[Federal Register Volume 78, Number 220 (Thursday, November 14, 2013)]
[Rules and Regulations]
[Pages 68505-68657]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-26665]



[[Page 68505]]

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

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

[[Page 68506]]


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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.

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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.

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, Attorney-Advisor, 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 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. Sec.  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. Sec.  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. Sec.  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
    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. Sec.  1.15: Risk Assessment Reporting Requirement for Futures 
Commission Merchants
    E. Sec.  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. Sec.  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. Sec.  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. Sec.  1.22: Use of Futures Customer Funds
    I. Sec.  1.23: Interest of Futures Commission Merchant in 
Segregated Futures Customer Funds; Additions and Withdrawals
    J. Sec.  1.25: Investment of Customer Funds
    1. General Comments Regarding the Investment of Customer Funds
    2. Reverse Repurchase Agreement Counterparty Concentration 
Limits
    K. Sec.  1.26: Deposit of Instruments Purchased With Futures 
Customer Funds
    L. Sec.  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. Sec.  1.30: Loans by Futures Commission Merchants: Treatment 
of Proceeds
    N. Sec.  1.32: (Sec.  22.2(g) for Cleared Swaps Customers and 
Sec.  30.7(l) for Foreign Futures and Foreign Options Customers): 
Segregated Account: Daily Computation and Record
    O. Sec.  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. Sec.  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 Sec.  1.3: Definitions; and Sec.  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. Sec.  3.3: Chief Compliance Officer Annual Report
III. Compliance Dates
    A. Financial Reports of FCMs: Sec.  1.10
    B. Risk Management Program for FCMs: Sec.  1.11
    C. Qualifications and Reports of Accountants: Sec.  1.16
    D. Minimum Financial Requirements for FCMs
    E. Written Acknowledgment Letters: Sec. Sec.  1.20, 1.26, and 
30.7
    F. Undermargined Amounts: Sec. Sec.  1.22(c), 30.7(a)
    G. SRO Minimum Financial Surveillance: Sec.  1.52
    H. Public Disclosures by FCMs: Sec.  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.
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    \1\ 7 U.S.C. 6d(a)(2).
    \2\ 7 U.S.C. 1 et seq.
    \3\ The term ``futures customer'' is defined in Sec.  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 Sec.  
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.
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    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.
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    \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 Sec.  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 Sec. Sec.  1.20 through 1.30, and Sec.  
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

[[Page 68508]]

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, Sec.  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 Sec.  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 Sec.  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, Sec.  
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.
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    \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 
Sec.  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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    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, Sec.  22.2(c) permits an FCM to commingle the 
Cleared Swaps Customer Collateral of multiple Cleared Swaps Customers 
into one or more accounts, and Sec.  22.2(e)(1) permits an FCM to 
invest Cleared Swaps Customer Collateral in accordance with Sec.  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 Sec.  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 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 Sec.  1.25.
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    \8\ The term ``foreign futures or foreign options customer'' is 
defined in Sec.  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 Sec.  1.3. The term ``foreign futures or foreign 
option'' is defined in Sec.  30.1 to generally mean any futures and/
or options transactions executed on a foreign board of trade.
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    However, unlike Sec.  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''), Sec.  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 Sec.  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 
Sec.  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

[[Page 68509]]

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 Sec.  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.
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    \9\ The term ``self-regulatory organization'' is defined by 
Sec.  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 Sec.  1.52.
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    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 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 well-functioning 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 self-regulation 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 
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 broker-dealer (``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

[[Page 68510]]

out of the customer accounts that were used by MFGI for various 
purposes other than to meet obligations to or on behalf of customers.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \12\ The Commission notes that the definition of ``customer 
funds'' in Sec.  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).
---------------------------------------------------------------------------

    These recent incidents highlighted weaknesses in the customer 
protection regime prescribed in the Commission's regulations and 
through the self-regulatory 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 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 Sec.  1.25, for the purpose of affording greater 
protection for such funds.\14\ Among other changes to Sec. Sec.  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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    In adopting the amendments to Sec.  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 Sec.  
1.25, 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.
---------------------------------------------------------------------------

    \15\ See Commission Regulation 39.12(g)(8)(i) and Derivatives 
Clearing Organization General Provisions and Core Principles, 76 FR 
69334 (Nov. 8, 2011).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \16\ See 77 FR 6336 (Feb. 7, 2012).
---------------------------------------------------------------------------

    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.
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    \17\ The term ``Cleared Swaps Customer Account'' is defined in 
Sec.  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.
---------------------------------------------------------------------------

    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

[[Page 68511]]

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 non-intermediated 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.
---------------------------------------------------------------------------

    \18\ See Core Principles and Other Requirements for Designated 
Contract Markets, 77 FR 36612 (June 19, 2012).
    \19\ Id. at 36646.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \20\ Further information on the public roundtable, including 
video recordings and transcripts of the 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 customers and their funds under 
the Act and Commission regulations.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \24\ For more information relating to the new FCM financial 
requirements, see http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4072.
---------------------------------------------------------------------------

    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

[[Page 68512]]

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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \26\ 77 FR 67866 (Nov. 14, 2012).
---------------------------------------------------------------------------

    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 Sec.  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 risk-based, 
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 Sec.  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 Sec.  
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 
Sec.  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.
---------------------------------------------------------------------------

    \27\ 78 FR 4093 (Jan. 18, 2013).
---------------------------------------------------------------------------

    During the comment period the Commission held two public 
roundtables to solicit input on issues related to the proposal from a 
cross-section 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

[[Page 68513]]

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.
---------------------------------------------------------------------------

    \28\ The 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.
---------------------------------------------------------------------------

    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. Sec.  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 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 Sec.  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 Sec.  1.11.\29\ As more fully discussed in section 
II.B. below, new Sec.  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 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\
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    \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.
    \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 Sec. Sec.  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.
---------------------------------------------------------------------------

    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

[[Page 68514]]

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 Sec. Sec.  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 Sec.  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 Sec.  1.22, Sec.  22.2, and Sec.  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\
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    \32\ The Commission notes, however, that it will receive notice 
under Sec.  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 Sec.  1.22, 
Sec.  22.2, and Sec.  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.
---------------------------------------------------------------------------

    The Commission has considered the comments and is adopting the 
amendments to Sec.  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 Sec.  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 Dodd-Frank Act. 
Section 724(a) of the Dodd-Frank 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 
Schedule.\34\ The Commission has considered the comment and has 
determined to adopt the Cleared Swaps Segregation Schedule as 
proposed.\35\
---------------------------------------------------------------------------

    \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, Sec.  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.
---------------------------------------------------------------------------

    In addition, Sec.  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 
Sec.  1.17; and the amount of its adjusted net capital in excess of its 
minimum net capital requirement. In addition, Sec.  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.
---------------------------------------------------------------------------

    \36\ 5 U.S.C. 552.
---------------------------------------------------------------------------

    The Commission proposed to amend Sec.  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

[[Page 68515]]

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\
---------------------------------------------------------------------------

    \37\ SUNY Buffalo Comment Letter at 8 (Mar. 19, 2013).
    \38\ Id. at 8-9.
    \39\ Id.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \40\ See 77 FR 6336 (Feb. 7, 2012).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \41\ 7 U.S.C. 2(c).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \42\ NFA Comment Letter at 9 (Feb. 15, 2013).
    \43\ Id.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  5.8. Such 
disclosure will provide greater transparency as to the firm's 
compliance with Commission regulations.
---------------------------------------------------------------------------

    \44\ See 75 FR 3282, 3290 (Jan. 20, 2010).
---------------------------------------------------------------------------

4. FCM Certified Annual Report Deadline
    The Commission proposed to amend Sec.  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

[[Page 68516]]

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 Sec.  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.

---------------------------------------------------------------------------

    \45\ NFA Comment Letter at 9 (Feb. 15, 2013).
---------------------------------------------------------------------------

5. Leverage Ratio Calculation
    The Commission proposed to add a new requirement in Sec.  
1.10(b)(5) to require each FCM to file with the Commission on a monthly 
basis its balance sheet leverage ratio. Proposed Sec.  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 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\
---------------------------------------------------------------------------

    \46\ NFA Comment Letter at 7-8 (Feb. 15, 2013).
    \47\ Id. at 7.
    \48\ Id. at 8.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \49\ FIA Comment Letter at 12 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 FCM-only 
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\
---------------------------------------------------------------------------

    \50\ RJ O'Brien Comment Letter at 8-9 (Feb. 15, 2013)
    \51\ Id.
    \52\ Id.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \53\ NFA is currently the only registered futures association.
---------------------------------------------------------------------------

    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 Sec.  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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Sec.  
1.10(c)(2)(i). The Commission is adopting the amendments as proposed.
    The Commission also is adopting a proposed technical amendment to 
Sec.  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

[[Page 68517]]

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 Sec.  1.10(c)(1) sets forth the jurisdiction of each of 
the Commission's three Regional offices under Sec.  140.02, and is 
intended to ensure that FCM's financial reports are filed expeditiously 
with the correct Commission Regional office.

B. Sec.  1.11: Risk Management Program for Futures Commission Merchants

    The Commission proposed new Sec.  1.11 to require each FCM that 
carries customer accounts to establish a ``Risk Management Program,'' 
as defined in Sec.  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 Sec.  1.11.\55\ Advantage stated ``that most aspects 
of proposed Sec.  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 Sec.  
1.11 as proposed, with the following observations and clarifications.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

1. Applicability
    Proposed paragraph (a) of Sec.  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 
Sec.  1.11. To clarify, the Commission notes that it would expect 
registered FCMs that do not accept customer funds to establish a Risk 
Management Program that complies with Sec.  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 
Sec.  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\
---------------------------------------------------------------------------

    \57\ Advantage Comment Letter at 2 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The Commission has considered the comment and has determined that 
Sec.  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 
Sec.  1.11.
    The Commission received no additional comments on proposed Sec.  
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 Sec.  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 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 Sec.  1.3) trading futures contracts, or 
options on futures contracts listed on designated contract markets, 
30.7 customers (as proposed to be defined in Sec.  30.1) trading 
futures contracts or options on futures contracts listed on foreign 
contract markets, and Cleared Swaps Customers (as defined in Sec.  
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 Sec.  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 Sec.  1.20 for futures customers, pursuant to Sec.  22.2 
for Cleared Swaps Customers, and pursuant to Sec.  30.7 for 30.7 
customers. The proposed definition of ``segregated funds'' makes clear 
that the requirements of Sec.  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\
---------------------------------------------------------------------------

    \58\ See 7 U.S.C. 6d(a)(2) and 7 U.S.C. 6d(f).
---------------------------------------------------------------------------

    The Commission did not receive any comments regarding the proposed 
definitions in Sec.  1.11(b) and is adopting the amendments as 
proposed.
3. Approval of Policies and Procedures and Submission to the Commission
    The Commission proposed Sec.  1.11(c) to require each FCM to 
establish, maintain, and enforce a system of risk management policies 
and procedures

[[Page 68518]]

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.
---------------------------------------------------------------------------

    \59\ Because Sec.  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.
---------------------------------------------------------------------------

    Under proposed Sec.  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 Sec.  1.11(c) and is adopting 
the amendments as proposed.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

4. Organizational Requirements of the Risk Management Program
a. Separation of Risk Management Unit from Business Unit
    The Commission proposed Sec.  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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \63\ Phillip Futures Inc. Comment Letter at 2 (Feb. 14, 2013).
    \64\ Id.
    \65\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \66\ CHS Hedging Comment Letter at 3 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \67\ RJ O'Brien Comment Letter at 9 (Feb. 15, 2013).
    \68\ Id.
    \69\ Id.
---------------------------------------------------------------------------

    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 
Sec.  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 Sec.  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 
Sec.  1.11.\70\ In general, the FIA requested the Commission to 
confirm, subject to certain exceptions or requirements, that the 
requirements of Sec.  1.11:
---------------------------------------------------------------------------

    \70\ See 77 FR 20128 (April 3, 2012).
---------------------------------------------------------------------------

    (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

[[Page 68519]]

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 Sec.  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\
---------------------------------------------------------------------------

    \71\ FIA Comment Letter at 54-55 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \72\ Id. at 52.
---------------------------------------------------------------------------

    The Commission generally agrees with the FIA in that, while the 
requirements of Sec.  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 Sec.  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 
Sec.  23.600(b) regarding the risk management program for SDs and MSPs, 
the Commission also confirms that Sec.  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 Sec.  1.11's risk management unit 
independence requirement.
---------------------------------------------------------------------------

    \73\ 77 FR 20128 (April 3, 2012).
---------------------------------------------------------------------------

    The Commission notes that the formal independence of the risk 
management unit from the business unit does not 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 Sec.  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 Sec.  1.11(d), the 
Commission is adopting the provision as proposed.
5. Components of the Risk Management Program
    The Commission's proposed Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \74\ FIA Comment Letter at 55 (Feb. 15, 2013).
    \75\ Id.
---------------------------------------------------------------------------

    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 Sec.  
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, Sec.  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 Sec.  1.20 from the depository and that 
the account is properly titled as belonging to the customers of the 
FCM; \77\ (3) establishing

[[Page 68520]]

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 Sec.  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.
---------------------------------------------------------------------------

    \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 Sec.  1.20, such account opening 
documentation is necessary to ensure that the 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 
Sec.  1.23, Sec.  22.17, or Sec.  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 documented.
---------------------------------------------------------------------------

    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 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 Sec.  1.11 may result in a referral to the 
Commission's Division of Enforcement for appropriate action.
---------------------------------------------------------------------------

    \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 
Sec. Sec.  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.
---------------------------------------------------------------------------

    Proposed Sec.  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 the Commission and NFA, the separation of duties is not 
necessary.\82\
---------------------------------------------------------------------------

    \82\ Phillip Futures Inc. Comment Letter at 2 (Feb. 14, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Also, to ensure the effectiveness of a Risk Management Program, 
Sec.  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 Sec.  1.11(e) as 
proposed.
6. Annual Review, Distribution of Policies and Procedures and 
Recordkeeping
    The Commission's proposal also includes: (1) Sec.  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) Sec.  1.11(g) which requires the 
timely distribution of written risk management policies and procedures 
to relevant supervisory personnel; and (3) Sec.  1.11(h) which 
discusses recordkeeping and availability of records. The Commission 
received no comments on paragraphs (f), (g), and (h) of Sec.  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

