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2012-1033

  • Federal Register, Volume 77 Issue 25 (Tuesday, February 7, 2012)[Federal Register Volume 77, Number 25 (Tuesday, February 7, 2012)]

    [Rules and Regulations]

    [Pages 6336-6409]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2012-1033]

    [[Page 6335]]

    Vol. 77

    Tuesday,

    No. 25

    February 7, 2012

    Part III

    Commodity Futures Trading Commission

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    17 CFR Parts 22 and 190

    Protection of Cleared Swaps Customer Contracts and Collateral;

    Conforming Amendments to the Commodity Broker Bankruptcy Provisions;

    Final Rule

    Federal Register / Vol. 77 , No. 25 / Tuesday, February 7, 2012 /

    Rules and Regulations

    [[Page 6336]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 22 and 190

    RIN Number 3038-AC99

    Protection of Cleared Swaps Customer Contracts and Collateral;

    Conforming Amendments to the Commodity Broker Bankruptcy Provisions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')

    is adopting final regulations to implement new statutory provisions

    enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (the ``Dodd-Frank Act''). Specifically, these

    regulations impose requirements on futures commission merchants

    (``FCMs'') and derivatives clearing organizations (``DCOs'') regarding

    the treatment of cleared swaps customer contracts (and related

    collateral), and make conforming amendments to bankruptcy provisions

    applicable to commodity brokers under the Commodity Exchange Act (the

    ``CEA'').

    DATES: The rules will become effective April 9, 2012. All parties must

    comply with the Part 22 rules by November 8, 2012. All parties must

    comply with the Part 190 rules by April 9, 2012. Prior to the

    compliance date for the Part 22 rules, the definition of 190.01(pp)

    (``Cleared Swap'') shall be limited to transactions where the rules or

    bylaws of a derivatives clearing organization require that such

    transactions, along with the money, securities, and other property

    margining, guaranteeing or securing such transactions, be held in a

    separate account for Cleared Swaps only.

    FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel,

    Division of Clearing and Risk (DCR), at 202-418-5092 or

    rwasserman@cftc.gov; M. Laura Astrada, Associate Chief Counsel, DCR, at

    202-418-7622 or lastrada@cftc.gov; Alicia Lewis, Special Counsel, DCR,

    at 202-418-5862 or alewis@cftc.gov; or Martin White, Assistant General

    Counsel, Office of the General Counsel, at 202-418-5129 or

    mwhite@cftc.gov, in each case, at the Commodity Futures Trading

    Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,

    DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Segregation Requirements.

    B. Overview of the Clearing Process as it Relates to the

    Segregation Requirements.

    C. Segregation Alternatives.

    D. Operation of the Segregation Models in an FCM Bankruptcy.

    E. Solicitation of Public Input.

    F. Clarification of the Application of Financial and Segregation

    Interpretation No. 10 to Cleared Swaps.

    II. The Final Rules

    III. Segregation Model for Cleared Swaps Customer Collateral

    A. Summary of the Comments.

    B. Discussion of the Comments.

    IV. Section by Section Analysis: Regulation Part 22

    A. Regulation 22.1: Definitions.

    B. Regulation 22.2--Futures Commission Merchants: Treatment of

    Cleared Swaps Customer Collateral.

    C. Regulation 22.3--Derivatives Clearing Organizations:

    Treatment of Cleared Swaps Customer Collateral.

    D. Regulation 22.4--Futures Commission Merchants and Derivatives

    Clearing Organizations: Permitted Depositories.

    E. Regulation 22.5--Futures Commission Merchants and Derivatives

    Clearing Organizations: Written Acknowledgment.

    F. Regulation 22.6--Futures Commission Merchants and Derivatives

    Clearing Organizations: Naming of Cleared Swaps Customer Accounts.

    G. Regulation 22.7--Permitted Depositories: Treatment of Cleared

    Swaps Customer Collateral.

    H. Regulation 22.8--Situs of Cleared Swaps Customer Accounts.

    I. Regulation 22.9--Denomination of Cleared Swaps Customer

    Collateral and Location of Depositories.

    J. Regulation 22.10--Application of other Regulatory Provisions.

    K. Regulation 22.11--Information to be Provided Regarding

    Customers and Their Cleared Swaps.

    L. Regulation 22.12--Information to be Maintained Regarding

    Cleared Swaps Customer Collateral.

    M. Regulation 22.13--Additions to Cleared Swaps Customer

    Collateral.

    N. Regulation 22.14--Futures Commission Merchant Failure to Meet

    a Customer Margin Call in Full.

    O. Regulation 22.15--Treatment of Cleared Swaps Customer

    Collateral on an Individual Basis.

    P. Regulation 22.16--Disclosures to Customers.

    V. Section by Section Analysis: Amendments to Regulation Part 190

    A. Background.

    B. Definitions.

    C. Amendments to Regulation 190.02--Operation of the Debtor's

    Estate Subsequent to the Filing Date and Prior to the Primary

    Liquidation Date.

    D. Amendments to Regulation 190.03--Operation of the Debtor's

    Estate Subsequent to the Primary Liquidation Date.

    E. Amendments to Regulation 190.04--Operation of the Debtor's

    Estate--General.

    F. Amendments to Regulation 190.05--Making and Taking Delivery

    on Commodity Contracts.

    G. Amendments to Regulation 190.06--Transfers.

    H. Amendments to Regulation 190.07--Calculation of Allowed Net

    Equity.

    I. Amendments to Regulation 190.09--Member Property.

    J. Amendments to Regulation 190.10--General.

    K. Amendments to Appendix A to Part 190--Bankruptcy Forms,

    Bankruptcy.

    L. Amendments to Appendix B to Part 190--Special Bankruptcy

    Distributions.

    VI. Effective Date

    VII. Consideration of Costs and Benefits

    A. Introduction.

    B. Benefits and Costs of Complete Legal Segregation Model

    Relative to Futures Model.

    C. Conclusion.

    VIII. Related Matters.

    A. Paperwork Reduction Act.

    B. Regulatory Flexibility Act.

    IX. Text of Proposed Rules

    I. Background

    A. Segregation Requirements

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

    Title VII of the Dodd-Frank Act \2\ amended the CEA \3\ to establish a

    comprehensive new regulatory framework for swaps and certain security-

    based swaps. The legislation was enacted to reduce risk, increase

    transparency, and promote market integrity within the financial system

    by, among other things: (1) Providing for the registration and

    comprehensive regulation of swap dealers and major swap participants;

    \4\ (2) imposing mandatory clearing and trade execution requirements on

    clearable swap contracts; (3) creating rigorous recordkeeping and real-

    time reporting regimes; and (4) enhancing the Commission's rulemaking

    and enforcement authorities with respect to, among others, all

    registered entities and intermediaries subject to the Commission's

    oversight.

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    \1\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376

    (2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.

    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \3\ 7 U.S.C. 1 et seq.

    \4\ In this release, the terms ``swap dealer'' and ``major swap

    participant'' shall have the meanings set forth in section 721(a) of

    the Dodd-Frank Act, which added sections 1a(49) and (33) of the CEA.

    However, as directed by section 721(c) of the Dodd-Frank Act, the

    Commission is in the process of promulgating rules to further

    define, among other terms, ``swap dealer'' and ``major swap

    participant.'' See 75 FR 80173, Dec. 21, 2010.

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    Section 724 of the Dodd-Frank Act prescribes the manner in which

    Cleared

    [[Page 6337]]

    Swaps (and related collateral) \5\ must be treated prior to and after

    bankruptcy. Section 724(a) of the Dodd-Frank Act amends section 4d of

    the CEA to add a new paragraph (f), which imposes the following

    requirements on an FCM, as well as any depository thereof (including,

    without limitation, a DCO):

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    \5\ Regulation 22.1 defines ``Cleared Swap'' and ``Cleared Swaps

    Customer Collateral.''

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    1. The FCM must treat and deal with all collateral (including

    accruals thereon) deposited by a customer \6\ to margin its Cleared

    Swaps as belonging to such customer;

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    \6\ Regulation 22.1 defines ``Cleared Swaps Customer.''

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    2. The FCM must separately account for and may not commingle such

    collateral with its own property and may not, with certain exceptions,

    use such collateral to margin the Cleared Swaps of any person other

    than the customer depositing such collateral;

    3. A DCO may not hold or dispose of the collateral that an FCM

    receives from a customer to margin Cleared Swaps in any manner that

    would indicate that such collateral belonged to the FCM or any person

    other than the customer; and

    4. The FCM and the DCO may only invest such collateral in

    enumerated investments.

    In other words, the FCM and the DCO (i) must hold such customer

    collateral in an account (or location) that is separate from the

    property belonging to the FCM or DCO, and (ii) must not use the

    collateral of one customer to (A) cover the obligations of another

    customer or (B) the obligations of the FCM or DCO. These basic

    requirements that Cleared Swaps Customer Collateral be treated as the

    property of customers and maintained in segregated accounts (or

    locations) are imposed by the statute and have the force of law

    regardless of the Commission's particular implementing regulations.

    Moreover, by the terms of the statute, these requirements would apply

    even if the Commission promulgated no implementing regulations.

    Section 724(b) of the Dodd-Frank Act governs bankruptcy treatment

    of Cleared Swaps by clarifying that Cleared Swaps are ``commodity

    contracts'' within the meaning of section 761(4)(F) of the Bankruptcy

    Code.\7\ Therefore, in the event of an FCM or DCO insolvency, Cleared

    Swaps Customers may invoke the protections of Subchapter IV of Chapter

    7 of the Bankruptcy Code (``Subchapter IV''). Such protections include:

    (i) protected transfers of Cleared Swaps and related collateral; \8\

    and (ii) if Cleared Swaps are subject to liquidation, preferential

    distribution of remaining collateral.\9\ However, section 766(h) of the

    Bankruptcy Code (``Section 766(h)'') subjects customers to mutualized

    risk by requiring that customer property be distributed ``ratably to

    customers on the basis and to the extent of such customers' allowed net

    equity claims.'' This requirement, in turn, limits the Commission's

    flexibility in designing a model for the protection of customer

    collateral.

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    \7\ 11 U.S.C. 761(4)(F).

    \8\ See, e.g., 11 U.S.C. 764.

    \9\ See, e.g., 11 U.S.C. 766(h) and (i).

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    B. Overview of the Clearing Process as It Relates to the Segregation

    Requirements

    1. Central Counterparties/Derivatives Clearing Organizations

    One of the primary objectives of the Dodd-Frank Act was to promote

    the central clearing of swaps and to establish the regulatory

    infrastructure for the clearing of swaps.\10\ Clearing is the process

    by which transactions in derivatives are processed, guaranteed, and

    settled by a central counterparty, also known as a DCO. In accordance

    with this overall Congressional purpose, section 724 of the Dodd-Frank

    Act amends the CEA to provide the statutory foundation for the

    protection of Cleared Swaps Customer Collateral.

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    \10\ See supra n. 1; S. Rep. No. 111-176, at 33 (2010) (``[w]ith

    appropriate collateral and margin requirements, a central clearing

    organization can substantially reduce counterparty risk and provide

    an organized mechanism for clearing transactions''); Process for

    Review of Swaps for Mandatory Clearing, 76 FR 44464, July 26, 2011

    (final rule); Derivatives Clearing Organizations General Provisions

    and Core Principles, 76 FR 69334, Nov. 8, 2011 (final rule).

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    A DCO has members (``Clearing Members'') who clear derivatives

    transactions (e.g., swaps) through the DCO and who are subject to the

    DCO's rules. Clearing Members may clear transactions on their own

    behalf (i.e., ``proprietary transactions'') or on behalf of customers

    (i.e., ``customer transactions''). Clearing members that clear swaps

    for customers must be registered as futures commission merchants

    (``FCMs'').\11\

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    \11\ Section 4d(f)(1) of the CEA, 7 U.S.C. 6d(f)(1).

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    The term ``central counterparty'' means, conceptually, that the DCO

    becomes the seller to every buyer, and the buyer to every seller. More

    specifically, the DCO novates swap transactions initially entered into

    between various market participants, such as swaps users, dealers, or

    end users, and cleared either directly (if the market participant is

    itself a Clearing Member) or indirectly (through an FCM that is a

    Clearing Member) . The contractual obligations between the original

    parties (``A'' and ``B'') \12\ are replaced by sets of equivalent

    obligations: between the Clearing Member FCMs acting for the original

    parties and the DCO and between the Clearing Member FCMs and their

    individual customers. Thus, if the original swap agreement would

    require a certain payment from A to B, as a result of the clearing

    process this obligation becomes (1) a duty by A's clearing FCM to pay

    the DCO, (2) a corresponding claim by A's FCM to recompense from A, (3)

    a duty by the DCO to pay B's clearing FCM, and (4) a corresponding duty

    by B's FCM to pay B.

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    \12\ For purposes of this example, neither A nor B is a Clearing

    Member.

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    In economic effect, the DCO serves as a guarantor that every

    Clearing Member party to a cleared swap receives performance according

    to the terms of the swap, while the clearing FCM serves as a guarantor

    of its customers' swaps obligations to the DCO.

    2. Variation

    To avoid the accumulation of large obligations, the DCO conducts a

    variation payment and collection cycle at least once a day, and in the

    case of many DCOs, twice a day. The DCO will first calculate the gain

    (and corresponding loss) on each contract through a process known as

    ``marking to market,'' using reported market prices where available, or

    other means (such as surveys of Clearing Members). The DCO will then

    aggregate and net the gains and losses for each Clearing Member

    (separately for proprietary and customer accounts), collect from those

    Clearing Members with net losses, and pay those Clearing Members with

    net gains. This process is highly time sensitive: The Clearing Member

    typically has only one or a few hours between the demand for payment

    and the time payment is due. Similarly, the Clearing Member FCMs will

    debit the accounts of those customers who have losses on their

    transactions, and credit the accounts of those customers who have

    gained.

    3. Margin (Collateral)

    To secure the prompt payment of variation obligations, the DCO will

    require each Clearing Member to post collateral (often referred to as

    ``margin'') for the transactions it clears (separately for customer

    positions and proprietary positions). If the Clearing Member does not

    promptly make a variation payment to the DCO--referred to as a

    default--the collateral may immediately be liquidated and applied to

    the obligation. Margin may only be used to meet the

    [[Page 6338]]

    default of the Clearing Member posting that margin. While proprietary

    margin may be used to meet obligations in either the Clearing Member's

    proprietary account or customer account, the reverse is not true: A

    Clearing Member's customer margin may not be used to meet a default in

    the Clearing Member's proprietary account.

