1)(ii)(C)(1) of this section to account
for payments received from or on behalf
of undermargined 30.7 customers (less
the sum of any disbursements made to
or on behalf of such customers) between
the close of the previous business day
and 6:00 p.m. Eastern Time on the
following business day.
(D) For purposes of paragraph
(f)(1)(ii)(B) of this section, a futures
commission merchant should include,
as clearing initial margin, customer
initial margin that the futures
commission merchant will be required
to maintain, for that futures commission
merchant’s 30.7 customers, at a foreign
broker, and, for purposes of paragraph
(f)(1)(ii)(C) of this section, must do so
prior to 6:00 p.m. Eastern Time on the
date referenced in paragraph
(f)(1)(ii)(B)(1) of this section.
(2) Requirements as to amount. (i) For
purposes of this paragraph (f)(2), the
term ‘‘account’’ shall mean the entries
on the books and records of a futures
commission merchant pertaining to the
30.7 customer funds of a particular 30.7
customer.
(ii) The futures commission merchant
must reflect in the account that it
maintains for each 30.7 customer the net
liquidating equity for each such
customer, calculated as follows: The
market value of any 30.7 customer funds
it receives from such customer, as
adjusted by:
(A) Any uses permitted under
paragraph (e) of this section;

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(B) Any accruals on permitted
investments of such collateral under
§ 1.25 of this chapter that, pursuant to
the futures commission merchant’s
customer agreement with that customer,
are creditable to such customer;
(C) Any gains and losses with respect
to contracts for the purchase or sale of
foreign futures or foreign option
positions;
(D) Any charges lawfully accruing to
the 30.7 customer, including any
commission, brokerage fee, interest, tax,
or storage fee; and
(E) Any appropriately authorized
distribution or transfer of such
collateral.
(iii) If the market value of 30.7
customer funds in the account of a 30.7
customer is positive after adjustments,
then that account has a credit balance.
If the market value of 30.7 customer
funds in the account of a 30.7 customer
is negative after adjustments, then that
account has a debit balance.
(iv) The futures commission merchant
must maintain in segregation an amount
equal to the sum of any credit balances
that 30.7 customers of the futures
commission merchant have in their
accounts. This balance may not be
reduced by any debit balances that the
30.7 customers of the futures
commission merchants have in their
accounts.
(3) A futures commission merchant
may not impose or permit the
imposition of a lien on any funds set
aside as the foreign futures or foreign
options secured amount, including any
residual financial interest of the futures
commission merchant in such funds.
(4) A futures commission merchant
may not include in funds set aside as
the foreign futures or foreign options
secured amount any money invested in
securities, memberships, or obligations
of any clearing organization or board of
trade. A futures commission merchant
may not include in funds set aside as
the foreign futures or foreign options
secured amount any other money,
securities, or property held by a member
of a foreign board of trade, board of
trade, or clearing organization, except if
the funds are deposited to margin,
secure, or guarantee 30.7 customers’
foreign futures or foreign options
positions and the futures commission
merchant obtains the written
acknowledgment from the member of
the foreign board of trade, board of
trade, or clearing organization as
required by paragraph (d) of this
section.
(g) Futures commission merchant’s
residual financial interest and
withdrawal of funds. (1) The provision
in paragraph (e) of this section, which

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prohibits the commingling of funds set
aside as the foreign futures or foreign
options secured amount with the funds
of a futures commission merchant, shall
not be construed to prevent a futures
commission merchant from having a
residual financial interest in the funds
set aside as required by the regulations
in this part for the benefit of 30.7
customers; nor shall such provisions be
construed to prevent a futures
commission merchant from adding to
such set aside funds such amount or
amounts of money, from its own funds
or unencumbered securities from its
own inventory, of the type set forth in
§ 1.25 of this chapter, as it may deem
necessary to ensure any and all 30.7
accounts from becoming undersecured
at any time.
(2) A futures commission merchant
may not withdraw funds, except
withdrawals that are made to or for the
benefit of 30.7 customers, from an
account or accounts holding the foreign
futures and foreign options secured
amount unless the futures commission
merchant has prepared the daily 30.7
calculation required by paragraph (l) of
this section as of the close of business
on the previous business day. A futures
commission merchant that has
completed its daily 30.7 calculation may
make withdrawals, in addition to
withdrawals that are made to or for the
benefit of 30.7 customers, to the extent
of its actual residual financial interest in
funds held in 30.7 accounts, including
the withdrawal of securities held in
secured amount safekeeping accounts
held by a bank, trust company, contract
market, clearing organization, member
of a foreign board of trade, or other
futures commission merchant. Such
withdrawal(s) shall not result in the
funds of one 30.7 customer being used
to purchase, margin or guarantee the
foreign futures or foreign options
positions, or extend the credit of any
other 30.7 customer or other person.
(3) A futures commission merchant
may not withdraw funds, in a single
transaction or a series of transactions,
that are not made for the benefit of 30.7
customers from an account or accounts
holding 30.7 customer funds if such
withdrawal(s) would exceed 25 percent
of the futures commission merchant’s
residual interest in such accounts as
reported on the daily secured amount
calculation required by paragraph (l) of
this section and computed as of the
close of business on the previous
business day, unless the futures
commission merchant’s chief executive
officer, chief finance officer or other
senior official that is listed as a
principal of the futures commission
merchant on its Form 7–R and is

