Home/Federal/Federal Register/2024-31177

Rule2024-31177

Regulations To Address Margin Adequacy and To Account for the Treatment of Separate Accounts by Futures Commission Merchants

Primary source

Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.

Published

January 22, 2025

Effective

March 24, 2025

Issuing agencies

Commodity Futures Trading Commission

Abstract

The Commodity Futures Trading Commission (Commission or CFTC) is amending its regulations, adopted under the Commodity Exchange Act (CEA), to require a futures commission merchant (FCM) to ensure a customer does not withdraw funds from its account with the FCM if the balance in the account after the withdrawal would be insufficient to meet the customer's initial margin requirements; and relatedly, to permit an FCM, subject to certain requirements, to treat the separate accounts of a single customer as accounts of separate entities for purposes of certain Commission regulations.

Full Text

<html>
<head>
<title>Federal Register, Volume 90 Issue 13 (Wednesday, January 22, 2025)</title>
</head>
<body><pre>
[Federal Register Volume 90, Number 13 (Wednesday, January 22, 2025)]
[Rules and Regulations]
[Pages 7880-7940]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-31177]

[[Page 7879]]

Vol. 90

Wednesday,

No. 13

January 22, 2025

Part III

Commodity Futures Trading Commission

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

17 CFR Parts 1, 22, 30, et al.

Regulations To Address Margin Adequacy and To Account for the Treatment
of Separate Accounts by Futures Commission Merchants; Final Rule

Federal Register / Vol. 90, No. 13 / Wednesday, January 22, 2025 /
Rules and Regulations

[[Page 7880]]

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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 22, 30, and 39

RIN 3038-AF21

Regulations To Address Margin Adequacy and To Account for the
Treatment of Separate Accounts by Futures Commission Merchants

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is amending its regulations, adopted under the Commodity Exchange Act
(CEA), to require a futures commission merchant (FCM) to ensure a
customer does not withdraw funds from its account with the FCM if the
balance in the account after the withdrawal would be insufficient to
meet the customer's initial margin requirements; and relatedly, to
permit an FCM, subject to certain requirements, to treat the separate
accounts of a single customer as accounts of separate entities for
purposes of certain Commission regulations.

DATES:
Effective date: This rule is effective March 24, 2025.
Compliance dates: The compliance date for FCMs that are clearing
members of a derivatives clearing organization (DCO) as of the date of
publication of this rule in the Federal Register shall be July 21,
2025. The compliance date for all other FCMs shall be January 22, 2026.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel,
202-418-5092, <a href="/cdn-cgi/l/email-protection#0b797c6a78786e79666a654b686d7f68256c647d">[email&#160;protected]</a>; Daniel O'Connell, Special Counsel,
202-418-5583, <a href="/cdn-cgi/l/email-protection#3d59525e5253535851517d5e5b495e135a524b">[email&#160;protected]</a>, Division of Clearing and Risk; Thomas
Smith, Deputy Director, 202-418-5495, <a href="/cdn-cgi/l/email-protection#295d5a44405d41694a4f5d4a074e465f">[email&#160;protected]</a>; Liliya
Bozhanova, Associate Director, 202-418-6232, <a href="/cdn-cgi/l/email-protection#fc909e9386949d92938a9dbc9f9a889fd29b938a">[email&#160;protected]</a>;
Jennifer Bauer, Special Counsel, 202-418-5472, <a href="/cdn-cgi/l/email-protection#345e565541514674575240571a535b42">[email&#160;protected]</a>, Market
Participants Division; Jasmine Lee, Special Counsel, 202-418-5226,
<a href="/cdn-cgi/l/email-protection#1e74727b7b5e7d786a7d30797168">[email&#160;protected]</a>, Division of Market Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC
20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
A. The Commission's Customer Funds Protection Regulations
B. The Divisions' No-Action Position
C. The Commission's First Proposal
D. The Commission's Second Proposal
II. Regulations
A. Amendments to Regulation Sec. 1.3
B. Amendments to Regulation Sec. 1.17
C. Amendments to Regulations Sec. Sec. 1.20, 1.32, 22.2, and
30.7
D. Regulation Sec. 1.44(a)
E. Regulation Sec. 1.44(b)
F. Regulation Sec. 1.44(c)
G. Regulation Sec. 1.44(d)
H. Regulation Sec. 1.44(e)
I. Regulation Sec. 1.44(f)
J. Regulation Sec. 1.44(g)
K. Regulation Sec. 1.44(h)
L. Appendix A to Part 1
M. Amendments to Regulation Sec. 1.58
N. Amendments to Regulation Sec. 1.73
O. Amendments to Regulation Sec. 30.2
P. Amendments to Regulation Sec. 39.13
III. Cost Benefit Considerations
A. Introduction
B. Consideration of the Costs and Benefits of the Commission's
Action
C. Costs and Benefits of the Commission's Action as Compared to
Alternatives
D. Section 15(a) Factors
IV. Related Matters
A. Antitrust Considerations
B. Regulatory Flexibility Act
C. Paperwork Reduction Act
D. Congressional Review Act

I. Background

A. The Commission's Customer Funds Protection Regulations

Protection of market participants from misuses of customer assets
and avoidance of systemic risk are two of the fundamental purposes of
the CEA.\1\ The Commission has promulgated regulations designed to
protect customer assets, including regulations designed to ensure that
FCMs appropriately margin customer accounts and are not induced to
cover one customer's margin shortfall with another customer's funds.
The Commission has also promulgated regulations designed to diminish
the risk that a customer default in its obligations to an FCM that is a
clearing member of a DCO (clearing FCM) results in the clearing FCM in
turn defaulting on its obligations to a DCO, which could adversely
affect the stability of the broader financial system.
---------------------------------------------------------------------------

\1\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
---------------------------------------------------------------------------

Section 4d(a)(2) of the CEA and regulation Sec. 1.20(a) require an
FCM to separately account for, and segregate from its own funds, all
money, securities, and property it has received to margin, guarantee,
or secure the trades or contracts of its commodity customers.\2\
Additionally, section 4d(a)(2) of the CEA and regulation Sec. 1.22(a)
prohibit an FCM from using the money, securities, or property of one
customer to margin or settle the trades or contracts of another
customer.\3\ This requirement is designed to prevent an FCM from
treating customers disparately and to mitigate the risk that the FCM
will not maintain sufficient funds in segregation to pay all customer
claims if the FCM becomes insolvent.\4\ Section 4d(a)(2) of the CEA and
regulations Sec. Sec. 1.20 and 1.22 effectively require an FCM to add
its own funds into segregation in an amount equal to the sum of all
customer undermargined amounts, including customer account deficits, to
prevent the FCM from being induced to use one customer's funds to
margin or carry another customer's trades or contracts.\5\
---------------------------------------------------------------------------

\2\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20(a).
\3\ 7 U.S.C. 6d(a)(2); 17 CFR 1.22(a).
\4\ Prohibition of Guarantees Against Loss, 46 FR 11668, 11669
(Feb. 10, 1981).
\5\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20; 17 CFR 1.22; Prohibition of
Guarantees Against Loss, 46 FR at 11669.
---------------------------------------------------------------------------

Section 5b of the CEA,\6\ as amended by the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010,\7\ sets forth eighteen core
principles with which DCOs must comply to register and maintain
registration as DCOs with the Commission. In 2011, the Commission
adopted regulations for DCOs to implement Core Principle D, which
concerns risk management.\8\ These regulations include a number of
provisions that require a DCO to in turn require that its clearing
members take certain steps to support their own risk management to
mitigate the risk that such clearing members pose to the DCO.
---------------------------------------------------------------------------

\6\ 7 U.S.C. 7a-1.
\7\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\8\ Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D);
Derivatives Clearing Organization General Provisions and Core
Principles, 76 FR 69334, 69335 (Nov. 8, 2011).
---------------------------------------------------------------------------

One such regulation, Sec. 39.13(g)(8)(iii), provides that a DCO
shall require a clearing member to ensure that a customer does not
withdraw funds from its account with the clearing member unless the net
liquidating value plus the margin deposits remaining in the customer's
account after the withdrawal would be sufficient to meet the customer
initial margin requirements with respect to all products and swap
portfolios held in the customer's account that are cleared by the
DCO.\9\ Regulation Sec. 39.13(g)(8)(iii) thus establishes a ``Margin
Adequacy Requirement'' designed to mitigate the risk that a clearing
FCM fails to hold customer funds sufficient to cover the required
initial margin for the customer's cleared positions.\10\ In light

[[Page 7881]]

of the use of omnibus margin accounts, in which the funds of multiple
customers are held together, this safeguard is necessary to avoid the
misuse of customer funds by mitigating the likelihood that the clearing
FCM will effectively cover one customer's margin shortfall using
another customer's funds.\11\
---------------------------------------------------------------------------

\9\ 17 CFR 39.13(g)(8)(iii).
\10\ For purposes of this final rule, the Commission uses the
term ``Margin Adequacy Requirement'' to refer to this requirement,
which applies indirectly to clearing FCMs via the operation of DCO
rules, and the analogous requirement set forth in regulation Sec.
1.44(b) which will apply directly to all FCMs.
\11\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
---------------------------------------------------------------------------

In adopting the Margin Adequacy Requirement of regulation Sec.
39.13(g)(8)(iii), the Commission stated \12\ that the regulation was
consistent with the definition of ``Margin Funds Available for
Disbursement'' in the Margins Handbook \13\ prepared by the Joint Audit
Committee (JAC), a representative committee of U.S. futures exchanges
and the National Futures Association (NFA).\14\ The Commission noted
that although designated self-regulatory organizations (DSROs) reviewed
FCMs to determine whether they appropriately prohibited their customers
from withdrawing funds from their futures accounts, it was unclear to
what extent that requirement applied to cleared swap accounts when such
swaps were executed on a designated contract market (DCM) that
participated in the JAC.\15\ The Commission also noted that clearing
members that cleared only swaps that were executed on a swap execution
facility were not subject to the requirements of the JAC Margins
Handbook or review by a DSRO.\16\
---------------------------------------------------------------------------

\12\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69379.
\13\ Joint Audit Committee Margins Handbook, available at <a href="http://www.jacfutures.com/jac/MarginHandBookWord.aspx">http://www.jacfutures.com/jac/MarginHandBookWord.aspx</a>.
\14\ JAC, JAC Members, available at <a href="http://www.jacfutures.com/jac/Members.aspx">http://www.jacfutures.com/jac/Members.aspx</a>. Self-regulatory organizations, such as commodity
exchanges and registered futures associations (e.g., NFA), enforce
minimum financial and reporting requirements, among other
responsibilities, for their members. See regulation Sec. 1.3, 17
CFR 1.3. Pursuant to regulation Sec. 1.52(d), when an FCM is a
member of more than one self-regulatory organization, the self-
regulatory organizations may decide among themselves which of them
will assume primary responsibility for these regulatory duties and,
upon approval of such a plan by the Commission, the self-regulatory
organization assuming such primary responsibility will be appointed
the designated self-regulatory organization for the FCM. 17 CFR
1.52(d).
\15\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69379.
\16\ Id.
---------------------------------------------------------------------------

Thus, although regulation Sec. 39.13(g)(8)(iii) was also designed
to apply these risk mitigation and customer protection standards to
futures and swap positions carried in customer accounts by clearing
FCMs, Commission regulations do not apply a Margin Adequacy Requirement
to non-clearing FCMs. Furthermore, regulation Sec. 39.13(g)(8)(iii)
does not require DCOs to apply a Margin Adequacy Requirement to the
positions carried by a clearing FCM that are not cleared at a
registered DCO (e.g., most foreign futures and foreign option
positions).\17\
---------------------------------------------------------------------------

\17\ The term ``foreign futures'' means any contract for the
purchase or sale of any commodity for future delivery made, or to be
made, on or subject to the rules of any foreign board of trade.
Regulation Sec. 30.1(a), 17 CFR 30.1(a). The term ``foreign
option'' means any transaction or agreement which is or is held out
to be of the character of, or is commonly known to the trade as, an
``option,'' ``privilege,'' ``indemnity,'' ``bid,'' ``offer,''
``put,'' ``call,'' ``advance guaranty'' or ``decline guaranty,''
made or to be made on or subject to the rules of any foreign board
of trade. 17 CFR 30.1(b).
---------------------------------------------------------------------------

B. The Divisions' No-Action Position

On July 10, 2019, the Division of Swap Dealer and Intermediary
Oversight (DSIO) (now Market Participants Division (MPD)) and the
Division of Clearing and Risk (DCR) (collectively, the Divisions)
published CFTC Letter No. 19-17, which, among other things, provides
staff guidance with respect to the processing of margin withdrawals
under regulation Sec. 39.13(g)(8)(iii) and announced a conditional and
time-limited no-action position for certain such withdrawals.\18\ The
advisory followed discussions with, and written representations from,
the Asset Management Group of the Securities Industry and Financial
Markets Association (SIFMA-AMG), the Chicago Mercantile Exchange (CME),
the Futures Industry Association (FIA), the JAC, and several FCMs,
regarding practices among FCMs and their customers related to the
handling of separate accounts of the same customer.\19\
---------------------------------------------------------------------------

\18\ CFTC Letter No. 19-17, July 10, 2019, available at <a href="https://www.cftc.gov/csl/19-17/download">https://www.cftc.gov/csl/19-17/download</a> as extended by CFTC Letter No. 20-
28, Sept. 15, 2020, available at <a href="https://www.cftc.gov/csl/20-28/download">https://www.cftc.gov/csl/20-28/download</a>; CFTC Letter No. 21-29, Dec. 21, 2021, available at <a href="https://www.cftc.gov/csl/21-29/download">https://www.cftc.gov/csl/21-29/download</a>; CFTC Letter No. 22-11, Sept. 15,
2022, available at <a href="https://www.cftc.gov/csl/22-11/download">https://www.cftc.gov/csl/22-11/download</a>; CFTC
Letter No. 23-13, Sept. 11, 2023, available at <a href="https://www.cftc.gov/csl/23-13/download">https://www.cftc.gov/csl/23-13/download</a>; and CFTC Letter No. 24-07, June 24, 2024,
available at <a href="https://www.cftc.gov/csl/24-07/download">https://www.cftc.gov/csl/24-07/download</a>.
\19\ See, e.g., SIFMA-AMG letter dated June 7, 2019 to Brian A.
Bussey and Matthew B. Kulkin (SIFMA-AMG Letter); CME letter dated
June 14, 2019 to Brian A. Bussey and Matthew B. Kulkin (CME Letter);
and FIA letter dated June 26, 2019 to Brian A. Bussey and Matthew B.
Kulkin (First FIA Letter).
---------------------------------------------------------------------------

CFTC Letter No. 19-17 used the term ``beneficial owner''
synonymously with the term ``customer,'' as ``beneficial owner'' was,
in this context, commonly used to refer to the customer that is
financially responsible for an account. Additionally, as discussed
further below, in the customer relationship context, FCMs often deal
directly with a commodity trading advisor acting as an agent of the
customer rather than with the customer itself. For the avoidance of
confusion (e.g., with regard to the terms ``owner'' or ``ownership,''
as those terms are used in Forms 40 and 102,\20\ or parts 17-20,\21\ or
with regard to the term ``beneficial owner,'' as that term may be used
by other agencies), this final rule uses only the term ``customer,''
except where directly quoting or paraphrasing a source that uses the
term ``beneficial owner.''
---------------------------------------------------------------------------

\20\ See CFTC, CFTC Form 40, Statement of a Reporting Trader,
available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@forms/documents/file/cftcform40.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@forms/documents/file/cftcform40.pdf</a>; see also CFTC,
Ownership & Control Reporting, available at <a href="https://www.cftc.gov/Forms/OCR/index.htm">https://www.cftc.gov/Forms/OCR/index.htm</a> (discussing Ownership and Control Reporting
under Form 102).
\21\ See 17 CFR parts 17 (covering reports by reporting markets,
FCMs, clearing members, and foreign brokers), 18 (reports by
traders), 19 (reports by persons holding reportable positions in
excess of position limits and by merchants and dealers in cotton),
and 20 (large trader reporting for physical commodity swaps).
---------------------------------------------------------------------------

The written representations preceding the issuance of CFTC Letter
No. 19-17 included letters filed separately by SIFMA-AMG, CME, and FIA
(collectively, the ``Industry Letters''). Citing regulation Sec.
39.13(g)(8)(iii)'s requirements related to the withdrawal of customer
initial margin, and JAC Regulatory Alert #19-02 reminding FCMs of those
requirements,\22\ SIFMA-AMG and FIA explained that provisions in
certain FCM customer agreements provide that certain accounts carried
by the FCM that have the same customer are treated as accounts for
different legal entities (i.e., ``separate accounts'').\23\
---------------------------------------------------------------------------

\22\ JAC, Regulatory Alert #19-02, May 14, 2019, available at
<a href="http://www.jacfutures.com/jac/jacupdates/2019/jac1902.pdf">http://www.jacfutures.com/jac/jacupdates/2019/jac1902.pdf</a>.
\23\ SIFMA-AMG Letter; First FIA Letter.
---------------------------------------------------------------------------

As FIA explained, there are a variety of reasons why a customer may
want separate treatment for its accounts under such an agreement.\24\
For instance, an institutional customer, such as an investment or
pension fund, may allocate assets to investment managers \25\ under
investment management agreements that require each investment manager
to invest a specified portion of the customer's assets under management
in accordance with an agreed trading strategy, independent of the
trading that may be undertaken for the customer by the same or other
investment manager(s) acting on behalf of other accounts of the

[[Page 7882]]

customer.\26\ Under such a circumstances, an investment manager, in
order to implement its trading strategy effectively, may want assurance
that the portion of funds it has been allocated to manage is entirely
available to the investment manager, and will not be affected by the
activities of other investment managers who manage other portions of
the customer's assets and maintain separate accounts at the same FCM.
---------------------------------------------------------------------------

\24\ First FIA Letter.
\25\ The Industry Letters sometimes used the terms ``investment
manager'' and ``asset manager'' interchangeably.
\26\ Id.
---------------------------------------------------------------------------

Additionally, as FIA explained, a commercial enterprise may
establish separate agreements to leverage specific broker expertise on
products or to diversify risk management strategies.\27\ In such cases,
each separate account may be subject to a separate customer agreement,
which the FCM in many cases negotiates directly with the customer's
agent, which is often an investment manager.\28\
---------------------------------------------------------------------------

\27\ Id.
\28\ Id.
---------------------------------------------------------------------------

SIFMA-AMG and FIA asserted that, subject to appropriate FCM
internal controls and procedures, separate accounts should be treated
as separate legal entities for purposes of regulation Sec.
39.13(g)(8)(iii); i.e., separate accounts should not be combined when
determining an account's margin funds available for disbursement.\29\
SIFMA-AMG and FIA maintained that such separate account treatment
should not be expected to expose an FCM to any greater regulatory or
financial risk, and asserted that an FCM's internal controls and
procedures could be designed to assure that the FCM does not undertake
any additional risk as to the separate account.\30\ The Industry
Letters included a number of examples of such controls and
procedures.\31\
---------------------------------------------------------------------------

\29\ SIFMA-AMG Letter; First FIA Letter.
\30\ SIFMA-AMG Letter; First FIA Letter.
\31\ SIFMA-AMG Letter; First FIA Letter; CME Letter.
---------------------------------------------------------------------------

In its letter, SIFMA-AMG suggested that it would be possible to
allow for separate account treatment without undermining the risk
mitigation and customer protection goals of regulation Sec.
39.13(g)(8)(iii).\32\ SIFMA-AMG recognized that there may be some
instances, such as a customer default, in which separate account
margining would no longer be prudent.\33\ SIFMA-AMG stated that an FCM
could agree to first satisfy any amounts owed from agreed assets
related to a separate account, and continue to release funds until the
FCM provided the separate account with a notice of an event of default
under the applicable clearing account agreement, and determined that it
is no longer prudent to continue to separately margin the customer's
accounts, provided that such actions are consistent with the FCM's
written internal controls and procedures.\34\ SIFMA-AMG further stated
that, in such instance, the FCM would retain the ability to ultimately
look to funds in other accounts of the customer, including accounts
under different control, and the right to call the customer for
funds.\35\ CME similarly asserted that disbursements on a separate
account basis should not be permitted in certain circumstances, such as
financial distress, that fall outside the ``ordinary course of
business.'' \36\ Although CME asserted that the plain language of
regulation Sec. 39.13(g)(8)(iii) unambiguously forbids disbursements
on a separate account basis, CME noted that it would be amenable to the
Commission amending the regulation to permit such disbursements,
subject to certain such risk-mitigating conditions.\37\
---------------------------------------------------------------------------