[[Page 68521]]

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.
---------------------------------------------------------------------------

    \85\ Such report is mandated by Sec.  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 Sec.  4d(d) of the 
Act, 7 U.S.C. 6d(d).
---------------------------------------------------------------------------

    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 Sec.  
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 Sec.  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 Sec.  
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 it difficult to recruit qualified persons to serve as a CCO/
CEO.\89\
---------------------------------------------------------------------------

    \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).
    \89\ Id.
---------------------------------------------------------------------------

    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. Sec.  1.12: Maintenance of Minimum Financial Requirements by Futures 
Commission Merchants and Introducing Brokers

    The regulatory notices required under Sec.  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 (Sec.  1.12 (a)); failing 
to maintain current books and records (Sec.  1.12(c)); and failing to 
comply with the requirements to properly segregate customer funds 
(Sec.  1.12(h)). As discussed further below, the Commission proposed to 
amend Sec.  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 business-
related events in order to afford FCMs time to determine the cause of 
the event and take an appropriate corrective action.\91\
---------------------------------------------------------------------------

    \90\ FIA Comment Letter at 37-38 (Feb. 15, 2013).
    \91\ Id.
---------------------------------------------------------------------------

    The purpose of the ``early warning'' notice system established 
under Sec.  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 Sec.  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 Sec.  1.17 to provide 
immediate notice to

[[Page 68522]]

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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \92\ NFA Comment Letter at 10 (Feb. 15, 2013).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

    \93\ Commencing November 13, 2012, the compliance date for 
certain Commission part 22 regulations, FCMs are required under 
Sec.  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).
---------------------------------------------------------------------------

    The Commission did not receive any comments on proposed Sec.  
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 Sec.  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 Sec.  1.25, or 
if the FCM holds permitted investments in a manner that is not in 
compliance with the provisions of Sec.  1.25, such as the investment 
concentration limitations contained in Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  1.32 each 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 Sec. Sec.  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\
---------------------------------------------------------------------------

    \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 (Sec.  1.32); (2) 
Secured Amount Schedule (Sec.  30.7); and, (3) Cleared Swaps 
Segregation Schedule (Sec.  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.
---------------------------------------------------------------------------

    One of the primary objectives of the proposed amendments to Sec.  
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 Sec.  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 
Sec.  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

[[Page 68523]]

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 Sec.  
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 Sec.  1.22, Sec.  
22.2, and Sec.  30.7. In addition, the Commission further notes that 
the obligation to file a notice under Sec.  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 Sec.  1.22, Sec.  22.2, and Sec.  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 Sec.  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 to provide the Commission with notice 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\
---------------------------------------------------------------------------

    \96\ Id.
    \97\ RJ O'Brien Comment Letter at 10 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \98\ FIA Comment Letter at 38 (Feb. 15, 2013).
    \99\ Id.
---------------------------------------------------------------------------

    The Commission has considered the comments and has determined to 
adopt the amendments to Sec.  1.12(k) and (l) as proposed, with the 
revision that the notices required by Sec.  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 Sec.  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 Sec.  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) 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.
---------------------------------------------------------------------------

    \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 Sec.  1.12(l).
---------------------------------------------------------------------------

    The Commission is cognizant of the commenters' desire for more 
precise guidance on when notices must be filed under Sec.  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

[[Page 68524]]

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 Sec.  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 Sec.  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 Sec.  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 
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\
---------------------------------------------------------------------------

    \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).
    \104\ Id. at 11.
    \105\ Id.
    \106\ TD Ameritrade Comment Letter at 3 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The Commission notes that it was not its intention to require an 
FCM to file with the Commission routine or non-material 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 Sec.  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 dual-registrant 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 notices required by Sec.  1.12. Currently, Sec.  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 Sec.  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 Sec.  1.12(n) to require that each 
notice filed by an FCM, IB, or SRO under Sec.  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 Sec.  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 Sec.  1.12(n).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \108\ CHS Hedging Comment Letter at 3 (Feb. 15, 2013).
    \109\ Id.
---------------------------------------------------------------------------

    The Commission has determined to adopt the amendments to Sec.  
1.12(n) and the technical and related amendments

[[Page 68525]]

in Sec.  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.
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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    The Commission has considered the comments and has determined that 
regulatory notices filed under Sec.  1.12 should not be made publicly 
available. The notices required under Sec.  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 Sec.  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 Sec.  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 Sec.  
1.12.

D. Sec.  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 year-end consolidated and 
consolidating financial information for the FCM and its highest level 
material affiliate.
    The Commission proposed to amend Sec.  1.15 to require the 
financial information to be filed in electronic format. The Commission 
received no comments on the proposed amendments to Sec.  1.15. The 
Commission is adopting the amendments as proposed. The 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. Sec.  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

[[Page 68526]]

Sec.  1.16. The Commission proposed to amend Sec.  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 Sec.  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 Sec.  1.16, including a discussion of 
the comments received, are discussed below.
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\
---------------------------------------------------------------------------

    \114\ Public Law 107-204, 116 Stat. 745 (July 30, 2002). See 
also section 101 of SOX.
    \115\ Sections 107 and 109 of SOX.
---------------------------------------------------------------------------

    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.
2. PCAOB Inspection Requirement
    The Commission proposed to amend Sec.  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\
---------------------------------------------------------------------------

    \116\ Section 104(b)(1)(A) of SOX.
    \117\ Section 104(b)(1)(B) of SOX.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    Several commenters raised issues with, or objected to, the 
proposal. Ernst & Young requested clarification that the term 
``examination'' in proposed Sec.  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 Sec.  
1.16 was intended to refer to the ``inspections'' required under 
section 104 of the SOX, and has revised the regulation accordingly.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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).
    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \127\ AICPA Comment Letter at 3 (Feb 11, 2013).
    \128\ Id.
---------------------------------------------------------------------------

    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

[[Page 68527]]

accountant is ``qualified'' to conduct the peer review.\130\
---------------------------------------------------------------------------

    \129\ NFA Comment Letter at 11 (Feb. 15, 2013).
    \130\ Id.
---------------------------------------------------------------------------

    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 Dodd-Frank 
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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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 PCAOB-registered 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 year-end 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.
3. Remediation of PCAOB Inspection Findings by the Public Accountant
    The Commission proposed in Sec.  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\
---------------------------------------------------------------------------

    \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 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

[[Page 68528]]

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 Sec.  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 Sec.  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 Sec.  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 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\
---------------------------------------------------------------------------

    \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).
    \138\ Deloitte Comment Letter at 1 (Jan. 14, 2013).
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \139\ Broker Dealer Reports, 78 FR 51910 (Aug. 21, 2013).
    \140\ Id.
---------------------------------------------------------------------------

5. Review of Public Accountant's Qualifications by the FCM's Governing 
Body
    The Commission proposed to amend Sec.  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 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\
---------------------------------------------------------------------------

    \141\ PWC Comment Letter at 3 (Jan. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  1.16.
    The Commission also is revising final Sec.  1.16(b)(4) in response 
to the comments received on proposed Sec.  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

[[Page 68529]]

the PCAOB. Accordingly, the Commission is revising Sec.  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 Sec.  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 Sec.  
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. Sec.  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
    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 
Sec.  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 Sec.  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.
    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\
---------------------------------------------------------------------------

    \142\ FIA Comment Letter at 8 (Feb. 15, 2013).
    \143\ FCStone Comment Letter at 4 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  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 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.
---------------------------------------------------------------------------

    \144\ Noncustomers are defined in Sec.  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.
---------------------------------------------------------------------------

    The Commission proposed to amend Sec.  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

[[Page 68530]]

extending significant amounts of credit over an extended period to 
cover a customer's margin deficit.\147\
---------------------------------------------------------------------------

    \146\ Vanguard Comment Letter at 7 (Feb. 22, 2013).
    \147\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \148\ MFA Comment Letter at 7 (Feb. 15, 2013).
    \149\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \153\ JSA Comment Letter at 2 (Feb. 15, 2013). See also Frontier 
Futures Comment Letter at 2-3 (Feb. 14, 2013).
    \154\ Id.
---------------------------------------------------------------------------

    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.\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\
---------------------------------------------------------------------------

    \155\ FIA Comment Letter at 26 (Feb. 15, 2013).
    \156\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \160\ Id.
    \161\ Id.
---------------------------------------------------------------------------

    TD Ameritrade stated that it did not support the proposed 
amendments to Sec.  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\
---------------------------------------------------------------------------

    \162\ TD Ameritrade Comment Letter at 3-4 (Feb. 15, 2013).
    \163\ Id.
    \164\ Id.
---------------------------------------------------------------------------

    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 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.\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

[[Page 68531]]

whom banking holidays fall on different days.\167\
---------------------------------------------------------------------------

    \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.
    \167\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \168\ CCC Comment Letter at 2-3 (Feb. 15, 2013).
    \169\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 futures exchanges to increase their margin requirements to 135% 
of maintenance margin to reduce the number and frequency of margin 
calls.\175\
---------------------------------------------------------------------------

    \173\ RJ O'Brien Comment Letter at 4 (Feb. 15, 2013).
    \174\ Id.
    \175\ Id.
---------------------------------------------------------------------------

    With respect to the reduction of the timeframe in Sec.  
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 Sec.  
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-a-day 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 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.
---------------------------------------------------------------------------

    \176\ See, e.g., NCBA Comment Letter at 2 (Feb. 15, 2013); NGFA 
Comment Letter at 3-4 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  
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 Sec.  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 Sec.  1.17(c)(5)(ix).
    The Commission has considered the proposal and is adopting the 
amendments to Sec.  1.17(c)(5)(ix) as

[[Page 68532]]

proposed. As noted above, Sec.  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 Sec.  
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 Sec.  
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 Sec.  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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \178\ CFA Comment Letter at 4-5 (Feb. 13, 2013).
    \179\ Id.
    \180\ Id.
    \181\ Id.
---------------------------------------------------------------------------

    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 dually-registered 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 Sec.  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 non-

[[Page 68533]]

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 non-customer accounts in 
their minimum capital computations. The Commission interprets Sec.  
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.

G. Sec.  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 Sec.  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 Sec.  1.20(a) to more clearly 
define the requirements regarding how FCMs must hold customer funds. 
Proposed paragraph (a) of Sec.  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 Sec.  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 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 Sec.  
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 
Sec.  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 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.
---------------------------------------------------------------------------

    \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.
    \183\ Id. (citing 63 FR 2188, 2190 (Jan. 14, 1998)).
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  1.20. Proposed Sec.  1.26, 
which would require an FCM or DCO that

[[Page 68534]]

invests customer funds in instruments described in Sec.  1.25 to obtain 
an acknowledgment letter from the depository holding such 
instruments,\184\ and proposed Sec.  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 Sec.  1.20(a) 
and (g)(4). The Commission proposed to repeal and replace Sec.  
30.7(c)(2), but retain the requirement to obtain an acknowledgment 
letter in proposed Sec.  30.7(d).
---------------------------------------------------------------------------

    \184\ Section 22.5 applies the written acknowledgment 
requirements of Sec. Sec.  1.20 and 1.26 to FCMs and DCOs in 
connection with depositing Cleared Swaps Customer Collateral in an 
account at a permitted depository.
---------------------------------------------------------------------------

    The Commission has proposed amendments to the acknowledgment letter 
requirements in Sec. Sec.  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.
---------------------------------------------------------------------------

    \185\ 74 FR 7838 (Feb. 20, 2009).
---------------------------------------------------------------------------

    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 Sec. Sec.  1.20 and 1.26, and Appendix E to part 
30 of the Commission's regulations (referred to herein as the 
``Template Letters'').
---------------------------------------------------------------------------

    \186\ 75 FR 47738 (Aug. 9, 2010).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \187\ 77 FR 67866 (Nov. 14, 2012).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \188\ Letters 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    Regulation 1.20 in its current form already requires FCMs and DCOs 
to obtain acknowledgment letters, and the 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\
---------------------------------------------------------------------------

    \195\ See Financial Conduct Authority, ``Review of the client 
assets regime for investment business,'' Consultation Paper CP13/5 
(July 2013).
---------------------------------------------------------------------------

    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 Sec.  1.20 would 
require FCMs and DCOs, respectively, to use the Template Letter set 
forth in Appendix A to Sec.  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 
Sec.  1.20, and the Template Letter for DCOs is being adopted as 
Appendix B to Sec.  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 Sec.  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

[[Page 68535]]

accounts held for the benefit of the FCM's customers.'' \196\
---------------------------------------------------------------------------

    \196\ Schwartz & Ballen Comment Letter at 8 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 
Sec. Sec.  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 Sec.  1.20(g)(4)(iv) has been renumbered as 
Sec.  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 
clarify meaning and provide consistency among the letters.
c. Federal Reserve Banks as Depositories
    Pursuant to Sec.  806(a) of the Dodd-Frank 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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \199\ Id. at 1.
    \200\ Id. at 2.
---------------------------------------------------------------------------

    The Commission is adopting, as proposed, Sec.  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 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 Sec.  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 
Sec.  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 Sec.  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\
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    \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 Sec.  39.2 of the 
Commission's regulations. A Federal Reserve Bank would be required 
to segregate customer funds and provide an acknowledgment letter 
under Sec.  1.20 with respect to any customer account subject to 
section 4d of the Act and opened by The Options Clearing Corporation 
in its capacity as a DCO.