    Similarly, FCMs will--indeed, are required to--collect collateral

    from each of their customers, based on each customer's portfolio of

    positions, to secure the prompt payment of the customer's variation

    obligations.\13\ If a customer fails to fulfill an obligation to the

    FCM arising out of a swap agreement the FCM clears for the customer,

    the FCM may use some or all of the value of the collateral that

    customer has posted to meet that obligation--that is the purpose of the

    collateral.

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    \13\ See regulation 39.13(g)(8)(ii) (stating that ``[a]

    derivatives clearing organization shall require its clearing members

    to collect customer initial margin, as defined in Sec. 1.3 of this

    chapter, from their customers, for nonhedge positions, at a level

    that is greater than 100 percent of the derivatives clearing

    organization's initial margin requirements with respect to each

    product and swap portfolio.''). 76 FR at 69439.

    The purpose of this rulemaking is to protect Cleared Swaps

    Customer Collateral in the event that an FCM defaults to a DCO due

    to ``Fellow-Customer Risk'' (as such term is defined in section

    I(B)(6) herein). However, as section III(B) explores in greater

    detail, the segregation model selected in this rulemaking provides

    limited protection from operational and investment risks.

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    The DCO will generally set minimum collateral levels for each type

    of swap, and will prescribe a ``margin methodology'' to determine the

    minimum margin level for portfolios of swaps. The DCO's margin

    methodology will be designed to estimate the amount of loss a portfolio

    of swap positions may incur, calculated at a statistical confidence

    level no less than 99%, over a holding period generally between one and

    ten days, depending on the time it is estimated to take to liquidate

    the swaps in the portfolio.\14\ The FCM will, in turn, use the same or

    similar methodology in determining the minimum level of collateral it

    must collect from each customer.\15\

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    \14\ See generally, 76 FR 69334. See specifically regulation

    39.13(g)(2)(ii) (setting forth a one-day minimum liquidation time

    for agricultural, energy, and metals swaps, and a five-day minimum

    liquidation time for all other swaps). 76 FR 69438.

    \15\ The FCM is required to collect a higher level of collateral

    from its customers than that prescribed for Clearing Members (see

    id.) and may, in its discretion, collect a yet higher level. See

    regulation 22.13(a)(1).

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    4. Default Resources

    As noted above, the margin collateral collected by a DCO is

    designed to cover most (e.g., 99%), but not all, potential losses

    incurred by a Clearing Member. DCOs cover the ``tail risk'' (i.e., the

    risk that a Clearing Member will incur, and default on, a loss in

    excess of the margin collected) by means of what is sometimes referred

    to as a default resources package, or ``waterfall.'' Elements of the

    waterfall may include a contribution of a specified amount of the DCO's

    own capital, pre-funded contributions from Clearing Members (a

    ``guaranty fund''),\16\ or (to a limited extent), a power by the DCO to

    assess additional contributions from Clearing Members. Unlike margin, a

    Clearing Member's contribution to the guaranty fund will generally be

    usable to meet the default of another Clearing Member. In other words,

    the guaranty fund is ``mutualized.'' Elements of the waterfall are

    applied in an order pre-determined by the DCO's rules. Such rules will

    often apply the guaranty fund contribution of the defaulter before the

    DCO's own capital, and the remainder of the guaranty fund (i.e., the

    guaranty fund contributions of the non-defaulting Clearing Members)

    thereafter.

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    \16\ See also infra at n. 250.

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    Though seemingly complex, centralized clearing has important

    advantages in terms of transparency, risk management, netting out of

    countervailing obligations, and reduced exposure of market participants

    to each other's credit risk (by effectively substituting the DCO's

    credit risk).

    5. Customer Accounts

    Generally, a clearing FCM will have two different types of Cleared

    Swaps Customer Accounts in connection with collateral provided to it by

    Cleared Swaps Customers. One account is maintained (generally at a

    bank) by the FCM on behalf of its Cleared Swaps Customers (the ``FCM

    Customer Account''). The FCM Customer Account holds assets provided by

    customers, or other assets of equivalent value, that are not currently

    posted with the DCO to support swaps positions cleared by the FCM on

    behalf of its Cleared Swaps Customers. The other account is maintained

    by the DCO for the FCM on behalf of the FCM's Cleared Swaps Customers

    (the ``DCO Customer Account''). The DCO Customer Account holds customer

    assets, or assets of equivalent value, that the FCM has posted to the

    DCO as collateral for swaps positions that have been established and

    cleared by the FCM for its Cleared Swaps Customers.

    The collateral posted by each Cleared Swaps Customer is, however,

    potentially exposed to risks that do not arise out of the obligations

    that a Cleared Swaps Customer has directly incurred by assuming his or

    her swaps position. \17\ The most important impact of such risks would

    occur in the case of an insolvency on the part of the FCM through which

    the Cleared Swaps Customer clears. As discussed in more detail below,

    the new CEA section 4d(f), and the Commission's implementing

    regulations, are designed to provide protection for Cleared Swaps

    Customer Collateral against certain risks that may arise during an

    insolvency on the part of the FCM through which the Cleared Swaps

    Customer clears.

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    \17\ Examples of other risks include the possibility of misuse

    or misallocation of a Cleared Swaps Customer's assets by a dishonest

    or negligent FCM.

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    6. Fellow-Customer Risk

    ``Fellow-Customer Risk'' is the risk that a DCO would need to

    access the collateral of non-defaulting Cleared Swaps Customers to cure

    an FCM default. Fellow-Customer Risk arises in circumstances in which a

    Cleared Swaps Customer (the ``defaulting customer'') of a clearing FCM

    suffers a (significant) loss in connection with a cleared swap.\18\ The

    loss will result in a call by the DCO for a variation payment from the

    clearing FCM that carries that Cleared Swaps Customer's Cleared

    Swaps.\19\ The clearing FCM may demand expedited payment from the

    defaulting Cleared Swaps Customer, but is in any event directly

    obligated promptly to meet the payment obligation to the DCO.

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    \18\ See also supra n. 13.

    \19\ As noted above, the amount the DCO will call for or pay to

    the FCM in respect of its Cleared Swaps Customers is the net of the

    gains and losses computed on a customer-by-customer basis.

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

    If the loss is great enough, it may exceed the sum of the FCM's

    available liquid assets, the swaps collateral posted by the Cleared

    Swaps Customer, and any additional payments immediately available from

    the Cleared Swaps Customer. In this situation, sometimes called a

    ``double default,'' the defaulting Cleared Swaps Customer will have

    defaulted on its obligation to the clearing FCM which, in turn, will

    default on its obligation to the DCO. In such circumstances, the FCM

    will likely have to file for protection in bankruptcy. Meanwhile, the

    defaulting Cleared Swaps Customer's loss will translate to a gain by

    one or more other market participants. Notwithstanding the default by

    the clearing FCM, the DCO, in its capacity as central counterparty, is

    required to pay out these gains. The DCO will thus be faced with a

    potentially significant loss.

    A potential resource for the DCO to apply to this loss in a double

    default

    [[Page 6339]]

    situation is the collateral held in the Cleared Swaps Customer Account

    maintained by the DCO for the defaulting FCM on behalf of the FCM's

    Cleared Swaps Customers. Under the current rules applicable to futures

    clearing, a DCO is permitted to use all of the collateral in the

    Clearing Member's customer account to meet a loss in that account,

    without regard to which customer(s) in fact supplied that collateral.

    Thus, in this case, the non-defaulting customers of the defaulting FCM

    clearing member would be exposed to loss due to ``Fellow-Customer

    Risk.''

    C. Segregation Alternatives

    In implementing new CEA section 4d(f), the Commission considered

    five alternative segregation models for Cleared Swaps Customer

    Collateral in the notice of proposed rulemaking issue by the Commission

    on June 9, 2011 (the ``NPRM'').\20\

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    \20\ See Notice of Proposed Rulemaking on the Protection of

    Cleared Swaps Customer Contracts and Collateral; Conforming

    Amendments to the Commodity Broker Bankruptcy Provisions, 76 FR

    33818, 33822, June 9, 2011.

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    1. Legal Segregation With Operational Commingling Model

    The first alternative explored by the Commission was legal

    segregation with operational commingling (the ``LSOC Model'' or

    ``Complete Legal Segregation Model''). Under the LSOC Model, each FCM

    and DCO would enter (or ``segregate''), in its books and records, the

    Cleared Swaps of each individual customer and relevant collateral. Each

    FCM and DCO would ensure that such entries are separate from entries

    indicating (i) FCM or DCO obligations, or (ii) the obligations of non-

    cleared swaps customers. Operationally, however, each FCM and DCO would

    be permitted to hold (or ``commingle'') the relevant collateral in one

    account. Each FCM and DCO would ensure that such account is separate

    from any account holding FCM or DCO property or holding property

    belonging to non-cleared swaps customers.

    Prior to the simultaneous default of an FCM and one of its Cleared

    Swaps Customers (as discussed above, a ``double default''), the FCM

    would ensure that the DCO does not use the collateral of one Cleared

    Swaps Customer to support the obligations of another customer by making

    certain that the value of the Cleared Swaps Customer Collateral that

    the DCO holds equals or exceeds the value of all Cleared Swaps Customer

    Collateral that it has received to secure the contracts of the FCM's

    customers. Following a double default, the DCO would be permitted to

    access the collateral of the defaulting Cleared Swaps Customers, but

    not the collateral of the non-defaulting Cleared Swaps Customers. Thus

    while, even under the LSOC Model, Section 766(h) requires the pro rata

    distribution of customer property, the collateral attributable to the

    non-defaulting Cleared Swaps Customers would be available to be

    distributed.

    2. Legal Segregation With Recourse Model

    Second, the Commission contemplated the Legal Segregation with

    Recourse Model (together with the LSOC Model, the ``Legal Segregation

    Models''). As with the LSOC Model, under the Legal Segregation with

    Recourse Model, each FCM and DCO would segregate the Cleared Swaps of

    each individual customer and relevant collateral in its books and

    records. However, each FCM and DCO would be permitted to commingle the

    relevant collateral in one account, provided that such account is

    separate from any proprietary accounts or accounts property belonging

    to non-cleared swaps customers.

    Again, as with the LSOC Model, prior to a double default, the FCM

    would ensure that the DCO does not use the collateral of one Cleared

    Swaps Customer to support the obligations of another customer by making

    certain that the value of the Cleared Swaps Collateral that the DCO

    holds equals or exceeds the value of all Cleared Swaps Collateral that

    it has received to secure the contracts of the FCM's customers.

    However, unlike the LSOC Model, following a double default, the Legal

    Segregation with Recourse Model would not prohibit a DCO from accessing

    the collateral of the non-defaulting Cleared Swaps Customers, after the

    DCO applies its own capital to cure the default, as well as the

    guaranty fund contributions of its non-defaulting FCM members.

    3. Physical Segregation Model

    The Commission also explored the possibility of full physical

    segregation (the ``Physical Segregation Model'') for Cleared Swaps

    Customer Collateral. The Physical Segregation Model primarily differs

    from the Legal Segregation Models operationally. In the ordinary course

    of business (i.e., prior to a double default), as with the Legal

    Segregation Models, each FCM and DCO would enter (or ``segregate''), in

    its books and records, the Cleared Swaps of each individual customer

    and relevant collateral. However, unlike the Legal Segregation Models,

    each FCM and DCO would maintain separate individual accounts for the

    relevant collateral. Hence, the FCM would ensure that the DCO does not

    use the collateral of one Cleared Swaps Customer to support the

    obligations of another customer by making certain that the DCO does not

    mistakenly transfer collateral in (i) the account belonging to the

    former to (ii) the account belonging to the latter.

    Following a double default, the Physical Segregation Model would

    lead to the same result as the Complete Legal Segregation Model.

    Specifically, the DCO would be permitted to access the collateral of

    the defaulting Cleared Swaps Customers, but not the collateral of the

    non-defaulting customers.

    As discussed above, one important limitation on the effectiveness

    of the Physical Segregation Model is section 766(h) of the Bankruptcy

    Code, which requires that customer property be distributed ratably.

    Thus, if because of Physical Segregation, certain Cleared Swaps

    Customer Collateral was better protected than the property of other

    Cleared Swaps Customers, it would not be permissible to pay Cleared

    Swaps Customers in the first group a higher proportion (i.e., a higher

    cents-on-the-dollar distribution) of their net equity claims than

    Cleared Swaps Customers in the second group. Rather, Cleared Swaps

    Customers in both groups would receive the same proportion of their

    allowed net equity claims. In other words, in spite of incurring

    greater cost under the Physical Segregation Model, a Cleared Swaps

    Customer would essentially receive the same level of protection for its

    Cleared Swaps Customer Collateral under the Physical Segregation Model

    as it would under the LSOC Model.

    4. Futures Model

    The Commission also considered replicating the segregation

    requirement currently applicable to futures (the ``Futures Model'').

    Under this model, DCOs treat each FCM's customer account on an omnibus

    basis, that is, as belonging to an undifferentiated group of customers.

    Prior to a double default, the Futures Model shares certain

    similarities with the Legal Segregation Models. Specifically, each FCM

    would enter (or ``segregate''), in its books and records, the Cleared

    Swaps of each individual customer and relevant collateral. Each DCO,

    however, would recognize, in its books and records, the Cleared Swaps

    that an FCM intermediates on a collective (or ``omnibus'') basis. Each

    FCM and DCO would be permitted to hold (or ``commingle'') all Cleared

    Swaps Customer Collateral in one account.

    [[Page 6340]]

    Following a double default, the Futures Model shares certain

    similarities with the Legal Segregation with Recourse Model.

    Specifically, the Futures Model would not prohibit a DCO from accessing

    the collateral of the non-defaulting Cleared Swaps Customers. However,

    unlike the Legal Segregation with Recourse Model, under the Futures

    Model the DCO would be permitted to access such collateral before

    applying its own capital or the guaranty fund contributions of non-

    defaulting FCM members.\21\

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

    \21\ For a more detailed discussion regarding the operation of

    the segregation models in an FCM bankruptcy, see section I.D.

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

    5. Optionality

    Finally, the Commission explored permitting a DCO to choose between

    (i) the Legal Segregation Models (whether Complete or with Recourse),

    (ii) the Physical Segregation Model, and (iii) the Futures Model,

    rather than mandating any particular alternative.

    D. Operation of the Segregation Models in an FCM Bankruptcy

    When discussing the issues surrounding an FCM bankruptcy under the

    Bankruptcy Code, analytically there are several scenarios to consider:

    (1) The bankruptcy is unrelated to the loss of customer funds, and

    there is no such loss; (2) The bankruptcy involves shortfalls in

    customer funds due to operational risks; (3) The bankruptcy involves

    losses due to customer risk (i.e., a customer incurs a loss in excess

    of the FCM's financial ability to cover); or (4) the bankruptcy

    involves shortfalls in customer funds due to operational risk and

    losses due to customer risk.

