Federal Register: Enhancing Protections Afforded Customers and Customer Funds Held by

604 Pages·2013·3 MB·English

6351-01-P
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
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
SUMMARY: 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.
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DATES: Effective date: [INSERT DATE 60 DAYS AFTER PUBLICATION IN
THE FEDERAL REGISTER].
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, [email protected]; Thomas Smith, Deputy Director, 202-418-5495,
[email protected]; Jennifer Bauer, Special Counsel, 202-418-5472, [email protected];
Joshua Beale, Attorney-Advisor, 202-418-5446, [email protected], Three Lafayette
Centre, 1155 21st Street N.W., Washington, DC 20581; Kevin Piccoli, Deputy Director,
646-746-9834, [email protected], 140 Broadway, 19th Floor, New York, NY 10005; or
Mark Bretscher, Special Counsel, 312-596-0529, [email protected], 525 W. Monroe
Street, Suite 1100, Chicago, IL. 60661.
Division of Clearing and Risk: Ananda Radhakrishnan, Director, 202-418-5188,
[email protected]; Robert B. Wasserman, Chief Counsel, 202-418-5092,
[email protected]; Phyllis P. Dietz, Deputy Director, 202-418-5449,
[email protected]; M. Laura Astrada, Associate Chief Counsel, 202-418-7622,
[email protected], Eileen Donovan, Associate Director, 202-418-5096,
[email protected]; Kirsten V. K. Robbins, Special Counsel, 202-418-5313,
[email protected]; or Shawn R. Durrani, Attorney-Advisor, 202-418-5048,
[email protected], Three Lafayette Centre, 1155 21st Street N.W., Washington, DC
20581.
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Office of the Chief Economist: Stephen Kane, Research Economist, [email protected],
202-418-5911, Three Lafayette Centre, 1155 21st Street N.W., 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
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
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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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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
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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)
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

1 7 U.S.C. 6d(a)(2).
2 7 U.S.C. 1 et seq.
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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 Dodd-Frank
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
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.

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/federalregister101612.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 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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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 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
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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

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 Cleared Swap.
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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, § 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,
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