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[[Page 68536]]

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 
read-only 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\
---------------------------------------------------------------------------

    \202\ Eurex Comment Letter at 1 (Aug. 1, 2013).
    \203\ Id. at 2.
    \204\ Id.
    \205\ FIA Comment Letter at 40 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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-by-case 
basis.
e. Release of Funds Upon Commission Instruction
    As proposed, the Template Letters would require a depository to 
release funds immediately 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. 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\
---------------------------------------------------------------------------

    \206\ Depository Bank Group Comment Letter at 10.
    \207\ Id. at 11; Schwartz & Ballen Comment Letter at 2 (Feb. 15, 
2013); Katten-FIA Comment Letter at 2 (Aug. 2, 2013).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \208\ NYPC Comment Letter at 2 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 impact such 
an instruction could have on the timely payment of obligations to a 
DCO.\212\
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    \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).
    \212\ CME Comment Letter at 7 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  1.20, proposed 
Sec.  30.7(d)(3), and the proposed Template Letters, including the 
Template Letters for Sec.  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\
---------------------------------------------------------------------------

    \213\ FIA 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).
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    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

[[Page 68537]]

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\
---------------------------------------------------------------------------

    \218\ FCStone Comment Letter at 5 (Feb. 15, 2013).
    \219\ Depository Bank Group Comment Letter at 13 (Feb. 15, 
2013).
---------------------------------------------------------------------------

    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 FCM-reported balances and balances at 
a depository because the depository typically posts all credits and 
debits after the close of business.\221\
---------------------------------------------------------------------------

    \220\ NYPC Comment Letter at 2 (Feb. 15, 2013).
    \221\ Schwartz & Ballen Comment Letter at 4 (Feb. 15, 2013).
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    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\
---------------------------------------------------------------------------

    \222\ LCH.Clearnet Comment Letter at 3 (Jan. 25, 2013).
---------------------------------------------------------------------------

    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 read-only access requirement.\225\
---------------------------------------------------------------------------

    \223\ NFA Comment Letter at 6 (Feb. 15, 2013).
    \224\ Id.
    \225\ Id. at 7.
---------------------------------------------------------------------------

    With the goal of achieving the highest degree of customer 
protection, the Commission has determined to adopt, 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 
provide the kind of information that would identify inaccuracies in FCM 
reporting. Accordingly, proposed Sec.  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 Sec.  1.20(g)(4) are renumbered 
accordingly.
    The Commission also is adopting Sec. Sec.  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 Sec.  39.19(c)(1), will enable it to verify DCO account 
balances with a depository as necessary.
---------------------------------------------------------------------------

    \226\ Proposed Sec. Sec.  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 Sec.  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 up-to-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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[[Page 68538]]

g. Requirement To File New Acknowledgment Letters
    Proposed paragraphs (d)(7) and (g)(4)(vii) of Sec.  1.20 and 
proposed Sec.  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 six-month 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\
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    \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).
---------------------------------------------------------------------------

    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) Sec. Sec.  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.
    The Commission also is adopting (renumbered) Sec. Sec.  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 Sec. Sec.  
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.
---------------------------------------------------------------------------

    \231\ The acknowledgment letter must be executed upon the 
opening of the account, regardless of when customer funds are 
deposited in the account.
---------------------------------------------------------------------------

    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'' 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\
---------------------------------------------------------------------------

    \232\ Depository Bank Group Comment Letter at 3 (Feb. 15, 2013). 
See also RJ O'Brien Comment Letter at 11 (Feb. 15, 2013).
    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \237\ Schwartz & Ballen Comment Letter at 6 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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

[[Page 68539]]

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 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\
---------------------------------------------------------------------------

    \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.''
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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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i. Liens
    The proposed Template Letters would include the following language: 
``Furthermore, [the depository]

[[Page 68540]]

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 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\
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    \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.
    \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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    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 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.
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    \253\ Katten-FIA Comment Letter at 2 (Aug. 2, 2013).
    \254\ Id.
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    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

[[Page 68541]]

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.
---------------------------------------------------------------------------

    \255\ NYPC Comment Letter at 3 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
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    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.
---------------------------------------------------------------------------

    \258\ Id. at 8.
---------------------------------------------------------------------------

    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 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 the Commission's intent to proceed in a 
commercially reasonable manner under the particular circumstances.
---------------------------------------------------------------------------

    \259\ Schwartz & Ballen Comment Letter at 7 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  
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 Sec.  1.20(e) to explicitly 
address the commingling of customer funds. Proposed Sec.  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 Sec.  1.20(b).
    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 68542]]

regulation or order, or by a DCO rule approved in accordance with Sec.  
39.15(b)(2) of the regulations.\260\
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    \260\ Regulation 22.2(c)(2) regarding cleared swaps customer 
accounts already prohibits commingling.
---------------------------------------------------------------------------

    Similarly, a proposed amendment to Sec.  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\
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    \261\ Proposed Sec.  30.7(e)(3).
---------------------------------------------------------------------------

    The Commission received one comment on the proposed amendments to 
Sec.  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\
---------------------------------------------------------------------------

    \262\ FIA Comment Letter at 36 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \263\ Id.
    \264\ Id.
---------------------------------------------------------------------------

    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 Sec.  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 
Sec.  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 Sec.  30.7 secured account and the customer's 
Cleared Swaps Account (as applicable) as directed by the customer upon 
the 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 Sec.  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 Sec.  1.20 as 
adopted.\265\
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    \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.
---------------------------------------------------------------------------

    The Commission adopts the amendment as proposed.
6. Limitations on the Use of Customer Funds
    Proposed Sec.  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 Sec.  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 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 
Sec.  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 Sec.  1.20(f) 
largely mirrors the language set forth in current Sec.  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.
---------------------------------------------------------------------------

    \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 Sec.  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 Sec.  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 Sec.  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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7. Segregation Requirements for DCOs
    Proposed Sec.  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 Sec.  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

[[Page 68543]]

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.
8. Immediate Availability of Bank and Trust Company Deposits
    The Commission proposed a paragraph (h) to Sec.  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\
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    \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 Sec.  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 ability to 
withdraw the funds from the account for the use intended (i.e., as 
performance bond). The Commission would consider any future 
amendments to Sec.  1.20(h) based upon the developments of 
alternative segregation modes.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
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    In addition, the Commission proposed an amendment to Sec.  
1.22.\271\ Regulation 1.22 is a longstanding regulation\272\ 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\
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    \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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    The Commission proposed an amendment to Sec.  1.22 to clarify that 
it is 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 Sec.  1.10) and on the daily segregation 
calculation.\277\
---------------------------------------------------------------------------

    \276\ 77 FR 67886.
    \277\ Id.
---------------------------------------------------------------------------

    The Commission requested comment on all aspects of the Proposed 
Residual Interest Requirement, including the costs and benefits of this 
proposed regulation.\278\
---------------------------------------------------------------------------

    \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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[[Page 68544]]

    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, 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 long-
standing 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 
under-segregated at any time during the day for any reason.'' \291\
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    \279\ CIEBA Comment Letter at 2 (Feb. 20, 2013).
    \280\ Id.
    \281\ Id. 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).
    \284\ Id.
    \285\ Paul/Weiss 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).
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    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 with 
section 4d of the Act, in light of other Commission regulations.\293\
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    \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).
    \293\ See, e.g., FIA Comment Letter at 18-21 (Feb. 15, 2013). 
See also FIA Comment Letter at 2-5 (June 20, 2013).
---------------------------------------------------------------------------

    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

[[Page 68545]]

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\
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    \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).
    \298\ CMC Comment Letter at 2 (Feb. 15, 2013).
    \299\ Id.
    \300\ Advantage Comment Letter at 8 (Feb. 15, 2013).
    \301\ See id. at 7-8.
    \302\ See id. at 7.
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    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 mid-sized 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 to require the real time 
calculation of margin deficits.\308\
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    \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).
    \308\ Id.
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    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\
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    \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).
---------------------------------------------------------------------------

    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\
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    \311\ Congressional Committees Comment Letter at 1 (Sept. 25, 
2013).
---------------------------------------------------------------------------

    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 
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\
---------------------------------------------------------------------------

    \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.'').
    \314\ FIA Comment Letter at 16 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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

[[Page 68546]]

their exposure to FCMs'' and ``have a significant impact on customers' 
own liquidity.'' \319\
---------------------------------------------------------------------------

    \315\ MFA 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.'')
    \319\ Newedge Comment Letter at 2 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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\
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    \320\ Steve Jones Comment Letter at 1 (Feb. 15, 2013).
    \321\ Jefferies Comment Letter at 7 (Feb. 15, 2013).
    \322\ Id. at 8.
    \323\ Id.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.
    \328\ Id.
    \329\ Id.
---------------------------------------------------------------------------

    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 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

[[Page 68547]]

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\
---------------------------------------------------------------------------

    \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).
    \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).
    \344\ Id.
    \345\ Id.
    \346\ RJ O'Brien Comment Letter at 3 (Feb. 15, 2013). See also 
ICA Comment Letter at 1-2 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 trade date.\350\ ISDA stated 
this alternative ``would rationally reduce'' FCMs cost of 
compliance\351\ and that ``[f]or an FCM with robust credit risk 
management systems, covering end-of-day 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 end-of-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 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\
---------------------------------------------------------------------------

    \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).
    \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).
    \359\ Id. at 4.
    \360\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \362\ RJ O'Brien Comment Letter at 5 (Feb. 15, 2013).
    \363\ Id.
---------------------------------------------------------------------------

    MFA stated that the Commission should modify the proposed FCM 
residual interest requirement in Sec.  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 pre-funding or intraday margin 
calls, while also ensuring that * * * FCMs will hold sufficient funds 
to protect against customer shortfalls.'' \365\
---------------------------------------------------------------------------

    \364\ MFA Comment Letter at 8-9 (Feb. 15, 2013).
    \365\ Id.
---------------------------------------------------------------------------

    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-of-day, 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

[[Page 68548]]

the FCM is obligated to transfer'' customer margin.\367\
---------------------------------------------------------------------------

    \366\ Paul/Weiss Comment Letter at 4 (Feb. 15, 2013).
    \367\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \368\ The Commission further notes that current Commission 
regulations also include such prohibitions. Namely, Sec.  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 Sec.  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).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \371\ As recognized by the Commission previously, the obligation 
to ensure that one customer's 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 Sec. Sec.  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.'').
---------------------------------------------------------------------------

    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 (non-
peak) and $83 billion (peak),\372\ to $73.2 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\
---------------------------------------------------------------------------

    \372\ See Jefferies Comment Letter at 8-9 (Feb. 15, 2013). 
Jefferies states that the proposal would 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.
_____________________________________-

    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 Sec.  
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

[[Page 68549]]

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\
---------------------------------------------------------------------------

    \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).
    \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).
---------------------------------------------------------------------------

    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 Sec.  
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 addresses, by its terms, more than net deficits, 
and appears to have remained substantively unchanged for the next four 
decades.
---------------------------------------------------------------------------

    \379\ See also section 4d(f)(2) of the Commodity Exchange Act, 
as well as Sec.  1.22 of this section and Sec.  22.2(d)(1) of this 
chapter.
    \380\ 2 FR 1223, 1225 (July 16, 1937).
    \381\ Id. at 1225 (emphasis supplied).
---------------------------------------------------------------------------

    In 1981, in its Regulation of Domestic Exchange-Traded Commodity 
Options, the Commission revised Sec.  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\
---------------------------------------------------------------------------

    \382\ See 46 FR 54500 (Nov. 3, 1981).
    \383\ See 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).
---------------------------------------------------------------------------

    The current version of Sec.  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 Sec.  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 
is required to do to comply with this requirement. Accordingly, the 
Commission is adopting proposed Sec. Sec.  1.20(i) and 1.22 with 
certain modifications.
    First, the Commission is revising proposed Sec.  1.20(i) by 
removing the Proposed Residual Interest Requirement from paragraph 
(i)(4). In addition, the Commission is revising the language in Sec.  
1.22 to add an amended residual interest requirement and additional 
technical corrections to Sec.  1.20(i) as described further below. 
Moreover, the Commission is reorganizing proposed Sec.  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

[[Page 68550]]

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.
---------------------------------------------------------------------------

    \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).
    \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).
---------------------------------------------------------------------------

    As noted above, the Commission is moving the Proposed Residual 
Interest Requirement from proposed Sec.  1.20(i) to new paragraph (c) 
in Sec.  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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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, at the time or times referred to in 
Sec.  1.22(c)(2), exceeds (ii) the value of the net liquidating equity 
for that account, as calculated in Sec.  1.20(i)(2). An FCM is required 
to perform the calculation set forth in Sec.  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 Sec.  39.14) that will 
complete during the following business day for each such DCO less (ii) 
any debit balances referred to in Sec.  1.20(i)(4) included in such 
undermargined amounts.\393\
---------------------------------------------------------------------------

    \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 Sec.  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 
Sec.  39.15(b)(2) of this chapter), commingled with a contract for 
the 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 Sec.  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).
---------------------------------------------------------------------------

    An FCM is required to perform the calculation in Sec.  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, Sec.  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, Sec.  
1.20(i)(2)(ii) is being removed because this requirement is now set 
forth in Sec.  1.22(c). Consistent with Federal Register requirements, 
Sec.  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 Sec.  1.22(c)(3), an FCM is required, prior to the Residual 
Interest Deadline, as defined in Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \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 Sec.  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.
---------------------------------------------------------------------------

    Regulation 1.22(c)(4) provides that for purposes of Sec.  
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 
Sec.  1.22(c)(3), must do so prior to the Residual Interest Deadline. 
In other words, Sec.  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.