    1. Bankruptcy Unrelated to Loss of Customer Funds

    An FCM bankruptcy that is unrelated to the loss of customer funds

    may arise because of financial difficulties in the FCM, financial

    difficulties in the proprietary accounts, or because of the impact of

    difficulties at a corporate parent or affiliate. Under this scenario,

    all models share important characteristics: Customer positions and

    related collateral, whether at a DCO or at the FCM, can be transferred

    to one or more willing transferee FCMs, or may be liquidated and

    returned to the trustee. With respect to fostering transfer, however,

    the Legal Segregation Models (whether Complete or with Recourse) and

    the Physical Segregation Model do have a significant advantage compared

    to the Futures Model: In each of them, information about the customers

    as a whole, and about each individual customer's positions, are

    transmitted to the DCO every day, an information flow (and store) that

    is not present in the Futures Model. Thus, each DCO will have important

    customer information on a customer by customer basis that can be used

    to facilitate and implement transfers, and is thus less reliant upon

    the FCM for that information.

    2. Bankruptcy With Shortfalls Due to Operational Risks or Investment

    Risks

    An FCM bankruptcy with shortfalls due to operational risks would

    arise because of a shortfall in segregated funds due to, e.g.,

    negligence, theft or other mishap. An FCM may also have shortfalls due

    to investment risks resulting from extraordinary losses on the set of

    investments permitted under regulation 1.25 (as included in new

    regulation 22.2(e)(3)). Under this scenario, all models again share

    important characteristics: Customer positions and related collateral at

    a DCO may be delivered to the Trustee, or may transferred by the DCO,

    but only to the extent of each customer's pro rata share. Under all of

    the segregation models, to the extent there is a shortfall, each

    customer will ultimately receive the same cents-on-the-dollar

    proportion of the value of the customer's account.

    However, with respect to fostering transfer, the other models again

    have a significant advantage compared to the Futures Model: In each of

    them, information about the customers as a whole, and about each

    individual customer's positions, are transmitted to the DCO every day,

    an information flow (and store) that is not present in the Futures

    Model. Thus, each DCO will have important customer information on a

    customer by customer basis that can be used to facilitate and implement

    transfers, and accordingly is less reliant upon the FCM for that

    information.

    3. Bankruptcy With Shortfalls Due to Customer Risk

    An FCM bankruptcy with shortfalls due to customer risk would arise

    because a customer incurs a loss that exceeds both the customer's

    collateral and the FCM's ability to pay.

    Under the Futures Model, the DCO could use the entirety of the

    FCM's customer account (or as much of it as necessary) to meet the

    entire loss created by the default. Transfer of customer positions

    would be difficult, in that the DCO would lack information as to which

    customers were in default, and which positions belonged to defaulting

    customers (and, presumably, would not be transferred) and which did

    not.\22\ The DCO would be permitted to liquidate customer positions, a

    process that might take between one and ten days.\23\ Once the loss was

    crystalized, the DCO would be able to turn over the collateral (less

    that used to meet the default) to the Trustee for use in the pro rata

    distribution.

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

    \22\ See generally, CME Group, Inc. (``CME'') at 14-15

    (discussing information deficits at bankrupt FCM).

    \23\ See 76 FR at 69366-68.

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

    Under the LSOC Model, the DCO could only use the collateral

    attributable to defaulting customers (those whose positions suffered

    losses) to meet the loss. Thus, all collateral attributable to

    customers whose net positions gained or were ``flat'' (neither gained

    nor lost), and much of the collateral attributable to customers whose

    net positions lost, would be immediately available for transfer.

    Moreover, the DCO would have information that is no more than one

    business day old tying customers to portfolios of positions, and the

    DCO itself would maintain the margining methodology that would tie such

    portfolios of positions to the collateral requirement associated with

    such portfolios. Even if the DCO decided to liquidate all customer

    positions, the collateral of non-defaulting customers would be exposed

    to less loss than under the Futures Model because the DCO would not

    have the right to access it.

    The Physical Segregation Model would work in a manner similar to

    the LSOC Model. Again, all collateral attributable to customers whose

    net positions gained or were ``flat'' (neither gained nor lost), and

    the remaining collateral attributable to customers whose net positions

    lost, would be immediately available for transfer. The DCO would have

    specific information on how much collateral was, in fact, attributable

    to each customer. However, because of the ratable distribution

    requirement, any losses that did exist would be shared ratably among

    all customers.

    Under the Legal Segregation with Recourse, the DCO could only use

    the collateral attributable to defaulting customers (those whose

    positions suffered losses) to meet the loss--at first. It would also

    use the defaulting clearing member FCM's own contribution to the

    guaranty fund, its own contribution to the guaranty fund, as well as

    the contributions of non-defaulting clearing members. However, if those

    resources were insufficient to cover the default, the DCO would have

    ``recourse'' to the collateral of non-defaulting customers. While such

    [[Page 6341]]

    recourse is much less likely under the Legal Segregation with Recourse

    Model than under the Futures Model--because the fellow-customer

    collateral would not be reached unless the loss was great enough to

    consume the entire guaranty fund--until the amount of loss from the

    default was crystalized (through liquidation or transfer), the DCO

    might be reluctant or unable to release the collateral of non-

    defaulting customers. Accordingly, while Legal Segregation with

    Recourse would (in most cases) provide customers superior recovery in a

    liquidation, it would be much less well-suited to a prompt transfer of

    positions.

    E. Solicitation of Public Input

    The Commission sought public comment on the segregation

    alternatives mentioned above, and on the advisability of permitting the

    DCO to choose between alternatives. First, the Commission, through its

    staff, held extensive external meetings with three segments of

    stakeholders (i.e., DCOs, FCMs, and swaps customers).\24\ Second, on

    October 22, 2010, the Commission, through its staff, held a roundtable

    (the ``First Roundtable'').\25\ Third, on November 19, 2010, the

    Commission issued an Advance Notice of Proposed Rulemaking for

    Protection of Cleared Swaps Customers Before and After Commodity Broker

    Bankruptcies (the ``ANPR''). Fourth, on June 3, 2011, the Commission,

    through its staff, held a second roundtable (the ``Second

    Roundtable'').\26\ Fifth, after careful consideration of the comments

    the Commission received on the ANPR, the Commission issued the NPRM.

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

    \24\ A list of external meetings is available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_6_SegBankruptcy/index.htm.

    \25\ The transcript from the First Roundtable (the ``First

    Roundtable Tr.'') is available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission6_102210-transcrip.pdf.

    \26\ The transcript from the Second Roundtable (the ``Second

    Roundtable Tr.'') is available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission6_060311-transcri.pdf.

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

    1. First Roundtable

    As the ANPR describes, the First Roundtable revealed that

    stakeholders had countervailing concerns regarding the alternative

    segregation models that the Commission set forth. On the one hand, a

    number of swaps customers argued that the Commission should focus on

    effectively eliminating Fellow-Customer Risk \27\ and Investment

    Risk.\28\ Such swaps customers emphasized that (i) They currently

    transact in uncleared swaps, (ii) they are able to negotiate for

    individual segregation at independent third parties for collateral

    supporting such uncleared swaps, and therefore (iii) they are currently

    subject to neither Fellow-Customer Risk nor Investment Risk. Such

    customers found it inappropriate that, under certain alternatives set

    forth by the Commission, they should be subject to Fellow-Customer Risk

    and Investment Risk when they transact in Cleared Swaps.

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

    \27\ As noted in section I.B.1, an FCM functions as a guarantor

    of customer transactions with a DCO. Section 4d(f) of the CEA

    prohibits an FCM from using the collateral deposited by one Cleared

    Swaps Customer to support the swap transactions of another Cleared

    Swaps Customer. Therefore, if one Cleared Swaps Customer owes money

    to the FCM (i.e., the Cleared Swaps Customer has a debit balance),

    the FCM, acting as guarantor, must deposit its own capital with the

    DCO to settle obligations attributable to such customer. If the

    Cleared Swaps Customer defaults to the FCM, and the Cleared Swaps

    Customer's obligations are so significant that the FCM does not have

    sufficient capital to meet them, then the FCM would default to the

    DCO.

    As discussed in Section I.B.4, the financial resources DCOs

    maintain to cover Clearing Member defaults with respect to customer

    positions in excess of collateral provided by the Clearing Member

    include property of the defaulting Clearing Member (i.e., collateral

    deposited to support FCM proprietary transactions and contributions

    to the DCO guaranty fund). Other elements of such packages may

    include: (i) The collateral that the FCM deposited to support the

    transactions of non-defaulting customers; (ii) a portion of the

    capital of the DCO; and (iii) contributions to the guaranty fund

    from other DCO Clearing Members. Typically, a DCO would exhaust one

    element before moving onto the next element. Therefore, the risk

    that the DCO would use any one element depends on the position of

    that element in the package.

    \28\ ``Investment Risk'' is the risk that each Cleared Swaps

    Customer would share pro rata in any decline in the value of FCM or

    DCO investments of Cleared Swaps Customer Collateral. Section 4d(f)

    of the CEA permits an FCM to invest Cleared Swaps Customer

    Collateral in certain enumerated instruments. The Commission is

    proposing to expand such instruments to include those referenced in

    regulation 1.25 (as it may be amended from time to time). Even

    though (i) such investments are ``consistent with the objectives of

    preserving principal and maintaining liquidity,'' and (ii) both the

    FCM, as well as the DCO, value such investments conservatively (by,

    e.g., applying haircuts), the value of such investments may decline

    to less than the value of the collateral originally deposited. See

    regulation 1.25(b) (as amended in Investment of Customer Funds and

    Funds Held in an Account for Foreign Futures and Foreign Options

    Transactions, 76 FR 78776, December 19, 2011). In such a situation,

    all customers would share in the decline pro rata, even if the

    invested collateral belonged to certain customers and not others.

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

    On the other hand, a number of FCMs and DCOs argued that the

    benefits of effectively eliminating Fellow-Customer Risk and Investment

    Risk are outweighed by the costs. With respect to benefits, these FCMs

    and DCOs noted that the Futures Model has served the futures industry

    well for many decades. With respect to costs, these FCMs and DCOs

    described two potential sources. First, FCMs and DCOs stated that,

    depending on the manner in which the Commission proposes to eliminate

    or mitigate Fellow-Customer Risk and Investment Risk, they may

    experience substantial increases to operational costs (e.g., costs

    associated with transaction fees, reconciliations, recordkeeping,

    reporting). Second, and more significantly, FCMs and DCOs stated that

    they may incur additional risk costs due to proposed financial

    resources requirements.\29\

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

    \29\ As described below, the term ``Risks Costs'' refers to the

    costs associated with the allocation of loss in the event of a

    default under the Complete Legal Segregation Model relative to the

    Futures Model. For a more detailed explanation of these costs, see

    the discussion in section VII.B.2.b., under the heading titled

    ```Risk Costs' and potential effects on margin levels and DCO

    guaranty fund levels in response to complete legal segregation.''

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

    In addition, some DCOs may have anticipated including collateral

    from non-defaulting Cleared Swaps Customers as an element in their

    financial resources packages. If DCOs no longer have access to such

    collateral, then those DCOs would need to obtain additional financial

    resources to meet proposed Commission requirements. Both FCMs and DCOs

    averred that the costs associated with obtaining such additional

    financial resources may be substantial, and would ultimately be borne

    by Cleared Swaps Customers.\30\

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

    \30\ 75 FR at 75163. For example, one DCO estimated that it

    would have to increase the amount of collateral that each Cleared

    Swaps Customer must provide by 60 percent, if it could no longer

    access the collateral of non-defaulting Cleared Swaps Customers to

    cure certain defaults. See infra n. 258.

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

    2. ANPR

    Given the concerns that stakeholders expressed at the First

    Roundtable, the Commission decided to seek further comment through the

    ANPR on the potential benefits and costs of (i) The Legal Segregation

    Models (whether Complete or with Recourse), (ii) the Physical

    Segregation Model, and (iii) the Futures Model. As the ANPR explicitly

    stated, ``[t]he Commission [was] seeking to achieve two basic goals:

    Protection of customers and their collateral, and minimization of costs

    imposed on customers and on the industry as a whole.'' \31\ In

    addition, the Commission requested comment on the impact of each model

    on behavior, as well as whether Congress evinced intent for the

    Commission to adopt any one or more of these models.

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

    \31\ Id.

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

    [[Page 6342]]

    As described in the NPRM, the Commission received thirty-one

    comments from twenty-nine commenters.\32\ The comments were generally

    divided by the nature of the commenter: Most (though not all) of the

    comments from current or potential Cleared Swaps Customers favored

    either the Legal Segregation Models (whether Complete or with Recourse)

    or the Physical Segregation Model, manifesting a willingness to bear

    the added costs.\33\ Most of the FCMs and DCOs favored the Futures

    Model, though one commenter favored the Complete Legal Segregation

    Model.\34\ Finally, another commenter, in its supplemental comment,

    opined that the most important factor that the Commission should

    consider is the extent to which a model fostered the portability \35\

    of Cleared Swaps belonging to non-defaulting customers.\36\ This

    commenter noted that the Physical Segregation Model and what is now

    referred to as the Complete Legal Segregation Model were most conducive

    to that goal.\37\

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

    \32\ All comment letters are available through the Commission's

    Web site at: http://www.cftc.gov/LawRegulation/FederalRegister/ProposedRules/2010-29836.

    \33\ See id.

    \34\ See id.

    \35\ The terms ``portability,'' ``port,'' and ``porting'' refer

    to the ability to reliably transfer the swaps (and related

    collateral) of a non-defaulting customer from an insolvent FCM to a

    solvent FCM, without the necessity of liquidating and re-

    establishing the swaps.

    \36\ See ISDA comment letters on ANPR.

    \37\ See id.

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

    After careful consideration of the First Roundtable discussion and

    the comments received in response to the ANPR, the Commission issued

    the NPRM on June 9, 2011.

    3. Second Roundtable

    Discussions during the Second Roundtable generally reflected the

    conflicting concerns expressed by market participants regarding the

    alternative segregation models set forth by the Commission. Swaps

    customers continued to state that the Commission should focus on

    mitigating Fellow-Customer Risk, with some also advocating for the

    elimination of Investment Risk, while FCMs and DCOs reiterated that the

    Commission should select the Futures Model as the segregation model for

    Cleared Swaps Customer Collateral because the Futures Model has served

    the futures industry well for many decades. Pension funds, and a few

    investment managers, remained concerned about their potential exposure

    to Fellow-Customer Risk and Investment Risk and continued to press the

    Commission to adopt the Physical Segregation Model either outright or

    on an optional basis.