\32\ SIFMA-AMG Letter.
\33\ Id.
\34\ Id.
\35\ Id.
\36\ CME Letter.
\37\ Id.
---------------------------------------------------------------------------

SIFMA-AMG and FIA requested that DCR confirm that it would not
recommend that the Commission initiate an enforcement action against a
DCO that permits its clearing FCMs to treat certain separate accounts
of a customer as accounts of separate entities for purposes of
regulation Sec. 39.13(g)(8)(iii),\38\ and confirm that a clearing FCM
may release excess funds from a separate customer account
notwithstanding an outstanding margin call in another account of the
same customer.\39\
---------------------------------------------------------------------------

\38\ FIA specifically noted that such a no-action position could
be conditioned on the FCM maintaining certain internal controls and
procedures. First FIA Letter.
\39\ SIFMA-AMG Letter; First FIA Letter; see also CME Letter.
---------------------------------------------------------------------------

In CFTC Letter No. 19-17, DCR stated that, in the context of
separate accounts, the risk management goals of regulation Sec.
39.13(g)(8)(iii) may effectively be addressed if a clearing FCM
carrying a customer with separate accounts meets certain conditions,
which were derived from the Industry Letters and specified in CFTC
Letter No. 19-17.\40\ DCR stated that it would not recommend that the
Commission take enforcement action against a DCO if the DCO permits its
clearing FCMs to treat certain separate accounts as accounts of
separate entities for purposes of regulation Sec. 39.13(g)(8)(iii)
subject to these conditions.\41\ The no-action position extended until
June 30, 2021, in order to provide staff with time to recommend, and
the Commission with time to consider, a rulemaking to implement on a
permanent basis requirements related to separate account treatment.\42\
CFTC Letter No. 20-28, published on September 15, 2020, extended the
no-action position until December 31, 2021 due to challenges presented
by the COVID-19 pandemic.\43\ CFTC Letter No. 20-28 stated that if the
process to consider codifying the no-action position provided for by
CFTC Letter No. 19-17 was not completed by that date, the Divisions
would consider further extending the no-action position.\44\ The
Divisions have continued to extend the no-action position in CFTC
Letter No. 19-17 as they have worked toward a final rule. The no-action
position currently expires on the earlier of June 30, 2025 or the
effective date of this final rule.\45\
---------------------------------------------------------------------------

\40\ CFTC Letter No. 19-17.
\41\ Id.
\42\ Id.
\43\ CFTC Letter No. 20-28.
\44\ Id.
\45\ CFTC Letter No. 24-07.
---------------------------------------------------------------------------

C. The Commission's First Proposal

On April 14, 2023, the Commission published in the Federal Register
a notice of proposed rulemaking designed to codify the no-action
position in CFTC Letter No. 19-17 (First Proposal).\46\ The First
Proposal proposed to amend regulation Sec. 39.13 to allow a DCO to
permit a clearing FCM to treat the separate accounts of customers as
accounts of separate entities for purposes of regulation Sec.
39.13(g)(8)(iii), if such clearing member's written internal controls
and procedures permitted it to do so, and the DCO required its clearing
members to comply with risk-mitigating requirements based on the
conditions in CFTC Letter No. 19-17.
---------------------------------------------------------------------------

\46\ Derivatives Clearing Organization Risk Management
Regulations to Account for the Treatment of Separate Accounts by
Futures Commission Merchants, 88 FR 22934 (Apr. 14, 2023) (First
Proposal).
---------------------------------------------------------------------------

The requirements for separate account treatment in the First
Proposal were substantially similar to the conditions in CFTC Letter
No. 19-17. However, certain such proposed requirements reflected
modification of the no-action conditions on which they were based,
including additional reporting requirements for clearing FCMs required
to cease disbursements on a separate account basis, an explicit process
for clearing FCMs to resume disbursements on a separate account basis,
and

[[Page 7883]]

provisions designed to further clarify the requirement that separate
accounts be on a one business day margin call.
The Commission originally proposed to codify the no-action position
in CFTC Letter No. 19-17 in part 39 to hew closely to the operation of
the no-action position itself. Under the First Proposal, DCOs would be
able to permit clearing FCMs to engage in separate account treatment,
provided such clearing FCMs complied with certain requirements, which
DCOs would be required to monitor and enforce through their rules.
The comment period for the First Proposal was extended once at the
request of a commenter and closed on June 30, 2023.\47\ The Commission
received comments from twelve commenters.\48\ Although commenters
generally supported codifying the no-action position in CFTC Letter No.
19-17, six commenters \49\ contended that the Commission should codify
the no-action position in its part 1 FCM regulations (where it would
apply directly to all FCMs) rather than in its part 39 DCO regulations
(where it would apply only to clearing FCMs, through the
instrumentality of DCO rules). Other commenters did not opine on
whether the proposed codification should be in part 1 versus part 39.
---------------------------------------------------------------------------

\47\ Derivatives Clearing Organization Risk Management
Regulations to Account for the Treatment of Separate Accounts by
Futures Commission Merchants, 88 FR 39205 (June 15, 2023).
\48\ The American Council of Life Insurers, CME, FIA,
Intercontinental Exchange, Inc., the JAC, MFA (formerly Managed
Funds Association), NFA, SIFMA-AMG, Symphony Communications
Services, LLC, and three individuals.
\49\ CME, FIA, Intercontinental Exchange, Inc., the JAC, NFA,
and SIFMA-AMG.
---------------------------------------------------------------------------

D. The Commission's Second Proposal

On February 20, 2024, the Commission voted to approve withdrawal of
the First Proposal and publish a notice of proposed rulemaking to
codify a Margin Adequacy Requirement similar to that of regulation
Sec. 39.13(g)(8)(iii), along with the no-action position in CFTC
Letter No. 19-17, in part 1 of its regulations, whereby it would be
applicable to all FCMs (Second Proposal).\50\ In the Second Proposal,
the Commission discussed and addressed comments received in response to
the First Proposal, including the comments that informed the
Commission's decision to withdraw the First Proposal and instead
propose to codify the no-action position of CFTC Letter No. 19-17 in
part 1.
---------------------------------------------------------------------------

\50\ Regulations to Address Margin Adequacy and To Account for
the Treatment of Separate Accounts by Futures Commission Merchants,
89 FR 15312 (Mar. 1, 2024) (Second Proposal). The Second Proposal
also contained supporting amendments in parts 1, 22, 30, and 39.
---------------------------------------------------------------------------

The notice of proposed rulemaking and withdrawal were published in
the Federal Register on March 1, 2024. The Commission is finalizing the
Second Proposal, with modifications responding to the comments
received. The bulk of the final rule will be contained in new
regulation Sec. 1.44. However, as explained below, the Commission is
also finalizing supporting amendments in regulations Sec. Sec. 1.3,
1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 39.13 to facilitate
implementation of regulation Sec. 1.44. The Commission is additionally
finalizing amendments to address inadvertent inconsistencies in
existing regulations.\51\
---------------------------------------------------------------------------

\51\ These are changes to regulation Sec. 1.3 (to clarify that
Saturday is not a business day); regulation Sec. 1.17(b) (to
reorganize the wording of the definition of the term ``business
day'' for capital purposes to be consistent with the wording in the
amendments to regulation Sec. 1.3, to clarify that the definition
of the term ``risk margin'' includes both customer and noncustomer
accounts, and to change the term ``FCM'' to read ``futures
commission merchant''); regulations Sec. Sec. 1.20(i), 30.7(f)(2),
and 22.2(f) (to revise the regulatory description of the calculation
of the total amount of funds that an FCM must hold in segregation
for futures customers, Cleared Swaps Customers, and 30.7 customers,
respectively, to align such description with the Commission's
financial forms and the instructions to such forms, reorganizing
regulations Sec. 22.2(f)); regulation Sec. 1.58(a) and (b) (to
clarify that gross margining requirements for omnibus accounts
carried for one FCM at another FCM apply to Cleared Swaps as well as
to futures and options on futures); and Sec. 30.2(b) (to clarify
that, in the context of the exclusion for applying certain
regulations to persons and transactions subject to the requirements
of part 30, existing regulations Sec. Sec. 1.41, 1.42, and 1.43
(which were added in the 2021 part 190 bankruptcy rulemaking) are
not excluded). These changes are discussed in greater detail in the
relevant sections below.
---------------------------------------------------------------------------

Regulation Sec. 1.44 is comprised of eight subsections. Regulation
Sec. 1.44(a) defines key terms solely for purposes of regulation Sec.
1.44. Regulation Sec. 1.44(b) incorporates, for all FCMs, and for all
accounts,\52\ the same Margin Adequacy Requirement that DCOs are
obligated in regulation Sec. 39.13(g)(8)(iii) to require their
clearing FCMs to apply. Regulation Sec. 1.44(c) makes clear that an
FCM can provide disbursements on a separate account basis only during
the ``ordinary course of business,'' a term that is defined in proposed
regulation Sec. 1.44(a). Regulation Sec. 1.44(d) explains how FCMs
may elect to engage in separate account treatment for one or more
customers. Regulation Sec. 1.44(e) enumerates the events that are
inconsistent with the ordinary course of business for purposes of
regulation Sec. 1.44 and contains requirements for FCMs related to
cessation of disbursements on a separate account basis upon the
occurrence of such events, and resumption of separate account
disbursements upon the cure of such events. Regulation Sec. 1.44(f)
contains the requirement that each separate account be on a ``one
business day margin call'' and sets out provisions designed to
establish how a one business day margin call is to be made and met for
purposes of regulation Sec. 1.44. Regulation Sec. 1.44(g) sets forth
capital, risk management, and segregation calculation requirements for
FCMs with respect to accounts for which the FCM has elected separate
treatment. Lastly, regulation Sec. 1.44(h) articulates information and
disclosure requirements for FCMs that engage in separate account
treatment.
---------------------------------------------------------------------------

\52\ Regulation Sec. 1.44(a) defines ``account'' to include
futures accounts and Cleared Swaps Customer Accounts, both of which
terms are defined in regulation Sec. 1.3, and 30.7 accounts. A 30.7
account means any account maintained by an FCM for or on behalf of
30.7 customers to hold money, securities, or other property to
margin, guarantee, or secure foreign futures or foreign options. 17
CFR 30.1(g).
---------------------------------------------------------------------------

II. Regulations

Section 8a(5) of the CEA \53\ authorizes the Commission ``to make
and promulgate such rules and regulations as, in the judgment of the
Commission, are reasonably necessary to effectuate any of the
provisions or to accomplish any of the purposes of'' the CEA. The
Commission is promulgating these rules pursuant to section 8a(5) as
reasonably necessary to effectuate sections 4d(a)(2) and 4d(f)(2) of
the CEA,\54\ providing for the segregation and protection of,
respectively, futures customer funds and Cleared Swaps Customer
Collateral, and section 4(b)(2)(A) of the CEA,\55\ providing for the
safeguarding of customers' funds in connection with foreign futures and
foreign option transactions. The Commission is also promulgating these
rules as reasonably necessary to effectuate section 4f(b) of the CEA,
which requires an FCM to meet minimum financial requirements prescribed
by the Commission as necessary to ensure that the FCM meets its
obligations.\56\ Moreover, the Commission is promulgating these rules
as reasonably necessary to accomplish the purposes of the CEA as set
forth in section 3(b); \57\ specifically, ``the avoidance of systemic
risk'' and ``protect[ing] all market participants from . . . misuses of
customer assets.''
---------------------------------------------------------------------------

\53\ 7 U.S.C. 12a(5).
\54\ 7 U.S.C. 6d(a)(2) and (f)(2).
\55\ 7 U.S.C. 6(b)(2)(A).
\56\ 7 U.S.C. 6f(b).
\57\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------

Accordingly, the Commission believes that the amendments adopted
herein relating to the Margin Adequacy

[[Page 7884]]

Requirement, and the modification of this requirement to permit,
subject to certain further conditions, separate account treatment in
connection with the withdrawal of customer initial margin, support the
customer funds protection and risk management provisions and purposes
of the CEA. As further described below, the Commission also believes
that preventing the undermargining of customer accounts and mitigating
the risk of a clearing member default, or the default of a non-clearing
FCM, and the potential for systemic risk in either scenario, is
effectively addressed by the standards set forth in this final rule.
All FCMs are currently subject to a detailed set of requirements
designed to provide effective protection for customer funds. These
include, for futures accounts, regulations Sec. Sec. 1.20 (requiring
segregation of customer funds), 1.22 (requiring, inter alia, residual
interest to cover undermargined amounts), and 1.23 (requiring FCMs to
maintain residual interest in segregated accounts up to a targeted
amount that they determine based on specified considerations), as well
as similar regulatory obligations with respect to Cleared Swaps
Customer Accounts (respectively, regulations Sec. Sec. 22.2(d) and (f)
and 22.17), and 30.7 accounts (regulation Sec. 30.7).
Regulation Sec. 39.13(g)(8)(iii) provides, through the Margin
Adequacy Requirement, an additional layer of protection for customer
funds, but only with respect to FCMs that are clearing members of DCOs.
Prior to this final rule, there was no analogous Margin Adequacy
Requirement applicable to FCMs that are not clearing members of DCOs.
As discussed above, regulation Sec. 39.13(g)(8)(iii) is designed to
mitigate the risk that a clearing member fails to hold, from a
customer, funds sufficient to cover the required initial margin for the
customer's cleared positions and, in light of the use of omnibus margin
accounts, avoid the misuse of customer funds by reducing the likelihood
that the clearing member will cover one customer's margin shortfall
using another customer's funds.\58\ Accordingly, regulation Sec.
39.13(g)(8)(iii) provides risk mitigation benefits for DCOs, clearing
FCMs, and customers. The effect of the staff no-action position in CFTC
Letter No. 19-17 is to allow DCOs to permit clearing FCMs to engage in
separate account treatment for purposes of that provision, but subject
to conditions designed to maintain the provision's risk mitigating
effects.
---------------------------------------------------------------------------

\58\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
---------------------------------------------------------------------------

By establishing requirements for separate account treatment for all
FCMs through the addition of a similar Margin Adequacy Requirement to
part 1, the Commission seeks to replicate the regulatory structure
presented by the interaction of regulation Sec. 39.13(g)(8)(iii) and
the no-action position of CFTC Letter No. 19-17 for all FCMs, and
further the customer fund protection and risk mitigation purposes of
the CEA \59\ by implementing measures designed to further ensure that
all FCMs, whether clearing or non-clearing, do not create or exacerbate
an undermargining scenario.
---------------------------------------------------------------------------

\59\ Section 3(b) of the CEA, 7 U.S.C. 5(b) (It is the purpose
of the CEA to ensure the financial integrity of all transactions
subject to this Act and the avoidance of systemic risk and to
protect all market participants from misuses of customer assets'').
---------------------------------------------------------------------------

The requirements for separate account treatment established herein
are designed to (i) ensure that FCMs carry out separate account
treatment in a consistent and documented manner; (ii) monitor customer
accounts on a separate and combined basis; (iii) identify and act upon
instances of financial or operational distress that necessitate a
cessation of disbursements on a separate account basis; (iv) provide
appropriate disclosures to customers \60\ regarding separate account
treatment; and (v) apprise their DSROs when they apply separate account
treatment or when an event has occurred that would necessitate
cessation of disbursements on a separate account basis.\61\
---------------------------------------------------------------------------

\60\ In this final rule, references to a ``customer'' are to a
direct customer of the FCM in question. Thus, where non-clearing FCM
N clears through clearing FCM C, a customer (including a separate
account customer) of N is not considered a customer of C.
\61\ For the avoidance of doubt, the final rule permits an FCM
to decide to engage in separate account treatment for a set of
customers. It neither requires an FCM to engage in such treatment
nor requires a customer of an FCM that decides to engage in separate
account treatment for certain customers to choose to have its
accounts with such FCM treated as separate accounts of separate
entities. Thus, separate account treatment should involve an
affirmative decision by both the FCM and the customer.
---------------------------------------------------------------------------

The amendments are designed to extend the customer protection and
risk management benefits of regulation Sec. 39.13(g)(8)(iii) to all
FCMs and all of their customer accounts, and to provide an alternative
means of achieving those risk management goals if the FCM elects to
permit customers to maintain separate accounts.\62\ Additionally, as
discussed further below in the cost benefit considerations, because a
number of clearing FCMs have already implemented the conditions set
forth in CFTC Letter No. 19-17, some FCMs will have already
implemented, in significant part, the requirements established herein.
---------------------------------------------------------------------------

\62\ As a result, regulation Sec. 1.44 prohibits the
application of portfolio margining or cross-margining treatment
between separate accounts of the same customer, but would not
prohibit the application of such treatments within a particular
separate account of a customer.
---------------------------------------------------------------------------

The Commission received comment letters in response to the Second
Proposal from the JAC, FIA, SIFMA-AMG, CME, Intercontinental Exchange,
Inc. (ICE), the Options Clearing Corporation (OCC), and MFA (formerly
Managed Funds Association). Commenters supported the Commission's
proposal to codify the no-action position of CFTC Letter No. 19-17 and
the Commission's proposed approach to base that codification in part 1.
Certain commenters commented on the substantive requirements proposed,
as well as how the proposed requirements may interact with one another
and with other Commission regulations, and suggested modifications to
the Second Proposal. The Commission addresses these comments in the
discussion below. Additionally, the Commission posed specific questions
for comment in the Second Proposal. Although in three instances
commenters responded explicitly to these questions,\63\ FIA noted that
it considers its comment letter responsive to Questions 1-4, 6, and 7
in its discussion of proposed amendments to regulation Sec. 1.17 and
proposed regulation Sec. 1.44(d), (f), and (h), including proposed
requirements for the disclosure of information in the Disclosure
Document required by regulation Sec. 1.55(i).\64\
---------------------------------------------------------------------------

\63\ FIA (Question 4), the JAC (Question 5) and CME (Question
8).
\64\ FIA Comment Letter.
---------------------------------------------------------------------------

Questions 1 and 2 concerned the Second Proposal generally. In
Question 1, the Commission requested comment regarding whether, in
light of changes made in the Second Proposal relative to the First
Proposal, the Commission should consider any requirements for separate
account treatment additional to those contained in regulation Sec.
1.44 as proposed or modify or remove any of the proposed requirements.
In Question 2, the Commission requested comment regarding whether the
interaction between regulation Sec. 1.44(g)-(h) as proposed and other
regulations under parts 1, 22, and 30 affected by the proposed
requirements (e.g., regulations Sec. Sec. 1.17, 1.20, 1.22, 1.23,
1.32, 1.55, 1.58, 1.73, 22.2, 30.2, and 30.7) was sufficiently clear.
No commenters responded explicitly to these questions, although, as
indicated above, certain comments addressed the thematic issues these
questions raise.