[[Page 68551]]

Eastern Time on the date of the settlement referenced in paragraph 
(c)(2)(i) or, as appropriate, (c)(4). The phased compliance schedule 
for Sec.  1.22(c) is set forth in Sec.  1.22(c)(5)(iii). However, the 
Residual Interest Deadline of 6:00 p.m. Eastern Time in Sec.  
1.22(c)(5)(ii) shall begin one year following the publication of this 
rule in the Federal Register.\396\
---------------------------------------------------------------------------

    \396\ For further discussion regarding the phase-in schedule for 
the requirements in Sec.  1.22(c), see section III.F.
---------------------------------------------------------------------------

    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 Sec.  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 amended pursuant to Sec.  
1.22(c)(5)(iii)(B), then the phase-in period shall end on December 31, 
2018.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \398\ See, e.g., Newedge Comment Letter at 3 (Feb. 15, 2013); RJ 
O'Brien Comment Letter at 5 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \399\ CIEBA Comment Letter at 3 (Feb. 15, 2013).
    \400\ Id.
---------------------------------------------------------------------------

    AIMA requested clarification that Sec. Sec.  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 
Sec.  1.17(c)(5) and the residual interest requirement now set forth in 
1.22(c)(2) are two separate requirements. As discussed above, Sec.  
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 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\
---------------------------------------------------------------------------

    \401\ See AIMA Comment Letter at 3 (Feb. 15, 2013).
    \402\ See section II.F. above.
    \403\ See section II.F. above regarding the requirement set 
forth Sec.  1.17(c)(5).
---------------------------------------------------------------------------

    Paul/Weiss requested that the Commission confirm that the 
requirements of jurisdiction and denomination in Sec.  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 Sec.  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 Sec.  1.49 with 
respect to denomination or jurisdiction should not apply, and 
accordingly, they will not.
---------------------------------------------------------------------------

    \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 Sec.  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).
---------------------------------------------------------------------------

    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

[[Page 68552]]

these comments are outside the scope of this rulemaking.
---------------------------------------------------------------------------

    \408\ FCStone Comment Letter at 6 (Feb. 15, 2013).
    \409\ NPPC Comment Letter at 2 (Feb. 15, 2013).
---------------------------------------------------------------------------

    FCStone objected to proposed Sec.  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.
---------------------------------------------------------------------------

    \410\ FCStone Comment Letter at 4 (Feb. 15, 2013).
---------------------------------------------------------------------------

10. Segregation Regimes
    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.
---------------------------------------------------------------------------

    \411\ See 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.
---------------------------------------------------------------------------

    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 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 Sec.  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 
Sec.  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 Sec.  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.
    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 opt-out 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

[[Page 68553]]

industry representatives regarding alternative segregation regimes.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

H. Sec.  1.22: Use of Futures Customer Funds

    RCG commented that the proposed amendments to Sec. Sec.  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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \416\ RCG Comment Letter at 7 (Feb. 12, 2013).
---------------------------------------------------------------------------

    As discussed in greater detail in section II.G.9. above, the 
Commission has considered the comments and has revised and reorganized 
Sec.  1.22.

I. Sec.  1.23: Interest of Futures Commission Merchant in Segregated 
Futures Customer Funds; Additions and Withdrawals

    The Commission proposed amending Sec.  1.23 to require additional 
safeguards with respect to an FCM withdrawing futures customer funds 
from segregated accounts that are part of the FCM's residual interest 
in such accounts.
    Proposed Sec.  1.23(a) provides that an FCM may deposit 
unencumbered proprietary funds, including securities from its own 
inventory that qualify as permitted investments under Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 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 pre-approved 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 Sec.  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 Sec.  1.11. Proposed Sec.  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 Sec. Sec.  22.17(c) and 30.7(g), respectively.
    NFA commented recommending that the Commission revise the language 
in Sec.  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

[[Page 68554]]

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 
Sec.  1.23.\418\ NFA also commented that the Commission should remove 
proposed Sec.  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\
---------------------------------------------------------------------------

    \417\ NFA Comment Letter at 14 (Feb. 15, 2013).
    \418\ Id.
    \419\ Id.
---------------------------------------------------------------------------

    The Commission has considered NFA's comment and is revising Sec.  
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 Sec.  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\
---------------------------------------------------------------------------

    \420\ The Commission also is making comparable revisions to 
Sec. Sec.  22.17(c) and 30.7(g) in light of NFA's comments.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \421\ Id.
---------------------------------------------------------------------------

    Jefferies commented that it generally supported proposed amendments 
to Sec.  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 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 Sec. Sec.  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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 Sec.  1.23 and the conforming provisions in 
Sec. Sec.  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\
---------------------------------------------------------------------------

    \425\ See NFA Comment Letter at 14 (Feb. 15, 2013).
---------------------------------------------------------------------------

    In addition, and in light of the changes discussed herein with 
respect to the residual interest requirements set forth in Sec. Sec.  
1.22, 22.2, and 30.7, the Commission is amending Sec.  1.23 and the 
conforming provisions in Sec. Sec.  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 Sec.  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.

J. Sec.  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,

[[Page 68555]]

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\
---------------------------------------------------------------------------

    \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 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).
---------------------------------------------------------------------------

    The Commission did not propose to amend the list of permitted 
investments set forth in Sec.  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 Sec.  1.29 to 
explicitly provide that an FCM is responsible for any losses resulting 
from the investment of customer funds under Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \429\ 11 U.S.C. 766.
---------------------------------------------------------------------------

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 
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 Sec.  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.
---------------------------------------------------------------------------

    \430\ LCH.Clearnet Comment Letter at 4 (Jan. 25, 2013); CFA 
Comment Letter at 6 (Feb. 13, 2013).
---------------------------------------------------------------------------

K. Sec.  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 Sec.  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 Sec.  1.26 to specify how direct 
investments by FCMs and DCOs in money market mutual funds (``MMMFs'') 
that qualify as permitted investments under Sec.  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 
Sec. Sec.  1.20 and 30.7, the proposed Template Letter for Sec.  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\
---------------------------------------------------------------------------

    \431\ ICI Comment Letter at 4-5 (Jan. 14, 2013).
    \432\ Id. at 5.
    \433\ Id. at 4-6 (Jan.14, 2013).
---------------------------------------------------------------------------

    The Commission originally proposed one Template Letter, Appendix A 
to Sec.  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 
Sec.  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 Sec.  1.26. 
The Template Letter specific to FCMs is now set forth in Appendix A to 
Sec.  1.26, and the Template Letter for DCOs is set forth in Appendix B 
to Sec.  1.26. The Commission has made other modifications to the Sec.  
1.26 Template Letters consistent with the modifications to the Sec.  
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

[[Page 68556]]

verification of the account shares of the FCM or DCO, and the Template 
Letters required under Sec.  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 Sec.  1.26 has been modified to include a 
reference to Appendix B to Sec.  1.20. Otherwise, the Commission is 
adopting Sec.  1.26 as proposed.

L. Sec.  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 Sec.  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 Sec.  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 
regulations were proposed for Cleared Swaps Customer Collateral under 
part 22 (Sec.  22.2(e)(1)), and for 30.7 customer funds under part 30 
(Sec.  30.7(i)).
---------------------------------------------------------------------------

    \434\ 77 FR 67866, 67888.
---------------------------------------------------------------------------

    FIA and CFA supported the proposed amendments to Sec.  1.29.\435\ 
No other comments were received. The Commission adopts the amendments 
to Sec. Sec.  1.29, 22.2(e)(1), and 30.7(i) as proposed.
---------------------------------------------------------------------------

    \435\ FIA Comment Letter at 30-31 (Feb. 15, 2013); CFA Comment 
Letter at 6 (Feb. 13, 2013).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \436\ CFA Comment Letter at 6 (Feb. 13, 2013).
---------------------------------------------------------------------------

    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 Sec.  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 
authorities responsible for overseeing the banks.\439\
---------------------------------------------------------------------------

    \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).
    \439\ Id.
---------------------------------------------------------------------------

    The FIA further stated that the Commission's new Sec.  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\
---------------------------------------------------------------------------

    \440\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \441\ Advantage Comment Letter at 3 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

[[Page 68557]]

    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\
---------------------------------------------------------------------------

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

    Accordingly, the Commission has directed staff to inquire into 
these issues, and to develop an appropriate proposed rulemaking.

M. Sec.  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 
non-cash 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 Sec.  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 Sec.  1.17. The Commission also noted that a trading account 
did not qualify as collateral for the loan under Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \444\ See CME rulebook at www.cmegroup.com/rulebook/CME/I/9/9.pdf.
---------------------------------------------------------------------------

    RCG commented that it believes that the proposal prohibiting an FCM 
from making unsecured loans to customers contradicts proposed Sec.  
1.22 as it applies to funding customers' margin deficits.\445\ The 
Commission notes that the requirement in Sec.  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 Sec.  1.30. When the FCM deposits 
proprietary funds into segregated accounts under Sec.  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.
---------------------------------------------------------------------------

    \445\ RCG Comment Letter at 4 (Feb. 12, 2013).
---------------------------------------------------------------------------

    Newedge also requested confirmation the proposed prohibition in 
Sec.  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 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\
---------------------------------------------------------------------------

    \446\ Newedge Comment Letter at 5 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The Commission is adopting the amendments to Sec.  1.30 as 
proposed.

N. Sec.  1.32: (Sec.  22.2(g) for Cleared Swaps Customers and Sec.  
30.7(l) for Foreign Futures and Foreign Options Customers): Segregated 
Account: Daily Computation and Record

    The Commission proposed to amend Sec.  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\
---------------------------------------------------------------------------

    \447\ The Commission also proposed amendments to Sec.  22.2(g) 
and Sec.  30.7(l) to impose requirements for Cleared Swaps and 
foreign futures and foreign options transactions, respectively, that 
correspond to the proposed amendments for Sec.  1.32. The comments 
for Sec. Sec.  1.32, 22.2(g), and 30.7(l) are addressed in this 
section.
---------------------------------------------------------------------------

    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 Sec.  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.

[[Page 68558]]

    The Commission proposed to amend Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Sec.  1.32(b) to provide that 
in determining the haircuts for commercial paper, convertible debt 
instruments, and nonconvertible debt instruments 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 Sec.  1.32 by requiring each 
FCM to file detailed information regarding depositories and the 
substance of the investment of customer funds under Sec.  1.25. 
Proposed paragraphs (f) and (j) of Sec.  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 Sec.  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 Sec.  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 Sec.  1.31.
    FIA generally supported the proposal.\451\ FIA noted that proposed 
Sec.  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 Sec.  30.7 customer funds) on a U.S. dollar-
equivalent 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\
---------------------------------------------------------------------------

    \451\ FIA Comment Letter at 30 (Feb. 15, 2013).
    \452\ Id. at 31.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  1.25.\454\
---------------------------------------------------------------------------

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

    The Commission has considered the comments and is adopting the 
amendments to Sec. Sec.  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

[[Page 68559]]

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 Sec.  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. dollar-equivalent basis. The FCM, however, must prepare 
segregation records on a daily basis on a currency-by-currency basis to 
ensure compliance with Sec.  1.49, which governs how FCMs may hold 
funds in foreign depositories. The FCM is not required under Sec.  1.32 
to file the currency-by-currency segregation records with the 
Commission or with its DSRO.

O. Sec.  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\
---------------------------------------------------------------------------

    \455\ 7 U.S.C. 7(d)(11).
    \456\ 7 U.S.C. 21(p).
---------------------------------------------------------------------------

    The Commission also has established in Sec.  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, Sec.  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 Sec.  
1.10 and minimum net capital under Sec.  1.17.
    In addition, the Commission adopted final amendments to Sec.  1.52 
on May 10, 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, Sec.  
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\
---------------------------------------------------------------------------

    \457\ 77 FR 36611 (June 19, 2012).
    \458\ The 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.
---------------------------------------------------------------------------

    The Commission proposed additional amendments to Sec.  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 Sec.  
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 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 Sec.  1.16.
    Proposed Sec.  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 Sec.  
1.11. Proposed amendments to Sec.  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 Sec.  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 Sec.  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

[[Page 68560]]

that are subject to the supervisory program.
    Proposed Sec.  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 Sec.  1.52 and, with the exception of the issues discussed below, 
has determined to adopt the amendments as proposed.\459\
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    \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 Sec.  
1.52 directly or to participate in a joint audit agreement with 
other SROs. In addition, Sec.  38.604 requires each SRO to have 
rules in place that require member FCMs to submit financial 
information to the SRO.
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1. Swap Execution Facilities Excluded From the Scope of Regulation 1.52
    The Commission is revising the final Sec.  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 Sec.  1.52 only, a contract market, as defined in 
Sec.  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 
Sec.  1.3(rrrr).
    The revision to definition of self-regulatory organization in Sec.  
1.52 is necessary due to the recent amendments to the definition of 
``self-regulatory organization'' set forth in Sec.  1.3(ee), which 
defines the term as a contract market, as defined in Sec.  1.3(h), a 
SEF, as defined in Sec.  1.3(rrrr), or a registered futures association 
under section 17 of the Act.\460\ Therefore, since Sec.  1.52 applies 
to each SRO, without including a definition for the term ``self-
regulatory organization'' under Sec.  1.52(a) that excludes SEFs, the 
full provisions of Sec.  1.52 would apply to SEFs.
---------------------------------------------------------------------------

    \460\ 77 FR 66288 (Nov. 2, 2012). Regulation 1.3 is the general 
definitions provision of the Commission's regulations.
---------------------------------------------------------------------------

    In adopting new regulations implement core principles and other 
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 Sec.  1.52 is not applicable to 
SEFs.
---------------------------------------------------------------------------

    \461\ 78 FR 33476 (June 4, 2013).
    \462\ Id.
---------------------------------------------------------------------------

2. Revisions to the Current SRO Supervisory Program
    The Commission received several comments concerning the proposed 
amendments to Sec.  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\
---------------------------------------------------------------------------

    \463\ NFA 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.
---------------------------------------------------------------------------

    The CME and JAC generally did not support the proposed amendments 
to Sec.  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 
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\
---------------------------------------------------------------------------

    \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).
    \468\ Id.
---------------------------------------------------------------------------

    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 Sec.  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\
---------------------------------------------------------------------------

    \469\ JAC Comment Letter at 2 (July 25, 2013).
    \470\ Id. See also JAC Comment Letter at 5 (Feb. 14, 2013).
---------------------------------------------------------------------------

    The JAC further stated that proposed Sec.  1.52 imposes potential 
duplicative oversight of FCM risk management policies and procedures by 
SROs and DCOs. The JAC noted that Sec.  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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    The Commission believes that the CME, NFA, JAC, SROs and DSROs play 
a critical role in examining FCMs and other registrants under the self-
regulatory 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 non-futures operations 
may pose risks to

[[Page 68561]]

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 Sec.  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 Sec.  1.11. However, Sec.  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 Sec.  
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 
Sec.  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 Sec.  1.11, SROs may coordinate with a DCO to ensure 
that duplicative work is not being performed by the separate 
organizations.\474\
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    \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 Sec.  39.13(h)(5) to 
perform risk management on clearing FCMs.
---------------------------------------------------------------------------

3. Auditing Standards Utilized in the SRO Supervisory Program
    Proposed Sec.  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. 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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \479\ The Commission is revising final Sec.  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.
---------------------------------------------------------------------------

4. ``Examinations Expert'' Reports
    Proposed Sec.  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

[[Page 68562]]

by Sec.  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\
---------------------------------------------------------------------------

    \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).
    \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).
---------------------------------------------------------------------------