    In addition, participants discussed various cost and benefits

    issues arising in relation to the Futures and the Legal Segregation

    Models. Specifically, several participants believed that the

    operational costs would not be significantly different between the

    Futures Model and the Complete Legal Segregation Model.\38\ Moreover,

    although some participants projected that risk costs would

    significantly increase if the Commission were to select the Complete

    Legal Segregation Model,\39\ one participant argued that these risk

    costs would not be incremental risk costs; rather they are risk costs

    that exist in the Futures Model that would most likely ultimately be

    borne by customers.\40\ Finally, one participant argued that any model

    that facilitates the ability to port ``is superior to one that

    doesn't'' because ``the closeout cost in the future's model was the

    most expensive,'' meaning that ``closing out a client account and rates

    could be extremely devastating to the market, and * * * be really

    significant losses * * * [and] any way [the losses] can be avoided

    would be beneficial to every participant in the market.'' \41\

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

    \38\ See Second Roundtable Tr. at 250, l.2 (In response to

    whether the Complete Legal Segregation Model would impose

    operational costs over the Futures Model, Ms. Bregasi stated that

    ``[t]here is no additional cost between LSOC and the futures

    model;'' Mr. Prager stated that ``[w]e don't see them incurring

    other than the start-up costs, the one time that everyone will have

    to incur to set up, the running cost. We don't see any incremental

    cost;'' and Mr. MacFarlane stated that ``I would agree there are no

    additional operational costs.''). See also, Second Roundtable Tr. at

    239, l.8 (Mr. Frankel explaining that operational costs resulting

    from passing ``the client identity and * * * some other multiplier

    that explains how much excess there is in the seg account for the

    client * * * [is] a small build.''); Second Roundtable Tr. at 243,

    l.22 (Mr. Kahn stating that ``in terms of the cost, the fact is OTC

    is a little different than futures because there is a tremendous

    build that everyone is doing in the case of OTC so if we need to

    build LSOC which in essence we've done in the LCH European model,

    there is a cost of that but I can't really define what it is. It's

    relatively small and not material.'').

    \39\ See Second Roundtable Tr. at 255, l.12 (Mr. Frankel arguing

    that ``Moving to a 99.9 percent confidence of coverage we think will

    increase margins by about 60 percent [for rates] * * * I think for

    CDS it could be more than double.''). See also Second Roundtable Tr.

    at 262, l.2 (Mr. Diplas arguing that ``not having the additional

    pool of funds that are associated with the fellow customers means

    that we definitely need to actually margin from a CCP perspective,

    the higher confidence interval. That will differ depending on the

    asset class we're looking at. Some of them, at least based on the

    existing pool of trades, it could be manageable like at 60, 70

    percent in rates. We'll talk about three to four times the amount

    that--in credit--and the more we get to instruments with fatter

    tails the higher the number is going to be. I think that is

    something that clients need to be cognizant of.'').

    \40\ See, e.g., Second Roundtable Tr. at 257, l.6 (Mr.

    MacFarlane stating that ``what's being said, if our transactions had

    to be margined on an individual basis it would require that we put

    up 60 to 70 percent more, which says that then the real risk of that

    transaction is 75 percent more than what we're collateralizing. So

    in the event of a default, not by us but by another counterparty

    potentially, they will be under-collateralized relative to what

    their individual transaction would require, and then that

    potentially could work its way back to us.'').

    \41\ See, e.g., Second Roundtable Tr. at 259, l.6 (quoting Mr.

    Frankel). For a more detailed discussion of cost and benefit

    considerations, please see discussion below in section VII.

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

    4. NPRM

    After carefully considering all comments to the ANPR and statements

    made during the First Roundtable discussion, the Commission proposed in

    the NPRM the Complete Legal Segregation Model as the segregation model

    for Cleared Swaps Collateral because the Complete Legal Segregation

    Model provided the best balance between benefits and costs in order to

    protect market participants and the public. Nonetheless, due in part to

    the strong opposing views expressed by market participants, the NPRM

    made clear that the Commission was still considering whether to adopt,

    in the alternative, the Legal Segregation with Recourse Model, and was

    continuing to assess the feasibility of an optional approach and the

    Futures Model.

    Commenters to the ANPR generally observed that customers ultimately

    would bear the costs of implementing whatever segregation model was

    selected by the Commission. Nonetheless, most (though not all) of the

    buy-side commenters favored individual protection for Cleared Swaps

    Customer Collateral. These commenters generally viewed the Complete

    Legal Segregation Model as the minimum level of protection necessary

    for Cleared Swaps Customer Collateral. Because it was largely

    recognized that customers would ultimately bear the costs of

    implementing the selected segregation model, the Commission believed it

    appropriate to give weight to the views of market participants who

    would bear those costs, and found it compelling that most buy-side

    commenters favored adoption of either the LSOC Model or the Physical

    Segregation Model. The Commission noted that the Legal Segregation

    Models and the Physical Segregation Model would provide greater

    individualized protection to Cleared Swaps Customer Collateral than the

    Futures Model, and was in accordance with section 4d(f) of the CEA. In

    addition, the Commission noted that the LSOC Model and the Physical

    Segregation Model may provide substantial benefits in the form of (i)

    [[Page 6343]]

    Decreased Fellow-Customer Risk, (ii) increased likelihood of

    portability, (iii) decreased systemic risk, and (iv) positive impact on

    portfolio margining, and asked for comment as to whether and why

    commenters favor or oppose adoption of the Futures Model.

    In choosing between the Legal Segregation Models and the Physical

    Segregation Model, the Commission noted that the operational costs for

    the Physical Segregation Model would be substantially higher than the

    operational costs for the Legal Segregation Models (whether Complete or

    with Recourse). With respect to benefits, the Commission believed that

    the Physical Segregation Model would provide only incremental

    advantages over the Complete Legal Segregation Model with respect to

    the mitigation of Fellow-Customer Risk. In addition, the Commission

    noted that while the Physical Segregation Model does eliminate

    Investment Risk, (i) the Commission was in the process of further

    addressing Investment Risk by proposing amendments to regulation 1.25,

    and (ii) each FCM and DCO already values investments conservatively.

    Finally, the Commission observed that the Physical Segregation Model

    would generally enhance portability to the same extent as the Complete

    Legal Segregation Model, and therefore would have similar effects on

    systemic risk. In addition, the Commission stated that the Physical

    Segregation Model and the Complete Legal Segregation Model would likely

    enhance portfolio margining to the same extent. Therefore, the

    Commission chose not to propose the Physical Segregation Model in the

    NPRM.

    In choosing between the Complete Legal Segregation Model and the

    Legal Segregation with Recourse Model, the Commission noted that

    commenters argued that implementing the former would result in

    significant Risk Costs,\42\ whereas implementing the latter would

    result in no Risk Costs. In addition, the Commission believes that

    comments to the ANPR that question the assumptions underlying the upper

    estimates of Risk Costs for the Complete Legal Segregation Model have

    raised credible issues regarding the accuracy of those estimates.

    Nevertheless, the Commission recognized that such assumptions formed an

    area of divergence between commenters, and therefore asked for

    additional comment on the Risk Costs for the Complete Legal Segregation

    Model. The Commission also observed that operational costs for the

    Complete Legal Segregation Model and the Legal Segregation with

    Recourse Model were approximately the same. With respect to benefits,

    the Commission noted that the Complete Legal Segregation Model would

    (i) Mitigate Fellow-Customer Risk even in extreme FCM defaults, unlike

    the Legal Segregation with Recourse Model, (ii) enhance portability

    (and therefore mitigate systemic risk) to a significantly greater

    extent than the Legal Segregation with Recourse Model, and (iii) have

    an incremental advantage over the Legal Segregation with Recourse Model

    with respect to impact on portfolio margining.\43\ Consequently, the

    Commission chose not to propose the Legal Segregation with Recourse

    Model in the NPRM, but stated that it was still considering this model

    as an alternative.

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

    \42\ For a more detailed discussion regarding risk costs, see

    section VII.B.2.b., infra.

    \43\ See 33818 FR at 33828.

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

    F. Clarification of the Application of Financial and Segregation

    Interpretation No. 10 to Cleared Swaps

    In response to the Commission's NPRM, clarification was requested

    \44\ regarding the applicability to the cleared swaps market of the

    Commission's 2005 Amendment to Financial and Segregation Interpretation

    No. 10 on the Treatment of Funds Deposited in Safekeeping Accounts

    (``Segregation Interpretation 10-1'').\45\ The commenter noted that

    ``[u]ntil 2005, the CFTC permitted the use of third-party custodial

    accounts for futures margin by pension plans and investment companies

    registered under the 1940 Act * * *. In 1984, the CFTC issued Financial

    and Segregation Interpretation No. 10 * * *, permitting the use of

    third party custodial accounts for the holding of customer property

    subject to certain conditions ensuring that an FCM would have immediate

    and unfettered access to customer funds.'' \46\ However, Segregation

    Interpretation 10-1 made it clear that, with limited exceptions, FCMs

    would not be in compliance with the requirements of section 4d(a)(2) of

    the CEA if they hold customer funds in a third-party custodial account.

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

    \44\ See Committee on Investment of Employee Benefit Assets

    (``CIEBA'') December 22, 2011 letter (``CIEBA Supplemental'') at 2.

    \45\ Amendment of Interpretation, 70 FR 24768, May 11, 2005

    (Notice) The underlying Financial and Segregation Interpretation No.

    10 (``Segregation Interpretation 10'') was issued on May 23, 1984,

    and can be found at Comm. Fut. L. Rep. (CCH) ]7120.

    \46\ CIEBA Supplemental at 4.

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

    The Commission agrees that Segregation Interpretation 10-1 does not

    apply to Cleared Swaps. Accordingly, and subject to the conditions

    described below, Cleared Swaps Customer Collateral may be deposited at

    a bank in a third-party safekeeping account, in lieu of posting such

    collateral directly to the FCM, without the FCM being deemed in

    violation of section 4d(f) of the CEA, and FCMs are permitted to

    allowed Cleared Swaps Customers to elect to have their Cleared Swaps

    Customer Collateral held in such accounts.

    However, if an FCM uses, or allows the use of, a third-party

    safekeeping account, that FCM must comply with all of the conditions

    for such accounts set forth in Segregation Interpretation 10 as

    originally issued in 1984.\47\ In addition, as noted in Segregation

    Interpretation 10, though the use of third-party safekeeping accounts

    is not prohibited, such collateral constitutes customer property within

    the meaning of the Bankruptcy Code. As such, positions and collateral

    held in third-party custodial accounts are subject to the U.S.

    Bankruptcy Code and applicable provisions in the CEA, which provide for

    the pro rata share of available customer property.

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

    \47\ These conditions include limitations regarding the titling

    and location of the third-party safekeeping account, and

    requirements concerning the FCM's rights to promptly liquidate

    positions and access collateral.

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

    The commenter also requested that the Commission revise or repeal

    Segregation Interpretation 10-1 to allow futures and options customers

    to have their collateral held in third-party safekeeping accounts.\48\

    However, while the Commission does not believe it would be appropriate

    to address this request at this time, as it is beyond the scope of this

    rulemaking, the Commission may address this concern in the future.

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

    \48\ See CIEBA Supplemental at 12

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

    The Commission also notes that a number of commenters\49\ have

    proposed alternative arrangements that would provide individual

    protection for collateral belonging to cleared swaps market

    participants (and, in some cases, futures customers) that are willing

    and able to bear the associated costs. However, these proposals raise

    important risk management and cost externality issues, particularly

    with respect to ensuring that collateral is promptly available to DCOs

    in the event of a default, ensuring proper capital treatment for the

    relevant market participants, and protecting all customers.

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

    \49\ See generally CIEBA August 8, 2011 letter (``CIEBA

    Original'') at 1-5; Salzman at 1-9; CME at 18; State Street at 2-4.

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

    The Commission has directed staff to carefully analyze these

    proposals with the goal of developing proposed rules that provide

    additional protection for

    [[Page 6344]]

    collateral belonging to market participants.\50\

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

    \50\ The Commission also notes that any market participant may

    become a clearing member of a DCO, consistent with the DCO's

    membership eligibility requirements and the CEA and Commission

    regulations, with all the rights and responsibilities associated

    therewith.

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

    The Commission agrees with the comment that ``swap margin is not

    meant to enhance the swap dealers' bottom line, but to protect the

    system against counterparty failure,'' \51\ and remains committed to

    protecting the market and market participants.

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

    \51\ See CIEBA Supplemental at 14.

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

    II. The Final Rules

    In determining the scope and content of the final rules, the

    Commission has taken into account issues raised by commenters,

    including those issues with respect to the costs and benefits

    associated with the proposed segregation model for Cleared Swaps

    Customer Collateral. The Commission received twenty-eight (28) comment

    letters on the proposed rules,\52\ twenty-five (25) of which addressed

    the issue of which segregation model the Commission should adopt for

    Cleared Swaps Customer Collateral. Of these twenty-five (25), the

    strong weight of the commenters rested in favor of individual

    protection for Cleared Swaps Customer Collateral, with twenty (20)

    comment letters supporting implementation of the Complete Legal

    Segregation Model, the Physical Segregation Model or some combination

    thereof.\53\ Four (4) comment letters supported adoption of the current

    Futures Model,\54\ with one (1) comment letter, from the FIA, showing

    support for both the Complete Legal Segregation Model and the Futures

    Model.

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

    \52\ All comment letters are available through the Commission's

    Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1038. Comments addressing the proposed rules

    were received from: APG Algemene Pensioen Groep N.V. and the

    European Federation Retirement Provision (``APG/EFRP''), American

    Council of Life Insurers (``ACLI''), Association of Institutional

    Investors (``AII''), Bank of America, N.A., BlackRock, Inc.

    (``BlackRock''), Chris Barnard, CME, CIEBA, Federal Home Loan Banks

    (``FHLB''), Fidelity Management & Research Co. (``Fidelity''),

    Freddie Mac, Futures Industry Association (``FIA''),

    IntercontinentalExchange, Inc. (``ICE''), Investment Company

    Institute (``ICI''), International Swaps and Derivatives

    Association, Inc. (``ISDA''), LCH.Clearnet Group Limited (``LCH''),

    Managed Funds Association (``MFA''), Natural Gas Exchange, Inc.