[[Page 7885]]

A. Amendments to Regulation Sec. 1.3

The definitions contained in regulation Sec. 1.3 are key to
understanding and interpreting the Commission's regulations, including
part 1 FCM regulations. The Commission believes the provisions of
regulation Sec. 1.44 require an amendment to regulation Sec. 1.3.
The Commission proposed to amend the definition of ``business day''
in regulation Sec. 1.3. Prior to this final rule, regulation Sec. 1.3
provided, in relevant part, that ``business day'' meant any day other
than a Sunday or holiday. The term ``business day'' is intended to
encompass days on which banks and custodians are open in the United
States to facilitate payment of margin. For the avoidance of doubt,
``holiday'' in this context refers to holidays in the United States.
The Commission proposed to modify the definition of ``business day'' in
regulation Sec. 1.3 to confirm that the term encompasses any day other
than a Saturday, Sunday, or holiday.
The Commission notes that, in actual practice, Saturdays are
generally not treated as business days in the markets,\65\ by market
participants, or for regulatory purposes.\66\ The Commission proposed
to amend the definition of ``business day'' in regulation Sec. 1.3 to
conform to that reality. In connection with the proposed amendments to
regulation Sec. 1.3, in Question 3 of the Second Proposal, the
Commission requested comment regarding whether its proposal to revise
the definition of ``business day'' in regulation Sec. 1.3 would result
in any adverse consequences for any market participants. The Commission
did not receive any comments with respect to the proposed amendment to
the definition of ``business day'' in regulation Sec. 1.3 or
explicitly in response to Question 3. Accordingly, the Commission is
adopting the amendment to the definition of ``business day'' in
regulation Sec. 1.3 as proposed.
---------------------------------------------------------------------------

\65\ It is true that some markets are moving toward 24/7
operation. The Commission will continue to monitor these
developments, and consider further rulemaking in this area as
appropriate. Nonetheless, a definition of business days that
includes Saturday, but not Sunday, does not reflect present or
plausible future reality.
\66\ For instance, Saturdays are treated as non-business days
for purposes of swaps reporting under parts 43 and 45 of the
Commission's regulations, 17 CFR 43.1; 17 CFR 45.2, execution of
confirmations by swap dealers, 17 CFR 23.501(c)(5)(ii), and under
the Commission's part 39 DCO regulations, 17 CFR 39.2 (defining an
intraday business day period). See also, e.g., CFTC, Guidebook for
Part 17.00: Reports by Reporting Markets, Futures Commission
Merchants, Clearing Members, and Foreign Brokers, at 18, May 30,
2023 (noting that for purposes of part 17.00 reports, ``reporting
entities may elect to not consider Saturdays to be a business day,
as Saturday is not commonly known as such'').
---------------------------------------------------------------------------

B. Amendments to Regulation Sec. 1.17

Regulation Sec. 1.17 establishes minimum financial requirements
for FCMs. Regulation Sec. 1.17(a)(1)(i) provides that each person
registered as an FCM must maintain adjusted net capital equal to, or in
excess of, the greatest of: (1) $1 million (or $20 million if the FCM
is also registered as a swap dealer); (2) eight percent of the total
``risk margin'' required on the positions in customer and noncustomer
accounts \67\ carried by the FCM; (3) the amount of adjusted net
capital required by NFA as a registered futures association; or (4) for
an FCM registered as a securities broker or dealer with the Securities
and Exchange Commission (SEC), the amount of net capital required by
SEC rule Sec. 15c3-1.\68\ For purposes of regulation Sec.
1.17(a)(1)(i), the term ``risk margin'' is defined by paragraph (b)(8)
of that regulation to generally mean the level of maintenance margin or
performance bond required for customer and noncustomer positions
established by the applicable exchanges or clearing organizations.
---------------------------------------------------------------------------

\67\ The term ``noncustomer account'' generally means the
accounts of affiliates of an FCM or employees of an FCM. See 17 CFR
1.17(b)(4).
\68\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

The Commission proposed several amendments to regulation Sec. 1.17
to reflect the regulatory capital treatment of separate accounts that
would result from the implementation of proposed regulation Sec. 1.44,
including the requirements contained in regulation Sec. 1.44(g)(3),
discussed below. As a general matter, the proposed amendments to
regulation Sec. 1.17 were designed to ensure that FCMs manage risk
with respect to separate accounts consistently, and cannot revert to
calculating minimum financial requirements on a combined account basis
where such calculations would tend to reflect less risk and reduced
financial requirements for a customer than if each of the customer's
separate accounts were treated as an account of a distinct customer
without regard to the same customer's other separate accounts.
Consistent with that intent, the Commission proposed to expand the
list of modifiers to the definition of the term ``risk margin'' for an
account by adding proposed paragraph (b)(8)(v) to regulation Sec.
1.17, providing that if an FCM carries separate accounts for separate
account customers pursuant to regulation Sec. 1.44, then the FCM shall
calculate the risk margin pursuant to regulation Sec.
1.17(a)(1)(i)(B)(1) as if each separate account is owned by a separate
entity.
The Commission notes that, under the amendments as proposed, risk
margin would be calculated on an individual basis for each separate
account. Calculating risk margin separately for each separate account
would eliminate the potential for portfolio margining offsets based on
positions between separate accounts of the same separate account
customer,\69\ which would either increase, or leave unchanged, the
total risk margin requirement, and thus the minimum adjusted net
capital requirement, for an FCM providing separate account
treatment.\70\ The proposed addition of paragraph (b)(8)(v) to
regulation Sec. 1.17 was intended to further clarify that, pursuant to
the Commission's FCM capital rule, an FCM that elects to permit
separate account treatment must compute the risk margin amount for
separate accounts as if each account is an account of a separate
entity.
---------------------------------------------------------------------------

\69\ As noted in regulation Sec. 39.13(g)(4), a DCO may allow
reductions in initial margin requirements for related positions if
the price risks with respect to such positions are significantly and
reliably correlated. This includes cases where (A) The products on
which the positions are based are complements of, or substitutes
for, each other. An example might be long versus short positions in
oil and natural gas, both of which may be used for generating
energy. However, portfolio margining is applicable only to accounts
for the same customer. See regulation Sec. 39.13(g)(8)(i)
(requiring collection of initial margin on a gross basis for each
clearing member's customer accounts). So, if a customer has, in a
single account, both long oil positions and short natural gas
positions, then the customer may benefit from a reduction in initial
margin requirements for the two risk-offsetting positions. However,
if those positions are in different separate accounts of the
customer under this this final rule, then the positions would not
lead to an initial margin reduction as the positions would not be
margined on a combined or portfolio basis.
\70\ As noted above, per regulation Sec. 1.17(a)(1)(i), the
adjusted net capital requirement for an FCM is the greatest of
several calculations, one of which is eight percent of the total
risk margin requirement as defined in regulation Sec. 1.17(b)(8).
Thus, a calculation that would increase, or leave unchanged, the
risk margin requirement would correspondingly increase, or leave
unchanged, the adjusted net capital requirement.
---------------------------------------------------------------------------

In proposing to amend the definition of the term ``risk margin'' in
regulation Sec. 1.17(b)(8) to reflect separate accounts, the
Commission noted that such amendment, and the resulting potential
increase in an FCM's minimum adjusted net capital requirement under
regulation Sec. 1.17(a)(1)(i), would also affect other regulations
that impose obligations on FCMs based on their level of adjusted net
capital.\71\ The Commission also

[[Page 7886]]

noted that the proposed amendments to the minimum capital requirements
would affect an FCM's obligation to provide certain notices to the
Commission and to the FCM's DSRO under regulation Sec. 1.12.\72\
---------------------------------------------------------------------------

\71\ For example, regulation Sec. 1.17(h) conditions an FCM's
ability to repay or prepay subordinated debt obligations on the FCM
maintaining an amount of adjusted net capital that, after taking
into effect the amount of the subordinated debt payment and other
subordinate debt payments maturing within a set time period, exceeds
the FCM's minimum adjusted net capital requirement by 120 percent to
125 percent, as specified in the applicable provision of regulation
Sec. 1.17(h). See, e.g., 17 CFR 1.17(h)(2)(vii) which generally
provides, subject to certain conditions, that an FCM may not make a
prepayment on an outstanding subordinated debt obligation if such
payment would result in the FCM maintaining less than 120 percent of
its minimum adjusted net capital requirement.
\72\ See, e.g., 17 CFR 1.12(a), which requires an FCM to provide
notice to the Commission and the FCM's DSRO if the FCM's adjusted
net capital at any time is less than the minimum required by
regulation Sec. 1.17.
---------------------------------------------------------------------------

The Commission additionally proposed to amend regulation Sec. 1.58
to provide that, where a clearing FCM carries an omnibus customer
account for a non-clearing FCM, and the non-clearing FCM applies
separate account treatment, then such non-clearing FCM must calculate
initial and maintenance margin for purposes of regulation Sec. 1.58(a)
separately for each separate account. These proposed amendments to
regulation Sec. 1.58 are discussed further below.
Second, the Commission proposed to amend regulation Sec.
1.17(c)(2), which defines ``current assets'' that an FCM may recognize
and include in computing its net capital. Regulation Sec. 1.17(c)(2)
currently defines ``current assets'' to include cash and other assets
or resources commonly identified as those that are reasonably expected
to be realized in cash or sold during the next 12 months. However,
regulation Sec. 1.17(c)(2)(i) provides that an FCM must exclude from
current assets any unsecured receivables resulting from futures,
Cleared Swaps, or 30.7 accounts that liquidate to a deficit or contain
a debit ledger balance only, provided, however, that the FCM may
include a deficit or debit ledger balance in current assets until the
close of business on the business day following the date on which the
deficit or debit ledger balance originated (provided, in turn, that the
account had timely satisfied the previous day's deficits or debit
ledger balances).
The Commission proposed to amend regulation Sec. 1.17(c)(2)(i) to
provide explicitly that if an FCM carries separate accounts for
separate account customers pursuant to proposed regulation Sec. 1.44,
then the FCM must treat each separate account as an account of a
separate entity for the calculation of net capital, with certain
limitations if deficits or debit ledger balances were not satisfied
across the separate accounts of one separate account customer in
accordance with the one business day requirements. As proposed, amended
regulation Sec. 1.17(c)(2)(i) would provide that the FCM must exclude
each unsecured separate account that liquidates to a deficit or
contains a debit ledger balance only from current assets in its
calculation of net capital, provided, however, that if the separate
account is subject to a call for margin by the FCM, it may be included
in current assets until the close of business on the business day
following the date on which the deficit or debit ledger balance
originated, provided that the separate account timely satisfied a
previous day's deficit or debit ledger balance in its entirety. As
proposed, amended regulation Sec. 1.17(c)(2)(i) further provides that,
if the separate account does not satisfy a previous day's deficit or
debit ledger balance in its entirety, then the deficit or debit ledger
balance for the separate account, and any other deficits or debit
ledger balances of the separate account customer in other separate
accounts carried by the FCM, shall not be included in current assets
until all such calls are satisfied in their entirety. The Commission's
proposed amendments were intended to provide the same capital treatment
to separate accounts as is currently provided customer accounts that
liquidate to deficits or contain debit ledger balances, and to be
consistent with corresponding conditions to the no-action position in
CFTC Letter No. 19-17.\73\
---------------------------------------------------------------------------

\73\ CFTC Letter No. 19-17. The letter provides that an ``FCM
shall record each separate account independently in the FCM's books
and records, i.e., the FCM shall record separate accounts as a
receivable (debit/deficit) or payable with no offsets between the
other separate accounts of the same customer.'' Id. (Condition 6).
The letter also provides that ``the receivable from a separate
account shall only be considered secured (a current/allowable asset)
based on the assets of that separate account, not on the assets held
in another separate account of the same customer.'' Id. (Condition
7).
---------------------------------------------------------------------------

Third, the Commission proposed to amend regulation Sec.
1.17(c)(4), which defines the term ``liabilities'' for purposes of an
FCM calculating its net capital. Regulation Sec. 1.17(c)(4) generally
defines the term ``liabilities'' to mean the total money liabilities of
an FCM arising in connection with any transaction whatsoever, including
economic obligations of an FCM that are recognized and measured in
conformity with generally accepted accounting principles. Regulation
Sec. 1.17(c)(4) also provides that for purposes of computing net
capital, an FCM may exclude from its liabilities funds held in
segregation for futures customers, Cleared Swaps Customers, and 30.7
customers, provided that such segregated funds are also excluded from
the FCM's current assets in computing the firm's net capital.
The Commission proposed to amend regulation Sec. 1.17(c)(4)(ii) to
explicitly provide that an FCM that carries the separate accounts of
separate account customers pursuant to proposed regulation Sec. 1.44
must compute the amount of money, securities, and property due to a
separate account customer as if each separate account of the separate
account customer is a distinct customer. The Commission further
proposed to amend regulation Sec. 1.17(c)(4)(ii) to provide that an
FCM, in computing its net capital, may exclude funds held in
segregation for separate account customers from the FCM's liabilities,
provided that funds held in segregation for separate account customers
are also excluded from the FCM's current assets. The purpose of the
proposed amendment is to ensure that an FCM, in computing its net
capital, reflects separate accounts in a consistent manner in
determining its total current assets and liabilities.
Fourth, the Commission proposed to amend regulation Sec.
1.17(c)(5), which defines the term ``adjusted net capital.'' Regulation
Sec. 1.17(c)(5)(viii) provides, in relevant part, that adjusted net
capital means net capital minus, among other items detailed in
regulation Sec. 1.17(c)(5), the amount of funds required in each
customer 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
the account's positions. FCMs are allowed to apply (that is, to reduce
the amount of this deduction from capital by) ``calls for margin or
other required deposits which are outstanding no more than one business
day.'' \74\ However, once a customer fails to meet a margin call within
one business day, the FCM loses that one business day period for
receiving any of that customer's future margin calls, until the point
in time at which the customer is no longer undermargined.\75\
---------------------------------------------------------------------------

\74\ 17 CFR 1.17(c)(5)(viii).
\75\ Thus, if, due to activity on Monday, Customer A is
undermargined by $150, and the FCM calls Customer A for that margin
on Tuesday, then the FCM does not need to deduct that $150 from its
net capital in computing its adjusted net capital, so long as the
margin call is met by the close of business on Wednesday. Moreover,
if Customer A, due to activity on Tuesday, is undermargined by an
additional $100, and the FCM calls for that additional $100 on
Wednesday, then the FCM does not need to deduct that additional $100
on Wednesday. If Customer A meets the $150 call by close of business
Wednesday, and the $100 call by close of business on Thursday, then
no deduction need be taken for either the $150 or the $100 margin
calls. However, if Customer A fails to meet Tuesday's $150 call by
close of business on Wednesday, then the FCM must deduct both the
$150 from Tuesday and the $100 from Wednesday (thus a total of
$250), as well as any future undermargined amounts until Customer A
cures its entire undermargined amount. Again, once a customer fails
to meet a margin call within one business day, the FCM loses the one
business day period for that customer to meet any of its future
margin calls, until the point in time at which the customer is no
longer undermargined.

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

[[Page 7887]]

The Commission proposed to amend regulation Sec. 1.17(c)(5)(viii)
to provide that an FCM that carries separate accounts for a separate
account customer pursuant to proposed regulation Sec. 1.44 must
compute the amount of funds required to meet maintenance margin
requirements for each separate account as if the account was owned by a
distinct customer. However, if a margin call for any separate account
of a separate account customer is outstanding for more than one
business day, then (consistent with the treatment of multiple margin
calls for a single customer described in the previous paragraph), no
margin call for that separate account customer will benefit from the
one business day period until the point in time at which all margin
calls for the separate accounts of that separate account customer have
been met in full.
As discussed further below in the context of proposed regulation
Sec. 1.44(f), the concepts of margin calls that are outstanding no
more than one business day (for purposes of Sec. 1.17(c)(5)(viii)) and
meeting a one business day margin call (for purposes of Sec. 1.44(f))
are separate and distinct. It is possible that a separate account
customer may meet the test for the first, but not the second, or may
meet the test for the second, but not the first.
The proposed amendments to regulation Sec. 1.17 also include
certain technical changes designed to improve clarity and promote
consistency with other Commission regulations.\76\
---------------------------------------------------------------------------

\76\ E.g., changes to punctuation and substitution of ``level of
maintenance margin or performance bond required for the customer and
noncustomer positions'' for ``level of maintenance margin or
performance bond required for the customer or noncustomer
positions'' with respect to the meaning of risk margin for an
account. See, e.g., regulation Sec. 1.17(b)(8). The Commission is
further replacing the term ``FCM'' in regulation Sec. 1.17(b)(8)
with ``futures commission merchant.'' The Commission is also
reorganizing paragraph Sec. 1.17(c)(5)(viii) into sub-paragraphs
(A), (B), (C), and (D) to enhance clarity. The Commission is also
reorganizing the wording of the definition of the term ``business
day'' in regulation Sec. 1.17(b)(6) to read ``any day other than a
Saturday, Sunday, or holiday'' rather than ``any day other than a
Sunday, Saturday, or holiday.'' This change would align the wording
in this provision with the wording of the term ``business day'' in
regulation Sec. 1.3.
---------------------------------------------------------------------------

Commenters did not object to the Commission's proposed addition of
paragraph (b)(8)(v) to regulation Sec. 1.17, the Commission's proposed
amendments to regulation Sec. 1.17(c)(4)(ii), or the technical
amendments that the Commission proposed to regulation Sec. 1.17. FIA
welcomed the Commission's proposal to amend regulation Sec. 1.17 to
require FCMs that carry separate accounts to calculate the risk margin
component of the FCM's regulatory capital requirement as if the
separate accounts are owned by separate entities.\77\ The JAC did not
object to the proposed amendments to regulation Sec. 1.17(c)(2)(i),
but contended that the amendments would introduce a change from the
current requirements related to the treatment of separate account
debits and deficits in CFTC Letter No. 19-17 by requiring FCMs to look
across all separate accounts of a separate account customer when
determining one day debits or deficits to be considered current assets
for net capital, rather than making that determination solely on the
basis of each of the separate account customer's separate accounts
individually.\78\ The JAC noted that FCMs may require time to update
their regulatory systems and records to comply with the amendments as
proposed.\79\
---------------------------------------------------------------------------

\77\ FIA Comment Letter.
\78\ JAC Comment Letter.
\79\ Id.
---------------------------------------------------------------------------

The JAC also recommended that the Commission clarify how an FCM
should consider whether a separate account timely satisfied the
previous day's debit or deficits in its entirety, noting that, if
margin calls are only considered satisfied when receipts are settled
for purposes of proposed regulation Sec. 1.17(c)(2)(i), then margin
calls met in non-USD in one separate account may affect the current or
noncurrent classification of a debit or deficits in all separate
accounts of a separate account customer.\80\ As discussed further
below, JAC guidance provides that FCMs, subject to certain conditions,
may apply margin equity credit to an account for certain pending non-
USD transactions. The JAC noted that, depending on how margin calls are
considered satisfied, the proposed amendments may require FCMs
permitting separate account treatment to consider additional capital
needs.\81\
---------------------------------------------------------------------------

\80\ Id.
\81\ Id.
---------------------------------------------------------------------------

With respect to the proposed amendments to regulation Sec.
1.17(c)(5)(viii), the JAC agreed that proposed regulation Sec.
1.17(c)(5)(viii)(A) (requiring that if one margin call is noncurrent,
then all margin calls are noncurrent), is consistent with how, pursuant
to the JAC's guidance, FCMs currently calculate noncurrent margin calls
and account for noncurrent margin calls for purposes of determining
capital charges. The JAC did not take a position with respect to the
proposed amendments to regulation Sec. 1.17(c)(5)(viii)(B), but urged
the Commission (if adopting the amendments as proposed) to highlight in
its final rulemaking that the amendments would require that, if a
margin call for any separate account of a separate account customer is
outstanding for more than one business day, then the calculation of
current calls used in computing the separate account's undermargined
capital charge must account for the age of all margin calls in all
separate accounts of the separate account customer. The JAC noted that
the resulting look-across to all margin calls in all separate accounts
of a separate account customer could result in significant capital
charges for FCMs even where each separate account is meeting its calls
on a one business day basis as required by proposed regulation Sec.
1.44(f), due to the additional time for compliance with the one
business day margin requirement provided for holidays and foreign
currency wires as proposed in accordance with the practices followed
under CFTC Letter No. 19-17.\82\
---------------------------------------------------------------------------

\82\ Id.
---------------------------------------------------------------------------

Additionally, as the JAC noted in its comments with respect to the
proposed amendments to regulation Sec. 1.17(c)(2)(i), JAC Regulatory
Alert #14-06 provides that, when calculating the undermargined capital
charge and consistent with the treatment for residual interest, an FCM
may consider pending non-USD deposits, ACH payments, and checks as
received, subject to certain conditions.\83\ The JAC requested that the
Commission confirm

[[Page 7888]]

that pending non-USD deposits would be permitted to be considered as
received in computing the undermargined capital charge for all
customers under proposed regulation Sec. 1.17(c)(5)(viii)(A) and
(B).\84\
---------------------------------------------------------------------------