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knowledgeable about the futures
commission merchant’s financial
requirements and financial position preapproves in writing the withdrawal, or
series of withdrawals.
(4) A futures commission merchant
must file written notice of the
withdrawal or series of withdrawals that
exceed 25 percent of the futures
commission merchant’s residual interest
in 30.7 customer funds as computed
under paragraph (h)(2) of this section
with the Commission and with its
designated self-regulatory organization
immediately after the chief executive
officer, chief finance officer or other
senior official as described in paragraph
(g)(2) of this section pre-approves the
withdrawal or series of withdrawals.
The written notice must:
(i) Be signed by the chief executive
officer, chief finance officer or other
senior official that pre-approved the
withdrawal, and give notice that the
futures commission merchant has
withdrawn or intends to withdraw more
than 25 percent of its residual interest
in accounts holding 30.7 customer
funds;
(ii) Include a description of the
reasons for the withdrawal or series of
withdrawals;
(iii) List the amount of funds provided
to each recipient and the name of each
recipient;
(iv) Include the current estimate of the
amount of the futures commission
merchant’s residual interest in the 30.7
customer funds after the withdrawal;
(v) Contain a representation by the
chief executive officer, chief finance
officer or other senior official as
described in paragraph (g)(3) of this
section that pre-approved the
withdrawal, or series of withdrawals,
that to such person’s knowledge and
reasonable belief, the futures
commission merchant remains in
compliance with the secured amount
requirements after the withdrawal. The
chief executive officer, chief finance
officer or other appropriate senior
official as described in paragraph (g)(2)
of this section must consider the daily
30.7 calculation as of the close of
business on the previous business day
and any other factors that may cause a
material change in the futures
commission’s residual interest since the
close of business the previous business
day, including known unsecured
customer debits or deficits, current day
market activity and any other
withdrawals made from the 30.7
customer accounts; and
(vi) Any such written notice filed
with the Commission must be filed via
electronic transmission using a form of
user authentication assigned in

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accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instruction issued by or approved by the
Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer. Any written notice
filed must be followed up with direct
communication to the regional office of
Commission which has supervisory
authority over the futures commission
merchant whereby the Commission
acknowledges receipt of the notice.
(5) After making a withdrawal
requiring the approval and notice
required in paragraphs (c)(1) and (c)(2)
of this section, and before the next daily
secured amount calculation, no futures
commission merchant may make any
further withdrawals from accounts
holding 30.7 customer funds, except to
or for the benefit of 30.7 customers,
without, for each withdrawal, obtaining
the approval required under paragraph
(c)(1) of this section and filing a written
notice with the Commission under
paragraph (g)(4)(vi) of this section and
its designated self-regulatory
organization signed by the chief
executive officer, chief finance officer,
or other senior official. The written
notice must:
(i) List the amount of funds provided
to each recipient and each recipient’s
name;
(ii) Disclose the reason for each
withdrawal;
(iii) Confirm that the chief executive
officer, chief finance officer, or other
senior official (and the identity of the
person if different from the person who
signed the notice) pre-approved the
withdrawal in writing;
(iv) Disclose the current estimate of
the futures commission merchant’s
remaining total residual interest in the
secured accounts holding 30.7 customer
funds after the withdrawal; and
(v) Include a representation that to the
best of the notice signatory’s knowledge
and reasonable belief the futures
commission merchant remains in
compliance with the secured amount
requirements after the withdrawal.
(6) If a futures commission merchant
withdraws funds that are not for the
benefit of 30.7 customers from the
separate accounts holding 30.7 customer
funds, and the withdrawal causes the
futures commission merchant to not
hold sufficient funds in the separate
accounts for the benefit of the 30.7
customers to meet its targeted residual
interest, as required to be computed

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under § 1.11 of this chapter, the futures
commission merchant must deposit its
own funds into the separate accounts for
the benefit of 30.7 customers to restore
the account balance to the targeted
residual interest amount on the next
business day, or, if appropriate, revise
the futures commission merchant’s
targeted amount of residual interest
pursuant to the policies and procedures
required by § 1.11 of this chapter.
Notwithstanding the foregoing, if the
futures commission merchant’s residual
interest in separate accounts for the
benefit of 30.7 customers is less than the
amount required to be maintained by
paragraph (f) of this section at any
particular point in time, the futures
commission merchant must
immediately restore the residual interest
to exceed the sum of such amounts. Any
proprietary funds deposited in the 30.7
customer accounts must be
unencumbered and otherwise compliant
with § 1.25 of this chapter, as
applicable.
(7) Notwithstanding any other
provision of this part, a futures
commission merchant may not
withdraw funds from 30.7 accounts,
except withdrawals that are made for
the benefit of 30.7 customers, unless the
futures commission merchant follows
its policies and procedures required by
§ 1.11 of this chapter.
(h) Permitted investments and
deposits of 30.7 customer funds. (1) A
futures commission merchant may
invest 30.7 customer funds subject to,
and in compliance with, the terms and
conditions of § 1.25 of this chapter.
Regulation 1.25 of this chapter shall
apply to the investment of 30.7
customer funds as if such funds
comprised customer funds or customer
money subject to segregation pursuant
to section 4d of the Act and the
regulations thereunder.
(2) Each futures commission merchant
that invests money, securities or
property on behalf of 30.7 customers
must keep a record showing the
following:
(i) The date on which such
investments were made;
(ii) The name of the person through
whom such investments were made;
(iii) The amount of money or current
market value of securities so invested;
(iv) A description of the obligations in
which such investments were made,
including CUSIP or ISIN numbers;
(v) The identity of the depositories or
other places where such investments are
maintained;
(vi) The date on which such
investments were liquidated or
otherwise disposed of and the amount
of money received or current market