    (``NGX''), Newedge USA, LLC (``Newedge''), Och-Ziff Capital

    Management Group (``Och-Ziff''), Jerrold E. Salzman, Securities

    Industry and Financial Markets Association (``SIFMA''), Tudor

    Investment Corporation (``Tudor''), and Vanguard. Note, CIEBA,

    Fidelity and the MFA each submitted two comment letters.

    \53\ The following commenters support the Complete Legal

    Segregation Model outright: ACLI, AII, BlackRock, Mr. Barnard,

    Freddie Mac, ICI, ISDA, LCH, SIFMA, and Vanguard. APG/EFRP, CIEBA,

    Fidelity, MFA, Tudor and FHLB support implementation of the Physical

    Segregation Model.

    \54\ The commenters in favor of adoption of the Futures Model

    were CME, ICE, Newedge, and Mr. Salzman.

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

    After carefully considering all comments, the Commission has

    selected the Complete Legal Segregation Model as the most appropriate

    segregation model for Cleared Swaps Customer Collateral under section

    4d(f) of the CEA. The Commission believes this model provides the best

    balance between benefits and costs in order to protect market

    participants and the public. The Commission has adopted a number of

    clarifications and corrections suggested in the comment letters. In

    other cases the final rules are adopted as proposed. The discussion

    below provides a more detailed analysis of the issues raised by the

    comment letters.

    III. Segregation Model for Cleared Swaps Customer Collateral

    In the NPRM, the Commission proposed the Complete Legal Segregation

    Model but made clear that, because the costs and benefits associated

    with the Complete Legal Segregation Model were still being evaluated,

    the Commission was considering whether to adopt the Legal Segregation

    with Recourse Model as an alternative, and was continuing to assess the

    feasibility of the Futures Model and a clearinghouse-by-clearinghouse

    Optional Approach. Below is a summary of the comments the Commission

    received regarding the alternative segregation models for Cleared Swaps

    Customer Collateral.

    A. Summary of the Comments

    1. Complete Legal Segregation Model

    As mentioned above, the majority of the comment letters supported

    adoption of the Complete Legal Segregation Model either outright or as

    a viable alternative to the Physical Segregation Model, with most

    arguing that the Complete Legal Segregation Model presents the best

    balance between costs and adequacy of collateral protections,\55\ and

    several calling it a ``significant improvement over the'' Futures

    Model.\56\ Several commenters also opined that the Complete Legal

    Segregation Model is supported by the statutory language and purposes

    of the Dodd-Frank Act.\57\

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

    \55\ See ACLI at 2; AII at 1; BlackRock at 1; Barnard at 2;

    Fidelity at 2; Freddie Mac at 2; LCH at 1-2; SIFMA at 3; Vanguard at

    8.

    \56\ CIEBA at 1; and FHLB at 1.

    \57\ See BlackRock at 3; Fidelity at 5-6; FIA at 3, n. 10; ICI

    at 2; Mr. Barnard at 1; and SIFMA at 3, n. 7.

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

    In addition, many of the comment letters asserted that the Complete

    Legal Segregation Model largely mitigates Fellow-Customer Risk and

    enhances the portability of cleared swap positions and associated

    collateral.\58\ One commenter stated that the Complete Legal

    Segregation Model is ``the most cost effective framework to adequately

    protect the margin customers post to cleared swap transactions''

    because it effectively mitigates Fellow-Customer Risk, avoids the costs

    associated with establishing the Physical Segregation Model by allowing

    margin to be held in an omnibus account, and enhances the portability

    of cleared swap positions and related margin.\59\ Another commenter

    stated that the Complete Legal Segregation Model ``provides the most

    operationally efficient framework to manage risk on a daily basis or

    port portfolios especially in periods of stress.'' \60\ And yet other

    commenters argued that there has been little substantiation of the

    ``increased costs'' that would arise from implementation of the

    Complete Legal Segregation Model, especially with respect to costs

    surrounding the reporting requirements associated with maintaining

    separate legal accounts given that ``other regulatory rulemakings that

    require similar reporting will likely result in many of these

    incremental operational costs being incurred regardless of which model

    is chosen.'' \61\

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

    \58\ See, e.g., AII at 3 (stating that the Complete Legal

    Segregation Model effectively eliminates Fellow-Customer Risk,

    enhances portability of positions and related margin, and largely

    avoids the costs associated with establishing individually

    segregated accounts); BlackRock at 2 (arguing that the Complete

    Legal Segregation Model ``eliminates Fellow-Customer Risk and

    facilitates `immediate' portability of customer positions if

    required''); CIEBA Original at 5 (acknowledging that the Complete

    Legal Segregation Model could eliminate Fellow-Customer Risk); FHLB

    at 3 (agreeing that the Complete Legal Segregation Model greatly

    reduces Fellow-Customer Risk); ICI at 3 (stating that the Complete

    Legal Segregation Model mitigates Fellow-Customer Risk); ISDA at 1-2

    (agreeing that Complete Legal Segregation Model facilitates post-

    default portability); MFA at 3-4 (stating that the Complete Legal

    Segregation Model eliminates Fellow-Customer Risk and enhances the

    portability of customer positions); Vanguard at 4-6 (arguing that

    the Complete Legal Segregation Model addresses counterparty risk and

    Fellow-Customer Risk); and SIFMA at 5 (stating that Complete Legal

    Segregation Model minimizes Fellow-Customer Risk and facilitates the

    ability of Cleared Swaps Customers to port their positions to a non-

    defaulting FCM).

    \59\ AII at 1.

    \60\ BlackRock at 6.

    \61\ Fidelity at 6. See also LCH at 2-3. The Commission has

    adopted a gross margining requirement. See 76 FR at 69374-76.

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

    [[Page 6345]]

    Several commenters also argued that, in selecting a segregation

    model for Cleared Swaps Customer Collateral, the Commission should take

    into account the differences between the risk profiles of futures and

    over the counter (``OTC'') swaps.\62\

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

    \62\ BlackRock at 2-4; Fidelity at 4; SIFMA at 2; Vanguard at 3-

    4.

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

    Furthermore, commenters argued that, unlike the Futures Model, the

    Complete Legal Segregation Model would not degrade the collateral

    protections that currently exist in the OTC swaps market.\63\ In

    addition, one commenter indicated that the Complete Legal Segregation

    Model is ``the model that most closely parallels the protections that

    [LCH] understand[s] will be required in Europe under the European

    Commission's proposal for a European Market Infrastructure Regulation

    (``EMIR'').'' \64\

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

    \63\ See Fidelity at 2-4; Freddie Mac at 1; and LCH at 1. See

    also Tudor at 2 (arguing that the segregation model selected by the

    Commission should not provide a lesser degree of protection for

    Cleared Swaps Customer Collateral).

    \64\ LCH at 1.

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

    Commenters who did not support adoption of the Complete Legal

    Segregation Model largely argued that (1) The costs of implementing the

    Complete Legal Segregation Model outweigh any of the purported benefits

    of such model; \65\ (2) the Complete Legal Segregation Model would, in

    the view of the commenter, fail to work operationally or legally,\66\

    and does not take into account the operational complexities of multi-

    tiered and multi-DCO clearing; \67\ (3) individualized segregation

    potentially introduces systemic costs because it impedes timely market

    settlements during periods of market stress; \68\ (4) since the Futures

    Model has served the industry well during times of stress in the

    futures market, it should be the segregation model for Cleared Swaps

    Customer Collateral; \69\ (5) the Complete Legal Segregation Model

    introduces moral hazard; \70\ or (6) the Complete Legal Segregation

    Model does not provide enough protection of Cleared Swaps Customer

    Collateral because there is some residual Fellow-Customer Risk,\71\ and

    it does not protect against fraud-related risks,\72\ record-keeping/

    operational risk, and Investment Risks.\73\ Moreover, several

    commenters disagreed with the Commission's interpretation of the

    statutory language in the Dodd-Frank Act, and argued that the statutory

    language cited by the Commission does not indicate Congressional intent

    for individual protection for Cleared Swaps Customer Collateral.\74\

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

    \65\ See, e.g., ICE at 11.

    \66\ See CME at 5 (stating that ``the framework established by

    the [Complete Legal Segregation Model] concept and the proposed

    regulations will be wholly inadequate to achieve the Commission's

    desired objectives: Namely, in an FCM default, the preservation of

    non-defaulting cleared swaps customers' collateral and the ability

    to port their positions and collateral to another FCM.'').

    \67\ See, e.g., CME at 6-8. See also Mr. Salzman at 7 (stating

    that ``the benefits promised by the proponents of the [Complete

    Legal Segregation Model] are illusory,'' and arguing that the

    Commission's authority to adopt, and a bankruptcy court's

    willingness to respect, such model are questionable).

    \68\ See ICE at 3.

    \69\ See, e.g., Newedge at 8; and CME at 23.

    \70\ See, e.g., Newedge at 4-5.

    \71\ See, e.g., CME at 7.

    \72\ Fraud-related risks are risks associated to an FCM's

    fraudulent activity with respect to the cleared swap margin account.

    \73\ See, e.g., Tudor at 4; CIEBA Original at 1; and FHLB at 3-6

    (each advocating for the adoption and implementation, either

    outright or on an optional basis, of the Physical Segregation Model,

    though acknowledging that the Complete Legal Segregation Model is

    preferable to the Futures Model).

    \74\ See CME at 21-22 (arguing that if Congress intended to

    change the framework for the protection of customer collateral it

    would have explicitly done so); FIA at 3, n. 10 (agreeing that the

    complete legal segregation model is permitted by the language of

    section 4d(f), but arguing that Commission reliance on the

    differences between sections 4d(a) and 4d(b) are misplaced); and ICE

    at 5 (arguing that the Commission should not rely on the language in

    section 4d(f) because there is no legislative history interpreting

    the statutory language).

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

    2. Physical Segregation Model

    Comments with respect to the Physical Segregation Model were mixed,

    with some commenters advocating the adoption of the Physical

    Segregation Model outright,\75\ others advocating for its adoption on

    an optional basis,\76\ and others arguing that the Physical Segregation

    Model should not be adopted because the increased costs and operational

    burdens associated with adoption of the Physical Segregation Model

    outweigh the benefits.\77\

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

    \75\ FHLB at 1; Tudor at 1-2.

    \76\ ACLI at 2; CIEBA at 2; MFA at 2; Mr. Salzman at 8.

    \77\ BlackRock at 6; Vanguard at 6.

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

    Two commenters requested that the Commission reconsider adoption of

    the Physical Segregation Model on the basis that (i) Customer

    collateral should be individually segregated at both the FCM and the

    DCO to provide the same level of customer collateral protection that

    currently exists in the OTC swaps market, (ii) none of the other models

    are sufficient to fully protect customer collateral from recordkeeping/

    operational, investment and fraud-related risks, (iii) the Physical

    Segregation Model facilitates porting more than the other models, and

    (iv) the commenters would be willing to bear any increased costs

    associated with the adoption of the Physical Segregation Model.\78\

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

    \78\ See, e.g., ICI at 2 and 9.

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

    In addition, though several commenters supported the Complete Legal

    Segregation Model as the best alternative under consideration, these

    commenters urged the Commission to develop a framework for the adoption

    of the Physical Segregation Model because (i) The protections offered

    by the Physical Segregation Model are greater than those offered by the

    Complete Legal Segregation Model, (ii) the Physical Segregation Model

    facilitates porting more than the other models, and (iii) the costs

    assertions resulting from implementing the Physical Segregation Model

    have either not been substantiated or are costs that the commenters are

    willing to bear.\79\

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

    \79\ See, e.g., ACLI at 2; BlackRock at 5.

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

    Commenters that opposed adoption of the Physical Segregation Model

    generally did so on the basis that implementation of the model would

    give rise to substantial increased costs with little increased benefit,

    as compared with the Complete Legal Segregation Model.\80\

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

    \80\ See, e.g., AII at 2; ICE at 9; FIA at 6; SIFMA at 4 n. 9;

    and Vanguard at 6.

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

    3. Futures Model

    As mentioned above, four comment letters supported adoption of the

    Futures Model, with one commenter supporting adoption of both the

    Complete Legal Segregation Model and the Futures Model.

    CME argued that the Futures Model provides the best balance of

    costs versus industry risk as a whole and is ``the only approach that

    provides both legal and operational certainty to all parties in the

    event of an FCM default.'' \81\ According to CME, the Complete Legal

    Segregation Model imperfectly protects customer collateral and thus,

    ``the Commission [should] not rush [sic] to implement a `solution' that

    gives superficial comfort, but may not work either operationally or

    legally in the event of an actual default.'' \82\ CME encouraged the

    Commission to ``engage in further study, and establish a review process

    that includes a representative group of interested parties with

    expertise in the area, in order to evaluate alternative approaches.''

    \83\ Because the Futures Model has effectively protected customer

    interests in the futures market, CME recommended that, in the interim,

    the Commission implement swaps clearing employing the Futures

    [[Page 6346]]

    Model.\84\ Moreover, CME suggests that the Commission support a new

    industry effort to, at some point in the future, develop and implement

    a guaranteed clearing participant relationship that would allow a

    client, on an optional basis, to have a direct relationship with a DCO,

    with the client's positions guaranteed by a guaranteeing clearing

    member of the DCO and the client's Cleared Swaps Customer Collateral

    held in an outside account by a third party custodian.

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

    \81\ CME at 23.

    \82\ Id. at 2.

    \83\ Id.

    \84\ See id. at 23.

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

    Mr. Salzman supported adoption of the Futures Model with optional

    full physical segregation of Cleared Swaps Customer Collateral.

    ICE advocated adoption of the Futures Model, arguing against

    fundamentally changing a clearinghouse's existing operations, and

    positing that customers that wish to avoid Fellow-Customer Risk might

    explore becoming direct clearing participants once they ``fully

    appreciate[e] the substantial costs * * * associated with implementing

    and maintaining [the Complete Legal Segregation Model].'' \85\ However,

    ICE also proposed, as a middle ground, a model that appears to be based

    on the Futures Model but that provides some protection against Fellow-

    Customer Risk. ICE explained that its ICE Clear Credit affiliate had

    adopted a model under which, ``customers are exposed to `fellow-

    customer risk' only with respect to the customer's pro-rata share of

    the net customer-related margin requirement of its clearing member.''

    \86\ ICE Clear Credit considers ``the difference between a customer's

    gross margin requirement and the customer's net margin requirement'' to

    be ``Excess Margin.'' \87\ ICE stated that a customer's Excess Margin

    is segregated and held by ICE Clear Credit on a custodial basis and is

    therefore not exposed to Fellow-Customer Risk. ICE argued that this

    model would provide some protection against Fellow-Customer Risk but

    would be more cost-effective than the proposed Complete Legal

    Segregation Model. In addition, ICE stated that individual segregation

    should be offered to customers at the option of a DCO, and also

    advanced the notion that the Commission should ``carefully consider and

    weigh the costs and benefits of potential customer-related OTC clearing

    models by asset class * * *.'' \88\

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

    \85\ ICE at 3.