\83\ Id. Specifically, JAC Alert #14-06 provides that, at an
FCM's discretion, it may consider a non-USD deposit as pending in a
customer's account and included in the account's margin equity if
``(i) the FCM assesses that it is prudent to do so based on the
account's past history of satisfying margin calls and the
operational and credit risk profile of the account owner, (ii) the
account is on a 1-day wire transfer basis (i.e., the wire is
initiated on Day 2), (iii) the FCM has a sufficient basis that the
wire was actually initiated, (iv) the FCM continues to age the
pending non-U.S. Dollar receipts and retains the ability to
recognize a failed deposit immediately upon occurrence, and (v) the
FCM treats unsettled non-U.S. Dollar disbursements from the account
in the same manner.'' JAC Regulatory Alert #14-06, Nov. 4, 2014,
available at <a href="http://www.jacfutures.com/jac/jacupdates/2014/jac1406.pdf">http://www.jacfutures.com/jac/jacupdates/2014/jac1406.pdf</a>.
\84\ JAC Comment Letter.
---------------------------------------------------------------------------

The JAC also noted that, as the Commission has not proposed to
modify regulation Sec. 1.17(c)(5)(ix), requiring undermargined capital
charges for noncustomer and omnibus accounts, the JAC will assume that
FCMs will still be able to apply treatment for pending deposits as set
forth in JAC Regulatory Alert #14-06 to noncustomers and omnibus
accounts, unless the Commission amends the provision or confirms
otherwise.\85\
---------------------------------------------------------------------------

\85\ Id.
---------------------------------------------------------------------------

Additionally, the JAC requested that the Commission confirm that
for purposes of the undermargined capital charge for a customer account
under regulation Sec. 1.17(c)(5), maintenance margin requirements
include the risk component only, and non-cash collateral should be
valued at market value less applicable haircuts, including for separate
account customers.\86\ The JAC stated that performing such margin
calculations differently in order to comply with different regulatory
reporting requirements may prove burdensome for FCMs that permit
separate account treatment.\87\
---------------------------------------------------------------------------

\86\ Id.
\87\ Id.
---------------------------------------------------------------------------

FIA contended that the proposed amendments to regulation Sec.
1.17(c)(2)(i) and regulation Sec. 1.17(c)(5)(viii) are inconsistent
with the principle of separate account margining and how clearing FCMs
have understood the conditions of CFTC Letter No. 19-17.\88\ FIA argued
that, for purposes of calculating both current assets under regulation
Sec. 1.17(c)(2)(i) and charges against net capital for undermargined
accounts under regulation Sec. 1.17(c)(5)(viii), the Second Proposal
would effectively require FCMs to suspend the ordinary course of
business for purposes of both calculations in the event that any
separate account fails to satisfy its previous day's deficit or debit
ledger balance in its entirety within one business day (for purposes of
the calculation of current assets) or within the close of business at
the end of the second business day following the call (for purposes of
the undermargined capital charge).\89\ FIA noted that, on the basis of
the conditions of the no-action position in CFTC Letter No. 19-17,\90\
FCMs calculate current assets and undermargined capital charges for
each separate account as if each such account were owned by a separate
entity, and do not look across to other separate accounts of the same
customer for purposes of either calculation, unless the FCM is
suspending the ordinary course of business for any such account.\91\
---------------------------------------------------------------------------

\88\ FIA Comment Letter.
\89\ Id.
\90\ Specifically, requirements that FCMs electing separate
account treatment (i) record each separate account independently in
the FCM's books and records, including by recording each separate
account as a receivable (debit/deficit) or payable with no offsets
between the other separate accounts of the same customer; and (ii)
reflect the receivable from a separate account as secured (as a
current/allowable asset) based on the assets of that separate
account rather than on the assets held in another separate account
of the same customer.
\91\ FIA Comment Letter.
---------------------------------------------------------------------------

FIA asserted that these proposed revisions to regulation Sec. 1.17
would be costly for FCMs, which would be required to rebuild
operational and reporting systems, and to rewrite underlying
programming code, to perform the necessary look-across of all of the
separately margined accounts for the same separate account customer
whenever the separate account customer fails to timely satisfy the
previous day's deficit/debit ledger balance in its entirety for the
current asset calculation, or fails to settle a margin call by the end
of the day after the call for the undermargined capital charge
calculation.\92\
---------------------------------------------------------------------------

\92\ Id.
---------------------------------------------------------------------------

FIA also argued that these proposed revisions to regulation Sec.
1.17 would be punitive for FCMs, because they would impose capital
costs on FCMs without regard to any related financial or operational
risk. FIA included in its comment letter an example illustrating how an
FCM could be required to take a significant capital charge due to a
failure to meet a margin call timely in one separate account, even if
the separate account customer's other separate accounts, managed by
other investment managers, have margin calls that have not yet aged to
a point that the FCM would be required to take a capital charge under
existing regulation Sec. 1.17.\93\ FIA noted that a recent survey of
its members showed that, although the percentage of required margin for
separate accounts to total customer margin requirements varied from
less than one percent to over 20%, members uniformly reported material
potential capital implications measured by amount of margin required
for a single beneficial owner across its separate accounts.\94\
---------------------------------------------------------------------------

\93\ Id.
\94\ Id.
---------------------------------------------------------------------------

FIA recommended that the Commission modify its proposed amendments
to regulation Sec. 1.17 to require a look-across of all of a separate
account customer's separate accounts only where the ordinary course of
business has been suspended for the separate account customer.\95\ FIA
further recommended that such look-across be made subject to the
requirements defining the Commission's proposed one business day margin
call requirement in proposed regulation Sec. 1.44(f) so that FCMs can
continue taking the benefit of current assets and avoiding charges
against capital while client settlement in non-USD for separate
accounts is pending.\96\
---------------------------------------------------------------------------

\95\ Id.
\96\ Id.
---------------------------------------------------------------------------

Like the JAC, FIA discussed the application of margin equity credit
to accounts for pending non-USD margin deposits under JAC guidance.\97\
FIA noted this practice appears to be in tension with the Commission's
proposed amendments to regulation Sec. 1.17 and urged the Commission
to clarify that the Second Proposal was not adopted with the intention
of prohibiting such current treatment of pending non-USD transfers for
purposes of computing undermargined capital charges.\98\
---------------------------------------------------------------------------

\97\ Id.
\98\ Id.
---------------------------------------------------------------------------

In proposing to codify the no-action position of CFTC Letter No.
19-17 in part 1 of its regulations, the Commission considered the way
in which it would need to modify existing provisions of part 1 to
facilitate separate account treatment for FCMs. With respect to the
calculation of current assets as set forth in regulation Sec.
1.17(c)(2)(i) and the undermargined capital charge as set forth in
regulation Sec. 1.17(c)(5)(viii), the Commission proposed a more
conservative approach to risk management that would trigger inclusion
of debits or deficits (with respect to proposed regulation Sec.
1.17(c)(2)(i)) or outstanding margin calls (with respect to proposed
regulation Sec. 1.17(c)(5)(viii)) across a separate account customer's
separate accounts when a margin call made of such separate account
customer for purposes of either regulation is not satisfied timely.
Although CFTC Letter No. 19-17, which applied directly to DCOs, did not
speak explicitly to how FCMs should treat separate accounts for
purposes of these regulations, its provisions call for DCOs to require
FCMs to subject accounts receiving separate treatment to heightened
scrutiny and enhanced risk management practices, particularly with
respect to timely receipt of margin.

[[Page 7889]]

The Commission has considered the JAC's and FIA's assertions that
the proposed amendments to regulation Sec. 1.17(c)(2)(i) and
regulation Sec. 1.17(c)(5)(viii) would represent a deviation from how
FCMs have generally understood and applied the conditions of CFTC
Letter No. 19-17. The Commission further acknowledges that a separate
account customer's untimely payment of margin with respect to a
separate account for purposes of regulation Sec. 1.17(c)(2)(i) or
regulation Sec. 1.17(c)(5)(viii) does not necessarily indicate that
the separate account customer is out of the ordinary course of
business, as set forth in proposed regulation Sec. 1.44(a), with
respect to that separate account or any other separate account of such
customer. It follows that a separate account for which payment of
margin is untimely for purposes of regulation Sec. 1.17(c)(2)(i) or
regulation Sec. 1.17(c)(5)(viii) may not be indicative of financial or
operational distress in the same manner as would untimely payment of
margin for purposes of regulation Sec. 1.44. Unlike regulations Sec.
1.17(c)(2)(i) and Sec. 1.17(c)(5)(iii), which require an FCM to
reserve capital when the aggregate of a customer's accounts are,
respectively, in debit/deficit or undermargined beyond a defined period
of time to protect the FCM against potential losses or price exposure
if the liquidation of the customer's positions is required, regulation
Sec. 1.44 is designed to build in allowances to account for delays
resulting from differences in time zones as well as international
banking conventions in establishing requirements for meeting a one
business day margin call. The Commission accordingly appreciates, and
finds persuasive, FIA's comments to the effect that the proposed look-
across of separate accounts of a separate account customer who does not
timely meet a margin call for purposes of regulation Sec.
1.17(c)(2)(i) or Sec. 1.17(c)(5)(viii) may prove costly to implement
and operationally disruptive to deploy. The Commission also appreciates
the JAC's comments regarding the potential implementation and
compliance burden that the proposed requirements would pose for FCMs.
Accordingly, the Commission is adopting the amendments to
regulation Sec. 1.17 as proposed, but with two modifications. First,
the Commission is removing language from the proposed amendments to
regulation Sec. 1.17(c)(2)(i) that would have provided that, if a
separate account does not meet a previous day's margin call for a
deficit or debit balance, the FCM shall exclude all separate accounts
of that separate account customer carried by the FCM that have a
deficit or debit ledger balance from current assets under regulation
Sec. 1.17(c)(2)(i). Second, the Commission is modifying the language
of proposed regulation Sec. 1.17(c)(5)(viii)(B) to provide that, if a
call for margin or other required deposits for any separate account of
a particular separate account customer is outstanding for more than one
business day, then all outstanding margin calls for that separate
account shall be treated as if the margin calls are outstanding for
more than one business day, and shall be deducted from net capital
until all such calls have been met in full. In this manner, where a
separate account customer's separate account does not meet a previous
day's margin call for a deficit or debit balance under regulation Sec.
1.17(c)(2)(i), or has a margin call or other required deposits
outstanding for more than one business day under regulation Sec.
1.17(c)(5)(viii), then the FCM shall treat the separate account on a
standalone basis in determining current assets or the undermargined
capital charge, and need not look across to debits or deficits, or
outstanding margin calls, in the separate account customer's other
separate accounts.
As previously discussed, the Commission believes that separate
account treatment results in a conservative capital treatment due to
the impact of removing portfolio margining across separate accounts,
including in the calculation of the required capital based on risk
margin separately for each separate account. Even during a period
outside the ordinary course of business when disbursements on a
separate account basis are suspended, the Commission believes that net
capital treatment may in most instances continue to be more
conservative by maintaining separate treatment of separate accounts for
net capital calculation purposes. In consideration of the comments
received regarding the operational difficulties which FCMs may face
from being required to consolidate the treatment of separate accounts
for net capital calculations and the likely conservative effect of
maintaining separate treatment, the Commission is adopting the final
rules as modified, and further clarifies that even during a period of a
suspension of disbursements on a separate account basis, an FCM must
continue separate treatment for net capital calculations. However,
should an FCM itself cease treating the separate accounts separately,
such as by initiating any cross-default remedies across the separate
accounts of a separate account customer (thus indicating the FCM is
exercising legal remedies to collapse separate accounts for the purpose
of collection against the separate account customer), then continued
separate net capital treatment by the FCM of such accounts would no
longer be appropriate, as an FCM's exercise of cross-default remedies
that combine separate accounts would be inconsistent with an FCM's
continued election of separate account treatment.
The Commission additionally considered the JAC's and FIA's comments
with respect to the treatment of pending non-USD transfers. As the JAC
and FIA noted, JAC Regulatory Alerts #14-03 and #14-06 permit FCMs to
apply margin equity credit to an account for pending non-USD transfers
for certain purposes and subject to certain conditions. As the JAC
noted, the guidance provided by JAC Regulatory Alert #14-03 and #14-06
provides that, due to the inherent delays in the settlement of certain
foreign currency transfers, in determining a customer's or
noncustomer's margin status (under JAC Regulatory Alert #14-03) or
residual interest requirement (under JAC Regulatory Alert #14-06), an
FCM may, at its discretion, consider unsettled non-USD transactions as
pending in a customer's or noncustomer's account and include in the
account's margin equity if: (i) the FCM assesses that it is prudent to
do so based on the account's past history of satisfying margin calls
and the operational and credit risk profile of the account owner; (ii)
the account is on a one-day wire transfer basis (i.e., the wire is
initiated on the day the margin call is issued); (iii) the FCM has a
sufficient basis to believe that the wire was actually initiated; (iv)
the FCM continues to age the pending non-USD receipts and retains the
ability to recognize a failed deposit immediately upon occurrence; and
(v) the FCM treats unsettled non-USD disbursements from the account in
the same manner.\99\ Although the Commission did not discuss treatment
of pending non-USD transfers in the First Proposal, in the Second
Proposal, or in CFTC Letter No. 19-17, as discussed below, commenters
raised questions related to the treatment of pending non-USD transfers
in several

[[Page 7890]]

contexts, which the Commission has focused on in developing this final
rule.
---------------------------------------------------------------------------

\99\ See JAC, JAC Regulatory Alert #14-03, May 21, 2014,
available at <a href="http://www.jacfutures.com/jac/jacupdates/2014/jac1403.pdf">http://www.jacfutures.com/jac/jacupdates/2014/jac1403.pdf</a>; JAC, JAC Regulatory Alert #14-06, Nov. 4, 2014,
available at <a href="http://www.jacfutures.com/jac/jacupdates/2014/jac1406.pdf">http://www.jacfutures.com/jac/jacupdates/2014/jac1406.pdf</a>.
---------------------------------------------------------------------------

In the Second Proposal, the Commission noted that it sought to
enact a narrow codification, with respect to all FCMs, of the no-action
conditions of CFTC Letter No. 19-17.\100\ In particular, the Commission
does not seek to disrupt current, established margining practices at
FCMs, except where explicitly stated in this final rule. In considering
the JAC's and FIA's comments with respect to the treatment of pending
non-USD transfers, the Commission considers, in light of this
objective, that currently, and for the past ten years, subject to JAC
guidance, a number of FCMs have treated as received certain pending
non-USD transfers (i.e., those that are consistent with that guidance)
for certain purposes.
---------------------------------------------------------------------------

\100\ Second Proposal, 89 FR at 15317.
---------------------------------------------------------------------------

As the third condition, the FCM must also have a sufficient basis
to believe that the transfer was actually initiated for immediate
settlement (including, as the Commission understands, that the transfer
was actually initiated on the required one-day basis). The Commission
notes that, as each condition for the treatment of pending non-USD
transfers is a separate condition, the Commission expects that in order
to meet this third condition, an FCM would rely on evidence beyond the
factors identified in the first condition (i.e., the account's past
history of satisfying margin calls and the operational and credit risk
profile of the account owner). Further to this point, the requirement
that the FCM have a sufficient basis to believe that the transfer was
actually initiated indicates that an FCM would be expected to identify
a sufficient, factual basis to support its conclusion that a specific
transfer was initiated for immediate settlement consistent with the
banking practices relative to the jurisdiction from which the transfer
originated. The Commission expects that such sufficient factual support
would include at minimum an affirmative, written representation from
the customer that the specific transfer had actually been
initiated.\101\ The fourth condition requires the FCM to continue aging
pending non-USD receipts and have the ability to recognize a deposit
failure immediately when it occurs, both of which are critical to
complying with the requirements of regulation Sec. 1.17 (among other
Commission regulations) that require an FCM to be able to accurately
age outstanding margin calls. In particular, a transfer that does not
arrive by the day it is expected (consistent with banking practices
relative to the jurisdiction from which the transfer originated) should
be considered to have failed. The fifth condition requires consistent
treatment of pending non-USD transfers in an account: to the extent an
FCM treats pending non-USD deposits as received for certain purposes,
it must similarly treat pending non-USD disbursements as disbursed.
---------------------------------------------------------------------------

\101\ The Commission notes that a pattern wherein funds are not
timely received despite such representations would undermine the
satisfaction of the first condition; i.e., the account's past
history of satisfying margin calls.
---------------------------------------------------------------------------

The Commission has considered the history of FCMs' treatment of
pending non-USD transfers under the JAC guidance. Among other
information, the Commission has considered, with respect to separate
accounts under the terms of the no-action position, the criteria
applied to such treatment under the JAC guidance, the potential risks
and benefits of such treatment for FCMs and customers, and the
Commission's objectives in codifying the no-action position of CFTC
Letter No. 19-17. The Commission confirms that it does not intend for
the final rule to preclude FCMs from considering pending non-USD
transfers as received for purposes of computing the undermargined
capital charge pursuant to regulation Sec. 1.17(c)(5), consistent with
the JAC guidance as described above.\102\ In doing so, however, the
Commission notes that it expects that DSROs will diligently monitor
their FCMs to ensure compliance with the criteria for such treatment,
and will take appropriate supervisory steps where they find failures to
comply with such criteria, with particular focus on the requirement
that an FCM have a sufficient basis to believe that a non-USD transfer
classified as pending was in fact initiated, and the requirement that
an FCM treat pending non-USD disbursements in a manner consistent with
its treatment of pending non-USD receipts.
---------------------------------------------------------------------------

\102\ The Commission additionally confirms that the final rule
is not intended to preclude FCMs from treating as received pending
non-USD transfers, subject to the same five conditions listed in JAC
Regulatory Alerts #14-03 and #14-06 discussed above, for purposes of
calculating undermargined capital charges for noncustomer and
omnibus accounts under regulation Sec. 1.17(c)(5)(ix). As the JAC
noted in its comment letter, the Commission did not propose to amend
this provision.
---------------------------------------------------------------------------

Lastly, to respond to the JAC's request for clarification on the
subject, the Commission confirms that, for purposes of the
undermargined capital charge for a customer account under regulation
Sec. 1.17(c)(5), maintenance margin requirements include the risk
component only. The Commission further confirms that in computing the
value of the margin deposits of an account, including accounts of
separate account customers, non-cash collateral should be valued at
market value less applicable haircuts.