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value of securities received as a result
of such disposition;
(vii) The name of the person to or
through whom such investments were
disposed of; and
(viii) A daily valuation for each
instrument and readily available
documentation supporting the daily
valuation for each instrument. Such
supporting documentation must be
sufficient to enable third parties to
verify the valuations and the accuracy of
any information from external sources
used in those valuations.
(3) Any 30.7 customer funds
deposited in a bank or trust company
located in the United States or in a
foreign jurisdiction must be available for
immediate withdrawal upon the
demand of the futures commission
merchant.
(4) Futures commission merchants
that invest 30.7 customer funds in
instruments described in § 1.25 of this
chapter shall include such instruments
in the computation of its secured
amount requirements, required under
paragraph (l) of this section, at values
that at no time exceed current market
value, determined as of the close of the
market on the date for which such
computation is made.
(i) Responsibility for § 1.25 investment
losses. A futures commission merchant
shall bear sole financial responsibility
for any losses resulting from the
investment of 30.7 customer funds in
instruments described in § 1.25 of this
chapter. No investment losses shall be
borne or otherwise allocated to the 30.7
customers of the futures commission
merchant.
(j) Loans by futures commission
merchants; treatment of proceeds. A
futures commission merchant may lend
its own funds to 30.7 customers on
securities and property pledged, or from
repledging or selling such securities and
property pursuant to specific written
agreement with such 30.7 customers.
The proceeds of such loans used to
purchase, margin, guarantee, or secure
the trades, contracts, or commodity
options of 30.7 customers shall be
treated and dealt with by a futures
commission merchant as belonging to
such 30.7 customers. A futures
commission merchant may not loan
funds on an unsecured basis to finance
a 30.7 customer’s foreign futures and
foreign options trading, nor may a
futures commission merchant loan
funds to a 30.7 customer secured by the
30.7 customer’s trading account.
(k) Permitted withdrawals. A futures
commission merchant may withdraw
funds from 30.7 customer accounts in
an amount necessary in the normal
course of business to margin, guarantee,

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secure, transfer, or settle 30.7 customers’
foreign futures or foreign option
positions with a foreign broker or
clearing organization. A futures
commission merchant also may
withdraw funds from 30.7 customer
accounts to pay commissions,
brokerage, interest, taxes, storage, and
other charges lawfully accruing in
connection with the 30.7 customers’
foreign futures and foreign options
positions.
(l) Daily computation of 30.7
customer secured amount requirement
and details regarding the holding and
investing of 30.7 customer funds. (1)
Each futures commission merchant is
required to prepare a Statement of
Secured Amounts and Funds Held in
Separate Accounts for 30.7 Customers
Pursuant to Commission Regulation
30.7 contained in the Form 1–FR–FCM
as of the close of each business day.
Futures commission merchants that
invest funds set aside as the foreign
futures or foreign options secured
amount in instruments described in
§ 1.25 of this chapter shall include such
instruments in the computation of its
secured amount requirements at values
that at no time exceed current market
value, determined as of the close of the
market on the date for which such
computation is made. Nothing in this
paragraph shall affect the requirement
that a futures commission merchant at
all times maintain sufficient money,
securities and property to cover its total
obligations to all 30.7 customers, in
accordance with paragraph (a) of this
section.
(2) A futures commission merchant
may offset any net deficit in a particular
30.7 customer’s account against the
current market value of readily
marketable securities, less deductions
(i.e., ‘‘securities haircuts’’) as set forth in
Rule 15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)), held for the same
particular 30.7 customer’s account in
computing the daily Foreign Futures
and Foreign Options Secured Amount.
Futures commission merchants that
establish and enforce written policies
and procedures to assess the credit risk
of commercial paper, convertible debt
instruments, or nonconvertible debt
instruments in accordance with Rule
240.15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)) may apply the
lower haircut percentages specified in
Rule 240.15c3–1(c)(2)(vi) for such
commercial paper, convertible debt
instruments and nonconvertible debt
instruments. The futures commission
merchant must maintain a security
interest in the securities, including a