    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 3\1/2\ years, 
matching that required by the AICPA in its Peer Review program.\484\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 Sec.  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 
Sec.  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 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. Sec.  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 Sec.  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 self-
regulatory organizations if the Commission determines that such Risk 
Disclosure Statements are reasonably calculated to provide the 
disclosures required by the Commission under Sec.  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\
---------------------------------------------------------------------------

    \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 Sec.  1.55(f) 
without furnishing such institutional customers with a Risk 
Disclosure Statement or obtaining the written acknowledgment 
required by Sec.  1.55. The term ``institutional customer'' is 
defined by Sec.  1.3(g) and section 1a of the Act as an eligible 
contract participant. The Commission did not propose to amend Sec.  
1.55(f) to require FCMs or IBs to furnish institutional customers 
with Risk Disclosure Statements.
---------------------------------------------------------------------------

    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 
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

[[Page 68563]]

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 Sec.  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.
    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\
---------------------------------------------------------------------------

    \487\ NFA Comment Letter at 15 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The FIA generally supported the proposed amendments to the general 
Risk Disclosure Statement set forth in Sec.  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\
---------------------------------------------------------------------------

    \488\ FIA 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.
---------------------------------------------------------------------------

    With respect to the Commission's proposed amendments to Sec.  
1.55(b), FIA recommended that the Commission delete the phrase ``due to 
fraud'' in Sec.  1.55 (b)(2) because customer funds may be 
misappropriated for any reason.\491\ Additionally, FIA suggested the 
disclosure in Sec.  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\
---------------------------------------------------------------------------

    \491\ Id. at 41.
    \492\ Id. at 41-42.
---------------------------------------------------------------------------

    The Commission has considered FIA's comments and had determined to 
revise 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 Sec.  
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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \493\ NEFI/PMAA Comment Letter at 2 (Jan. 14, 2013).
---------------------------------------------------------------------------

    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

[[Page 68564]]

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\
---------------------------------------------------------------------------

    \494\ FIA Comment Letter at 42-43 (Feb. 15, 2013).
    \495\ Id.
    \496\ CFA Comment Letter at 8 (Feb. 13, 2013).
    \497\ NGFA Comment Letter at 5 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 adequately apprised of the revised Risk 
Disclosure Statement.
    FIA also noted that the Commission previously approved, pursuant to 
Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \498\ FIA Comment Letter at 43 (Feb. 15, 2013).
    \499\ Id.
---------------------------------------------------------------------------

    Regulation 1.55(c) provides that the Commission may approve for use 
in lieu of the standard Risk Disclosure Statement required by Sec.  
1.55(b) 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 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 Sec.  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.
a. Firm Specific Disclosure Document
i. General Requirements
    The Commission proposed new paragraphs (i) and (k) to Sec.  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 Sec.  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 Sec.  
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

[[Page 68565]]

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\
---------------------------------------------------------------------------

    \500\ SIFMA Comment Letter at 2 (Feb. 21, 2013).
    \501\ Vanguard 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 Sec.  1.55(i).
    \502\ FHLB Comment Letter at 10 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \503\ FIA Comment Letter at 41 (Feb. 15, 2013).
    \504\ FIA Comment Letter at 43-44 (Feb. 15, 2013).
    \505\ Id.
    \506\ Id.
---------------------------------------------------------------------------

    FIA further requested that the Commission confirm the level of 
detail required to be provided by privately-held 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\
---------------------------------------------------------------------------

    \507\ Id. at 44.
    \508\ Id.
---------------------------------------------------------------------------

    The Commission has considered the comments and is adopting Sec.  
1.55(i) and (j) as proposed. In response to FIA's comments, the 
Commission confirms that beyond the requirements stated in Sec.  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 Sec.  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 Sec.  1.55(k), may satisfy the 
disclosure requirements in Sec.  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 Sec.  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 Sec.  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 Sec.  1.55 in a 
manner that is clear, concise and understandable.
    In assessing whether the annual report contains the necessary 
information required by Sec.  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 annual report is prepared. 
An FCM is not in compliance with Sec.  1.55 if the annual report 
information does not disclose the information required by Sec.  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 Sec.  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 Sec.  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 Sec.  1.55(k)(1) and the Commission is adopting the amendments 
as proposed.
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \509\ FIA Comment Letter at 51 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The term ``principal'' is defined in Sec.  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

[[Page 68566]]

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 Sec.  3.1.
    Proposed Sec.  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\
---------------------------------------------------------------------------

    \510\ Id. at 45.
---------------------------------------------------------------------------

    The Commission believes that FIA is defining the requirements of 
Sec.  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 Sec.  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 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 Sec.  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 Sec.  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 Sec.  1.25 
investments.\511\
---------------------------------------------------------------------------

    \511\ Id. at 47-48.
---------------------------------------------------------------------------

    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 Sec.  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 Sec.  
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 Sec.  1.25 counterparties. 
The Commission is revising final Sec.  1.55(k)(4) accordingly.
    Proposed Sec.  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 customer funds in an affiliated entity; and any 
significant liabilities, contingent or otherwise, and material 
commitments.
    FIA commented that the word ``risks'' in Sec.  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

[[Page 68567]]

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\
---------------------------------------------------------------------------

    \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.
    \519\ Id. at 46.
    \520\ Id. at 34.
---------------------------------------------------------------------------

    The Commission believes that it is appropriate that Sec.  
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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.55(k)(6) and is adopting the regulation as 
proposed.
    Proposed Sec.  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 recommended the 
Commission confirm that the disclosure required under this paragraph 
would be limited to matters required to be disclosed in accordance with 
Sec.  4.24(l)(2).\521\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Sec.  
1.55(k)(7) as appropriate to reflect this concept.
    The Commission, however, does not agree with FIA's comment that 
disclosures under proposed Sec.  1.55(k)(7) should be limited to 
administrative, civil, enforcement, or criminal matters that would be 
required to be disclosed under Sec.  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 Sec.  1.55(k)(8) requires the Firm Specific Disclosure 
Document to contain a basic overview of customer fund segregation, 
collateral management and investments, FCMs, and dual registrant FCM/
BDs. The disclosures included under Sec.  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 Sec.  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 Sec.  1.55(k)(8) should 
disclose the risks of engaging in trading on foreign markets. The 
disclosures required by Sec.  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 Sec.  1.55(k)(8) and 
is adopting the amendments as proposed.
    Proposed Sec.  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 Sec.  1.55(k)(9) 
and is adopting the amendments as proposed.
    Proposed Sec.  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, Sec.  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-the-counter transactions into which the

[[Page 68568]]

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 Sec.  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 Sec.  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 
over-the-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 
Sec.  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\
---------------------------------------------------------------------------

    \522\ CMC Comment Letter at 2 (Feb. 15, 2013).
    \523\ NFA Comment Letter at 15-16 (Feb. 15, 2013).
    \524\ Id.
    \525\ Id. at 1.
    \526\ Id. at 16.
    \527\ Id.
---------------------------------------------------------------------------

    The Commission understands that not all customers would have the 
same use for the detailed information required by Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \528\ FIA Comment Letter at 48 (Feb. 15, 2013).
    \529\ Id.
    \530\ RJ O'Brien Comment Letter at 11 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 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 Sec.  
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.
---------------------------------------------------------------------------

    \531\ FIA Comment Letter at 46-47 (Feb. 15, 2013).
---------------------------------------------------------------------------

    FIA stated that the requirement in Sec.  1.55(k)(10)(iv) for an FCM 
to disclose the aggregate notional value, by asset class, of its non-
hedged, principal over-the-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 Sec.  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, 
Sec.  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

[[Page 68569]]

and uncommitted lines of credit in the requirement in Sec.  
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 Sec.  
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.
---------------------------------------------------------------------------

    \532\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \533\ Id.
---------------------------------------------------------------------------

    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, 
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.
---------------------------------------------------------------------------

    \534\ Newedge Comment Letter at 4 (Feb. 15, 2013); RJ O'Brien 
Comment Letter at 11 (Feb. 15, 2013).
    \535\ FIA Comment Letter at 50 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \536\ FIA Comment Letter at 50 (Feb. 15, 2013).
---------------------------------------------------------------------------

2. Public Availability of FCM Financial Information
    Proposed Sec.  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 Sec.  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 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 Sec.  
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 Sec.  
1.10.\539\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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

[[Page 68570]]

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\
---------------------------------------------------------------------------

    \540\ ACLI Comment Letter at 2-3 (Feb. 15, 2013).
    \541\ Id.
    \542\ ACLI Comment Letter at 2-3 (Feb. 15, 2013).
    \543\ TIAA-CREF Comment Letter at 2-3 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 that rather than making the financial 
information public, it should only be provided to customers at their 
request.\547\
---------------------------------------------------------------------------

    \546\ Phillip Futures Inc. Comment Letter at 3 (Feb. 14, 2013).
    \547\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \548\ RCG Comment Letter at 6 (Feb. 12, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \549\ TD Ameritrade Comment Letter at 4 (Feb. 15, 2013).
    \550\ Id.
---------------------------------------------------------------------------

    The Commission has considered the comments and is adopting the 
regulations as proposed, with the revision to Sec.  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, Sec.  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 Sec.  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 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 Sec.  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 Sec.  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 Sec.  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

[[Page 68571]]

publicly available under Sec.  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, Sec.  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 Sec.  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 Sec.  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).
---------------------------------------------------------------------------

    \551\ See discussion in section I.A. above.
---------------------------------------------------------------------------

    The determination that appropriate enhancements are necessary with 
respect to the regulatory requirements discussed above for segregated 
futures 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 Sec.  1.11 encompasses the firm's business 
with futures customers, Cleared Swaps Customers, and 30.7 customers.
    In addition, the Commission proposed amendments to Sec.  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 Sec.  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 Sec.  1.25 compliant instruments is consistent with the 
amendments adopted for Sec.  1.29(b) that require an FCM to bear sole 
responsibility for any losses resulting from the investment of futures 
customers funds in Sec.  1.25 compliant instruments. The proposed 
amendments to Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 of the proposed 
amendments to Sec.  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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    As discussed in more detail above, several commenters objected to 
proposed residual interest requirements under Sec. Sec.  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

[[Page 68572]]

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\
---------------------------------------------------------------------------

    \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.'').
    \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).
---------------------------------------------------------------------------

    In response to these comments, the Commission notes that the 
proposed amendments to Sec.  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\
---------------------------------------------------------------------------

    \559\ See also Part 22 Staff Interpretation.
    \560\ See id. at 2 (answer to Question 2.1).
---------------------------------------------------------------------------

    Because of the confusion expressed by commenters regarding the 
residual interest requirements for Cleared Swaps, the Commission is 
revising Sec.  22.2(a) and (f). The Commission is revising proposed 
Sec.  22.2(a) by deleting the last sentence. The Commission is revising 
Sec.  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 Sec.  1.22. To be 
clear, and as requested by several commenters, the Commission confirms 
that the language in Sec.  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 
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, Sec.  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, Sec.  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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

R. Amendments to Sec.  1.3: Definitions; and Sec.  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.
---------------------------------------------------------------------------

    \563\ 52 FR 28980 (Aug. 5, 1987).
---------------------------------------------------------------------------

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 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 Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  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.''
---------------------------------------------------------------------------

    \564\ The Commission is also adopting as final amendments to 
Sec.  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 
Sec.  1.20.
---------------------------------------------------------------------------

    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

[[Page 68573]]

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 Sec.  30.7 further differs from the regulations 
governing how FCMs hold funds for futures customers and Cleared Swap 
Customers in that Sec.  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 Sec.  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 foreign-domiciled 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 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 Sec.  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 Sec.  1.3(rr) to match structurally the 
definition of the term ``customer funds'' in Sec.  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.
---------------------------------------------------------------------------

    \565\ The Commission recently adopted final regulations that 
revised the definitions in Sec.  1.3. In this rulemaking, Sec.  
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).
---------------------------------------------------------------------------

    The Commission also proposed to amend Sec.  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 
Sec.  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 Sec.  30.7 calculation.
    Consistent with proposed changes in Sec.  1.20(i) and part 22, the 
Commission also proposed to add language to Sec.  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
    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\
---------------------------------------------------------------------------

    \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 Sec.  30.7 and treating customers from all 
parts of the globe in a similar manner. CFA Comment Letter at 9 
(Feb. 13, 2013).
---------------------------------------------------------------------------

2. Funds Held in Non-U.S. Depositories
    The Commission proposed to amend Sec.  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\
---------------------------------------------------------------------------

    \567\ Pilot Flying J Comment Letter at 2 (Feb. 14, 2013).
---------------------------------------------------------------------------

    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

[[Page 68574]]

stated is consistent with Sec.  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 Sec.  
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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    RCG requested the Commission to clarify application of Sec.  
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\
---------------------------------------------------------------------------

    \572\ RCG Comment Letter at 7 (Feb. 12, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \573\ Jefferies Bache Comment Letter at 6 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  30.7(b), which appears to allow such funds to be 
held at a bank or trust company outside the U.S.\576\
---------------------------------------------------------------------------

    \574\ Advantage Letter at 8 (Feb. 15, 2013).
    \575\ Id. at 9.
    \576\ Id.
---------------------------------------------------------------------------

    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 Sec.  30.7(b), provided that the 
FCMs do not exceed the 20 percent limit on the 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.
---------------------------------------------------------------------------

    \577\ CFTC Advisory No. 87-4 (Nov. 18, 1987).
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 68575]]

framework, these concerns should no longer dictate the advisability of 
commingling the funds of regulated foreign futures and foreign options 
transactions with unregulated transactions.
---------------------------------------------------------------------------

    \578\ See 52 FR 28980, 28985-28986.
---------------------------------------------------------------------------

    New Sec.  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\
---------------------------------------------------------------------------

    \579\ CIEBA Comment Letter at 4 (Feb. 20, 2013).
    \580\ Nodal Comment Letter at 1-2 (Jan. 21, 2013).
    \581\ LCH.Clearnet Comment Letter at 6-7 (Jan. 25, 2013).
---------------------------------------------------------------------------

    The Commission is adopting new Sec.  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 Sec.  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 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 
Sec.  30.7, to extend regulatory provisions from Sec. Sec.  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 Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \582\ See Sec.  22.2(d)(2).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \583\ See sections II.G.9. and II.Q. above for discussion of the 
Proposed Residual Interest Requirement.
    \584\ See section II.G.9. above.
---------------------------------------------------------------------------