C. Amendments to Regulations Sec. Sec. 1.20, 1.32, 22.2, and 30.7

As previously stated, protecting market participants from misuses
of customer assets is one of the fundamental purposes of the CEA.\103\
Regulations Sec. Sec. 1.32, 22.2(g), and 30.7(l) are designed in part
to further this purpose by requiring each FCM carrying accounts for
futures customers, Cleared Swaps Customers, or 30.7 customers,
respectively, to perform a daily computation of, and to prepare a daily
record demonstrating compliance with, the FCM's obligation to hold a
sufficient amount of funds in designated customer segregated accounts
to meet the aggregate credit balances of all of the FCM's futures
customers, Cleared Swaps Customers, and 30.7 customers.\104\ An FCM is
required to prepare the daily segregation calculations reflecting
customer account balances as of the close of business each day, and to
submit the applicable segregation statements electronically to the
Commission and to the FCM's DSRO by noon the next business day.
---------------------------------------------------------------------------

\103\ Section 3(b) of the CEA, 7 U.S.C. 5(b); see also, e.g.,
CEA section 4d(a)(2), 7 U.S.C. 6d(a)(2); CEA section 4d(f)(2), 7
U.S.C. 6d(f)(2); CEA section 4b(2)(A), 7 U.S.C. 6b(2)(A).
\104\ Each FCM that carries accounts for futures customers,
Cleared Swaps Customers, and 30.7 customers is required to prepare
daily statements demonstrating compliance with the applicable
segregation requirements. For futures customers, the FCM must
prepare a daily Statement of Segregation Requirements and Funds in
Segregation for Customers Trading on U.S. Commodity Exchanges (17
CFR 1.32(a)) (``Futures Segregation Statement''); for Cleared Swaps
Customers, the FCM must prepare a daily Statement of Cleared Swaps
Customer Segregation Requirements and Funds in Cleared Swaps
Customer Accounts under section 4d(f) of the CEA (17 CFR 22.2(g)(1)-
(4)) (``Cleared Swaps Segregation Statement''); and for 30.7
customers, the FCM must prepare a daily Statement of Secured Amounts
and Funds Held in Separate Accounts for 30.7 Customers pursuant to
regulation 30.7 (17 CFR 30.7(l)(1)). The statements listed above are
part of the Commission's Form 1-FR-FCM, which contains the financial
reporting templates required to be filed by FCMs.
---------------------------------------------------------------------------

The Commission proposed to amend regulations Sec. Sec. 1.32, 22.2,
and 30.7 to provide that an FCM that permits separate accounts pursuant
to regulation Sec. 1.44 must perform its daily segregation
calculations, and prepare its daily segregation statements, by treating
the accounts of separate account customers as accounts of separate
entities. The amendments add new paragraph (l) to regulation Sec.
1.32, new paragraph (g)(11) to regulation Sec. 22.2, and new paragraph

[[Page 7891]]

(l)(11) to regulation Sec. 30.7. The purpose of the amendments is to
establish the manner in which these existing segregation and reporting
obligations apply to FCMs that permit separate accounts pursuant to
regulation Sec. 1.44. Regulations Sec. Sec. 1.32, 22.2, and 30.7
require an FCM to prepare one daily segregation computation, and submit
one segregation schedule, for the funds of its futures customers,
Cleared Swaps Customers, and 30.7 customers, respectively. The
amendments to regulations Sec. Sec. 1.32, 22.2(g), and 30.7(l) provide
that an FCM that permits separate accounts, in preparing such
computation and segregation schedule, is required to record each
separate account as if it were an account of a separate entity, and
include all separate accounts with other futures accounts, Cleared
Swaps Customer Accounts, and 30.7 accounts, as applicable, carried by
the FCM that are not separate accounts.
In addition, the amendments provide that an FCM, in computing its
segregation obligations, may offset a net deficit in a particular
separate account customer's separate account against the current value,
net of specified haircuts, of any readily marketable securities held by
the FCM for the separate account customer, provided that the readily
marketable securities are held as margin collateral for the specific
separate account that is in deficit. Readily marketable securities held
for other separate accounts of the separate account customer may not be
used to offset the separate account that is in deficit.\105\ The
amendments to regulations Sec. Sec. 1.32, 22.2(g), and 30.7(l) with
respect to the offsetting of a net deficit in a customer's account by
the value of readily marketable securities, less applicable haircuts,
held in the customer's account are consistent with how an FCM currently
offsets a net deficit in a customer's account that is margined by
securities. In addition, the amendments are consistent with the
separate account conditions to the no-action position in CFTC Letter
No. 19-17.\106\
---------------------------------------------------------------------------

\105\ I.e., if separate account customer S has separate accounts
A and B, then readily marketable securities held for separate
account A could not be used to offset a deficit in separate account
B, and vice versa.
\106\ See CFTC Letter No. 19-17 (providing, among other
conditions for separate account treatment, that ``[e]ach receivable
from a separate account shall be `grossed up' on the applicable
segregation, secured or cleared swaps customer statement; thus, an
FCM shall use its own funds to cover the debit/deficit of each
separate account.'').
---------------------------------------------------------------------------

The Commission also proposed to amend regulation Sec. 22.2(f) to
revise the regulatory description of the stated calculation of the
total amount of funds that an FCM is required to hold in segregation
for Cleared Swaps Customers. The amendment: (i) corrects an error
included in the drafting of the description of the calculation when the
regulation was originally adopted in 2012; and (ii) aligns the
regulatory text describing the segregation calculation set forth in
regulation Sec. 22.2(f) with the calculation performed on the Cleared
Swaps Segregation Statement that is submitted to the Commission each
day by FCMs with Cleared Swaps Customers pursuant to regulation Sec.
22.2(g). The amendment applies across FCMs with Cleared Swaps
Customers, whether or not such FCMs maintain separate accounts.
The segregation calculation required by regulation Sec. 22.2(f) is
intended to ensure that an FCM holds, at all times, a sufficient amount
of funds in segregation to cover its total financial obligation to all
Cleared Swaps Customers. Compliance with the segregation requirements
helps ensure that an FCM is not using the funds of one Cleared Swaps
Customer to cover a deficit in the Cleared Swaps Customer Account of
another Cleared Swaps Customer, and further helps ensure that an FCM
holds sufficient funds in segregation to transfer the Cleared Swaps
Customer Accounts, including the Cleared Swaps and the Cleared Swaps
Customer Collateral, to a transferee FCM if the transferor FCM becomes
insolvent.
To achieve the regulatory objective noted above, regulation Sec.
22.2(f)(2) currently requires an FCM to calculate its minimum
segregation requirement as the sum of the net liquidating equities of
each Cleared Swaps Customer Account with a positive account balance
carried by the FCM. The net liquidating equity of a Cleared Swaps
Customer Account is explicitly calculated as the sum of the market
value of any funds held in the Cleared Swaps Customer Account of a
Cleared Swaps Customer (including readily marketable securities), as
adjusted positively or negatively by, among other things, any
unrealized gains or losses on open Cleared Swaps positions, the value
of open long option positions and short option positions, fees charged
to the account, and authorized withdrawals. To the extent that the
calculation results in a net liquidating equity that is positive, the
Cleared Swaps Customer Account has a credit balance.\107\ To the extent
that the calculation results in a net liquidating equity that is
negative, the Cleared Swaps Customer Account has a debit balance.\108\
Regulation Sec. 22.2(f)(4) provides that an FCM must hold, at all
times, a sufficient amount of funds in segregation to meet the total
net liquidating equities of all Cleared Swaps Customer Accounts with
credit balances, and further provides that the FCM may not offset this
total by any Cleared Swaps Customer Accounts with debit balances.
---------------------------------------------------------------------------

\107\ 17 CFR 22.2(f)(3).
\108\ Id.
---------------------------------------------------------------------------

With respect to Cleared Swaps Customer Accounts with debit
balances, regulation Sec. 22.2(f)(5) further requires the FCM to
include in the total funds required to be held in segregation all debit
balances to the extent secured by readily marketable securities held
for the particular Cleared Swaps Customers that have debit balances.
The required addition of debit balance accounts in regulation Sec.
22.2(f)(5) was intended to be consistent with the long-standing Futures
Segregation Statement contained in the Form 1-FR-FCM and the Form 1-FR-
FCM Instructions Manual.\109\ An error, however, was made in drafting
the description of the details of the segregation calculation in
current regulation Sec. 22.2(f)(5). Specifically, as noted above,
regulation Sec. 22.2(f)(5) requires an FCM to include in the total
segregation requirement any Cleared Swaps Customer Accounts with debit
balances that are secured by readily marketable securities. However,
the full value of the readily marketable collateral is part of the
calculation of the net liquidating equity of the account. Therefore, a
Cleared Swaps Customer Account with a debit balance would never have
additional readily marketable securities available to offset a debit
balance.\110\
---------------------------------------------------------------------------

\109\ In adopting the final regulation Sec. 22.2(f), the
Commission stated that proposed regulation Sec. 22.2(f) set forth
an explicit calculation for the amount of Cleared Swaps Customer
Collateral that an FCM must maintain in segregation that did not
materially differ from the calculation of the amount of funds an FCM
is required to hold in segregation under the Form 1-FR-FCM for
futures customers. The Commission adopted final regulation Sec.
22.2(f) as proposed. Protection of Cleared Swaps Customer Contracts
and Collateral; Conforming Amendments to the Commodity Broker
Bankruptcy Provisions; Final Rule, 77 FR 6336, at 6352-6353 (Feb. 7,
2012).
\110\ For example, if a Cleared Swaps Customer Account was
comprised of cash of $300, securities of $200, and an unrealized
loss on open Cleared Swaps of $600, the account would have a net
equity debit balance of $100 under regulation Sec. 22.2(f). There
are no additional securities that the FCM may use to secure the $100
debit balance and, therefore, the FCM is required to increase its
segregation requirement by $100 to ensure that there are sufficient
funds in segregation to cover the FCM's obligation to all Cleared
Swaps Customers with a credit balance.
---------------------------------------------------------------------------

The segregation calculation required under regulation Sec. 1.32
for futures accounts, and the Commission's Form 1-FR-FCM and related
Form 1-FR-

[[Page 7892]]

FCM Instructions Manual, differs from the description as currently
written in regulation Sec. 22.2(f)(4) and (5) with respect to the
offsetting of debit balances by readily marketable securities.
Specifically, an FCM is required to calculate the net equity of each
futures customer excluding the value of any noncash collateral held in
the account.\111\ If the calculation results in a debit balance, the
FCM is permitted to offset the debit balance by the fair market value
of any readily marketable securities (after application of applicable
securities haircuts set forth in the regulation).\112\
---------------------------------------------------------------------------

\111\ The Form 1-FR-FCM Instructions Manual provides that a
customer account is in deficit when the combination of the account's
cash ledger balance, unrealized gain or loss on open futures
contracts, and the value of open option contracts liquidates to an
amount less than zero. The manual explicitly provides that ``[a]ny
securities used to margin the account are not included in
determining a customer's deficit.'' 1-FR-FCM Instructions Manual, p.
10-2. Accordingly, an FCM would exclude the value of any readily
marketable securities from the calculation of the customer's account
balance. The 1-FR-FCM Instructions Manual is available on the
Commission's website at: <a href="http://www.cftc.gov/sites/default/files/idc/groups/public/@iointermediaries/documents/file/1fr-fcminstructions.pdf">www.cftc.gov/sites/default/files/idc/groups/public/@iointermediaries/documents/file/1fr-fcminstructions.pdf</a>.
\112\ 17 CFR 1.32(b). Applying the calculation in regulation
Sec. 1.32 to Cleared Swaps, if a Cleared Swaps Customer Account was
comprised of cash of $300, securities of $200, and an unrealized
loss on open Cleared Swaps of $600, the account would have a net
equity debit balance of $300, as the value of the securities is not
included in the calculation ($300 cash less $600 in unrealized
losses, results in a $300 debit balance). The FCM may offset the
$300 debit balance by $170, which represents the value of the
readily marketable securities held in the account as collateral
($200 fair market value of the securities, less a $30 haircut). The
FCM is then required to include $130 in its segregation requirement,
which represents the amount of the unsecured debit balance remaining
in the customer's account (i.e., $300 debit balance, less $170 value
of the securities after haircuts).
---------------------------------------------------------------------------

As noted above, the amendments to regulation Sec. 22.2(f)(4) and
(5) are intended to correct the description of the segregation
calculation and to make it consistent with: (i) how FCMs calculate
their total Cleared Swaps segregation obligations under regulation
Sec. 22.2(g), (ii) how FCMs report their total segregation
requirements on the Cleared Swaps Segregation Statement, and (iii) the
segregation calculation requirements for futures accounts under
regulation Sec. 1.32. Thus, the amendments are not expected to have
any effect on FCMs and their current practices.
In addition, the Commission proposed to amend regulations
Sec. Sec. 1.20(i) and 30.7(f), which require an FCM carrying futures
accounts and 30.7 accounts, respectively, to calculate its total
segregation requirements in a manner that is consistent with current
regulation Sec. 22.2(f). As with the amendment to regulation Sec.
22.2(f), the amendments to regulations Sec. Sec. 1.20(i) and 30.7(f)
apply across FCMs that maintain futures customer accounts or 30.7
customer accounts, respectively, whether or not such FCMs maintain
separate accounts. The Commission adopted current regulations
Sec. Sec. 1.20(i) and 30.7(f) in 2013. The final regulations, however,
did not include the provision set forth in regulation Sec. 22.2(f)(5)
requiring an FCM to include any secured debit balances in its
segregation requirement. This omission was unintentional, as the
Commission expressed its intent to ``mirror'' the requirements of
regulation Sec. 22.2(f) in regulation Sec. 1.20(i) (and effectively
regulation Sec. 30.7(f)).\113\
---------------------------------------------------------------------------

\113\ Enhancing Protections Afforded Customers and Customer
Funds Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68506, 68543 (Nov. 14, 2013) (discussing the
Commission's intent to adopt regulation Sec. 1.20(i) consistent
with the corresponding requirements in regulation Sec. 22.2(f));
id. at 68576 (discussing the Commission's intent for the daily
segregation calculation for 30.7 accounts to be consistent with the
requirements for the daily segregation calculations for futures
customer funds in regulation Sec. 1.32).
---------------------------------------------------------------------------

To address the omission, the Commission proposed to amend
regulations Sec. Sec. 1.20(i) and 30.7(f) to reflect the requirement
that an FCM include any unsecured customer debit balances, calculated
consistent with the amendments to regulation Sec. 22.2(f)(4) and (5)
that are discussed above, in the calculation of its futures and foreign
futures and foreign options segregation requirement. The amendments to
regulations Sec. Sec. 1.20(i) and 30.7(f) accurately describe and
reflect the existing segregation calculations for futures, foreign
futures, and Cleared Swaps as originally intended. The amendments to
regulations Sec. Sec. 1.20(i) and 30.7(f) are not expected to have any
impact on FCMs as the firms currently calculate their segregation
requirements by including customer unsecured debit balances.
The Commission did not receive any comments with respect to the
proposed amendments to regulations Sec. Sec. 1.20, 1.32, 22.2, and
30.7. Accordingly, the Commission is adopting the amendments to
regulations Sec. Sec. 1.20, 1.32, 22.2, and 30.7 as proposed.\114\
---------------------------------------------------------------------------

\114\ The Commission is making technical changes in the final
amendments with respect to regulations Sec. Sec. 1.20(i)(5)(ii),
1.32(b), 22.2(f)(5)(ii), and 30.7(f)(2)(v)(B) to correct the
citation to the SEC regulation defining ``ready market'' (Sec.
240.15c3-1(c)(11) rather than Sec. 241.15c3-1(c)(11)).
---------------------------------------------------------------------------

D. Regulation Sec. 1.44(a)

The Commission structured proposed regulation Sec. 1.44 so that
FCMs would be required to avoid returning margin to customers when
doing so would create or exacerbate a margin deficiency in the
customer's account; however, the proposed regulation then would allow
FCMs to provide for separate account treatment within the Commission's
broader regulatory framework for FCMs. As such, regulation Sec. 1.44,
as proposed, contains certain terms that are designed to operate in a
specific manner with respect to regulation Sec. 1.44, but that do not
apply, or do not apply in the same way, with respect to other of the
Commission's FCM regulations. The Commission therefore proposed to add
new regulation Sec. 1.44(a) to define certain terms only for purposes
of regulation Sec. 1.44. The Commission believes that regulation Sec.
1.44(a) is reasonably necessary to accomplishing the goals of
protecting customer funds and mitigating systemic risk because it
defines key terms in requirements that FCMs will need to apply to
ensure margin adequacy, and in requirements that FCMs will need to
apply when treating customer accounts separately for purposes of margin
adequacy.
The Commission proposed to define ``account'' for purposes of
proposed regulation Sec. 1.44 as meaning a futures account, a Cleared
Swaps Customer Account (both of which are defined in regulation Sec.
1.3, which definitions apply broadly to all CFTC regulations), or a
Sec. 30.7 account (as defined in regulation Sec. 30.1 \115\). The
Commission proposed this definition to implement the proposed Margin
Adequacy Requirement, including in the context of separate account
treatment, with respect to accounts of all three types for all FCMs,
consistent with comments received in response to the First Proposal.
---------------------------------------------------------------------------

\115\ 17 CFR 30.1.
---------------------------------------------------------------------------

ICE's comment letter indirectly addressed the definition of
``account'' in proposed regulation Sec. 1.44(a). ICE voiced support
for the Commission's proposal to permit FCMs to provide separate
account treatment for customers with regulation 30.7 accounts for
futures and options transactions traded on exchanges outside the United
States, but stated it does not believe it is necessary for the
Commission to distinguish regulation 30.7 accounts from futures and
Cleared Swap Customer accounts in connection with separate account
treatment.\116\ ICE also noted that there are references in proposed
regulation Sec. 1.44 to DCMs that should also include foreign
exchanges

[[Page 7893]]

in connection with regulation 30.7 accounts.\117\
---------------------------------------------------------------------------

\116\ ICE Comment Letter.
\117\ Including proposed regulation Sec. 1.44(b)(2) and (f)(7).
Id.
---------------------------------------------------------------------------

The Commission proposed to codify the Second Proposal principally
in part 1 (as opposed to in part 39) in light of comments received in
response to the First Proposal. This is designed to ensure that the
Margin Adequacy Requirement and requirements for separate account
treatment will apply directly to all FCMs and all FCM customers,
including futures customers, Cleared Swaps Customers, and 30.7 account
customers. The Commission is distinguishing these accounts in
regulation Sec. 1.44 to ensure that the regulation encompasses each
class of FCM customer.
The Commission agrees that certain references to DCMs that are
included in regulation Sec. 1.44 should be clarified to include
explicitly foreign exchanges in connection with 30.7 accounts, as
separate account customers may have foreign futures and foreign options
positions traded on such exchanges. Accordingly, as noted further below
in connection with regulation Sec. 1.44(b)(2) and 1.44(f)(7), in
adopting these provisions, the Commission is modifying them to refer to
``any designated contract market or other board of trade,'' in order to
encompass such foreign exchanges. The Commission did not receive any
other comments related to the definition of ``account'' in proposed
regulation Sec. 1.44(a) and is adopting that definition as proposed.
The Commission also proposed in proposed regulation Sec. 1.44(a)
to further define ``business day'' as having the same meaning as set
forth in regulation Sec. 1.3, but with the clarification that
``holiday'' refers to Federal holidays as established by 5 U.S.C. 6103.
The Commission also proposed in proposed regulation Sec. 1.44(a) to
define ``holiday'' as meaning Federal holidays as established by 5
U.S.C. 6103.
In Question 4 of the Second Proposal, the Commission sought
commenters' views on how the proposed definition of ``business day''
should address days when securities and other markets are closed.
(E.g., whether the Commission should address in the definition days
when such other markets are open or create an exception for days when
such markets are closed on a prescheduled basis.) The Commission sought
information on potential liquidity challenges or other risks that could
result from such an exception, as well as information on how FCMs and
customers currently address days when securities and other markets are
closed.
In its comment letter, FIA noted that neither the proposed
definitions of ``business day'' nor ``holiday'' in proposed regulation
Sec. 1.44(a) address days on which banks are open but futures and
securities markets are closed.\118\ FIA stated that, on such days,
transfers of non-cash collateral cannot settle, and separate account
customers settling initial margin calls with such collateral will,
under the proposed regulation, be deemed to have failed to meet a
margin call.\119\ In FIA's view, a separate account customer should not
be deemed to have failed to settle a margin call because securities
markets are closed.\120\ FIA suggested the Commission revise the
definition of ``holiday'' in proposed regulation Sec. 1.44(a) to
provide that holidays include ``any business day that is not a
securities settlement day in the United States.'' \121\ No other
commenters responded specifically to this question.
---------------------------------------------------------------------------

\118\ FIA Comment Letter.
\119\ Id.
\120\ Id.
\121\ Id.
---------------------------------------------------------------------------