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written authorization to liquidate the
securities at the futures commission
merchant’s discretion, and must set
aside the securities in a safekeeping
account compliant with paragraph (c) of
this section. For purposes of this
section, a security will be considered
‘‘readily marketable’’ if it is traded on a
‘‘ready market’’ as defined in Rule
15c3–1(c)(11)(i) of the Securities and
Exchange Commission (17 CFR
240.15c3–1(c)(11)(i)).
(3) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization the daily
Statement of Secured Amounts and
Funds Held in Separate Accounts for
30.7 Customers pursuant to Commission
Regulation 30.7 required by paragraph
(l)(1) of this section by noon the
following business day.
(4) Each futures commission merchant
shall file the Statement of Secured
Amounts and Funds Held in Separate
Accounts for 30.7 Customers pursuant
to Commission Regulation 30.7 required
by paragraph (l)(1) of this section in an
electronic format using a form of user
authentication assigned in accordance
with procedures established or
approved by the Commission.
(5) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization a report listing
the names of all banks, trust companies,
futures commission merchants,
derivatives clearing organizations,
foreign brokers, foreign clearing
organizations, or any other depository or
custodian holding 30.7 customer funds
as of the fifteenth day of the month, or
the first business day thereafter, and the
last business day of each month. This
report must include:
(i) The name and location of each
depository holding 30.7 customer funds;
(ii) The total amount of 30.7 customer
funds held by each depository listed in
paragraph (l)(5) of this section; and
(iii) The total amount of cash and
investments that each depository listed
in paragraph (l)(5) of this section holds
for the futures commission merchant.
The futures commission merchant must
report the following investments:
(A) Obligations of the United States
and obligations fully guaranteed as to
principal and interest by the United
States (U.S. government securities);
(B) General obligations of any State or
of any political subdivision of a State
(municipal securities);
(C) General obligation issued by any
enterprise sponsored by the United
States (government sponsored enterprise
securities);

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(D) Certificates of deposit issued by a
bank;
(E) Commercial paper fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation;
(F) Corporate notes or bonds fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation; and
(G) Interests in money market mutual
funds.
(6) Each futures commission merchant
must report the total amount of
customer-owned securities held by the
futures commission merchant as 30.7
customer funds and must list the names
and locations of the depositories
holding customer-owned securities.
(7) Each futures commission merchant
must report the total amount of 30.7
customer funds that have been used to
purchase securities under agreements to
resell the securities (reverse repurchase
transactions).
(8) Each futures commission merchant
must report which, if any, of the
depositories holding 30.7 customer
funds under paragraph (l)(5) of this
section are affiliated with the futures
commission merchant.
(9) Each futures commission merchant
shall file the detailed list of depositories
required by paragraph (l)(5) of this
section by 11:59 p.m. the next business
day in an electronic format using a form
of user authentication assigned in
accordance with procedures established
or approved by the Commission.
(10) Each futures commission
merchant shall retain its daily secured
amount computation, the Statement of
Secured Amounts and Funds Held in
Separate Accounts for 30.7 Customers
pursuant to Commission Regulation
30.7 required by paragraph (l)(1) of this
section, and the detailed list of
depositories required by paragraph (l)(5)
of this section, together with all
supporting documentation, in
accordance with the requirements of
§ 1.31 of this chapter.
■ 27. Add appendix E to part 30 to read
as follows:
Appendix E to Part 30—
Acknowledgment Letter for CFTC
Regulation 30.7 Customer Secured
Account
[Date]
[Name and Address of Depository]
We refer to the Secured Amount
Account(s) which [Name of Futures
Commission Merchant] (‘‘we’’ or ‘‘our’’) have

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68653

opened or will open with [Name of
Depository] (‘‘you’’ or ‘‘your’’) entitled:
[Name of Futures Commission Merchant] [if
applicable, add ‘‘FCM Customer Omnibus
Account’’] CFTC Regulation 30.7 Customer
Secured Account under Section 4(b) 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 ‘‘Funds’’) of customers who
trade foreign futures and/or foreign options
(as such terms are defined in U.S.
Commodity Futures Trading Commission
(‘‘CFTC’’) Regulation 30.1, 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 kept separate and
apart and separately accounted for 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 30 of the CFTC’s regulations,
as amended; that the Funds may not be
commingled with our own funds in any
proprietary account we maintain with you;
and that the Funds must otherwise be treated
in accordance with the provisions of Section
4(b) of the Act and CFTC Regulation 30.7.
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 or 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.
In addition, you agree that the Account(s)
may be examined at any reasonable time by
the director of the Division of Swap Dealer
and Intermediary Oversight of the CFTC or
the director of the Division of Clearing and
Risk of the CFTC, or any successor divisions,
or such directors’ designees, or an
appropriate officer, agent or employee of our
designated self-regulatory organization
(‘‘DSRO’’), [Name of DSRO], and this letter
constitutes the authorization and direction of
the undersigned on our behalf to permit any
such examination to take place without
further notice or consent from us.
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 Swap Dealer and Intermediary Oversight
of the CFTC or the director of the Division