    \86\ Id.

    \87\ Id. at 3, n. 3.

    \88\ ICE at 1-2.

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

    Newedge, which submitted a comment on behalf of itself, DRW Trading

    Group and nine ``Customers,'' supported adoption of the Futures Model

    on the basis that the Futures Model ``is the model most consistent with

    the general purposes of Title VII of Dodd-Frank as well as least likely

    to add moral hazard to the industry.'' \89\ Newedge argued that Title

    VII is about the reduction of systemic risk through the mutualization

    of risk, and that by mutualizing credit risk the Futures Model promotes

    the purpose of the Dodd-Frank Act because such mutualization encourages

    the creation and maintenance of well-capitalized FCMs. In addition,

    Newedge argued that the loss of customer off-sets would increase moral

    hazard because it would encourage FCMs to maintain less excess capital.

    Furthermore, Newedge suggested that, as an alternative to the adoption

    of the Complete Legal Segregation Model, the Commission should require

    greater FCM disclosure to allow customers to better assess Fellow-

    Customer Risk.\90\

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

    \89\ Newedge at 2.

    \90\ Newedge argues that such disclosure be provided in ``plain

    English'' on an annual basis, and include the following data:

    The FCM's total equity, regulatory capital and net worth;

    The dollar value of the FCM's proprietary margin requirements as

    a percentage of its segregated and secured customer margin

    requirements;

    What number of the FCM's customers comprise an agreed

    significant percentage of its customer segregated funds;

    The aggregate notional value of non-hedged, principal OTC

    transactions into which the FCM has entered;

    The amount, generic source and purpose of any unsecured and

    uncommitted short-term funding the FCM is using;

    The aggregate amount of financing the FCM provides for customer

    transactions involving illiquid financial products for which it is

    difficult to obtain timely and accurate prices;

    The percentage of customer ``bad debts'' the FCM had during the

    prior year compared to its year-end segregated and secured customer

    funds; and

    A summary of the FCM's current risk practices, controls and

    procedures.

    Newedge at 7. See also FHLB at 7, n. 14 (encouraging the

    Commission, in response to a question in the NPRM regarding

    additional disclosure of FCM financial information, to make such

    information publicly available on a real time basis); and MFA at 5

    (arguing that ``if the Commission mandates the disclosure by FCMs of

    certain financial information, customers will be in a better

    position than they are today to evaluate the financial strength of

    their FCM.'').

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

    Comment letters supporting individual protection for customer

    collateral over the Futures Model generally did so on the basis that

    the Futures Model (i) does not protect Cleared Swaps Customer

    Collateral from Fellow-Customer Risk, Investment Risk, operational risk

    or fraud-related risk, and (ii) does not facilitate the portability of

    customer positions and associated collateral in the event of an FCM's

    default.\91\

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

    \91\ See, e.g., AII at 1-2; BlackRock at 2, 7-8; CIEBA Original

    at 5; FHLB at 6-7; Fidelity at 3; Freddie Mac at 1-2; SIFMA at 5;

    and Vanguard at 4-5.

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

    BlackRock argued that not only does the Futures Model fail to

    address the core risk differences between futures and OTC swaps, but

    because of the buffer created by the mutualized risk provided by the

    customer collateral, the Futures Model may result in less stringent

    selection and oversight of customers by FCMs.\92\ In addition,

    BlackRock argued that the moral hazard argument advocated by proponents

    of the Futures Model presumes that futures customers have access to

    information that allows them to make informed decisions regarding their

    fellow customers. However, BlackRock stated that access to such

    information is currently lacking, there are no requirements or

    incentives for a DCO or FCM to inform a customer when a fellow customer

    is in a stress or potential default situation and, as a result,

    customers are forced to rely on DCOs and regulators for protection.\93\

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

    \92\ Blackrock at 8.

    \93\ Id.

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

    Freddie Mac argued that by allowing DCOs to access the collateral

    of non-defaulting customers to cover the losses of defaulting

    customers, the Futures Model provides a ``subsidy to DCOs, FCMs and

    their riskiest customers at the expense of customers that present less

    risk[, and] this non-transparent shifting of risk would create moral

    hazard and inefficient credit decisions.'' \94\

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

    \94\ Freddie Mac at 2.

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

    Similarly, FHLB argued that DCOs and FCMs should bear all Fellow-

    Customer Risk as they are in a superior position to conduct analyses of

    other cleared swap customers.\95\ In addition, FHLB indicated that if

    the Commission adopts the Futures Model as the segregation model for

    Cleared Swaps Customer Collateral, it would be anomalous for market

    participants to have the initial margin they post for Cleared Swaps

    face greater risk than the initial margin they post for uncleared

    swaps.\96\ Moreover, the Futures Model would impede portability because

    the collateral posted for Cleared Swaps ``could be tied up in the

    omnibus account indefinitely.'' \97\

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

    \95\ FHLB at 6-7.

    \96\ FHLB at 7. FHLB also states that market participants have a

    statutory right to segregate initial margin they post for uncleared

    swaps with an independent custodian. Id. at 6.

    \97\ FHLB at 7.

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

    SIFMA stated that avoiding Fellow-Customer Risk presented by the

    Futures Model should be the most important

    [[Page 6347]]

    objective in selecting a segregation model for Cleared Swaps Customer

    Collateral and, as such, none of the members of the Asset Management

    Group supports the Futures Model.\98\ In addition, SIFMA argued that

    the Futures Model does not facilitate portability to the same extent as

    the Complete Legal Segregation Model and, therefore, is not as

    effective at reducing systemic risk.\99\

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

    \98\ SIFMA at 3.

    \99\ See SIFMA at 4-6.

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

    Vanguard asserted that the Futures Model exposes market

    participants to Fellow-Customer Risk and because this risk is not a

    factor in the OTC swaps markets, the magnitude of such risk is not

    something that a customer could ever assess, especially given the

    ``complete lack of transparency with respect to [an] FCM's other

    customers and their trading positions.'' \100\ Furthermore, Vanguard

    stated that mutualization of customer losses effectively allows ``less

    sophisticated analysis of the risk presented by individual customers

    and their trading portfolios as such individual risk can ultimately be

    covered by the overall pool of margin posted by all of the FCM's

    customers,'' with the result that ``riskier customers (and trading

    portfolios) [are] likely to be under margined and safer clients (and

    trading portfolios) [are] likely to be over margined relative to their

    actual level of risk presented to the system.'' \101\ In sum, Vanguard

    stated that, given the differences between the swaps and futures

    markets, the Futures Model could expose a Cleared Swaps Customer to

    significantly greater and potentially unlimited risk.\102\

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

    \100\ Vanguard at 5.

    \101\ Id.

    \102\ Id.

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

    4. Legal Segregation With Recourse Model

    None of the comment letters received by the Commission appeared to

    support the Legal Segregation with Recourse Model. Commenters that

    discussed this model generally stated that the Commission should not

    adopt the Legal Segregation with Recourse Model because either (1) by

    failing to mitigate Fellow-Customer Risk, it is substantially inferior

    to the Complete Legal Segregation Model \103\ or (2) it suffers from

    the same shortcomings as the Complete Legal Segregation Model since it

    is costly to implement and fails to mitigate investment and operational

    risks.\104\

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

    \103\ See BlackRock at 7; FHLB at 7; Freddie Mac at 2; FIA at 6-

    7; MFA at 2; and Vanguard at 4.

    \104\ See, e.g., CME at 16.

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

    5. Optional Approach

    Though some commenters expressed a desire to have optional full

    physical segregation of Cleared Swaps Customer Collateral, none of the

    commenters supported the Optional Approach outlined by the

    Commission.\105\ Under this approach, each DCO would choose the level

    of customer collateral protection it chooses to offer.\106\ The

    Commission noted that this approach might be reconciled with section

    766(h) of the Bankruptcy Code by permitting DCOs to require that FCMs

    establish separate legal entities, each of which is limited to clearing

    at DCOs that use only the same customer collateral protection

    model.\107\

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

    \105\ See, e.g., MFA at 3 n. 11 (stating ``[t]he Commission

    should allow market participants to elect the Physical Segregation

    Model but only to the extent that it is compatible with the Complete

    Legal Segregation Model. We are not advocating that the Commission

    adopt the ``Optional Approach'' set forth in the Proposing Release,

    because we believe that approach would be very difficult to

    implement.''); ACLI at 2 (supporting the option to negotiate and

    select the Physical Segregation Model); BlackRock at 5 (stating that

    BlackRock would support an optional approach if the Commission

    believes such an approach would be prudent, but cautions that

    optionality may present implementation challenges and result in

    portability delays); CIEBA Original at 1 (promoting optional

    individual segregation of Cleared Swaps Customer Collateral); CME at

    17-20 (arguing that the Commission should support efforts to

    establish programs that would permit individuals to physically

    segregate the collateral associated with their Cleared Swaps

    positions on an optional basis); and Tudor at 6 (arguing that if the

    Commission does not adopt the Physical Segregation Model, the

    Commission should ``require DCOs to offer various segregation models

    to their cleared swaps customers, including full physical

    segregation.'').

    \106\ See 76 FR at 33825.

    \107\ See 76 FR at 33829.

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

    One commenter stated that it is ``likely that the benefits of

    creating such a regulatory structure would be illusory,'' \108\ while

    another argued that ``[o]ptionality will produce complexity and expense

    that might be tolerable when the cleared swaps market is well

    established, but that will be burdensome to a developing market.''

    \109\ In addition, one commenter expressed concern regarding the

    appropriateness of the Commission adopting a segregation regime ``that

    provides protection to customers based on their ability and willingness

    to pay.'' \110\

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

    \108\ CME at 20.

    \109\ ISDA at 2.

    \110\ FIA at 6.

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

    B. Discussion of the Comments

    After careful analysis of the issues raised by the comment letters

    with respect to the selection of a segregation model for Cleared Swaps

    Customer Collateral, the Commission is adopting the Complete Legal

    Segregation Model. As described above, the majority of market

    participants supported adoption of either the Complete Legal

    Segregation Model or the Physical Segregation Model. In addition, while

    certain technical corrections/clarifications were requested, none of

    the commenters identified material new information with respect to

    costs or benefits associated with the adoption of the Complete Legal

    Segregation Model or any other model under consideration. Some

    commenters did, however, re-iterate their view that their business

    model depended upon receiving stronger protection for their Cleared

    Swaps Customer Collateral than what exists under the Futures Model.

    These commenters are accustomed to paying for the higher costs implicit

    in separate accounting in the current bilateral market.

    On the other hand, CME, ICE, and Mr. Salzman identified a number of

    issues with the Complete Legal Segregation Model, including a number of

    limitations on the protection it provides to customers. They did not,

    however, provide reason to reject the conclusion that the Complete

    Legal Segregation Model provides substantially greater protection

    against Fellow-Customer Risk than the Futures Model.

    CME notes \111\ that a portion of the Cleared Swaps Customer

    Collateral will be held at the FCM, not the DCO, and that this

    collateral will not be protected by Complete Legal Segregation in the

    event that an FCM becomes insolvent. This proposition is true \112\ but

    is of little or no relevance to the comparison of Complete Legal

    Segregation with the Futures Model favored by these commenters.

    Complete Legal Segregation is intended to protect against Fellow-

    Customer Risk. As discussed in the NPRM and above,\113\ Fellow-Customer

    Risk is the risk that the collateral of one customer will be used to

    compensate a DCO for market losses resulting from the swaps of another

    customer.\114\ In other words, Fellow-Customer Risk arises in

    connection with collateral maintained in an FCM's customer account

    posted with a DCO because, under the Futures Model, the DCO is

    potentially entitled to take all of the collateral in this account to

    cover losses created by the swaps of any customer. However, Cleared

    Swaps Customer Collateral held at the FCM (or at a location other than

    at the DCO, such as a bank) is not accessible to the DCO. Thus, such

    [[Page 6348]]

    collateral is not subject to Fellow-Customer Risk.\115\ While Cleared

    Swaps Customer Collateral in the customer account at the FCM is

    available to meet customers' swaps-related obligations to the FCM, the

    FCM is prohibited by statute from using one customer's Cleared Swaps

    Customer Collateral as margin or security for another customer's

    swaps.\116\

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

    \111\ CME at 6.

    \112\ See supra note 13.

    \113\ See supra at Section 1.B.6.

    \114\ 76 FR at 33821 n. 21.

    \115\ As explained above, FCMs typically maintain two separate

    Cleared Swaps Customer Accounts. One is maintained at the DCO and

    contains collateral required by the DCO to secure current swaps

    positions. The second is maintained by the FCM itself, typically at

    a bank, and contains collateral provided to the FCM by customers but

    not currently posted to the account at the DCO.

    \116\ Section 4d(f)(2)(B) of the CEA, 7 U.S.C. 6d(f)(2)(B).

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

    To be sure, Cleared Swaps Customer Collateral is subject to

    operational risk--the risk that, due to fraud, incompetence, or other

    mishap, customer funds that are required to be segregated are lost.

    Operational risk, however, is common to all of the segregation models

    for Cleared Swaps Customer Collateral, including the Physical

    Segregation Model.\117\ Collateral at the FCM is also subject to a

    modicum of Investment Risk. But Commission regulation 1.25, upon which

    regulation 22.2(e)(1) is based, is designed to ensure that customer

    segregated funds are invested in a manner that minimizes their exposure

    to credit, liquidity, and market risks both to preserve their

    availability to customers and DCOs and to enable investments to be

    quickly converted to cash at a predictable value in order to avoid

    systemic risk. Towards these ends, regulation 1.25 establishes a

    general prudential standard by requiring that all permitted investments

    be ``consistent with the objectives of preserving principal and

    maintaining liquidity.'' \118\

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

    \117\ Moreover, as noted above (see supra section I.D.2), while

    the LSOC Model does not protect against operational risk any more

    than the Futures Model, it is superior in that it enhances the

    ability to transfer collateral after an insolvency caused by

    operational risk.

    \118\ See regulation 1.25(b).