The Commission acknowledges that, on days on which banks are open
but futures and securities markets are closed, customers, including
separate account customers, may be unable to use non-cash collateral to
aid in their meeting margin calls. However, FCMs and customers may
arrange for a variety of methods to settle margin calls, including bank
transfers. The Commission believes that, given the availability of such
funding mechanisms on days when banks are open but securities and other
markets are closed, introducing an exception that would allow for
additional delays in the payment of margin on such days may introduce
unnecessary additional risk of undermargining.
The Commission did not receive any other comments related to the
definitions of ``business day'' or ``holiday'' in proposed regulation
Sec. 1.44(a) and is adopting those definitions as proposed.
Relatedly, the Commission proposed to define ``one business day
margin call'' as a margin call that is issued and met in accordance
with the requirements of proposed regulation Sec. 1.44(f). The
Commission did not receive any comments with respect to this proposed
definition, but the Commission received comments related to the
substantive requirements defining a one business day margin call in
proposed regulation Sec. 1.44(f). The Commission addresses those
comments below in connection with that provision. The Commission is
adopting the definition of ``one business day margin call'' in
regulation Sec. 1.44(a) as proposed.
Under regulation Sec. 1.44, an FCM may provide disbursements on a
separate account basis only when it, and its customer, are operating
within the ``ordinary course of business,'' as that term is defined in
the proposed regulation. The Commission proposed to define ``ordinary
course of business'' as meaning the standard day-to-day operation of
the FCM's business relationship with its separate account customer, a
condition where there are no unusual circumstances that might indicate
either a materially increased level of risk that the separate account
customer may fail promptly to perform its financial obligations to the
FCM, or a decrease in the FCM's financial resilience. The Commission
proposed regulation Sec. 1.44(e) to set forth the circumstances that
would be inconsistent with the ordinary course of business, and the
occurrence of which would require a cessation of disbursements on a
separate account basis.
SIFMA-AMG contended that the definition of ``ordinary course of
business'' in proposed regulation Sec. 1.44(a) poses certain
regulatory compliance challenges.\122\ Specifically, SIFMA-AMG asserted
that the proposed definition does not sufficiently clarify the meaning
of ``standard day-to-day operation.'' \123\ SIFMA-AMG argued that FCMs
and DCOs would be required to continuously monitor for a series of
events, some of which would not appear to rise to the level of
significance to suggest that they are not within the ordinary course of
business, such as the failure of a customer to make a single margin
payment.\124\ SIFMA-AMG urged the Commission to better define
``ordinary course of business'' and consider an approach that presumes
operation in the ordinary course of business, with clearly delineated
events such as default or bankruptcy as the only instances that would
be considered outside the ordinary course of business.\125\
---------------------------------------------------------------------------

\122\ SIFMA-AMG Comment Letter.
\123\ Id.
\124\ Id.
\125\ Id.
---------------------------------------------------------------------------

SIFMA-AMG further contended that the Commission's proposed
definition of ``ordinary course of business'' fails to recognize that
FCMs must, under Commission regulations, manage risk effectively, and
that FCMs also have

[[Page 7894]]

commercial incentives to do so.\126\ SIFMA-AMG argued the proposed
definition of ``ordinary course of business'' is inconsistent with an
FCM's obligations, noting that an FCM's obligations under its Risk
Management Program (RMP) are intentionally fluid and are designed to
allow FCMs to tailor their RMP to the specific activities of the FCM
and its customers.\127\
---------------------------------------------------------------------------

\126\ Id.
\127\ Id.
---------------------------------------------------------------------------

In adopting regulation Sec. 1.44(a), the Commission has determined
to modify the definition of ``ordinary course of business'' in
consideration of SIFMA-AMG's comment. As an initial matter, the
Commission notes that under regulation Sec. 1.44 as proposed, events
inconsistent with the ordinary course of business are generally those
that the Commission would expect an FCM to become aware of through its
existing compliance function and procedures (e.g., with respect to
cessation of disbursements on a separate account basis for a separate
account customer, a failure to deposit margin timely; the occurrence
and declaration by the FCM of an event of default as defined in the
account documentation executed between the FCM and the separate account
customer; a good faith determination by the FCM's chief compliance
officer (CCO), one of its senior risk managers, or other senior
manager, following such FCM's own internal escalation procedures, that
the separate account customer is in financial distress; or the
insolvency or bankruptcy of the separate account customer or a parent
company of the customer; or, with respect to cessation of disbursements
on a separate account basis for any of an FCM's customers, a
determination in good faith by an FCM's CCO, senior risk managers, or
other senior management, that the FCM itself is under financial or
other distress; or the insolvency or bankruptcy of the FCM or a parent
company of the FCM) and notifications or directives from third parties.
The Commission notes that the list of events inconsistent with the
ordinary course of business proposed as part of regulation Sec.
1.44(e) is substantially the same as the list of events discussed in
CFTC Letter No. 19-17, which has been relied on by DCOs (and by
extension their clearing FCMs) successfully since 2019. As SIFMA-AMG
noted in its comment letter, FCMs have some discretion in managing risk
with respect to their (and their customers') activities, and FCMs
appear to have done so effectively under the conditions of CFTC Letter
No.19-17 for over five years. The Commission expects FCMs will under
regulation Sec. 1.44 similarly exercise risk management discretion to
identify when certain non-ordinary course of business events have
occurred.\128\
---------------------------------------------------------------------------

\128\ See, e.g., new regulation Sec. 1.44(e)(1)(iii) (``A good
faith determination by the futures commission merchant's chief
compliance officer, one of its senior risk managers, or other senior
manager, following such futures commission merchant's own internal
escalation procedures, that the separate account customer is in
financial distress, or there is significant and bona fide risk that
the separate account customer will be unable promptly to perform its
financial obligations to the futures commission merchant, whether
due to operational reasons or otherwise.'').
---------------------------------------------------------------------------

Additionally, the Commission notes that although failure to make a
single margin payment may not in itself represent a departure from the
ordinary course of business (hence the Commission's proposal,
consistent with the no-action conditions of CFTC Letter No. 19-17, to
include an exception to non-ordinary course of business conditions for
failure to pay margin due to certain unusual administrative errors or
operational constraints), as a general matter, ensuring timely payment
of margin is critical to the Commission's goal of providing for
separate account treatment in a manner that ensures the safety of
customer funds and effective risk mitigation.
Although the Commission believes default or bankruptcy of an FCM or
customer are not the only events that could represent a departure from
the ordinary course of business with respect to separate account
margining, the Commission agrees that the standard for what constitutes
the ordinary course of business can be more clearly defined.
Under the proposal, although the occurrence of any of the events
described in regulation Sec. 1.44(e) would be inconsistent with the
``ordinary course of business,'' it was also possible that some other,
unspecified, events might also be inconsistent with the ``ordinary
course of business.'' Accordingly, the Commission has modified
regulation Sec. 1.44(a) to close the set of such events by providing
that the ``ordinary course of business'' means the operation of the
FCM's business relationship with its separate account customer absent
the occurrence of one or more of the events specified in regulation
Sec. 1.44(e). In such manner, the ordinary course of business
continues, provided none of the events delineated in regulation Sec.
1.44(e) have occurred.
The Commission proposed to define ``separate account'' as meaning
any one of multiple accounts of the same separate account customer that
are carried by the same FCM. The Commission did not receive any
comments with respect to this proposed definition and is adopting it as
proposed.
The Commission proposed to define ``separate account customer'' as
meaning a customer for which the FCM has elected to engage in separate
account treatment. The Commission also did not receive any comments
with respect to this proposed definition and is adopting it as
proposed.
Lastly, the Commission proposed to define ``undermargined amount''
for an account as meaning the amount, if any, by which the customer
margin requirements with respect to all products held in that account,
exceed the net liquidating value plus the margin deposits currently
remaining in that account.\129\ The proposed definition noted that
``[f]or purposes of this definition, `margin requirements' shall mean
the level of maintenance margin or performance bond (including, as
appropriate, the equity component or premium for long or short option
positions) required for the positions in the account by the applicable
exchanges or clearing organizations.'' \130\ This clarification (which
was drawn from the definition of risk margin in regulation Sec.
1.17(b)(8)) is in recognition of the difference between exchange (or
clearing organization) requirements for ``initial margin'' and
``maintenance margin.'' However, here, unlike risk margin, the
Commission included the equity component or premium for long or short
option positions, as those are part of the total required level of
margin. ``Initial margin'' is the amount of margin (otherwise known as
``performance bond'' \131\ in this context) required to establish a
position. Some (though not all) contract markets and clearing houses
establish ``maintenance margin'' requirements that are less than the
corresponding initial margin

[[Page 7895]]

requirement. Where, due to adverse market movements, the amount of
margin on deposit is less than the initial margin requirement, but
greater than or equal to maintenance margin, the FCM is not required to
(though it may) call additional margin from the customer. Once the
amount of margin on deposit is less than the maintenance margin
required, the FCM must call the customer for enough margin to meet the
initial margin level.
---------------------------------------------------------------------------

\129\ The definition of ``undermargined amount'' in regulation
Sec. 1.44(a) is different from, and simpler than, the definitions
of ``undermargined amount'' for the purpose of residual interest
calculations in regulations Sec. Sec. 1.22(c)(1), 22.2(f)(6)(i),
and 30.7(f)(1)(ii). The calculations in the latter cases are
required to take into account information at the close of business
on day T-1 that will be used to calculate a residual interest
requirement on day T, as well as payments that may be received on
day T, and the elimination of double counting of debit balances.
\130\ The definition of ``undermargined amount'' in regulation
Sec. 1.44(a) further provides that, with respect to positions for
which maintenance margin is not specified, ``margin requirements''
shall refer to the initial margin required for such positions.
\131\ ``Performance bond'' secures the performance by a customer
to meet its variation margin payment obligations to its FCM (or the
performance of variation margin payment obligations of an FCM to the
clearinghouse, or to an intermediary upstream FCM).
---------------------------------------------------------------------------

The Commission used the term ``undermargined amount'' in connection
with proposed regulation Sec. 1.44(f) in defining the requirements for
making and meeting a one business day margin call, as well as in
proposed regulation Sec. 1.44(g) in setting legally segregated,
operationally commingled (LSOC) compliance calculations for separate
accounts.
In its comment letter, the JAC contended that the Commission's
proposed definition of ``undermargined amount'' in proposed regulation
Sec. 1.44(a) is inconsistent with industry practice and methodologies
for calculating the undermargined amount provided in the JAC Margins
Handbook.\132\ Specifically, proposed regulation Sec. 1.44(a) defines
``undermargined amount'' for an account as, ``the amount, if any, by
which the customer margin requirements with respect to all products
held in that account exceeds the net liquidating value plus the margin
deposits currently remaining in that account.'' Further, proposed
regulation Sec. 1.44(a) provides that, for purposes of such
definition, ``margin requirements'' means the ``level of maintenance
margin or performance bond (including, as appropriate, the equity
component or premium for long or short options positions) required for
the positions in the account by the applicable exchanges or clearing
organizations.''
---------------------------------------------------------------------------

\132\ JAC Comment Letter.
---------------------------------------------------------------------------

As the JAC explained, its Margins Handbook recognizes two methods
for determining the undermargined amount: the Net Liquidating Value
Method \133\ and the Total Equity Method.
---------------------------------------------------------------------------

\133\ Also referred to as the ``Risk Method'' or ``Pure SPAN
Method.''
---------------------------------------------------------------------------

For purposes of the Net Liquidating Value Method, the JAC Margins
Handbook defines the undermargined amount as: ``The amount by which
margin equity is less than the maintenance margin requirement.'' \134\
The JAC noted that, for purposes of this method, its Margins Handbook
defines margin equity as ``an account's net liquidating equity plus the
collateral value of acceptable margin deposits'' \135\ and defines the
maintenance margin requirement as: ``The minimum amount of margin
equity required to be maintained in an account.'' \136\
---------------------------------------------------------------------------

\134\ JAC Comment Letter (citing JAC Margins Handbook, Chapter
1, Definition of ``Undermargined Amount'').
\135\ Id. (citing JAC Margins Handbook, Chapter 1, Definition of
``Margin Equity'').
\136\ Id. (citing JAC Margins Handbook, Chapter 1, Definition of
``Maintenance Margin Requirement (MMR)''). The definition further
notes that the maintenance margin requirement is the actual risk
margin calculated by the SPAN[supreg] margin system. Id.
---------------------------------------------------------------------------

Under the alternative Total Equity Method, the undermargined amount
is the amount by which total equity plus the collateral value of
acceptable margin deposits is less than the risk maintenance margin
requirement adjusted for the option value.\137\
---------------------------------------------------------------------------

\137\ Id. (citing JAC Margins Handbook, Chapter 4, ``Margins
Calls''). The JAC noted that net long option value reduces the risk
margin requirement while net short option value increases it.
---------------------------------------------------------------------------

The JAC argued that, as proposed, the definition of ``undermargined
amount'' in proposed regulation Sec. 1.44(a) would require that, for
all customer accounts (not just the separate accounts of separate
account customers), an FCM include the equity component of long and
short options in both the margin equity and the margin
requirement.\138\ However, the JAC asserted, under the JAC Margins
Handbook, exchange rules, and industry practice, the equity component
of long and short options is included only in either the margin equity
(under the Net Liquidating Value Method) or margin requirement (under
the Total Equity Method).\139\ The JAC further asserted that currently,
option premium is already included in margin equity and is not a
component of the margin requirement.\140\
---------------------------------------------------------------------------

\138\ Id.
\139\ Id.
\140\ Id.
---------------------------------------------------------------------------

The JAC noted that, depending on the composition of an account, the
Second Proposal's definition of ``undermargined amount'' may result in
different undermargined amounts than the Net Liquidating Value Method
or Total Equity Method as those methods are applied today. The JAC
requested the Commission provide the specific calculation for inclusion
of the equity component of premium for long or short options positions
and provide further clarification as to the rationale for the apparent
proposed change in methodology.
FIA similarly commented that, although the proposed definition of
``undermargined amount'' in proposed regulation Sec. 1.44(a) appeared
to derive from the JAC Margins Handbook definition of the same term,
the definition as proposed may give the impression that the Commission
intends to codify a preference for the Net Liquidating Value Method to
the exclusion of the Total Equity Method alternative in the JAC Margins
Handbook. FIA recommended that the Commission amend the proposed
definition of ``undermargined amount'' in proposed regulation Sec.
1.44(a) to provide that ``undermargined amount'' for an account means
the account's margin deficiency, if any, computed in accordance with
applicable guidance of the JAC promulgated under regulation Sec.
1.52(d).
The Commission's proposed definition of ``undermargined amount'' is
based not on the Net Liquidating Value/Risk/Pure SPAN Method as set
forth in the JAC Margins Handbook but rather on the Margin Adequacy
Requirement in regulation Sec. 39.13(g)(8)(iii), which provides that a
DCO shall require its clearing members to ensure their customers do not
withdraw funds from their accounts with such clearing members unless
the net liquidating value plus the margin deposits remaining in a
customer's account after such withdrawal are sufficient to meet the
customer initial margin requirements with respect to all products and
swap portfolios held in such customer's account which are cleared by
the DCO. In that respect, it is not intended to evince a requirement to
determine the undermargined amount of an account specifically using the
Net Liquidating Value Method to the exclusion of the Total Equity
Method as set forth in the JAC Margins Handbook. In proposing the
definition of ``undermargined amount,'' the Commission sought to make
clear that an FCM's determination of the undermargined amount for a
separate account should account for the equity component or premium for
long or short options positions in computing the required level of
margin for an account. However, the Commission's intent was not to
change FCMs' current practice with respect to the way in which they
determine the undermargined amount for an account.
In its comment letter, the JAC noted that FCMs determine the
undermargined amount using either the Net Liquidating Value method or
the alternative Total Equity method set forth in the JAC Margins
Handbook, both of which incorporate the equity component for long or
short option positions (the former as part of margin equity and the
latter as part of margin requirements), and that margin

[[Page 7896]]

premium is already included as part of margin equity under either
method.
Having considered the JAC's and FIA's comments, relevant provisions
of the JAC Margins Handbook, and the Commission's objectives in
defining ``undermargined amount,'' the Commission is persuaded that
utilizing either the Net Liquidating Value method or the alternative
Total Equity method to determine an account's undermargined amount
generally will produce an identical result (with the exception, as the
JAC notes, of certain instances involving long options positions, in
which the Total Equity method will produce a greater margin deficiency,
resulting in a greater margin requirement, which would further serve to
mitigate risk).
Accordingly, in adopting the definition of ``undermargined amount''
in regulation Sec. 1.44(a), the Commission is removing the proposed
language stating that, for purposes of the definition of
``undermargined amount,'' the term ``margin requirements'' shall
``include[ ], as appropriate, the equity component or premium for long
or short option positions,'' based on the Commission's understanding,
in light of comments received, that under current practice, the equity
component is included as a matter of course in margin equity or margin
requirements, and the option premium is factored into margin
equity.\141\ The Commission believes the resulting definition is
consistent with the Net Liquidating Value method for determining an
undermargined amount, as set forth in the JAC's Margins Handbook.
Notwithstanding that definition, the Commission also believes an FCM's
use of the Total Equity method, as set forth in the JAC's Margins
Handbook, would also be consistent with that definition.
---------------------------------------------------------------------------

\141\ The Commission is also making a technical (grammatical)
change to the definition of ``undermargined amount'' in regulation
Sec. 1.44(a) to change ``by which the customer margin requirements
. . . exceeds the net liquidating value . . .'' to ``by which the
customer margin requirements . . . exceed the net liquidating value
. . . .''
---------------------------------------------------------------------------

In Question 5 of the Second Proposal, the Commission invited
commenters to provide feedback with respect to whether the definition
of ``undermargined amount'' should apply haircuts to the value of
customer collateral held by an FCM and, if so, whether the amount of
such haircuts should be based on SEC rule 240.15c3-1 and Commission
regulation Sec. 1.17(c)(5)(ii), or on some other basis. A haircut is a
reduction in the allowable value of an asset to account for market
risk. In its comment letter, the JAC stated that non-cash collateral on
deposit in a customer's account should be valued at market value less
applicable SEC and CFTC haircuts for determining the margin value of
collateral. No other commenters responded specifically to this
question. The Commission has determined, in adopting the definition of
``undermargined amount'' in regulation Sec. 1.44(a), to include in
that definition a requirement that collateral haircuts based on Rule
15c3-1 of the Securities and Exchange Commission (17 CFR 240.15c3-1)
and regulation Sec. 1.17(c)(5) be applied to the value of the margin
deposits held by an FCM to reflect potential market risk associated
with the value of the collateral if and when such collateral was
liquidated.
Accordingly, the Commission is adopting regulation Sec. 1.44(a) as
proposed, subject to the modifications discussed above with respect to
the definitions of ``ordinary course of business'' and ``undermargined
amount.''