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of Clearing and Risk of the CFTC, or any
successor divisions, or such directors’
designees, or an appropriate officer, agent, or
employee of [Name of DSRO], acting in its
capacity as our DSRO, 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.
You further acknowledge and agree that,
pursuant to authorization granted by us to
you previously or herein, you have provided,
or will promptly provide following the
opening of the Account(s), the director of the
Division of Swap Dealer and Intermediary
Oversight of the CFTC, or any successor
division, or such director’s designees, with
technological connectivity, which may
include provision of hardware, software, and
related technology and protocol support, to
facilitate direct, read-only electronic access
to transaction and account balance
information for the Account(s). This letter
constitutes the authorization and direction of
the undersigned on our behalf for you to
establish this connectivity and access if not
previously established, without further
notice to or consent from us.
The parties agree that all actions on your
part to respond to the above information and
access 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
or access request, in order to provide for the
secure transmission and delivery of the
requested information or access to the
appropriate recipient(s).
We will not hold you responsible for acting
pursuant to any information or access request
from the director of the Division of Swap
Dealer and Intermediary Oversight of the
CFTC or the director of the Division of
Clearing and Risk of the CFTC, or any
successor divisions, or such directors’
designees, or an appropriate officer, agent, or
employee of [Name of DSRO], acting in its
capacity as our DSRO, 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 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 30.7 customer funds maintained in
the Account(s), or to impose such charges
against us or any proprietary account
maintained by us with you. 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

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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 Part 30 of the CFTC regulations that relates
to the holding of customer 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
the parties in connection with the
Account(s), this letter agreement shall govern
with respect to matters specific to Section
4(b) of the Act and the CFTC’s regulations
thereunder, 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) and to
[Name of DSRO], acting in its capacity as our
DSRO. We hereby authorize and direct you
to provide such copies 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.

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[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Depository]
By:
Print Name:
Title:
Contact Information: [Insert phone number
and email address]
Date:

28. Add appendix F to part 30 to read
as follows:

■

Appendix F to Part 30—
Acknowledgment Letter for CFTC
Regulation 30.7 Customer Secured
Money Market Mutual Fund Account
[Date]
[Name and Address of Money Market Mutual
Fund]
We propose to invest funds held by [Name
of Futures Commission Merchant] (‘‘we’’ or
‘‘our’’) on behalf of our customers in shares
of [Name of Money Market Mutual Fund]
(‘‘you’’ or ‘‘your’’) under account(s) entitled
(or shares issued to):
[Name of Futures Commission Merchant] [if
applicable, add ‘‘FCM Customer Omnibus
Account’’] CFTC Regulation 30.7 Customer
Secured Money Market Mutual Fund
Account under Section 4(b) 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 are holding these
funds, including any shares issued and
amounts accruing in connection therewith
(collectively, the ‘‘Shares’’), for the benefit of
customers who trade foreign futures and/or
foreign options (as such terms are defined in
U.S. Commodity Futures Trading
Commission (‘‘CFTC’’) Regulation 30.1, as
amended); that the Shares held by you,
hereafter deposited in the Account(s) or
accruing to the credit of the Account(s), will
be kept separate and apart and separately
accounted for 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 30 of the CFTC’s
regulations, as amended; and that the Shares
must otherwise be treated in accordance with
the provisions of Section 4(b) of the Act and
CFTC Regulations 1.25 and 30.7.
Furthermore, you acknowledge and agree
that such Shares 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 Shares 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.
In addition, you agree that the Account(s)
may be examined at any reasonable time by
the director of the Division of Swap Dealer
and Intermediary Oversight of the CFTC or

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the director of the Division of Clearing and
Risk of the CFTC, or any successor divisions,
or such directors’ designees, or an
appropriate officer, agent or employee of our
designated self-regulatory organization
(‘‘DSRO’’), [Name of DSRO], and this letter
constitutes the authorization and direction of
the undersigned on our behalf to permit any
such examination to take place without
further notice to or consent from us.
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 Swap Dealer and Intermediary Oversight
of the CFTC or the director of the Division
of Clearing and Risk of the CFTC, or any
successor divisions, or such directors’
designees, or an appropriate officer, agent, or
employee of [Name of DSRO], acting in its
capacity as our DSRO, 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.
You further acknowledge and agree that,
pursuant to authorization granted by us to
you previously or herein, you have provided,
or will promptly provide following the
opening of the Account(s), the director of the
Division of Swap Dealer and Intermediary
Oversight of the CFTC, or any successor
division, or such director’s designees, with
technological connectivity, which may
include provision of hardware, software, and
related technology and protocol support, to
facilitate direct, read-only electronic access
to transaction and account balance
information for the Account(s). This letter
constitutes the authorization and direction of
the undersigned on our behalf for you to
establish this connectivity and access if not
previously established, without further
notice to or consent from us.
The parties agree that all actions on your
part to respond to the above information and
access requests will be made in accordance
with, and subject to, such reasonable 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
or access request, in order to provide for the
secure transmission and delivery of the
requested information or access to the
appropriate recipient(s).
We will not hold you responsible for acting
pursuant to any information or access request
from the director of the Division of Swap
Dealer and Intermediary Oversight of the
CFTC or the director of the Division of
Clearing and Risk of the CFTC, or any
successor divisions, or such directors’
designees, or an appropriate officer, agent, or
employee of [Name of DSRO], acting in its
capacity as our DSRO, 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 we become subject to either a
voluntary or involuntary petition for relief
under the U.S. Bankruptcy Code, we