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

    CME also provides a detailed description of how, due to the ``the

    extended operational timeline for derivatives clearing and the netting

    of payments,'' a customer could default on a payment on Tuesday, but

    the DCO would, due to a countervailing gain by a different customer or

    customers of the same clearing member, not see such a default until

    after Wednesday's clearing cycle (payments for which may not be due

    until Thursday morning).\119\ This analysis elides the fact that,

    pursuant to the calculations required under regulation 22.2(f), an FCM

    with a customer who incurred a loss in excess of that customer's

    Cleared Swaps Customer Collateral would, unless and until that customer

    posted additional collateral, be required to have covered such loss

    with the FCM's own capital deposited into the Cleared Swaps Customer

    Account. If, at any moment, such customer loss was not covered by the

    FCM's own capital, then the FCM would be in violation of its

    segregation requirements. Pursuant to Commission regulation 1.12(h),

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

    \119\ CME at 9.

    [w]henever a person registered as a futures commission merchant

    knows or should know that the total amount of its funds on deposit

    in segregated accounts on behalf of customers * * * is less than the

    total amount of such funds required by the Act and the Commission's

    rules to be on deposit in segregated * * * accounts on behalf of

    such customers, the registrant must report such deficiency

    immediately by telephonic notice * * * to the registrant's

    designated self-regulatory organization and the principal office of

    the Commission in Washington, DC * * *.\120\

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

    \120\ Commission regulation 1.12(h) emphasis added.

    Thus, an FCM whose customer suffers such a loss which is not

    covered by the FCM's own capital on deposit in the Cleared Swaps

    Customer Account will certainly know of such deficiency no later than

    noon the next day (Wednesday in CME's example), when it will be

    required, pursuant to regulation 22.2(g), to compute its segregated

    funds requirements and the amount of segregated funds it has on deposit

    to meet such requirements. Moreover, the Commission believes that an

    FCM carrying a customer account that suffers losses in excess of that

    firm's ability to cover ``should know'' of such losses by the end of

    that trading day (Tuesday in CME's example).

    Such notice will permit the Commission to act to notify the

    relevant clearing organizations and to ensure that prompt action is

    taken to either bring capital in to enable the FCM to meet its

    segregated funds requirements or to otherwise act to minimize customer

    losses.

    CME implies that a successful porting of customer accounts requires

    information that is ``100% accurate,'' \121\ and that an FCM is

    unlikely to meet that standard each day. CME also notes that there may

    be portfolio changes in customer accounts on the day of default.\122\

    Moreover, CME notes that a defaulting FCM may have systems that

    fail.\123\ CME notes that in the case of Lehman Brothers,\124\ there

    was a ``rushed, confused, uncertain and near-panic atmosphere,'' as

    described in the report of the SIPA Trustee.\125\

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

    \121\ CME at 13.

    \122\ Id. at 12.

    \123\ Id. at 14.

    \124\ The Lehman Brothers FCM was placed into a Securities

    Investor Protection Corporation liquidation on Friday, September 19,

    2008.

    \125\ CME at 14 (citation omitted).

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

    Recent experience demonstrates, however, that transfers can occur

    despite less than perfect information. For example, in the case of the

    bankruptcy of Lehman Brothers the commodity customer accounts were

    effectively transferred to Barclays over the weekend of September 20-

    21, 2008, immediately following the commencement of the liquidation of

    the firm,\126\ and any discrepancies were resolved, despite the

    difficulties described. Indeed, the key issue will be to identify the

    collateral attributable to the defaulting customer, as distinguished

    from the collateral attributable to all other customers, as

    discrepancies between non-defaulting customers can be resolved either

    as transferred accounts are reconciled, or through the claims process.

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

    \126\ This transfer was authorized in the hours immediately

    following the commencement of Lehman's liquidation, and was

    implemented in the hours immediately thereafter.

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

    Thus, while CME is correct in stating that ``the risk of ultimate

    financial loss to customers due to a fellow-customer default is reduced

    but certainly not eliminated under CLSM,'' \127\ the Commission

    concludes, based on its experience with its rules in general and with

    FCM bankruptcies in particular, that the probability and probable

    amount of such loss is far less than CME implies.

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

    \127\ CME at 15.

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

    Moreover, the swift portability of collateral associated with

    customer positions in the event of an FCM's default remains problematic

    under the Futures Model where there is a customer default. Furthermore,

    many of the imperfections of the Complete Legal Segregation Model and

    the residual Fellow-Customer Risk associated therewith that were

    highlighted by CME arise from the ``last-day risk'' that results from

    the fact that information about each customer's positions is only

    provided once each day. However, the NPRM made clear in relevant

    portions of sections 22.11 and 22.12, and the Commission reiterates

    herein, that information must be provided and calculations must be made

    at least once a business day. In other words, many of the imperfections

    discussed by CME are not inherent to the Complete Legal Segregation

    Model. Rather, each DCO is free to make improvements to that

    [[Page 6349]]

    minimum regulatory standard if the DCO finds such improvements to be

    technologically feasible and economically justifiable. For example, a

    DCO could require its clearing members to identify the customer

    associated with each swap as it is cleared, and the DCO could use this

    information to associate gains and losses more tightly with each

    customer, thereby minimizing ``last-day risk.'' The NPRM and this final

    rule simply set a minimum threshold for daily tracking.

    With respect to costs associated with evaluating the credit risks

    of individual customers, CME noted that it calculates, ``at the end of

    each trading day * * * for each FCM's cleared swaps customer account *

    * * the net position of each customer in the account [and] the net

    margin requirement for each customer in the account.'' \128\ Thus,

    based on CME's description of its current clearing practices, it would

    appear that CME already undertakes an individualized evaluation of the

    sufficiency of the collateral posted by each customer of an FCM.\129\

    In addition, as CME notes, ``FCMs are subject to compliance audits that

    are conducted for each FCM by the DCO serving as its ``designated self-

    regulatory organization.'' \130\ It would therefore seem that at least

    some of the costs associated with evaluating the credit risk of

    individual customers are already being incurred by DCOs.

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

    \128\ Id. at 9 (emphasis supplied).

    \129\ In addition, during the Second Roundtable, Ms. Taylor of

    CME stated that with respect to risk management, CME is ``set up to

    do it in the over-the-counter business at the individual customer

    level.'' See Second Roundtable Tr. at168, l. 10.

    \130\ See also Second Roundtable Tr. at 171, l. 18 (Ms. Taylor

    stating that ``on a day-to-day basis we don't see the collateral

    that's in the account of a customer at an FCM, but we do have

    transparency into the efficacy of the practices of holding margin

    and holding it in segregated accounts through the financial

    supervision and audit functions so that there is ongoing monitoring

    of that * * *'').

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

    With respect to ICE's proposal, the Commission notes that it would

    provide less Fellow-Customer Risk protection than the Complete Legal

    Segregation Model. The fact that swap customers seem to overwhelmingly

    favor at least as much Fellow-Customer Risk protection as afforded to

    them under the Complete Legal Segregation Model, notwithstanding the

    potential costs, weighs in favor of the Complete Legal Segregation

    Model rather than ICE's proposal.

    With respect to Newedge's suggestion for increased disclosure of

    FCM information, additional disclosure is often beneficial, and the

    Commission will consider additional disclosure requirements as a means

    of enhancing protection for collateral belonging to market

    participants. However, because of confidentiality concerns, any

    feasible enhanced disclosure is insufficient for quantifying risk

    exposure to Fellow-Customer Risk and, thus, insufficient for providing

    Cleared Swaps Customers with the ability to effectively manage such

    exposure.\131\ Moreover, even if it were practical to provide Cleared

    Swaps Customers with information sufficient to assess Fellow-Customer

    Risk, that task is better left to the DCO since (1) DCOs have a

    concentrated ability to ensure adequate risk mitigation, and (2) having

    each Cleared Swaps Customer effectively risk-manage each FCM would

    likely entail duplication with resulting cost.

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

    \131\ See Second Roundtable at p. 183, 1.12-p. 184, 1.10 (In

    reference to the disclosure of additional FCM information, Mr. Kahn

    stating ``Barclays does agree and would be willing to show our risk-

    management procedures and policies, and we do talk to our buy side

    clients about that * * * [but] if Barclays is providing clearing

    services for any of the individual firms on the other side of the

    table, we do not say that, nor would we ever give out any position

    level information. It is very important to us that in whatever

    paradigm it's set up and how you evaluate from a risk-management

    standpoint that the buy side and their trades that they've put on

    that we are serving remains confidential and does not leak to the

    market in any side.''); and Second Roundtable at p. 185, 1.6 (Ms.

    Taylor stating that ``when we know when people clear, that's very

    confidential information and I'm very sympathetic to the fear about

    fellow customer risk, but I'm also very sympathetic to the fact that

    none of you would want your information disclosed so that there is a

    balance on the other side * * *''). See also In re Stotler and Co.,

    144 B.R. 385, 393 (Bankr.N.D.Ill. 1992) (``[T]he legislative history

    of 11 U.S.C. 766 emphasizes that the risk of a broker's bankruptcy

    is not to be borne by the customer * * *.'' Individual customers

    ``face a formidable task in researching the relative solvency,

    reputation, and success of competing FCMs.'').

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

    Thus, after careful analysis of the comments, the Commission

    believes that the Complete Legal Segregation Model provides the most

    appropriate framework for the protection of Cleared Swaps Customer

    Collateral at this time. None of the segregation models the Commission

    considered provides perfect protection for Cleared Swaps Customer

    Collateral, and the degree of imperfection of any of the models is

    influenced by ``the facts and circumstances'' of an FCM default.

    However, as CME notes, the Complete Legal Segregation Model ``would, on

    its face, lead to greater protection of cleared swaps customer

    collateral against Fellow-Customer Risk than the Futures Model'' \132\

    and is ``more likely to facilitate portability of cleared swaps

    customer positions than the Futures Model, in the event of an FCM

    default in its cleared swaps customer account * * *.'' \133\

    Furthermore, the Complete Legal Segregation Model provides the best

    balance between benefits and costs in order to protect market

    participants and the public.

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

    \132\ CME at 16.

    \133\ Id.

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

    Finally, while the Complete Legal Segregation Model is a critical

    step in the efforts to protect customers and their collateral, as noted

    above, the Commission is actively considering seeking notice and

    comment on a proposal to allow individual protection of client assets.

    In addition, the Commission is directing staff to look into the

    possibility of adopting the Complete Legal Segregation Model for the

    futures market. The Commission remains committed to protecting market

    participants.

    IV. Section by Section Analysis: Regulation Part 22

    A. Regulation 22.1: Definitions

    Proposed regulation 22.1 established definitions for, inter alia,

    the following terms: ``cleared swap,'' ``cleared swaps customer,''

    ``cleared swaps customer account,'' ``cleared swaps customer

    collateral,'' ``cleared swaps proprietary account,'' ``clearing

    member,'' \134\ ``collecting futures commission merchant,''

    ``commingle,'' ``customer,'' ``depositing futures commission

    merchant,'' ``permitted depository,'' \135\ and ``segregate.''

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

    \134\ Under the Commission's proposal, the term ``clearing

    member'' means ``any person that has clearing privileges such that

    it can process, clear and settle trades through a derivatives

    clearing organization on behalf of itself or others. The derivatives

    clearing organization need not be organized as a membership

    organization.''

    \135\ The Commission proposed to define ``permitted depository''

    as a depository that is a bank located in the United States, a trust

    company located in the United States, a Collecting Futures

    Commission Merchant registered with the Commission (but only with

    respect to a Depositing Futures Commission Merchant providing

    Cleared Swaps Customer Collateral), or a derivatives clearing

    organization registered with the Commission. In addition, the FCM or

    the DCO must hold a written acknowledgment letter from the

    depository as required by proposed regulation 22.5.

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

    1. ``Segregate'' and ``Commingle''

    Regulation 22.1 proposed definitions for the terms ``segregate''

    and ``commingle'' that are intended to codify the common meaning of

    such terms under the part 1 of the Commission's regulations (the ``Part

    1 Provisions''). Pursuant to the proposal, to ``segregate'' two or more

    items means to keep them in separate accounts and to avoid combining

    them in the same transfer between accounts. In contrast, ``commingle''

    means to hold two or more items in the same account, or to combine such

    items in a transfer between accounts. The Commission did not receive

    comments on these

    [[Page 6350]]

    proposed definitions and is, therefore, adopting them as proposed.

    2. ``Cleared Swap''

    Regulation 22.1 proposed a definition of the term ``Cleared Swap''

    that (i) excludes, for purposes of Part 22 only, cleared swaps (and

    related collateral) that, pursuant either to a Commission rule,

    regulation, or order (including an order under section 4d(a) of the

    CEA) or to a DCO rule approved in accordance with regulation

    39.15(b)(2),\136\ are commingled with futures contracts (and related

    collateral) in a customer account established for the futures

    contracts, but (ii) includes, for purposes of Part 22 only, futures

    contracts or foreign futures contracts (and, in each case, related

    collateral) that, pursuant to either a Commission rule, regulation, or

    order (including an order under section 4d(f) of the CEA) or to a DCO

    rule approved in accordance with regulation 39.15(b)(2),\137\ are

    commingled with cleared swaps (and related collateral) in a customer

    account established for the cleared swaps. The Commission did not

    receive comments on the proposed definition of ``Cleared Swap'' and is

    adopting it as proposed with one change. The Commission finalized

    regulation 39.15 on October 18, 2011.\138\ That final regulation

    requires a DCO seeking to commingle Cleared Swaps (and related

    collateral) with futures contracts (and related collateral) in a

    futures account to petition for a Commission order under section 4d(a)

    of the CEA. Thus, the final definition of ``Cleared Swap'' in this

    rulemaking removes the reference to DCO rule approval procedures

    relevant to such commingling.

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

    \136\ Section 4d(a) of the CEA, 7 U.S.C. 6d(a).

    \137\ Section 4d(f) of the CEA, 7 U.S.C. 6d(f).

    \138\ 76 FR 69441.

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

    3. ``Cleared Swaps Customer'' and ``Customer''

    Regulation 22.1 proposed definitions of ``Cleared Swaps Customer''

    and ``Customer.'' The Commission is adopting the definitions of

    ``Cleared Swaps Customer'' and ``Customer'' essentially as proposed,

    except that a technical amendment is made to the definition of Cleared

    Swaps Customer to clarify that a clearing member of a DCO is not a

    Cleared Swaps Customer with respect to Cleared Swaps cleared on that

    DCO.