E. Proposed Regulation Sec. 1.44(b)

The Commission proposed regulation Sec. 1.44(b) to require all
FCMs, whether clearing or non-clearing, to comply with the same Margin
Adequacy Requirement that DCOs are required to apply to their clearing
FCMs pursuant to regulation Sec. 39.13(g)(8)(iii). As proposed,
regulation Sec. 1.44(b) provides that an FCM shall ensure that a
customer does not withdraw funds from its accounts with such FCM unless
the net liquidating value (calculated as of the close of business on
the previous business day) plus the margin deposits remaining in the
customer's account after such withdrawal are sufficient to meet the
customer initial margin requirements with respect to all products held
in such customer's account, except as provided in proposed regulation
Sec. 1.44(c), which allows an FCM to permit disbursements on a
separate account basis under ordinary course of business
conditions.\142\
---------------------------------------------------------------------------

\142\ Consistent with the existing Margins Handbook, the Margin
Adequacy Requirement is based on initial margin requirements rather
than any lower maintenance margin requirement. See JAC Margins
Handbook at 10-1 (``Margin Funds Available for Disbursement = Net
Liquidating Value + Margin Deposits - Initial Margin Requirement >
0''); see also supra n. 13 and accompanying text.
---------------------------------------------------------------------------

In proposing regulation Sec. 1.44(b), the Commission sought to
articulate a standard for the calculation of margin adequacy that is
consistent with the Commission's requirements for calculation of
undermargined amounts for purposes of an FCM's residual interest
calculations.\143\ Regulations Sec. Sec. 1.22(c)(2), 22.2(f)(6)(ii),
and 30.7(f)(ii)(B) require each FCM to compute such undermargined
amounts based on the information available to the FCM as of the close
of each business day for futures customer accounts, Cleared Swaps
Customer Accounts, and 30.7 accounts, respectively.
---------------------------------------------------------------------------

\143\ Id.
---------------------------------------------------------------------------

In order to address circumstances in which the previous day (for
purposes of regulation Sec. 1.44(b)(1)'s margin adequacy calculation
requirements), excluding Saturdays and Sundays, is a holiday (as
defined in regulation Sec. 1.44(a)) on which markets, but not banks,
may be open, proposed regulation Sec. 1.44(b)(2) further provides
that, in such circumstances, the margin adequacy calculation shall
instead be made using the net liquidating value of an account as of the
close of business on such holiday where (i) any DCM on which the FCM
trades is open for trading; and (ii) an account of any of the FCM's
customers includes positions traded on such a market.\144\
---------------------------------------------------------------------------

\144\ Proposed regulation Sec. 1.44(b)(2), and proposed
regulation Sec. 1.44(f)(7), discussed below, are consistent with
JAC Regulatory Alert #22-02, which provides that an FCM must issue
margin calls to customers on holidays where futures markets are open
and U.S. banks are closed. The margin calls are calculated based on
information as of the close of the previous business day (i.e., the
business day prior to the holiday) and the FCM does not count the
holiday for purposes of aging the margin call. JAC Regulatory Alert
#22-01, Mar. 30, 2022, available at <a href="http://www.jacfutures.com">www.jacfutures.com</a>.
---------------------------------------------------------------------------

The Commission notes that proposed regulation Sec. 1.44(b)'s
requirements related to the timing of the margin adequacy calculation
required by the same section are intended to represent a minimum
standard. The proposed requirements are not intended to prevent an FCM
from exercising its judgment in connection with good risk management
practice to prevent the disbursement of customer funds based on
intervening intraday market movements resulting in losses to a customer
account between the calculation benchmark set forth in proposed
regulation Sec. 1.44(b) and the time at which a customer requests to
withdraw funds. Ensuring that customers do not withdraw funds from
their accounts at FCMs if such withdrawal would create or exacerbate an
initial margin shortfall is reasonably necessary from a risk management
perspective to reduce the likelihood and magnitude of the risk that the
FCM must cover losses due to a default by the customer on obligations
that exceed the margin held by the FCM. Similarly, because customer
funds are held by an FCM in omnibus accounts, this

[[Page 7897]]

prohibition will reduce the likelihood and magnitude of the risk that
the FCM will effectively use the margin of other customers to ``margin
or guarantee the trades or contracts, or to secure or extend the credit
of'' a customer that was permitted to withdraw margin in a manner that
created or exacerbated an undermargined condition,\145\ whether the
duty to prevent such withdrawals falls on DCOs acting on their clearing
member FCMs (per regulation Sec. 39.13(g)(8)(iii)), or directly on
FCMs.
---------------------------------------------------------------------------

\145\ See CEA Sec. 4d(a)(2), 7 U.S.C. 6d(a)(2) (Providing that
an FCM may not use the money or property 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.'').
---------------------------------------------------------------------------

Because regulation Sec. 39.13(g)(8)(iii) applies only to DCOs
(which in turn can only apply regulation Sec. 39.13(g)(8)(iii)'s
Margin Adequacy Requirement to their clearing member FCMs), and given
the strong trend of the comments in favor of addressing these issues in
a manner that is uniform across all types of FCMs directly in part 1
rather than indirectly through part 39, the Commission continues to
view it as reasonably necessary to extend the requirement to prevent
such undermargining scenarios to all FCMs.
Accordingly, it is the Commission's judgment that regulation Sec.
1.44(b), which will apply a Margin Adequacy Requirement similar to that
of regulation Sec. 39.13(g)(8)(iii) directly to FCMs, both clearing
and non-clearing, is reasonably necessary to protect customer funds and
mitigate systemic risk, thus effectuating CEA section 4d(a)(2),
4d(f)(2), and 4(b)(2)(A) \146\ and accomplishing the purposes of
``avoidance of systemic risk'' and ``protecting all market participants
from . . . misuses of customer assets.'' \147\
---------------------------------------------------------------------------

\146\ 7 U.S.C. 6d(a)(2), 6d(f)(2), and 6(b)(2)(A).
\147\ CEA Sec. 3(b), 7 U.S.C. 5(b). See, as discussed above,
section 8a(5) of the CEA, 7 U.S.C. 12a(5), authorizing the
Commission to make and promulgate such rules and regulation as in
the Commission's judgment are reasonably necessary to effectuate any
of the provisions, or to accomplish any of the purposes, of the CEA.
---------------------------------------------------------------------------

The JAC discussed proposed regulation Sec. 1.44(b) in several
respects in its comment letter. First, the JAC asserted that proposed
regulation Sec. 1.44(b)(1) is unclear; specifically, because it is
unclear how the Commission is defining customer initial margin
requirements in light of its definition of the term ``margin
requirements,'' within the proposed definition of the term
``undermargined amount'' in proposed regulation Sec. 1.44(a), as
including ``the equity component or premium for long or short option
positions.'' \148\ As the JAC noted, proposed regulation Sec.
1.44(b)(1) would affect all customers, not just customers whose
accounts receive separate account treatment.\149\
---------------------------------------------------------------------------

\148\ JAC Comment Letter. The JAC reiterated additional points
in support of this contention that the Commission discusses above in
connection with the definition of ``undermargined amount'' in
regulation Sec. 1.44(a).
\149\ Id.
---------------------------------------------------------------------------

As discussed above in connection with regulation Sec. 1.44(a), the
Commission is adopting its proposed definition of ``undermargined
amount'' with modifications to remove language that the JAC identified
as inconsistent with exchange rules and industry practice, and the
Commission views an FCM's use of either of the Net Liquidating Value or
alternative Total Equity method set forth in the JAC Margins Handbook
as consistent with the Commission's objective in defining an account's
undermargined amount for purposes of regulation Sec. 1.44.
Second, the JAC contended that proposed regulation Sec. 1.44(b)
may impact the way some FCMs settle with customers on a daily
basis.\150\ Specifically, the JAC asserted, many FCMs initiate multiple
cash and/or collateral transactions within the same customer account on
the same business day in order to settle each individual currency
within the account, or may call initial margin separately from
variation margin within a single customer account, whether or not such
account is receiving separate account treatment.\151\ The JAC noted
this may result in a withdrawal of margin funds by a single customer
account or within a separate account when, in the aggregate, including
required margin on all positions and total margin equity, the account
was undermargined as of the close of business on the prior business
day.\152\ The JAC asserted this is a generally accepted practice,
provided certain controls are in place and adequate records are
maintained to demonstrate margin calls are issued, aged, and fully
initiated for immediate settlement to support any outgoing
disbursements.\153\ The JAC requested that the Commission confirm
whether such margin procedures will continue to be permissible for
separate and non-separate accounts, particularly with respect to the
funds available for disbursement to a customer.\154\
---------------------------------------------------------------------------

\150\ Id.
\151\ Id.
\152\ Id.
\153\ Id.
\154\ Id.
---------------------------------------------------------------------------

Relatedly, the JAC sought clarification regarding whether the
Second Proposal requires each separate account to settle a single
undermargined amount pursuant to proposed regulation Sec. 1.44(f) or
disburse a single excess margin amount pursuant to proposed regulation
Sec. 1.44(b), taking into account the aggregate of all positions and
currencies within the separate account.\155\ The JAC indicated that, to
the extent the proposed regulations would require a change in current
practice with respect to settlement of margin payments on a currency-
by-currency basis within a customer account (whether or not the account
is receiving separate treatment), then FCMs may be required to update
their regulatory records, risk programs, margin calculations, and
reporting for customer accounts.\156\
---------------------------------------------------------------------------

\155\ Id. The JAC provided the following example: a customer's
separate account has an overall undermargined amount at the close of
business on Monday of $2,000 USD (comprised of an undermargined
amount in GBP currency with a USD equivalent value of $6,000 and
funds in excess of its margin requirements in USD currency of
$4,000). The JAC requested the Commission clarify whether, although
the separate account was undermargined overall for Monday's close of
business, the FCM could allow the separate account customer to
withdraw on Tuesday the excess margin funds denominated in USD of
$4,000 while also issuing a margin call on Tuesday for the GBP
undermargined amount (for the USD equivalent value of $6,000), and
remain in compliance with proposed regulation Sec. 1.44(b) and, if
so, (i) whether there are certain requirements and controls that the
FCM must have in place; and (ii) how the different settlement
timeframes of the currencies would impact such permissibility,
including in cases where a specific currency cannot be initiated for
immediate settlement (e.g., if in the JAC's example, Tuesday is a
banking holiday in the UK, but not in the U.S.). Id.
\156\ Id.
---------------------------------------------------------------------------

In response to the JAC's comment, the Commission confirms that each
separate account would not be required to settle a single undermargined
amount or disburse a single excess margin amount pursuant to regulation
Sec. 1.44 as adopted herein. Rather, each receipt or disbursement
would add to or subtract from the available balance in a customer's
account, calculated using a single reference currency. As stated above,
regulation Sec. 1.44(b) as proposed would require an FCM to ensure
that a customer does not withdraw funds from its accounts with the FCM
unless the net liquidating value (calculated as of the close of
business on the previous business day) plus the margin deposits
remaining in the customer's account after the withdrawal are sufficient
to meet the customer initial margin requirements with respect to all
products held in the customer's account, except as provided for
pursuant to regulation Sec. 1.44(c), which sets forth the fundamental
requirements for separate account treatment.

[[Page 7898]]

The Commission notes that, for purposes of regulation Sec.
1.44(b), the net liquidating value is calculated based on the market
value of the positions in the customer's account. In proposing
regulation Sec. 1.44(b), the Commission noted that real-time
calculation of margin adequacy with respect to a potential withdrawal
may prove impracticable.\157\ In doing so, the Commission refers to the
fact that it may be impracticable for an FCM to calculate the market
value of the positions in a customer's account on a real-time basis.
---------------------------------------------------------------------------

\157\ Second Proposal, 89 FR at 15324.
---------------------------------------------------------------------------

However, the Commission does not believe it would be impracticable
for an FCM to account for payments received or disbursements made since
the close of business on the previous business day. Indeed, regulation
Sec. 1.22(c)(3)(ii) provides that an FCM may reduce the amount of
residual interest required to be maintained under regulation Sec.
1.22(c)(3)(i) 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 business on the
previous business day and the Residual Interest Deadline.\158\
Regulations Sec. Sec. 22.2(f)(6)(iii)(B) and 30.7(f)(ii)(C)(2) permit
this practice as to the accounts of Cleared Swaps Customers and 30.7
customers, respectively.\159\
---------------------------------------------------------------------------

\158\ 17 CFR 1.22(c)(3)(ii).
\159\ 17 CFR 22.2(f)(6)(iii)(B); 17 CFR 30.7(f)(ii)(C)(2). See
also, e.g., JAC Comment Letter (discussing multi-settlement
margining procedures as well as treatment of pending non-USD
transfers for purposes of determining a customer's residual interest
requirement).
---------------------------------------------------------------------------

Similarly, in calculating margin adequacy under regulation Sec.
1.44(b), an FCM should consider payments received from or on behalf of
customers, including the separate accounts of separate account
customers, less the sum of any disbursements made to or on behalf of
such customers, between the close of business on the previous business
day and the time at which the FCM considers a disbursement to a
customer. In calculating the current balance in a customer's account,
an FCM may use either the currency exchange rates at the close of
business on the previous day, or at some later time. The FCM should be
consistent in both the sources of exchange rates that it uses and in
choosing the time as of which it will reference such exchange rates in
calculating the current balance in the customer's account. Moreover, in
doing so, the FCM must act consistently with regulation Sec.
1.49(e).\160\ Additionally, as discussed below, the Commission notes
that the final rule is not intended to preclude FCMs from, consistent
with JAC guidance, considering as received for purposes of regulation
Sec. 1.44(b)'s Margin Adequacy Requirement pending receipts
denominated in non-USD (and non-CAD, in light of regulation Sec.
1.44(f)(1)-(3)'s provisions for the timing of margin payments to meet a
one business day margin call standard) currencies.\161\ The Commission
expects that an FCM will, consistent with JAC guidance, also treat
pending non-USD (and non-CAD) disbursements in the same manner (i.e.,
as disbursed).
---------------------------------------------------------------------------

\160\ 17 CFR 1.49(e).
\161\ See the Commission's discussion of the JAC's guidance with
respect to pending non-USD transfers above in its discussion of
amendments to regulation Sec. 1.17.
---------------------------------------------------------------------------

Third, the JAC noted that although the Margin Adequacy Requirement
in proposed regulation Sec. 1.44(b) discusses determination of funds
available for withdrawal from customer accounts, the Commission in the
Second Proposal proposed only to establish a requirement to collect
margin from separate account customers (in proposed regulation Sec.
1.44(f)(1)) and did not propose a broader requirement for FCMs to
collect margin, analogous to the collection requirement in regulation
Sec. 39.13(g)(8)(ii), and applicable to all accounts carried by
clearing and non-clearing FCMs.\162\ The JAC further noted that, in the
absence of such a requirement, the requirements applicable to margin
collection are limited to requirements under exchange rules whereas
requirements applicable to disbursements to customers will be defined
by Commission regulations (unless the exchange or clearing organization
imposes a more stringent requirement).\163\
---------------------------------------------------------------------------

\162\ Id. Regulation Sec. 39.13(g)(8)(ii) provides, among other
things, that a DCO shall require its clearing members to collect
customer initial margin at a level that is not less than 100 percent
of the DCO's clearing initial margin requirements with respect to
each product and portfolio and commensurate with the risk presented
by each customer account. 17 CFR 39.13(g)(8)(ii).
\163\ JAC Comment Letter.
---------------------------------------------------------------------------

As discussed above, commenters to the First Proposal, including the
JAC, asked that the Commission codify requirements for the treatment of
separate accounts in its regulations that would apply to all FCMs. In
the Second Proposal, the Commission proposed to do just that. The
Commission discussed in the Second Proposal its intent to promulgate a
narrow codification, applied directly to FCMs, of the requirements for
margin disbursement set forth in regulation Sec. 39.13(g)(8)(iii),
subject to requirements based on the conditional no-action position in
CFTC Letter No. 19-17, including requirements for separate account
treatment that closely mirror the conditions in the no-action
position.\164\ The no-action position in CFTC Letter No. 19-17 and the
First Proposal concerned requirements for separate account treatment
for purposes of regulation Sec. 39.13(g)(8)(iii) regarding
disbursements of margin, and did not discuss requirements for
collection of margin outside of the separate account context.
Accordingly, the Commission considers the imposition of a requirement
for collection of margin analogous to regulation Sec. 39.13(g)(8)(ii)
to be out of scope for purposes of this rulemaking, although the
Commission may consider further amendments to its regulations in the
future to incorporate a separate margin collection requirement. As the
JAC's comment notes, margin collection requirements are currently set
by exchanges (as well as DCOs with respect to cleared transactions).
---------------------------------------------------------------------------

\164\ See Second Proposal, 89 FR at 15317.
---------------------------------------------------------------------------

The JAC also recommended that the Commission revise the Margin
Adequacy Requirement in proposed regulation Sec. 1.44(b) (and/or the
definition of ``account'' proposed in proposed regulation Sec.
1.44(a)) to ``include accounts of noncustomers who pose risk to the FCM
if such noncustomers are permitted to withdraw margin funds that would
create or exacerbate an undermargined situation, or not be required to
deposit and maintain sufficient margin to cover the risk of their
positions.'' \165\
---------------------------------------------------------------------------

\165\ The JAC noted the Commission could then consider allowing
separate account treatment for such noncustomers under the
provisions of proposed regulation Sec. 1.44(c)-(h).
---------------------------------------------------------------------------

The Commission appreciates the JAC's recommendation to consider
revising the Margin Adequacy Requirement to apply to the accounts of
noncustomers, which the Commission generally understands to encompass
accounts of certain affiliates and affiliated individuals of an FCM.
The Commission notes that the Margin Adequacy Requirement of regulation
Sec. 39.13(g)(8)(iii) does not apply with respect to withdrawals by
noncustomers, and neither CFTC Letter No. 19-17 nor the Commission's
proposals to codify the no-action position in that letter contemplated
the application of a Margin Adequacy Requirement, or requirements for
separate account treatment, with respect to noncustomers. The
Commission considers application of the Margin Adequacy Requirement in
proposed regulation Sec. 1.44(b) to noncustomers to

[[Page 7899]]

be outside the scope of this rulemaking, but will consider whether to
provide additional risk management requirements applicable to
noncustomers in the future.\166\
---------------------------------------------------------------------------

\166\ There are currently requirements relating to risk
assessment recordkeeping for FCMs with respect to affiliated persons
in regulations Sec. Sec. 1.14 and 1.15.
---------------------------------------------------------------------------

Lastly, as the Commission discusses above in connection with
amendments to regulation Sec. 1.17, the Commission received a number
of comments requesting that the Commission confirm whether FCMs may
consider as received pending non-USD transfers for purposes of certain
regulations, consistent with JAC guidance and current industry
practice. Although the Commission did not receive any such comments
specifically with respect to proposed regulation Sec. 1.44(b), for the
avoidance of doubt, the Commission confirms that the final rule is not
intended to preclude FCMs from considering as received pending non-USD
transfers, consistent with JAC guidance, when considering a
disbursement under regulation Sec. 1.44(b). However, in light of
regulation Sec. 1.44(f)(1)-(3), under which payment of margin in
Canadian dollars (CAD) is required to be settled pursuant to the timing
requirements for payment of margin in USD for purposes of meeting a one
business day margin call standard, the Commission expects that, when
considering pending non-USD transfers for purposes of regulation Sec.
1.44(b)'s Margin Adequacy Requirement, FCMs will treat pending CAD
transfers on the same basis as pending USD transfers (i.e., they will
not be treated as received or as disbursed). Additionally, a non-USD
transfer that ultimately is not received on a one business day basis,
as set forth in regulation Sec. 1.44(f), would be considered a failed
deposit and could no longer be considered pending, even if this was due
to administrative error or operational constraint. Thereafter, that
transfer would only be considered as received upon actual receipt.
Having considered comments received in response to proposed
regulation Sec. 1.44(b), the Commission is adopting regulation Sec.
1.44(b) as proposed, subject to modifications to regulation Sec.
1.44(b)(2), discussed above in connection with regulation Sec.
1.44(a), to address foreign exchanges related to regulation Sec. 30.7
accounts.\167\
---------------------------------------------------------------------------

\167\ Specifically, as adopted, regulation Sec. 1.44(b)(2)
provides, ``For purposes of [regulation Sec. 1.44(b)(1)] . . .
where the previous day (excluding Saturdays and Sundays) is a
holiday . . . where any designated contract market or other board of
trade on which the futures commission merchant trades is open for
trading, and where an account of any of the futures commission
merchant's customers includes positions traded on such a market, the
net liquidating value for such an account should . . . be calculated
as of the close of business on such holiday.''
---------------------------------------------------------------------------

F. Regulation Sec. 1.44(c)

The Commission proposed regulation Sec. 1.44(c) to establish the
fundamental requirements for separate account treatment. As a general
matter, these requirements are substantially the same as in CFTC Letter
No. 19-17, and in the First Proposal, except that the FCM may choose to
engage in separate account treatment without a requirement that a DCO
specifically authorize such treatment. As proposed, regulation Sec.
1.44(c) provides that an FCM may, only during the ordinary course of
business, as that term is defined in regulation Sec. 1.44, treat the
separate accounts of a separate account customer as accounts of
separate entities for purposes of regulation Sec. 1.44(b),\168\ if
such FCM elects to do so as specified in regulation Sec. 1.44(d).
Regulation Sec. 1.44(c) further provides that an FCM that has made
such an election shall comply with the risk-mitigating requirements set
forth in proposed regulation Sec. 1.44 and maintain written internal
controls and procedures designed to ensure such compliance.
---------------------------------------------------------------------------

\168\ As noted above, proposed regulation Sec. 1.44(b) is
intended to serve as an analog to regulation Sec. 39.13(g)(8)(iii)
for FCMs.
---------------------------------------------------------------------------

The Commission believes that permitting FCMs to treat the separate
accounts of separate account customers as accounts of separate entities
for purposes of regulation Sec. 1.44(b), subject to the risk-
mitigating requirements set forth in regulation Sec. 1.44,
accomplishes the CEA's purposes of promoting responsible innovation as
well as effective customer fund protection and risk mitigation.\169\
Compliance with those requirements can best be achieved if the FCM
maintains written internal controls and procedures designed to ensure
such compliance.
---------------------------------------------------------------------------

\169\ See CEA Sec. Sec. 3(b), 8a(5); see also, CEA section
4d(a)(2), 7 U.S.C. 6d(a)(2); CEA section 4d(f)(2), 7 U.S.C.
6d(f)(2); CEA section 4b(2)(A), 7 U.S.C. 6b(2)(A); CEA section
4f(b), 7 U.S.C. 6f(b).
---------------------------------------------------------------------------

In its comment letter, ICE stated that it does not object to the
specific requirements that would be imposed under proposed regulation
Sec. 1.44(c) where an FCM elects separate account treatment with
respect to a customer.\170\
---------------------------------------------------------------------------

\170\ ICE Comment Letter.
---------------------------------------------------------------------------

The Commission did not receive any other comments specific to
proposed regulation Sec. 1.44(c). Accordingly, the Commission is
adopting regulation Sec. 1.44(c) as proposed.