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acknowledge that you will have no obligation
to release the Shares 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 Shares maintained in the Account(s),
or to impose such charges against us or any
proprietary account maintained by us with
you. 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 Part 30 of the CFTC regulations that relates
to the holding of customer 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.
We are permitted to invest customers’
funds in money market mutual funds
pursuant to CFTC Regulation 1.25. That rule
sets forth the following conditions, among
others, with respect to any investment in a
money market mutual fund:
(1) The net asset value of the fund must be
computed by 9:00 a.m. of the business day
following each business day and be made
available to us by that time;
(2) The fund must be legally obligated to
redeem an interest in the fund and make
payment in satisfaction thereof by the close
of the business day following the day on
which we make a redemption request except
as otherwise specified in CFTC Regulation
1.25(c)(5)(ii); and,
(3) The agreement under which we invest
customers’ funds must not contain any

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provision that would prevent us from
pledging or transferring fund shares.
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
the parties in connection with the
Account(s), this letter agreement shall govern
with respect to matters specific to Section
4(b) of the Act and the CFTC’s regulations
thereunder, 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) and to
[Name of DSRO], acting in its capacity as our
DSRO. We hereby authorize and direct you
to provide such copies 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 Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Money Market Mutual Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number
and email address]
DATE:

PART 140—ORGANIZATION,
FUNCTIONS, AND PROCEDURES OF
THE COMMISSION
29. The authority citation for part 140
is revised to read as follows:

■

Authority: 7 U.S.C. 2(a)(12), 12a, 13(c),
13(d), 13(e), and 16(b).

30. Amend § 140.91 to:
a. Revise the section heading;
b. Redesignate paragraph (a)(8) as
paragraph (a)(12), and paragraph (a)(7)
as paragraph (a)(8);
■ c. Add new paragraphs (a)(7), (a)(9),
(a)(10), and (a)(11); and
■ d. Revise paragraph (b).
The revisions and additions read as
follows:
■
■
■

§ 140.91 Delegation of authority to the
Director of the Division of Clearing and Risk
and to the Director of the Division of Swap
Dealer and Intermediary Oversight.

(a) * * *

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(7) All functions reserved to the
Commission in § 1.20 of this chapter.
*
*
*
*
*
(9) All functions reserved to the
Commission in § 1.26 of this chapter.
(10) All functions reserved to the
Commission in § 1.52 of this chapter.
(11) All functions reserved to the
Commission in § 30.7 of this chapter.
*
*
*
*
*
(b) The Director of the Division of
Clearing and Risk and the Director of
the Division of Swap Dealer and
Intermediary Oversight may submit any
matter which has been delegated to him
or her under paragraph (a) of this
section to the Commission for its
consideration.
Issued in Washington, DC, on November 1,
2013, by the Commission.
Melissa D. Jurgens,
Secretary of the Commission.

Appendices to Enhancing Protections
Afforded Customers and Customer
Funds Held by Futures Commission
Merchants and Derivatives Clearing
Organizations—Commission Voting
Summary and Statements of
Commissioners
Note: The following appendices will not
appear in the Code of Federal Regulations.

Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Chilton and Wetjen voted in
the affirmative. Commissioner O’Malia voted
in the negative.

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Appendix 2—Statement of Chairman
Gary Gensler
I support this final set of customer
protection reforms, which comprehensively
enhances the protection around the handling
and segregation of futures and swaps
customer funds.
Segregation of customer funds is the core
foundation of the commodity futures and
swaps markets. Segregation must be
maintained at all times. That means every
moment of every day.
Market events, though, of these last two
years highlighted that the Commission must
do everything within our authorities and
resources to strengthen oversight programs
and protection of customer funds.
These reforms are the sixth set of rules
finalized by this Commission during a twoyear process to ensure that customers have
confidence that their funds are segregated
and protected. These reforms benefit from the
Commission’s thorough review of existing
customer protection rules—looking for any
gaps in those rules and the oversight of these
markets.
They benefit from significant public input,
including staff roundtables, the Technology
Advisory Committee, the Agricultural
Advisory Committee and numerous reports
submitted by market participants.

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They also benefit from input through a
coordinated effort of the CFTC with other
regulators; the self-regulatory organizations
(SROs), such as the CME and the National
Futures Association (NFA); as well as
congressional reports and input on these
matters. I support these rules, in summary,
for at least six reasons:
• First, FCMs and clearing members must
significantly enhance their supervision of
and accounting for customer funds. They will
have to put in place additional policies and
procedures for these new protections.
• Second, significant enhancements
around outside accounting and auditing—
regarding the actual accountants or certified
public accountants that audit futures
commission merchants (FCMs), and also
regarding the SROs and how they audit the
FCMs.
• Third, significant customer fund
protections with regard to how funds are
moved around. Basically, when a firm moves
money within a firm, how can they move that
money around? Some of these reforms were
adopted by SROs last year, such as requiring
senior management signoff, and the preapproval of moving those monies. There are
also significant new changes to required
acknowledgement letters from the banks and
custodians.
• Fourth, reforms related to investing in
foreign futures accounts. Our Part 30 regime
really had not kept pace with protections for
domestic futures accounts. With these
reforms and the reforms that the NFA had
put in place last year, investing in foreign
futures accounts will be significantly aligned
with the domestic protections.
• Fifth, there’s significant new
transparency. Transparency to the
regulators—we will be able to see
electronically custodial accounts and cash
accounts on a daily basis. There is
transparency to customers, as well, with the
twice-a-month statements regarding the
details of their funds in the investment
accounts. These reforms also have been put
in place by the SROs, but it is important that
we do this at the federal level as well, and
put them in our rules.
• Sixth, the final rules include provisions
on capital and residual interest of the FCMs
themselves. This was quite possibly the most
debated feature of these reforms, but I think
they are important. In response to
commenters on this provision, we are
phasing in compliance to smooth
implementation. This section calls for studies
and roundtables, and provides for a five-year
phase in on these matters.
It is important that we look very closely at
the law and work to ensure that one
customer’s funds or property are not used in
some way to secure or guarantee other
customer’s positions.
Prior to this final rule set, the Commission
already had made important improvements
to protections for customers:
• Amendments to rule 1.25 regarding the
investment of funds that bring customers
back to protections they had prior to
exemptions the Commission granted between
2000 and 2005. Importantly, this prevents
use of customer funds for in-house lending
through repurchase agreements;