    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 Sec.  
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 Sec.  30.7(f) as follows.
---------------------------------------------------------------------------

    \585\ See Roundtable Tr. at 266-267 (Feb. 5, 2013).
---------------------------------------------------------------------------

    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

[[Page 68576]]

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 Sec.  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 Sec.  
30.7(f)(2)(B)(iv) that is included in such undermargined amounts.
    In addition, and for the reasons set forth above, pursuant to Sec.  
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 Sec.  30.7(f)(1)(ii)(B) in 
segregated funds that is equal to or exceeds the computation set forth 
in (ii)(B). Moreover, Sec.  30.7(f)(1)(ii)(C)(2) provides that an FCM 
may reduce the amount of residual interest required in Sec.  
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 Sec.  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 Sec.  30.7(f)(1)(ii)(C), must do so by 6:00 p.m. Eastern 
Time. In other words, Sec.  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 Sec.  30.7(f)(2) and (f)(3) to Sec.  
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 Sec.  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 Sec.  30.7.\586\ The Commission 
agrees with this position and hereby confirms the applicability of its 
prior guidance.\587\
---------------------------------------------------------------------------

    \586\ MFA Comment Letter at 10 (Feb. 15, 2013).
    \587\ Specifically, 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).
---------------------------------------------------------------------------

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 
Sec.  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 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 Sec.  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 Sec.  30.7(g) was recently adopted by the Commission to 
provide that the investment of Sec.  30.7 funds be subject to the 
investment limitations contained in Sec.  1.25.\588\ As proposed, the 
Commission is moving this permitted investment requirement to a new 
paragraph Sec.  30.7(h), and further is adopting a new paragraph Sec.  
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 Sec.  
30.7(i) is intended to apply the same standard as is being adopted in 
the amendment to Sec.  1.29 for segregated funds discussed above.
---------------------------------------------------------------------------

    \588\ 76 FR 78776, 78802 (December 19, 2011).
---------------------------------------------------------------------------

    The Commission also proposed and is adopting an amended paragraph 
(j) to Sec.  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 Sec.  
1.30 discussed above.
    Finally, the Commission proposed and is adopting an amended 
paragraph (l) to Sec.  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 Sec.  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 Sec.  1.32.
    No comments were received on the above proposals and the Commission 
is adopting the amendments as proposed.

S. Sec.  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

[[Page 68577]]

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 Sec.  3.3(f)(2) 
to reflect the amendments to Sec.  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 Sec.  
3.3 as proposed.
---------------------------------------------------------------------------

    \589\ NFA Comment Letter at 9 (Feb. 15, 2013).
---------------------------------------------------------------------------

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: Sec.  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 Sec.  
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 Sec.  1.10(b)(1)(ii) for FCMs with years ending 
after June 1, 2014. This date will also coincide with several other 
compliance dates affecting public accountants discussed under Sec.  
1.16 below.

B. Risk Management Program for FCMs: Sec.  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 
Sec.  1.11 are appropriate and unlikely to be burdensome as FCMs 
typically have most (if not all) of these requirements in place.'' 
\590\
---------------------------------------------------------------------------

    \590\ Advantage Comment Letter at 2 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The Commission recognizes that some FCMs may need a sufficient 
period of time to develop and implement a risk management program that 
complies with Sec.  1.11, but believes that many firms already maintain 
programs that comply with many of the requirements in Sec.  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: Sec.  1.16

    The Commission is amending Sec.  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 Sec.  
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 Sec.  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 Sec.  1.16(b)(1) that requires 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 Sec.  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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    The Commission also is establishing a compliance date of December 
31, 2015 for the requirement in Sec.  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 Sec.  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

[[Page 68578]]

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 Sec.  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: Sec. Sec.  1.20, 1.26, and 30.7

    The Commission is amending Sec. Sec.  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.
---------------------------------------------------------------------------

    \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 Sec. Sec.  1.20(d)(1) and 30.7(d)(1).
---------------------------------------------------------------------------

    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: Sec. Sec.  1.22(c), 30.7(f)

    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 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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 Sec. Sec.  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 Sec.  1.22(c) is necessary and appropriate. The phased 
compliance schedule for Sec.  1.22(c) is set forth in Sec.  
1.22(c)(5)(iii). However, the Residual Interest Deadline of 6:00 p.m. 
Eastern Time in Sec.  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 Sec.  30.7(f), the 
Commission is establishing a compliance date of one year following the 
publication of this rule in the Federal Register.
---------------------------------------------------------------------------

    \596\ For further discussion regarding the phase-in schedule for 
the requirements in Sec.  1.22(c), see section II.G.9.
---------------------------------------------------------------------------

G. SRO Minimum Financial Surveillance: Sec.  1.52

    The Commission amended Sec.  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 Sec.  
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 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 Sec.  
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 Sec.  1.52, or such other time as may be approved by 
the Commission. The Commission further revised Sec.  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\
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    \597\ The Commission also amended Sec.  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 Sec.  1.52(d)(2)(ii)(H) 
an Sec.  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.
---------------------------------------------------------------------------

    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: Sec.  1.55

    The Commission has amended Sec.  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

[[Page 68579]]

provide electronic account opening documents.
    The Commission also amended Sec.  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 Sec.  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.

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, 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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

[[Page 68580]]

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 Sec.  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 Sec. Sec.  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 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 foreign-domiciled 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 foreign-domiciled 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 Sec.  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 Sec.  1.55 requires disclosure of firm-specific risks 
to customers. This 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 Sec.  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,

[[Page 68581]]

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 Sec. Sec.  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, settlement and other 
relevant employees regarding the segregation requirements for 
segregated funds, for notices under Sec.  1.12, procedures for 
reporting non-compliance, 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 
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 Sec.  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 Sec.  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,

[[Page 68582]]

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 
Sec.  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 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 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

[[Page 68583]]

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 Sec.  1.52, the 
Commission did not have adequate information to determine the ongoing 
cost of the proposed requirements for SROs and DSROs.
---------------------------------------------------------------------------

    \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.
    \601\ As above, the lower bound assumes that an FCM requires the 
minimum estimated number of personnel hours to be compliant and that 
for event-triggered 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 
Sec.  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.
---------------------------------------------------------------------------

    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''
    The Commission adopted an amendment to Sec.  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 Sec.  30.7 from the ``Alternative 
Method'' to the ``Net Liquidating Equity Method'' of calculating the 
foreign futures or foreign options secured amount.
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 Sec.  30.7 and 
discussed below.
Section 1.10--Financial Reports of Futures Commission Merchants and 
Introducing Brokers
    The Commission adopted amendments to Sec.  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.
---------------------------------------------------------------------------

    \602\ The Segregation Schedule and Secured Amount Schedule are 
already public documents.
---------------------------------------------------------------------------

Costs and Benefits
    In the NPRM, the Commission considered the amendments to Sec.  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 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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.25 investments compared 
to investments that are not subject to Sec.  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

[[Page 68584]]

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\
---------------------------------------------------------------------------

    \603\ NFA Comment Letter at 8 (Feb. 15, 2013).
    \604\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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. 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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \609\ Commercial Energy Working Group Comment Letter at 2 (Feb. 
12, 2013).
    \610\ Id. at 3
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \611\ NFA Comment Letter at 15 (Feb. 15, 2013).
    \612\ Id. at 16.
---------------------------------------------------------------------------

Section 1.11 Risk Management Program for Futures Commission Merchants
    The Commission adopted new Sec.  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

[[Page 68585]]

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 Sec.  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 Sec.  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 Sec.  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 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 Sec.  
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 Sec.  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 Sec.  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 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 Sec.  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 Sec.  1.11.
    The Commission did receive comments from several FCMs objecting to 
the requirements of Sec.  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\
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    \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.
---------------------------------------------------------------------------

    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

[[Page 68586]]

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 Sec.  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\
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    \616\ CHS Hedging Comment Letter at 3 (Feb. 15, 2013); RJ 
O'Brien Comment Letter at 9-10 (Feb. 15, 2013).
    \617\ Frontier Futures Comment Letter at 2 (Feb. 14, 2013).
    \618\ FIA Comment Letter at 55 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The Commission understands the general concerns of commenters 
regarding the costs of the requirements of Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  1.12 to identify additional circumstances in which the 
FCM must provide immediate written notice to the 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 Sec.  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 Sec.  1.12 that 
requires that every notice or report filed with the Commission pursuant 
to Sec.  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 Sec.  
1.12(a)(2), if an FCM knows that it does not have adequate capital to 
meet the requirements of Sec.  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 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 Sec.  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 Sec.  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 Sec.  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).
    \620\ FIA Comment Letter at 37 (Feb. 15, 2013); RJ O'Brien 
Comment Letter at 10 (Feb. 15, 2013).

---------------------------------------------------------------------------

[[Page 68587]]

    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 Sec.  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 Sec.  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 Sec.  1.55, which it believes are more 
beneficial to the protection of customers and appropriate to the 
disclosure purposes than the public availability of Sec.  1.12 notices.
    The situations enumerated that were proposed in Sec.  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 Sec.  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 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 Sec.  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 
Sec.  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 Sec.  1.12(m) should appropriately address the comment and provide 
the benefit intended without overly burdensome costs.
---------------------------------------------------------------------------

    \621\ TD Ameritrade Comment Letter at 3 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The requirement that notifications to the Commission pursuant to 
Sec.  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 Sec.  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.
Section 1.16 Qualifications and Reports of Accountants
    The adopted changes to Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Sec.  1.16, however, it qualitatively 
considered the

[[Page 68588]]

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 Sec.  1.16 and the Commission altered some of 
the proposed Sec.  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., non-issuer 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.
---------------------------------------------------------------------------

    \623\ AICPA Comment Letter at 3 (Feb. 11, 2013).
    \624\ Id. at 2-3.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \625\ See additional discussion at section II.E. above.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \626\ See http://pcaobus.org/Registration/rasr/Pages/AnnualFees.aspx.
    \627\ Id.
---------------------------------------------------------------------------

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 Sec.  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 Sec.  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 haircuts \629\ to those that are deemed to be a low 
credit risk.\630\ The Commission's amendment to Sec.  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.
---------------------------------------------------------------------------

    \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).
    \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.
---------------------------------------------------------------------------

Costs and Benefits
    In the NPRM, the Commission provided a detailed discussion of the 
benefits the changes to Sec.  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 Sec.  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.

[[Page 68589]]

    Regarding the proposed amendment to Sec.  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, Sec.  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 
dually-registered as BDs, any changes adopted by the SEC to these 
securities haircuts will be applicable under Sec.  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.
---------------------------------------------------------------------------

    \631\ CFA Comment Letter at 4-5 (Feb. 13, 2013).
    \632\ Commission 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 Sec.  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.
---------------------------------------------------------------------------

    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, Sec.  1.17(c)(5)(ix) 
required 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. 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 Sec.  
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\
---------------------------------------------------------------------------

    \635\ FIA Comment Letter at 26 (Feb. 15, 2013).
    \636\ Id.
---------------------------------------------------------------------------

    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 non-
institutional 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 these ranchers, 
farmers and other commercial market participants that wish to hedge 
their commercial risks.\640\
---------------------------------------------------------------------------

    \637\ RJ O'Brien Comment Letter at 3-4 (Feb. 15, 2013).
    \638\ Id.
    \639\ Id.
    \640\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \644\ CCC Comment Letter at 2-3 (Feb. 15, 2013).
    \645\ Id.
---------------------------------------------------------------------------

    FIA and RJ O'Brien suggested alternatives to the Commission's

[[Page 68590]]

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \649\ NFA Comment Letter at 13 (Feb. 15, 2013).
---------------------------------------------------------------------------

    The Commission has considered the comments and is adopting the 
amendments to Sec.  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 
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.
Section 1.20 Futures Customer Funds To Be Segregated and Separately 
Accounted for
    The amendments to Sec.  1.20 reorganize the section and alter the 
substance of the section's requirements in certain places.
    The final Sec.  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

[[Page 68591]]

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 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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
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    \653\ MGEX Comment Letter at 3 (Feb. 18, 2013) and RCG Comment 
Letter at 7 (Feb. 12, 2013).
---------------------------------------------------------------------------

    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 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\
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    \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.
    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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 SIFMA Report on Management and 
Professional Earnings in the Securities Industry.