G. Regulation Sec. 1.44(d)

The Commission proposed regulation Sec. 1.44(d) to provide that an
FCM may elect to treat the separate accounts of a customer as accounts
of separate entities for purposes of proposed regulation Sec. 1.44(b).
As proposed, regulation Sec. 1.44(d)(1) provides that, to elect to
treat the separate accounts of a customer as accounts of separate
entities for purposes of regulation Sec. 1.44(b), the FCM shall
include the customer on a list of separate account customers maintained
in its books and records, and that such list shall include both the
identity of each separate account customer and the identity of each
separate account of such customer. The FCM would also be required to
keep this list current. Furthermore, as proposed, regulation Sec.
1.44(d)(2) provides that, when an FCM first chooses to include a
customer on a list of separate account customers, the FCM is required
to provide, within one business day, notification of the election to
allow separate account treatment for customers in accordance with the
process specified in regulation Sec. 1.12(n)(3).\171\ For the
avoidance of doubt, the notification of such election would remain a
one-time notification made the first time the FCM begins providing
separate account notification for any customer. Successive
notifications would not be required for each additional customer for
which the FCM provides separate account treatment. Furthermore, the FCM
would need only provide notification of the election and would not be
required to include the identity of the separate account customer. The
Commission believes that regulation Sec. 1.44(d) is reasonably
necessary to protect customer funds and mitigate systemic risk because
it is designed to enable DSROs to effectively monitor and regulate FCMs
that engage in separate account treatment, and to provide that FCMs
will have the records necessary to understand which accounts receive
separate account treatment for purposes of monitoring compliance with
the proposed regulation.
---------------------------------------------------------------------------

\171\ See 17 CFR 1.12(n)(3).
---------------------------------------------------------------------------

In its comment letter, the JAC stated that a complete and accurate
listing of separate accounts is critical to ensure that the
Commission's risk mitigating requirements can be effectively carried
out by an FCM, monitored by self-regulatory organizations (SROs) and
the Commission for compliance with such requirements, and monitored by
DCOs for customer gross margin reporting under proposed regulation
Sec. 39.13(g)(8)(i), and to assist DCOs and/or bankruptcy trustees in
porting accounts in the event of an FCM's

[[Page 7900]]

insolvency.\172\ The JAC asserted that, currently, when such listing
has been requested, certain FCMs offering separate account treatment
under the no-action position of CFTC Letter No. 19-17 include all of
the FCM's accounts or potential accounts on such listing rather than
only those accounts ``currently subject to separate account treatment
(i.e., beneficial owners that maintain more than one account at the FCM
which are being treated separately).'' \173\ The JAC recommended that
the Commission require only accounts currently receiving separate
account treatment to be included on such listing to ensure proper focus
and attention to the additional risks posed by separate account
treatment, effective monitoring of reporting of separate accounts, and
proper and efficient porting of separate accounts.\174\ The JAC also
recommended that the Commission require separate accounts to be clearly
identified as such in the FCM's books and records, including on the
separate account customer's statements to assist in ensuring a current,
accurate, and complete listing of accounts receiving separate
treatment.\175\
---------------------------------------------------------------------------

\172\ JAC Comment Letter.
\173\ Id.
\174\ Id.
\175\ Id.
---------------------------------------------------------------------------

The Commission notes that the recordkeeping requirement in
regulation Sec. 1.44(d)(1), described above, is substantially similar
to the corresponding condition in CFTC Letter No. 19-17 that an FCM
maintain a list of all separate accounts receiving separate account
treatment, indicating the beneficial owner and account numbers of such
accounts. For the avoidance of doubt, the Commission also believes that
the recordkeeping requirement in regulation Sec. 1.44(d)(1) as
proposed is consistent with the JAC's comment. It requires an FCM that
elects to treat separate accounts of a customer as accounts of separate
entities for purposes of regulation Sec. 1.44(b) to: (i) include the
customer on a list of separate account customers maintained in its
books and records; (ii) include on the list the identity of each
separate account customer; (iii) include on the list the identity of
each separate account of such customer; and (iv) keep the list current.
The definition of ``separate account customer'' in regulation Sec.
1.44(a) is ``a customer for which the [FCM] has made the election set
forth in [regulation Sec. 1.44(d)].'' The FCM would thus be required
to subject the customers on that list, as separate account customers,
to the requirements of regulation Sec. 1.44 for separate account
treatment, including regulation Sec. 1.44's one business day margin
call standard.
In its comment letter, ICE opined that it would be appropriate for
the Commission under proposed regulation Sec. 1.44(d) to require an
FCM to provide notice to DCOs of which it is a clearing member of
accounts that are subject to separate account treatment, so that the
DCO can comply with its obligations with respect to the margining of
such accounts under regulation Sec. 39.13(g).\176\
---------------------------------------------------------------------------

\176\ ICE Comment Letter.
---------------------------------------------------------------------------

The Commission designed the Second Proposal to codify the terms of
the no-action position in CFTC Letter No. 19-17 in a manner directly
applicable to FCMs and not through the instrumentation of DCO rules.
The Commission notes that under the conditions of CFTC Letter No. 19-
17, an FCM shall, on a one-time basis, provide notification to its DSRO
if it will apply separate account treatment a provided for in the no-
action position to any separate accounts. No such notification to a DCO
was a condition of the no-action position and, because the Commission
is modifying part 1 to apply a Margin Adequacy Requirement and
requirements for separate account treatment directly to FCMs, the
Commission views a requirement, imposed by the Commission, for an FCM
to provide to a DCO of which it is a clearing member the one-time
notification of commencement of separate account treatment as outside
the scope of this rulemaking. The Commission further notes that a DCO
has the discretion to put in place additional rules regarding
information its clearing members must provide, and could choose to
independently promulgate a requirement under DCO rules to provide
notification to such DCO the first time an FCM begins separate account
treatment for a customer.\177\ Regulation Sec. 39.13(g)(8)(iii), as
amended by this final rulemaking, requires a DCO to have rules
requiring that its clearing members do not withdraw funds from their
accounts in a manner that would lead to or exacerbate an undermargining
scenario, except as provided for in regulation Sec. 1.44, and DCOs
have discretion in how they choose to monitor for and enforce that
requirement.
---------------------------------------------------------------------------

\177\ See, e.g., ICE Clear Credit Rule 406(f) (``Each
Participant shall provide such reports to ICE Clear Credit with
respect to Non-Participant Parties and their related Client Related
Positions and Non-Participant Collateral . . . upon request of ICE
Clear Credit and upon such other basis, if any, as is provided in
the ICE Clear Credit Procedures.'').
---------------------------------------------------------------------------

FIA requested that the Commission clarify that any clearing FCM
that has already provided the notice required by proposed regulation
Sec. 1.44(d)(2) to its DSRO in compliance with the conditions of CFTC
Letter No. 19-17 shall be deemed to have complied with the requirement
of proposed regulation Sec. 1.44(d)(2) that an FCM provide
notification to its DSRO of the first time the FCM includes a customer
on its list of separate account customers.\178\
---------------------------------------------------------------------------

\178\ FIA Comment Letter.
---------------------------------------------------------------------------

As discussed above, in addition to requiring an FCM to maintain a
list of all separate accounts (indicating the beneficial owner and
account numbers) receiving separate account treatment, CFTC Letter No.
19-17 requires as a condition to separate account treatment that an FCM
shall, on a one-time basis, provide notification to its DSRO if it will
apply separate account treatment to any separate accounts. As proposed,
regulation Sec. 1.44(d)(2) adds to this requirement that such
notification shall be provided in accordance with the following
conditions: (i) the first time that the FCM includes a customer on the
list of separate account customers; (ii) within one business day; (iii)
to the Commission (in addition to the DSRO); and (iv) in accordance
with the process specified in regulation Sec. 1.12(n)(3). With respect
to the one-time notification that the FCM is required to provide to its
DSRO, the Commission recognizes that the requirements of regulation
Sec. 1.44(d)(2) are, in the main, substantially the same as those in
the corresponding condition of CFTC Letter No. 19-17. Notwithstanding
the timing and manner requirements of regulation Sec. 1.44(d)(2) as
proposed, recognizing that FCMs have successfully applied separate
account treatment under the conditions of CFTC Letter No. 19-17 for
over five years, the Commission confirms that a clearing FCM that has
already provided to its DSRO the one-time notification of commencement
of separate account treatment pursuant to the no-action conditions of
CFTC Letter No. 19-17 shall be deemed to have complied with the
analogous requirement of regulation Sec. 1.44(d)(2).
Having considered comments received with respect to proposed
regulation Sec. 1.44(d), the Commission is adopting regulation Sec.
1.44(d) as proposed.

H. Regulation Sec. 1.44(e)

As proposed, regulation Sec. 1.44(e) enumerates events that would
be inconsistent with the ordinary course of business, as that term is
defined in regulation Sec. 1.44(a), and sets forth

[[Page 7901]]

requirements related to the cessation and resumption of permitting
disbursements on a separate account basis upon, respectively, the
occurrence and cure of certain non-ordinary course of business events.
Each of these events would raise important concerns about the financial
resiliency of the FCM or one or more of its separate account
customers.\179\ As discussed above with respect to regulation Sec.
1.44(a), the list of events in regulation Sec. 1.44(e) will be the
exclusive set of events that are inconsistent with the ordinary course
of business for purposes of regulation Sec. 1.44.
---------------------------------------------------------------------------

\179\ For example, while the bankruptcy of an FCM or a separate
account customer would have direct effects, the bankruptcy of an
FCM's or separate account customer's parent company would also
portend financial challenges for, respectively, the FCM or separate
account customer (e.g., if the parent company decided to liquidate
its subsidiaries in bankruptcy). Experience in the bankruptcies of,
e.g., Refco and Lehman, demonstrates that when one member of an
affiliate financial company structure files for bankruptcy, other
affiliates soon follow.
---------------------------------------------------------------------------

These events are divided into two categories: (i) events that
concern the separate accounts of a particular separate account
customer, the occurrence of any one of which would require the FCM to
cease permitting disbursements on a separate account basis with respect
to all accounts of that customer; and (ii) events that concern the
financial status of the FCM itself, and the occurrence of any one of
which would require the FCM to cease permitting disbursements on a
separate account basis with respect to all of its separate account
customers.
Significantly, while a separate account customer is outside the
ordinary course of business as defined in regulation Sec. 1.44(a),
only the privilege of permitting disbursements on a separate account
basis, pursuant to regulation Sec. 1.44(c), is terminated (or
suspended). So long as a customer remains a separate account customer,
whether or not within the ordinary course of business, then the FCM is
required to comply with the requirements of regulation Sec. 1.44,
including with respect to the relevant provisions addressed in
regulations Sec. Sec. 1.17, 1.20, 1.22, 1.23, 1.32, 1.55, 1.58, 1.73,
22.2, 30.7, and 39.13(g)(8)(i) regarding that customer and all of that
customer's separate accounts. Similarly, if it is the FCM that is
outside the ordinary course of business, it is only the privilege of
permitting disbursements on a separate account basis with respect to
any of the FCM's separate account customers and their separate accounts
that is terminated (or suspended). The FCM continues to be required to
comply with the requirements in regulation Sec. 1.44, including with
respect to the relevant provisions described above, with respect to its
separate account customers and their separate accounts. Thus, for the
avoidance of doubt, a separate account customer that is outside the
ordinary course of business is still a separate account customer.
The first category of events is as follows:
<bullet> (1)(i) The separate account customer, including any
separate account of such customer, fails to deposit initial margin or
maintain maintenance margin or make payment of variation margin or
option premium as specified in proposed regulation Sec. 1.44(f).\180\
---------------------------------------------------------------------------

\180\ I.e., the one business day margin call requirement.
---------------------------------------------------------------------------

<bullet> (ii) The occurrence and declaration by the FCM of an event
of default as defined in the account documentation executed between the
FCM and the separate account customer.
<bullet> (iii) A good faith determination by the FCM's CCO, one of
its senior risk managers, or other senior manager, following such FCM's
own internal escalation procedures, that the separate account customer
is in financial distress, or there is significant and bona fide risk
that the separate account customer will be unable promptly to perform
its financial obligations to the FCM, whether due to operational
reasons or otherwise.
<bullet> (iv) The insolvency or bankruptcy of the separate account
customer or a parent company of such customer.
<bullet> (v) The FCM receives notification that a board of trade, a
DCO, an SRO as defined in regulation Sec. 1.3 or section 3(a)(26) of
the Securities Exchange Act of 1934, the Commission, or another
regulator \181\ with jurisdiction over the separate account customer,
has initiated an action \182\ with respect to such customer based on an
allegation that the customer is in financial distress.
---------------------------------------------------------------------------

\181\ E.g., the SEC or a foreign regulator.
\182\ In this context, the term ``initiate an action'' is
intended to include the filing of a complaint or a petition to take
action against an entity, or an analogous process. The initiation or
conduct of an investigation would not be sufficient to constitute
``initiating an action'' in this context.
---------------------------------------------------------------------------

<bullet> (vi) The FCM is directed to cease permitting disbursements
on a separate account basis, with respect to the separate account
customer, by a board of trade, a DCO, an SRO, the Commission, or
another regulator with jurisdiction over the FCM, pursuant to, as
applicable, board of trade, DCO, or SRO rules, government regulations,
or law.
The second set of events is as follows:
<bullet> (2)(i) The FCM is notified by a board of trade, a DCO, an
SRO, the Commission, or another regulator with jurisdiction over the
FCM, that the board of trade, the DCO, the SRO, the Commission, or
other regulator, as applicable, believes the FCM is in financial or
other distress.
<bullet> (ii) The FCM is under financial or other distress as
determined in good faith by its CCO, senior risk managers, or other
senior management.
<bullet> (iii) The insolvency or bankruptcy of the FCM or a parent
company of the FCM.
As proposed, regulation Sec. 1.44(e)(3) provides that the FCM must
provide notice to its DSRO and to the Commission of the occurrence of
any of the events terminating (or suspending) disbursements on a
separate account basis for one or more separate account customers. The
notice must be provided to the DSRO and the Commission in accordance
with the process specified in regulation Sec. 1.12(n)(3). The notice
also must identify the event and, if applicable, the customer. The FCM
is required to provide such notice promptly in writing no later than
the next business day following the date on which the FCM identifies or
has been informed that the relevant event has occurred. The
notification required upon exiting the ordinary course of business is
intended to ensure that the Commission and DSROs will be apprised of
the occurrence of non-ordinary course of business events, so that they
may actively communicate with and monitor an FCM with respect to the
resolution of such events (e.g., where an FCM attempts to establish
that its customer has reentered ordinary course of business
conditions).
Regulation Sec. 1.44(e)(4), as proposed, provides an avenue for an
FCM that has experienced a non-ordinary course of business event with
respect to itself or a customer to return to the ordinary course of
business and resume disbursements on a separate account basis for
itself or its customers, as may be the case. Regulation Sec.
1.44(e)(4) provides that an FCM that has ceased permitting
disbursements on a separate account basis to a separate account
customer due to the occurrence of a non-ordinary course of business
event, with respect to that specific separate account customer, or with
respect to all such customers, may resume permitting disbursements to
such customer(s) on a separate account basis if such FCM reasonably
believes, based on new information, that those circumstances triggering
the event have been cured, and such FCM documents in writing the
factual basis and rationale for its

[[Page 7902]]

conclusion. However, regulation Sec. 1.44(e)(4) also provides that, if
the circumstances triggering cessation of such treatment were an action
or direction by a board of trade, a DCO, an SRO, the Commission, or
another regulator with jurisdiction over the separate account customer
or the FCM, then cure of those circumstances would require the
withdrawal or other appropriate termination of such action or direction
by that entity.
That permitting disbursements on a separate account basis should be
discontinued (or at least suspended) under certain circumstances is
reflected in CME's recommendation, preceding issuance of CFTC Letter
No. 19-17, that disbursements on a separate account basis be permitted
only during the ordinary course of business. As CME explained, FCMs
should maintain the flexibility to determine that either the customer
or the FCM itself is in distress and ``pause'' disbursements until the
customer's other account can demonstrably meet the call to deposit
funds.\183\ Similarly, as CME noted, an FCM should not be purposely
releasing funds to a customer when the customer's overall account is in
deficit, as doing so may create a shortfall in segregated, secured, or
Cleared Swaps Accounts in the event the FCM becomes insolvent.\184\
---------------------------------------------------------------------------

\183\ CME Letter.
\184\ Id.
---------------------------------------------------------------------------

However, the Commission acknowledges that in some instances, an FCM
or customer may exit a state of financial, operational, or other
distress, such that resumption of separate account disbursements would
be appropriate. By explicitly providing FCMs with an avenue to resume
disbursements on a separate account basis consistent with the
resumption of the ordinary course of business, the Commission seeks to
ensure that a temporary departure from the ordinary course of business,
once remedied, does not continue to preclude an FCM from applying (and
a customer from having applied to its accounts) separate account
treatment, and to incentivize transparency between FCMs and their DSROs
and Commission staff with respect to conditions at the FCMs or
customers that could indicate operational or financial distress and,
more generally, the risk management program at the FCM.
Regulation Sec. 1.44(e) is designed to ensure that disbursements
are permitted on a separate account basis only during the routine
operation of the FCM's business relationship with its customer. Certain
events signaling financial or operational distress of the FCM or
customer are inconsistent with the normal operation of the business
relationship between the FCM and its customer. The Commission believes
that, when such events occur, and throughout the duration of their
occurrence, suspending FCMs' ability to provide disbursements on a
separate account basis with respect to the Margin Adequacy Requirement
is reasonably necessary to protect customer funds and mitigate systemic
risk, and to effectuate section 4d of the CEA.
The JAC, noting the passage of time since the Divisions issued CFTC
Letter No. 19-17, requested that the Commission provide examples of
non-enumerated events that would constitute operating outside the
ordinary course of business, so that FCMs and their customers can
better understand the circumstances in which disbursements on a
separate account basis are not permitted.
In the Second Proposal, the Commission proposed to define the
``ordinary course of business'' as the ``standard day-to-day operation
of the futures commission merchant's business relationship with its
separate account customer,'' based on the similar definition in CFTC
Letter No. 19-17 (``standard day to day operation of the FCM's business
relationship with its customer''). Although in both CFTC Letter No. 19-
17 and proposed regulation Sec. 1.44(e) the Commission set forth
events that it would consider inconsistent with the ordinary course of
business, the Commission acknowledges that the Second Proposal's
proposed definition of ``ordinary course of business'' in conjunction
with the list of events inconsistent with the ordinary course of
business in proposed regulation Sec. 1.44(e) may have resulted in
confusion regarding the scope of events that the Commission will
consider inconsistent with the ordinary course of business for purposes
of regulation Sec. 1.44(a).
As discussed above in connection with SIFMA-AMG's comment related
to the definition of ``ordinary course of business'' in regulation
Sec. 1.44(a), the Commission is modifying the proposed definition of
``ordinary course of business'' in regulation Sec. 1.44(a) to make
clear that regulation Sec. 1.44(e) contains the complete list of
events that, for purposes of regulation Sec. 1.44, would cause a
separate account customer or an FCM providing separate account
treatment to fall outside the ordinary course of business, such that
the FCM would need to cease providing disbursements on a separate
account basis for one or more customers. Therefore, only the events
specifically enumerated in regulation Sec. 1.44(e) would place a
separate a

[…truncated; see source link]

View on FederalRegister.gov →Plain-text source

Indexed from Federal Register on January 22, 2025.

This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.