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• Clearinghouses have to collect margin on
a gross basis and FCMs are no longer able to
offset one customer’s collateral against
another and then send only the net to the
clearinghouse;
• The so-called ‘‘LSOC rule’’ (legal
segregation with operational comingling) for
swaps ensures customer money is protected
individually all the way to the clearinghouse;
• The Commission included customer
protection enhancements in the final rule for
designated contract markets. These
provisions codify into rules staff guidance on
minimum requirements for SROs regarding
their financial surveillance of FCMs; and
• Rules enhancing the protection of
customer funds when entering into uncleared
swap transactions. These reforms fulfill
Congress’ mandate that counterparties of
swap dealers be given a choice regarding
whether or not they get the protections that
come from segregation of monies and
collateral they post as initial margin.

Appendix 3—Dissenting Statement of
Commissioner Scott D. O’Malia—
Enhancing Protections Afforded
Customers and Customer Funds Held by
Futures Commission Merchants and
Derivatives Clearing Organizations 1
I respectfully dissent from the
Commission’s approval today of the final
Customer Protection Rules.
I supported the proposed rules because I
wanted to solicit public comment and engage
market participants in an open discussion
about how the Commission should improve
its customer protection regulatory oversight.
In the wake of the global financial crisis,
it is extremely important to intensify
regulatory efforts to strengthen customer
protection policies in order to promote the
financial stability of the derivatives markets.
There is no dispute customer protection must
be the cornerstone of the Commission’s
oversight. Sound customer protection
policies and measures, such as the electronic
customer verification confirmation services
will improve the efficiency and transparency
of financial markets.2
The Commission must promulgate
workable regulations that provide clear
guidance to industry participants and ensure
cost-effective access to markets. Such
regulations must be designed to address real
weaknesses in the current regulatory regime
and allow industry participants to continue
with well-established industry practices that
had nothing to do with the financial crisis or
the recent bankruptcies of MF Global and
Peregrine Financial.
Unfortunately, the Commission’s customer
protection rules fall short of these objectives.
Instead of mitigating customer risk, the rules
1 ‘‘Customer

Protection Rules’’
this regard, I applaud the efforts of the
Chicago Mercantile Exchange Inc. (CME) and the
National Futures Association (NFA) to protect
customer accounts by introducing daily electronic
confirmation services. This new technology allows
CME and NFA to review balances held at bank
depositories and compare the balances with
customer account information provide by futures
commission merchants (FCMs).
2 In

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create a false sense of security by imposing
broad and ambiguous requirements and
introducing another layer of governmental
oversight. Even worse, they force a change in
a longstanding and generally accepted
industry practice that will likely result in
seriously harmful consequences for small
FCMs and their end-user customers.
I do support several provisions that allow
customers greater insight into the operations
of an FCM. These provisions include: An
improved FCM disclosure regime that will
give customers new and critical information
about their FCM exposures, elimination of
the alternative method of calculating
segregation requirements for § 30.7 funds
(treatment of foreign futures or foreign
options), improved reporting of segregated
fund balances, and enhancements to risk
management procedures. However, I am
unable to support the final rule for the
reasons stated below.
Reinterpretation of the Residual Interest
Deadline Will Result in Costly Prefunding of
Margin Payments
My main concern with the final rules is
their radical reinterpretation of the
longstanding residual interest deadline. This
reinterpretation decreases the time in which
customers’ margin calls must arrive to their
FCM from the current three days to just one
day.
Such a change would mean a drastic
increase in pre-funding of margin, perhaps
nearly double the amounts currently
required. As a result, many small
agribusiness hedgers will have to consider
alternative risk management tools or, even
worse, will be forced out of the market.3 I am
disappointed that yet again the Commission
has rushed to implement a rule that
disregards the express Congressional
directive to protect end-users.
I recognize that the Commodity Exchange
Act (CEA) does not permit an FCM to use the
money or property of one customer to margin
the futures or option positions of another
customer.4 Despite this fact, it has been the
prevailing industry practice authorized by
the Commission for decades.
To the extent that the Commission must
reinterpret this statutory provision, I believe
this reinterpretation must be based on the
3 See e.g.; National Grain and Feed Association
Comment Letter at 2 (Dec. 28, 2012) (stating that the
Commission’s proposed changes ‘‘could have the
unintended impact of disadvantaging smaller and
mid-size FCMs that provide ‘hands-on’ service to
many of the relatively smaller hedgers in
agribusiness’’); Texas Cattle Feeders Association
Comment Letter (Jan. 14, 2013) (warning that such
changes ‘‘could have the potential to cause
unintended consequences such as added costs
eventually borne by customers’’); Iowa Cattlemen’s
Association Comment Letter (Feb. 15, 2013) (‘‘it is
imperative that the CFTC understand all sizes of
businesses . . . [in order to have] . . . a better
opportunity to write rules that provide a logical fit.
Our fear is that if this rule is put in place, we will
have members who will not take advantage of the
risk management tools . . . .’’).
4 CEA § 4d(a)(2).