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[[Page 68592]]

    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.
---------------------------------------------------------------------------

    \658\ RCG Comment Letter at 8 (Feb. 12, 2013).
    \659\ MGEX Comment Letter at 3 (Feb.18. 2013).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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\
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    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \664\ FCStone Comment Letter at (Feb. 15, 2013).
    \665\ ICI Comment Letter at 5 (Jan. 14, 2013).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

    \666\ See note 395 above regarding the operation of the 
requirement in Sec.  1.22(c)(3) where an FCM is subject to multiple 
Residual Interest Deadlines.
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 68593]]

to a ``double default.'' \667\ When combined with the reporting 
requirements in Sec. Sec.  1.10, 1.32, 22.2, and 30.7, the requirement 
in Sec.  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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Sec.  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 
Sec.  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.
---------------------------------------------------------------------------

    \669\ See the discussion in section II.G.9. above.
---------------------------------------------------------------------------

    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 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 Sec.  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 would not create any additional funding costs.
    Despite these revisions to the proposed rule, the Commission 
recognizes that the requirements of final rule Sec.  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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 
pre-funding 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\
---------------------------------------------------------------------------

    \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 pre-funding requirements that some 
customers may bear. These are subjects that may be addressed in the 
Report.
---------------------------------------------------------------------------

    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 Sec.  1.22(c), FCMs may need to maintain

[[Page 68594]]

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 Sec.  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 (non-peak) 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 (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\
---------------------------------------------------------------------------

    \672\ FIA Comment Letter at 14, 16 (Feb. 15, 2013).
    \673\ See FIA Comment Letter at 2-3 (June 20, 2013).
    \674\ Id. at 8.
    \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.
---------------------------------------------------------------------------

    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 (``Sec.  
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 Sec.  1.25 investments have the potential to 
reduce the effective cost of funds.
---------------------------------------------------------------------------

    \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)).
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \679\ See section II.G.10. above.
---------------------------------------------------------------------------

    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. 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

[[Page 68595]]

damaging financial and operational burdens on FCMs, and the resulting 
financial burdens on customers.'' \684\
---------------------------------------------------------------------------

    \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.
    \684\ FIA Comment Letter at 23 (Feb. 15, 2013). See also ISDA 
Comment Letter at 4 (May 8, 2013).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    However, the point in time approach adopted in final rule Sec.  
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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 Sec.  
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 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.
---------------------------------------------------------------------------

    \693\ See ISDA Comment Letter at 4-5 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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

[[Page 68596]]

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \695\ See http://www.cftc.gov/MarketReports/FinancialDataforFCMs/HistoricalFCMReports/index.htm.
    \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.
---------------------------------------------------------------------------

    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 $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\
---------------------------------------------------------------------------

    \702\ That is, 31% of $35.4 billion and $2.3 billion, 
respectively.
---------------------------------------------------------------------------

    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 top-10 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 top-10 FCMs based on the historical costs 
of funds.
---------------------------------------------------------------------------

    \703\ See http://www.cftc.gov/MarketReports/FinancialDataforFCMs/HistoricalFCMReports/index.htm.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \704\ See id.
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 68597]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 Sec.  1.22 using the Commission's assumption of 
37.5% of initial margin needed for residual interest.
---------------------------------------------------------------------------

    \706\ See http://www.cftc.gov/MarketReports/FinancialDataforFCMs/HistoricalFCMReports/index.htm.
---------------------------------------------------------------------------

    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, in part, the need for additional residual 
interest on volatile trading days. The Commission received comments on 
the proposed costs and benefits of Sec.  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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.'').
    \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 `self-
guaranteeing' customers,'' which ``would be damaging to markets by 
destroying the incentives for continued participation by liquidity 
providers essential to the markets' efficiency.'').
    \716\ Id.
---------------------------------------------------------------------------

    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)

[[Page 68598]]

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\
---------------------------------------------------------------------------

    \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 
pre-funding 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.
---------------------------------------------------------------------------

    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 
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\
---------------------------------------------------------------------------

    \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).
    \720\ See id. at 4, 17.
    \721\ JSA Comment Letter at 1 (Feb. 15, 2013).
    \722\ Id. at 2.
    \723\ See Congressional Committees Letter at 1 (Sept. 25, 2013).
---------------------------------------------------------------------------

    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 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 non-institutional 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\
---------------------------------------------------------------------------

    \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.
    \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).
---------------------------------------------------------------------------

    The Commission recognizes that smaller FCMs may have more 
difficulty than large FCMs in absorbing the additional costs created by 
the requirements in Sec.  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 pre-
funding 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 Sec.  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

[[Page 68599]]

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.
---------------------------------------------------------------------------

    \732\ See CIEBA Comment Letter at 3 (Feb. 20, 2013).
---------------------------------------------------------------------------

    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 Sec.  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 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \734\ Newedge Comment Letter at 3 (Feb. 15, 2013). See also RJ 
O'Brien Comment Letter at 5 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  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 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.
---------------------------------------------------------------------------

    \735\ See Frontier Futures Comment Letter at 3 (Feb. 14, 2013).
    \736\ Id.
---------------------------------------------------------------------------

    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 Sec.  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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    In light of these concerns and in response to the commenters' 
requests, the Commission is directing staff to, within thirty months of 
the publication

[[Page 68600]]

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 phase-in 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 Sec.  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 Sec.  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 with its policies and procedures 
established in Sec.  1.11. The amendments to Sec.  1.23 were also made 
for Cleared Swaps and foreign futures at Sec.  22.17, and Sec.  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 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 Sec.  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

[[Page 68601]]

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 Sec.  1.22.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \741\ Jefferies Comment Letter at 5 (Feb. 15, 2013).
    \742\ FIA Comment Letter at 27-29 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 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 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, Sec.  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 25-percent 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 Sec.  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

[[Page 68602]]

changes to Sec.  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 Sec.  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\ 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 Sec.  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 Sec.  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.
---------------------------------------------------------------------------

    \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 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).
---------------------------------------------------------------------------

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 Sec.  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 Sec.  
1.20, in accordance with the requirements established in Sec.  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 Sec.  
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 Sec.  1.26 rather than the acknowledgment letters in the 
appendices of Sec.  1.20.\747\ The content of the Template Letters in 
the appendices to Sec.  1.26 is identical to those in the appendices to 
Sec.  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 Sec.  
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.
---------------------------------------------------------------------------

    \747\ Further, per Sec.  1.25(c)(3), the FCM or DCO shall obtain 
the Sec.  1.26 Template Letter from ``an entity that has substantial 
control over the [MMMF] 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 [MMMF] 
sponsor or depository acting as custodian for [MMMF] shares.''
---------------------------------------------------------------------------

Benefits
    The benefits are largely the same as for the Template Letters 
required under Sec.  1.20, described above in the cost-and-benefit 
section related to Sec.  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 Sec.  1.25(c).
Costs
    The costs are largely the same as for the Template Letters required 
under Sec.  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 Sec.  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 Sec.  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.

[[Page 68603]]

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 Sec.  
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 Sec.  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 Sec.  
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 Sec.  1.25. 
FIA filed a comment supporting the proposed amendments to Sec.  
1.29.\749\ No other comments were received. The Commission has adopted 
the amendments to Sec.  1.29 as proposed.
---------------------------------------------------------------------------

    \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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Section 1.30 Loans by Futures Commission Merchants; Treatment of 
Proceeds
    The Commission adopted amendments to Sec.  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.
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 
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 Sec.  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 Sec.  1.17, except that in 
Sec.  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 Sec.  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 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 break-
down of the different categories of Sec.  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 Sec.  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 
Sec. Sec.  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

[[Page 68604]]

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.
---------------------------------------------------------------------------

    \750\ See Segregated Investment Detail Report at http://www.nfa.futures.org/NFA-compliance/NFA-futures-commission-merchants/fcm-reporting.pdf.
---------------------------------------------------------------------------

    FIA commented in support of the amendments to Sec.  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 Sec.  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 Sec.  
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 Sec.  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, that the amendments to Sec.  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 Sec.  1.32 were not expected to result 
in incremental costs for FCMs.
---------------------------------------------------------------------------

    \751\ FIA Comment Letter at 30-31 (Feb. 15, 2013).
    \752\ See Jefferies Comment Letter at 3 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 Sec.  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 Sec. Sec.  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 FCMs to manipulate the haircut, as 
suggested by CFA.
---------------------------------------------------------------------------

    \753\ See CFA Comment Letter at 7 (Feb. 13, 2013).
---------------------------------------------------------------------------

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 Sec.  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

[[Page 68605]]

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 Sec.  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 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\
---------------------------------------------------------------------------

    \754\ CME, JAC, MGEX, NFA and PWC all commented objecting to or 
raising concern with this aspect of the amendment to Sec.  1.52.
    \755\ See PWC letter at 3 (Jan. 15, 2013).
    \756\ See 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).
---------------------------------------------------------------------------

    In consideration of the concerns of commenters, the Commission has 
adopted revised amendments to the examinations expert requirement to 
Sec.  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 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 Sec.  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.
---------------------------------------------------------------------------

    \763\ See JAC Comment Letter at 3-4 (July 25, 2013).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \764\ See NFA Comment Letter at 5, n.2 (Feb. 15, 2013).

---------------------------------------------------------------------------

[[Page 68606]]

Section 1.55 Public Disclosures by Futures Commission Merchants
    Amended Sec.  1.55 significantly revises the disclosures that FCMs 
are required to provide to prospective customers and the public, 
detailed in Sec.  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 Sec.  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 Sec.  1.55.
    In addition, the amendments at Sec.  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 FCM 
and an explanation of how such 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.
---------------------------------------------------------------------------

    \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.''
---------------------------------------------------------------------------

    The newly adopted Sec.  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 Sec.  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 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 Sec.  1.55 provide customers with additional 
information regarding certain non-firm-specific 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 non-firm 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

[[Page 68607]]

did receive many comments that supported the amendments to Sec.  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 cost-
effective 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\
---------------------------------------------------------------------------

    \766\ See FHLB Comment Letter at 3 (Feb. 15, 2013).
    \767\ See ACLI Comment Letter at 2 (Feb. 15, 2013); Commercial 
Energy Working Group Comment Letter at 2 (Feb. 13, 2013).
---------------------------------------------------------------------------

    FIA specifically commented with respect to the disclosures required 
under Sec.  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 mid-size FCMs.\770\
---------------------------------------------------------------------------

    \768\ See FIA Comment Letter at 43 (Feb. 15, 2013).
    \769\ Id. at 44.
    \770\ Newedge Comment Letter at 4 (Feb. 15, 2013).
---------------------------------------------------------------------------

    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 
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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    Certain commenters have requested that the Commission consider the 
alternative to further require all Sec.  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 Sec.  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, Sec.  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 Sec.  1.12 and which require updated public 
disclosure, although the two are distinct 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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.17 and Sec.  
1.32 but for Cleared Swaps; (2) requiring the FCM to

[[Page 68608]]

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 Sec.  1.31.
---------------------------------------------------------------------------

    \772\ As noted in section II.Q. above, the revisions to 
Sec. Sec.  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.
---------------------------------------------------------------------------

Costs and Benefits
    As discussed above, amendments to Sec.  22.2(a) and (f) are not 
intended to change existing practice and thus do not introduce new 
costs. The other amendments to Sec.  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 Sec.  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 Sec.  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 Sec.  1.11.
Costs and Benefits
    The costs and benefits are similar to those created by Sec. Sec.  
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 Sec. Sec.  1.23 and 1.11, but incremental thereto with 
respect to Cleared Swaps Customer Accounts.
Section 30.1 Definitions
    Amendments adopted to Sec.  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 foreign-domiciled 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 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 Sec.  30.7.
Section 30.7 Treatment of Foreign Futures or Foreign Options Secured 
Amount
    The adopted amendments to Sec.  30.7 (1) Incorporate the funds of 
foreign-domiciled investors deposited with an FCM for investment in 
foreign futures and foreign options within the protections provided in 
Sec.  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 Sec.  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 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 Sec. Sec.  
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 Sec.  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 Sec. Sec.  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 
Sec.  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 
Sec. Sec.  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) Sec.  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.
---------------------------------------------------------------------------

    \773\ The additional specificity incorporates the same 
requirements for acknowledgment and agreement that are contained in 
the templates in the appendices of Sec. Sec.  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 Sec.  1.11.
---------------------------------------------------------------------------

    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

[[Page 68609]]

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 Sec.  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 
Sec. Sec.  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 Sec.  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 Sec.  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 Sec.  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. 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\
---------------------------------------------------------------------------

    \775\ See NFA Interpretive Notice 9066 (Revised, July 1, 2013).
---------------------------------------------------------------------------

    In the NPRM, the Commission proposed in Sec.  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.
---------------------------------------------------------------------------

    \776\ See, e.g., Lehman, MFGI.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 Sec.  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

[[Page 68610]]

$0.7 billion (31% of $2.3 billion) of customer excess corresponding to 
30.7 accounts.
---------------------------------------------------------------------------

    \779\ See http://www.cftc.gov/MarketReports/FinancialDataforFCMs/HistoricalFCMReports/index.htm.
    \780\ See id.
    \781\ See id.
    \782\ As discussed in the analysis of Sec.  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.
---------------------------------------------------------------------------

    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.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \784\ requires Federal 
agencies, in promulgating regulations, to consider the impact of those 
regulations on small entities. As stated in the NPRM, the Commission 
has previously established certain definitions of ``small entities'' to 
be used by the Commission in evaluating the impact of its rules on 
small entities in accordance with the RFA.\785\ The proposed 
regulations would affect FCMs and DCOs.
---------------------------------------------------------------------------

    \784\ 5 U.S.C. 601 et seq.
    \785\ 47 FR 18618 (Apr. 30, 1982).
---------------------------------------------------------------------------

    The Commission previously has determined that FCMs are not small 
entities for purposes of the RFA, and, thus, the requirements of the 
RFA do not apply to FCMs.\786\ The Commission's determination was 
based, in part, upon the obligation of FCMs to meet the minimum 
financial requirements established by the Commission to enhance the 
protection 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.
---------------------------------------------------------------------------

    \786\ Id. at 18619.
    \787\ Id.
    \788\ See 66 FR 45605, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------

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 submit to OMB this 
final rulemaking, together with ICRs that have been updated to include 
the comment summary contained herein.
---------------------------------------------------------------------------

    \789\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The collections contained in this rulemaking are mandatory 
collections. In formulating burden estimates for the collections in 
this rulemaking, to avoid double accounting of information collections 
that already have been assigned control numbers by OMB, or are covered 
as burden hours in collections of information pending before OMB, the 
PRA analysis provided in the proposed rulemaking, along with the 
information collection request (``ICR'') with burden estimates that 
were incorporated into the rulemaking by reference and submitted to 
OMB, accounted only burden estimates for collections of information 
that have not previously been submitted to OMB. The Commission sought 
comment on the collections of information contained in 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).