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thorough analysis of the market data and the
full evaluation of the costs of strict
compliance with the statute before
implementing policy changes, and not after
as is the case with the residual interest
deadline.
The residual interest deadline rule makes
no effort to respond to the commenters’
concerns that the residual interest deadline
would be especially costly for smaller FCMs
and end-users.5 Given the express
Congressional directive to protect end-users,
I would have expected the Commission to
conduct meaningful cost-benefit analysis to
justify the costs when compared to the actual
risk to customer accounts and the derivatives
markets and to explain why the Commission
could not have adopted an alternative
approach. Regrettably, the Commission has
failed to do so.
Even the Commission’s own cost benefit
analysis points out, while significantly
understating the impact, that:
‘‘Smaller FCMs may have more difficulty
than large FCMs in absorbing the additional
cost created by the requirements of the rules
(particularly § 1.22). It is possible that some
smaller FCMs may elect to stop operating as
FCMs as a result of these costs.’’ 6
I cannot support a rule that will impose
such onerous costs and compliance burdens
on the smallest FCMs and small, nonsystemically relevant customers.
Finally, although I support a phase-in
compliance schedule for the residual interest
deadline, I am disappointed that the
Commission, in deciding whether to change
the deadline at a future time, is not required
to make such a decision based on data.
Instead, the Commission will simply come
up with another arbitrary residual interest
deadline that has nothing to do with
customer or FCM risk exposure.
Yet again, the Commission has chosen to
avoid fact-based analysis. I strongly believe
that the Commission should utilize facts and
data to make an informed decision about the
appropriate time for the residual interest
deadline.
The Rules Fail To Provide a Clear Standard
for Compliance.
In addition to my serious concerns about
the final rules’ treatment of the residual
interest deadline, I am concerned that the
rules unreasonably expand the scope of the
new regulatory compliance regime without
providing a clear regulatory objective.
For example, the rules require that a SelfRegulatory Organization (SRO) supervisory
program ‘‘address all areas of risk to which
[FCMs] can reasonably be foreseen to be
subject (emphasis added).’’ 7 This broad
language requires the SRO to guess at what
criteria the programs would be measured
against, and under what framework the SRO
would make this determination. In short, the
new language does nothing but adds more
5 Futures Industry Association Comment Letter at
16 (Feb. 15, 2013).
6 Customer Protection Rules at 313.
7 § 1.52(c)(2).

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ambiguity to the SRO’s customer protection
program and increases the cost of compliance
with vague requirements.
Examination Experts do not add Value to the
Customer Protection Regime
I also have concerns about the requirement
that each SRO supervisory program of its
member FCMs be reviewed by an
‘‘examinations expert.’’ 8 I question the
benefit of this requirement given the fact that
the Joint Audit Committee (JAC) currently
performs this function. The JAC’s primary
responsibility is to oversee the practices and
procedures that each SRO must follow when
it conducts audits and financial reviews of
FCMs. This regulatory task is already in place
and implemented in a less costly and more
efficient manner than set forth in the final
rules.
Moreover, in light of the Commission’s
regulatory oversight of all SROs and the
Commission’s review of all JAC examination
programs, this additional layer of review
does not provide any benefit except for
isolating the Commission from its primary
responsibility to oversee customer protection
programs.
Customers Deserve Better Protections in
Bankruptcy Proceedings
Going forward, the Commission should
address key customer protections in the areas
of bankruptcy. Congress should make
changes to the Bankruptcy Code to ensure
that certain bankruptcy protections are
afforded to FCM customers. Specifically,
Congress should amend the pro-rata
distribution rules in bankruptcy. Despite the
Commission’s customer segregation
requirements, individual customer accounts
are still subject to a pro-rata distribution in
bankruptcy. In addition to these changes to
the Bankruptcy Code, the Commission
should amend its rules to allow the
Commission to appoint a trustee to oversee
derivatives customers’ accounts in the
bankruptcy of a broker-dealer FCM.
Conclusion
I support implementation of a rigorous
customer protection program that provides
clear and meaningful mechanisms for
mitigating customer risks. However, the
customer protection rules approved today
have missed the mark.
In sum, many of the new rules impose
overly broad and nonsensical regulatory
requirements and, in doing so, impede the
industry’s ability to operate in an efficient
manner. Regrettably, the negative effects will
be felt most by farmers and other end-users,
whose ability to hedge risk in a cost-effective
manner will be hampered if not eliminated
altogether. This is contrary to the
Congressional directive, and I cannot support
rules that result in such an outcome.
[FR Doc. 2013–26665 Filed 11–13–13; 8:45 am]
BILLING CODE 6351–01–P
8 § 1.52.

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