[[Page 68611]]



    Appendix 1 to Supplementary Information--Table of Comment Letters
------------------------------------------------------------------------
     Abbreviation used (if applicable)                Full name
------------------------------------------------------------------------
Advantage.................................  Advantage Futures LLC.
AFMP Group................................  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.
AIMA......................................  Alternative Investment
                                             Management Association.
Amarillo..................................  Amarillo Brokerage Co.
ACLI......................................  American Council of Life
                                             Insurers.
AFBF......................................  American Farm Bureau
                                             Federation.
AICPA.....................................  American Institute of
                                             Certified Public
                                             Accountants.
AIM.......................................  American Iron & Metal.
BlackRock.................................  BlackRock, Inc.
Depository Bank Group.....................  BMO Harris Bank, Barclays
                                             Bank, The Bank of New York
                                             Mellon and Brown Brothers
                                             Harriman & Co.
Center for Audit Quality..................  Center for Audit Quality.
CFA.......................................  CFA Institute.
Chris Barnard.............................  Chris Barnard.
CHS Hedging...............................  CHS Hedging, Inc.
CME.......................................  CME Group Inc.
CoBank....................................  CoBank.
Commercial Energy Working Group...........  Commercial Energy Working
                                             Group.
CIEBA.....................................  Committee on Investment of
                                             Employee Benefit Assets.
CCC.......................................  Commodity Customer
                                             Coalition.
Congressional Committees..................  Congress of the United
                                             States: Frank D. Lucas,
                                             House Committee on
                                             Agricultural; Debbie
                                             Stabenow, Senate Committee
                                             on Agriculture, Nutrition,
                                             and Forestry.
Deloitte..................................  Deloitte & Touche.
Ernst & Young.............................  Ernst & Young LLP.
Eurex.....................................  Eurex Clearing AG.
FHLB......................................  Federal Home Loan Banks.
Federal Reserve Banks.....................  Federal Reserve Banks of New
                                             York and Chicago.
FXCM......................................  Forex Capital Markets LLC.
Franklin..................................  Franklin Templeton
                                             Investments.
Frontier Futures..........................  Frontier Futures, Inc.
FIA.......................................  Futures Industry Association
                                             (Collectively--Barclays,
                                             State Street, Goldman
                                             Sachs, others).
Global Commodity..........................  Global Commodity Analytics &
                                             Consulting LLC.
ISRI......................................  Institute of Scrap Recycling
                                             Industries, Inc.
ISDA......................................  International Swap Dealers
                                             Association, Inc.
FCStone...................................  INTL FCStone, Inc.
ICI.......................................  Investment Company
                                             Institute.
ICA.......................................  Iowa Cattlemen's
                                             Association.
Jefferies.................................  Jefferies Bache, LLC.
JSA.......................................  John Stewart and Associates.
JAC.......................................  Joint Audit Committee.
Katten-FIA................................  Katten Muchin Rosenman LLP
                                             on behalf of the Futures
                                             Industry Association.
KPMG......................................  KPMG LLP.
Kripke Enterprises........................  Kripke Enterprises.
LCH.Clearnet..............................  LCH.Clearnet Group Limited.
MFA.......................................  Managed Funds Association.
Manitoba..................................  Manitoba Corporation.
MGEX......................................  Minneapolis Grain Exchange,
                                             Inc.
NCBA......................................  National Cattlemen's Beef
                                             Association.
NCFC......................................  National Council of Farmer
                                             Cooperatives.
NFA.......................................  National Futures
                                             Association.
NGFA......................................  National Grain and Feed
                                             Association.
NIBA......................................  National Introducing Brokers
                                             Association.
NPPC......................................  National Pork Producers
                                             Council.
NEFI/PMAA.................................  New England Fuel Institute
                                             Petroleum Marketers
                                             Association of America.
NYPC......................................  New York Portfolio Clearing,
                                             LLC.
Newedge...................................  Newedge USA, LLC.
Nodal.....................................  Nodal Exchange, LLC.
Paul/Weiss................................  Paul, Weiss, Rifkind,
                                             Wharton & Garrison LLP.
Phillip Futures Inc.......................  Phillip Futures Inc.
Pilot Flying J............................  Pilot Travel Centers, LLC.
Premier Metal Services....................  Premier Metal Services, LLC.
Prudential................................  The Prudential Insurance
                                             Company of America.
PWC.......................................  PWC LLP.
Randy Fritsche............................  Randy Fritsche.
Rice Dairy LLC............................  Rice Dairy LLC.

[[Page 68612]]

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

BILLING CODE 6351-01-P

[[Page 68613]]

Appendix 2 to Supplementary Information--CFTC Form 1-FR-FCM
[GRAPHIC] [TIFF OMITTED] TR14NO13.000


[[Page 68614]]


[GRAPHIC] [TIFF OMITTED] TR14NO13.001


[[Page 68615]]


[GRAPHIC] [TIFF OMITTED] TR14NO13.002


[[Page 68616]]


[GRAPHIC] [TIFF OMITTED] TR14NO13.003


[[Page 68617]]


[GRAPHIC] [TIFF OMITTED] TR14NO13.004


[[Page 68618]]


[GRAPHIC] [TIFF OMITTED] TR14NO13.005


[[Page 68619]]


[GRAPHIC] [TIFF OMITTED] TR14NO13.006

BILLING CODE 6351-01-C

List of Subjects

17 CFR Part 1

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

17 CFR Part 3

    Associated persons, Brokers, Commodity futures, Customer 
protection, Major swap participants, Registration, Swap dealers.

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.

17 CFR Part 140

    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:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
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 Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

0
2. Amend Sec.  1.3 to revise paragraph (rr) to read as follows:


Sec.  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 Sec.  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

[[Page 68620]]

foreign futures contracts or foreign options.
* * * * *

0
3. Amend Sec.  1.10 to:
0
a. Revise paragraph (b)(1)(ii);
0
b. Add paragraph (b)(5); and
0
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:


Sec.  1.10  Financial reports of futures commission merchants and 
introducing brokers.

* * * * *
    (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 Sec.  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 Sec.  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 
Sec.  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 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 Sec.  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 Sec.  30.1 of this chapter) in 
accordance with Sec.  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 Sec.  30.1 of this chapter) in 
accordance with Sec.  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 
statement of the computation of the minimum capital requirements 
pursuant to Sec.  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 Sec.  30.1 of this 
chapter) in accordance with Sec.  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 Sec.  30.1 of this chapter) in accordance with Sec.  
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.
* * * * *

0
4. Add Sec.  1.11 to read as follows:


Sec.  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

[[Page 68621]]

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 Sec.  1.3, 
Cleared Swaps Customer as defined in Sec.  22.1 of this chapter, and 
30.7 customer as defined in Sec.  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 
Sec.  1.20 for futures customers, pursuant to Sec.  22.2 of this 
chapter for Cleared Swaps Customers, and pursuant to Sec.  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 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 self-regulatory 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.
    (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

[[Page 68622]]

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 Sec.  1.20, and Sec. Sec.  
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 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 Sec.  1.23, Sec.  22.17 of this chapter, or 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.25, to ensure that all non-cash assets held 
in the customer segregated accounts, both customer-owned securities and 
investments in accordance with Sec.  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.

[[Page 68623]]

    (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 Sec.  1.31 and shall be made 
available promptly upon request to representatives of the Commission.

0
5. Amend Sec.  1.12 to:
0
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
0
b. Add paragraphs (j), (k), (l), (m), and (n).
    The revisions and additions read as follows:


Sec.  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 Sec.  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, 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 Sec.  
1.17(a)(1)(i)(A);
    (2) 110 percent of the amount required by Sec.  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 240.17a-11(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 Sec.  1.16(e)(2), of 
the existence of any material inadequacy, as specified in Sec.  
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.
    (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 Sec.  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 self-
regulatory 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 Sec.  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

[[Page 68624]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.10(h), excess net capital as 
defined in the rules of the 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 Sec.  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 Sec.  1.20, Cleared Swaps 
Customer Collateral, as defined in Sec.  22.1 of this chapter, or 30.7 
customer funds, as defined in Sec.  30.1 of this chapter, in 
instruments that are not permitted investments under Sec.  1.25, or has 
otherwise violated the requirements governing the investment of funds 
belonging to customers under Sec.  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 Sec.  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 
Sec.  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 Sec.  1.22, and 
Sec. Sec.  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

[[Page 68625]]

to the futures commission merchant by the Securities and Exchange 
Commission or a securities self-regulatory 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 self-regulatory 
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 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 
self-regulatory 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 Sec.  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.

0
6. Amend Sec.  1.15 to revise paragraph (a)(4) to read as follows:


Sec.  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.
* * * * *

0
7. Amend Sec.  1.16 to:
0
a. Revise paragraphs (a)(4), (b)(1), (c)(1) and (c)(2), and 
(f)(1)(i)(C); and
0
b. Add paragraph (b)(4).
    The revisions and addition read as follows:


Sec.  1.16  Qualifications and reports of accountants.

    (a) * * *
    (4) Customer. The term ``customer'' means customer, as defined in 
Sec.  1.3, and 30.7 customer, as defined in Sec.  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

[[Page 68626]]

    (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.
* * * * *

0
8. Amend Sec.  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:


Sec.  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 unless 
otherwise directed by the Commission and/or the designated self-
regulatory 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 self-regulatory 
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 
Sec.  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 Sec.  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 Sec.  
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 Sec.  1.3, Cleared Swaps Customers as defined in Sec.  
22.1 of this chapter, and 30.7 customers as defined in Sec.  30.1 of 
this chapter in securities as permitted investments under Sec.  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 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 Sec.  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

[[Page 68627]]

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;
* * * * *

0
9. Revise Sec.  1.20 to read as follows:


Sec.  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 Sec.  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 Sec.  1.11, with the following depositories:
    (1) A bank or trust company;
    (2) A derivatives clearing organization; or
    (3) Another futures commission merchant.
    (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 Sec.  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 self-regulatory 
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.
    (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

[[Page 68628]]

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 Sec.  
1.31, for as long as the account remains open, and thereafter for the 
period provided in Sec.  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 Sec.  1.23.
    (3) A futures commission merchant may not commingle futures 
customer funds with funds deposited by 30.7 customers as defined in 
Sec.  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 Sec.  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 Sec.  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 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 Sec.  1.49.
    (4) Written acknowledgment from depositories. (i) A derivatives 
clearing organization must obtain a written acknowledgment from each 
depository prior to or contemporaneously with the opening of 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

[[Page 68629]]

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 Sec.  1.31, for as long as the account remains open, and 
thereafter for the period provided in Sec.  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 Sec.  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 Sec.  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 by a 
derivatives clearing organization rule approved in accordance with 
Sec.  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 
Sec.  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.

Appendix A to Sec.  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

[[Page 68630]]

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.
    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 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 Sec.  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

[[Page 68631]]

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 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:
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:



0
10. Revise Sec.  1.22 to read as follows:


Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 68632]]

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 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.

0
11. Revise Sec.  1.23 to read as follows:


Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  1.32 as of the close of business on the 
previous business day. A futures commission merchant that has 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

[[Page 68633]]

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 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 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 Sec.  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 pre-approves 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;
    (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 paragraph (c)(2) of this section 
with the Commission 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 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 Sec.  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 Sec.  1.11. Notwithstanding the foregoing, if a the futures 
commission merchant's residual interest in customer accounts is less 
than the amount required by Sec.  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 Sec.  1.25, as applicable.

0
12. Amend Sec.  1.25 to:
0
a. Remove paragraph (b)(6); and
0
b. Revise paragraphs (b)(3)(v), (c)(3), (d)(7), (d)(11), and (e).
    The revisions read as follows:


Sec.  1.25  Investment of customer funds.

* * * * *

[[Page 68634]]

    (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 Sec.  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 Sec.  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 Sec.  1.26. The futures commission merchant or the 
derivatives clearing organization shall obtain the acknowledgment 
letter required by Sec.  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 Sec.  1.26.
* * * * *
    (11) The transactions effecting the agreement are recorded in the 
record required to be maintained under Sec.  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 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 Sec.  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 Sec.  1.20 part. For purposes of 
this section and Sec. Sec.  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 Sec.  1.23. 
Investments permitted by Sec.  1.25 that are owned by the futures 
commission merchant and deposited into a futures customer account 
pursuant to Sec.  1.26 shall be considered futures customer funds until 
such investments are withdrawn from segregation in accordance with 
Sec.  1.23. Investments permitted by Sec.  1.25 that are owned by the 
futures commission merchant and deposited into a Cleared Swaps Customer 
Account, as defined in Sec.  22.1 of this chapter, shall be considered 
Cleared Swaps Customer Collateral, as defined in Sec.  22.1 of this 
chapter, until such investments are withdrawn from segregation in 
accordance with Sec.  22.17 of this chapter.
* * * * *

0
13. Revise Sec.  1.26 to read as follows:


Sec.  1.26  Deposit of instruments purchased with futures customer 
funds.

    (a) Each futures commission merchant who invests futures customer 
funds in instruments described in Sec.  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 Sec.  1.20. Each derivatives clearing organization 
which invests money belonging or accruing to futures customers of its 
clearing members in instruments described in Sec.  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 
Sec.  1.20.
    (b) Each futures commission merchant or derivatives clearing 
organization which invests futures customer funds in money market 
mutual funds, as permitted by Sec.  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 Sec.  1.31, for as long as 
the account remains open, and thereafter for the period provided in 
Sec.  1.31, a written acknowledgment and shall file such acknowledgment 
in accordance with the requirements of Sec.  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 Sec.  1.20. In either case, the written 
acknowledgment shall be obtained, provided to the Commission and 
designated self-regulatory organizations, and retained as required 
under Sec.  1.20.

Appendix A to Sec.  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'')

[[Page 68635]]

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 
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, 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:

[[Page 68636]]

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

Appendix B to Sec.  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 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 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]

[[Page 68637]]

Date:


0
14. Revise Sec.  1.29 to read as follows:


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

    (a) The investment of customer funds in instruments described in 
Sec.  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 Sec.  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.

0
15. Revise Sec.  1.30 to read as follows:


Sec.  1.30  Loans by futures commission merchants; treatment of 
proceeds.

    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.

0
16. Amend Sec.  1.32 to:
0
a. Revise the section heading;
0
b. Revise paragraphs (b) and (c); and
0
c. Add paragraphs (d), (e), (f), (g), (h), (i), (j), and (k).
    The revisions and additions to read as follows:


Sec.  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 
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 Sec.  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 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 self-regulatory 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).

[[Page 68638]]

    (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 Sec.  1.31.

0
17. Revise Sec.  1.52 to read as follows:


Sec.  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 Sec.  1.3(h)) or a registered futures association under 
section 17 of the Act. The term ``self-regulatory organization'' for 
purpose of this section does not include a swap execution facility (as 
defined in Sec.  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 Sec. Sec.  
1.10 and 1.17, for futures commission merchants and introducing 
brokers, and Sec. Sec.  5.7 and 5.12 of this chapter for retail foreign 
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 Sec.  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 
self-regulatory 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 Sec.  1.17(c) for futures commission merchants and 
introducing brokers, and Sec.  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 Sec.  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 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 self-regulatory 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 self-regulatory 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

[[Page 68639]]

uniform examination programs and procedures that have been submitted to 
the Commission.
    (v) Adequate documentation. A self-regulatory 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 self-regulatory 
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;
    (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 self-regulatory 
organization, and comments and recommendations in connection with such 
evaluation from such examinations expert; and
    (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 self-regulatory 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'