    4. ``Cleared Swaps Customer Collateral''

    Proposed regulation 22.1 defined Cleared Swaps Customer Collateral

    to include (i) money, securities, or other property that an FCM or a

    DCO receives, from, for, or on behalf of a Cleared Swaps Customer that

    is intended to or does margin, guarantee, or secure a Cleared Swap

    \139\ or, if the Cleared Swap is in the form or nature of an option,

    constitutes the settlement value of such option and (ii) ``accruals,''

    which are the money, securities, or other property that an FCM or DCO

    receives, either directly or indirectly, as incident to or resulting

    from a Cleared Swap that the FCM intermediates for a Cleared Swaps

    Customer. The proposed definition explicitly included a Cleared Swap in

    the form or nature of an option as Cleared Swaps Customer Collateral,

    but did not explicitly include option premiums as Cleared Swaps

    Customer Collateral. The proposed definition also explicitly included

    in ``accruals'' the money, securities, or other property that a DCO may

    receive relating to the Cleared Swap that an FCM intermediates for a

    Cleared Swap Customer.

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

    \139\ Proposed regulation 22.1 provides that ``Cleared Swaps

    Customer Collateral'' includes collateral that an FCM or a DCO

    receives from, for, or on behalf of a Cleared Swaps Customer that

    either (i) is actually margining, guaranteeing, or securing a

    Cleared Swap or (ii) is intended to margin, guarantee, or secure a

    Cleared Swap. This provision is a clarification of ``customer

    funds'' as defined in regulation 1.3, which includes ``all money,

    securities, and property received by a futures commission merchant

    or by a clearing organization from, for, or on behalf of, customers

    or option customers * * * to margin, guarantee, or secure futures

    contracts.''

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

    FIA suggested that the Commission confirm that the term Cleared

    Swaps Customer Collateral includes all assets provided by a Cleared

    Swaps Customer, including any sums required by an FCM to margin a

    Cleared Swap, even if that sum is in excess of the amount required by

    the relevant DCO, as well as collateral ``voluntarily'' deposited by a

    Cleared Swaps Customer in a Cleared Swaps Customer Account.\140\ In

    response, the Commission is clarifying that the definition of Cleared

    Swaps Customer Collateral includes any sums required by an FCM that is

    intended to, or does, margin a Cleared Swap as well as collateral

    ``voluntarily'' deposited by, or on behalf of, a Cleared Swaps Customer

    in a Cleared Swaps Customer Account. Moreover, in response to this

    comment, the Commission is adding a new section 22.13(c), which states

    that collateral posted by a Cleared Swaps Customer in excess of the

    amount required by a DCO (the ``excess collateral'') may be transmitted

    by the Cleared Swaps Customer's FCM to the DCO if, but only if, (i) the

    FCM is permitted to do so by DCO rule and (ii) the DCO provides a

    mechanism by which the FCM can identify the amount of such excess

    collateral attributable to each Cleared Swaps Customer, and such

    mechanism is employed effectively to accomplish that goal.

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

    \140\ See FIA at 7-8.

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

    5. ``Cleared Swaps Customer Account'' and ``Cleared Swaps Proprietary

    Account''

    As proposed, regulation 22.1 defined a ``Cleared Swaps Customer

    Account'' as (i) an account that an FCM maintains at a Permitted

    Depository for the Cleared Swaps (and related collateral) of its

    Cleared Swaps Customers, or (ii) an account that a DCO maintains at a

    Permitted Depository for collateral related to Cleared Swaps that the

    FCM members intermediate for their Cleared Swaps Customers. Regulation

    22.1 also proposed a definition for ``Cleared Swaps Proprietary

    Account'' that is substantially similar to regulation 1.3, which

    defines ``Proprietary Account'' for futures contracts. The Commission

    requested comment on whether the proviso in paragraph (b)(8), which

    states that ``an account owned by any shareholder or member of a

    cooperative association of producers, within the meaning of section 6a

    of the Act, which association is registered as an FCM and carries such

    account on its records, shall be deemed to be a Cleared Swaps Customer

    Account and not a Cleared Swaps Proprietary Account of such

    association, unless the shareholder or member is an officer, director,

    or manager of the association,'' remains relevant, particularly with

    respect to Cleared Swaps. The Commission did not receive comments on

    these proposed definitions and is, therefore, adopting the definitions

    of ``Cleared Swaps Customer Account'' and ``Cleared Swaps Proprietary

    Account'' as proposed.

    6. ``Clearing Member''

    Regulation 22.1 proposed a definition of ``Clearing Member.'' The

    Commission did not receive comments on this proposed definition.

    Therefore, the Commission is adopting the definition of ``Clearing

    Member'' as proposed.

    7. ``Collecting Futures Commission Merchant'' and ``Depositing Futures

    Commission Merchant''

    Proposed regulation 22.1 defined a ``Collecting Futures Commission

    Merchant'' or ``Collecting FCM'' as one that carries Cleared Swaps on

    behalf of another FCM and the Cleared Swaps Customers of that other FCM

    and, as part of doing so, collects Cleared Swaps

    [[Page 6351]]

    Customer Collateral.\141\ In contrast, a ``Depositing Futures

    Commission Merchant'' or ``Depositing FCM'' was defined as one that

    carries Cleared Swaps on behalf of its Cleared Swaps Customers through

    a Collecting FCM, and, as part of doing so, deposits Cleared Swaps

    Customer Collateral with such Collecting FCM. The Commission did not

    receive comments on these proposed definitions and is adopting the

    definitions of ``Collecting Futures Commission Merchant'' and

    ``Depositing Futures Commission Merchant'' as proposed.

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

    \141\ For the avoidance of doubt, an FCM does not become a

    Collecting FCM simply by intermediating the proprietary transactions

    of another FCM. An FCM only becomes a Collecting FCM by

    intermediating, on behalf of another FCM, Cleared Swaps belonging to

    Cleared Swaps Customers (and the relevant collateral).

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

    8. ``Permitted Depository''

    Regulation 22.1 proposed a definition of ``Permitted Depository.''

    The Commission did not receive comments on this proposed definition and

    is, therefore, adopting the definition of ``Permitted Depository'' as

    proposed.

    B. Regulation 22.2--Futures Commission Merchants: Treatment of Cleared

    Swaps Customer Collateral

    Regulation 22.2 proposed requirements for an FCM's treatment of

    Cleared Swaps Customer Collateral, as well as the associated Cleared

    Swaps.

    1. In General

    Proposed regulation 22.2(a) required an FCM to treat and deal with

    the Cleared Swaps of Cleared Swaps Customers, as well as associated

    Cleared Swaps Customer Collateral, as belonging to the Cleared Swaps

    Customers. The Commission did not receive any comments on regulation

    22.2(a) and is therefore adopting regulation 22.2(a) as proposed.

    2. Location of Collateral

    Proposed regulation 22.2(b) required that an FCM segregate all

    Cleared Swaps Customer Collateral that it receives. Additionally,

    proposed regulation 22.2(b) required that an FCM adopt one of two

    methods to hold segregated Cleared Swaps Customer Collateral, which

    parallel either implicit assumptions or explicit provisions of

    regulation 1.20(a).

    The Commission did not receive any comments on regulation 22.2(b)

    and is therefore adopting regulation 22.2(b) as proposed.

    3. Commingling

    Proposed regulation 22.2(c) permitted an FCM to commingle the

    Cleared Swaps Customer Collateral of multiple Cleared Swaps Customers,

    while prohibiting the FCM from commingling Cleared Swaps Customer

    Collateral with:

    FCM property, except as permitted under proposed

    regulation 22.2(e) (as discussed below); or

    ``customer funds'' (as regulation 1.3 defines such term)

    for futures contracts or the ``foreign futures or foreign options

    secured amount'' (as regulation 1.3 defines such term), except as

    permitted by a Commission rule, regulation or order (or a derivatives

    clearing organization rule approved pursuant to regulation

    39.15(b)(2)).\142\

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

    \142\ As the discussion on the proposed definition of ``Cleared

    Swaps'' highlights, if the Commission adopts a rule or regulation or

    issues an order pursuant to section 4d(a) of the CEA, or if the

    Commission approves DCO rules pursuant to regulation 39.15(b)(2)

    permitting such commingling, the Commission would apply the

    corresponding provisions and Part 190 to the Cleared Swap (and

    related collateral) as if the swap constituted a futures contract

    (and related collateral).

    In contrast, if the Commission adopts a rule or regulation or

    issues an order pursuant to section 4d(f) of the CEA, or if the

    Commission approves DCO rules pursuant to regulation 39.15(b)(2)

    permitting such commingling, the proposed definition of ``Cleared

    Swap'' would operate to apply Part 22 and Part 190 to (i) the

    futures contract (and related collateral) or (ii) the foreign

    futures contract (and related collateral) as if such contracts

    constituted Cleared Swaps (and related collateral).

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

    The Commission did not receive any comments on regulation 22.2(c)

    and is therefore adopting regulation 22.2(c) as proposed.

    4. Limitations on Use

    Proposed regulation 22.2(d) prohibited an FCM from (i) using, or

    permitting the use of, the Cleared Swaps Customer Collateral of one

    Cleared Swaps Customer to purchase, margin, or settle the Cleared

    Swaps, or any other transaction, of a person other than the Cleared

    Swaps Customer; (ii) using Cleared Swaps Customer Collateral to margin,

    guarantee, or secure the non-Cleared Swap contracts (e.g., futures or

    foreign futures contracts) of the entity constituting the Cleared Swaps

    Customer; \143\ (iii) imposing, or permitting the imposition of, a lien

    on Cleared Swaps Customer Collateral, including on any FCM residual

    financial interest therein; and (iv) claiming that any of the following

    constitutes Cleared Swaps Customer Collateral:

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

    \143\ As mentioned above, an entity may simultaneously transact

    (i) Futures contracts, (ii) foreign futures contracts, (iii) Cleared

    Swaps, and (iv) uncleared swaps. Such entity would constitute a

    Cleared Swaps Customer only with respect to its Cleared Swaps.

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

    Money invested in the securities, memberships, or

    obligations of any DCO, designated contract market (``DCM''), swap

    execution facility (``SEF''), or swap data repository (``SDR''); or

    Money, securities, or other property that any DCO holds

    and may use for a purpose other than to margin, guarantee, secure,

    transfer, adjust or settle the obligations incurred by the FCM on

    behalf of its Cleared Swaps Customers.

    ISDA argued that these proposed rules could prevent or inhibit

    portfolio margining, even where netting itself is legally enforceable,

    and stated that the Commission should ``acknowledge in rule that excess

    collateral may be managed and applied so as to facilitate portfolio

    based-margining (including to the benefit of uncleared swaps).'' \144\

    FIA requested that the Commission confirm that regulation 22.2(d) will

    permit FCMs to take security interests in their Cleared Swaps

    Customers' Cleared Swaps Customer Accounts in support of other

    positions held by such customers at the FCM, or for other entities

    (including affiliates of FCMs) to take such security interests in

    support of financing the Cleared Swaps Customer's margin obligations.

    MFA asked the Commission to ensure that Cleared Swaps Customers are

    able to grant liens on Cleared Swaps Customer Collateral (subordinate

    to a DCO's rights) to be able to continue entering into cross-product,

    and other multilateral, netting agreements. MFA also argued that the

    Commission should either (i) modify proposed regulation 22.2(d)(2) to

    limit application of the rule to ``prohibiting an FCM's creditors from

    obtaining a lien on [Cleared Swaps Customer Collateral]'' or (ii)

    clarify in the final rule release or in interpretive guidance that the

    language of proposed regulation 22.2(d) is not intended to limit a

    Cleared Swaps Customer's ability ``to grant liens on entitlements to

    cleared swap positions and related collateral as contemplated by UCC 9-

    102(14), 102(15), 9-102(16), 9-102(17), 9-102(49);'' provided such lien

    does not impair a DCO's first priority interests to such

    collateral.\145\

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

    \144\ ISDA at 4-5.

    \145\ See MFA at 5-6.

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

    As explained above, ``excess'' collateral refers to the collateral

    that a Cleared Swaps Customer deposits with an FCM or DCO that is more

    than the amount required by the FCM or DCO to margin such customer's

    Cleared Swaps portfolio. Since the ``excess'' collateral belongs to the

    Cleared Swaps Customer, and is not required by the FCM or DCO, it is

    entirely proper for the Cleared Swaps Customer to manage the

    collateral. The Cleared Swaps Customer may manage ``excess'' collateral

    by giving instructions to the FCM to,

    [[Page 6352]]

    among other things, transfer such collateral from one account (e.g., a

    Cleared Swaps Customer Account) to another account (e.g., a futures

    account).\146\ However, it is less clear how collateral that is not

    ``excess''--namely, collateral margining cleared positions (for which

    the counterparty is the DCO, through the FCM)--can also be used to

    margin uncleared positions (for which the counterparty is, by

    definition, other than a DCO). Accordingly, while the Commission

    supports the benefits of portfolio margining, the Commission does not

    believe it would be prudent to permit collateral margining cleared

    positions to simultaneously be used to margin uncleared positions.

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

    \146\ Regulation Part 22 creates the presumption that all money,

    securities, and other property deposited in a Cleared Swaps Customer

    Account constitutes Cleared Swaps Customer Collateral. Therefore, in

    order for a Cleared Swaps Customer to use ``excess'' collateral to

    margin, e.g., uncleared swaps, such customer must direct the

    transfer of such collateral from the Cleared Swaps Customer Account.

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

    In addition, the Commission clarifies that an FCM may not, under

    any circumstances, grant a lien to any person (other than to a DCO) on

    its Cleared Swaps Customer Account, or on the FCM's residual interest

    in its Cleared Swaps Customer Account. On the other hand, a Cleared

    Swaps Customer may grant a lien on the Cleared Swaps Customer's

    individual cleared swaps account (an ``FCM customer account'') that is

    held and maintained at the Cleared Swaps Customer's FCM.\147\ The

    Commission notes that by permitting a Cleared Swaps Customer to grant a

    lien on that Cleared Swaps Customer's FCM customer account, an FCM is

    not permitting the grant of a lien on Cleared Swaps Customer

    Collateral. Furthermore, the Commission confirms that regulation

    22.2(d) permits (i) FCMs to take a security interest in a Cleared Swaps

    Customer's FCM customer account in support of other positions held by

    such customer at the FCM, and (ii) other entities (including affiliates

    of FCMs) to take a security interest in a Cleared Swaps Customer's FCM

    customer account in support of financing the Cleared Swaps Customer's

    margin obligations.

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

    \147\ An FCM customer account is an account maintained by the

    FCM on behalf of a specific Cleared Swaps Customer that holds assets

    provided by that Cleared Swaps Customer, or other assets of

    equivalent value, that are not currently posted with the DCO to

    support swaps positions cleared by the FCM on behalf of such Cleared

    Swaps Customer. Typically, an FCM customer account constitutes a

    notation in the books and records of the FCM, and not a separate

    account at a depository. For a more detailed discussion of FCM

    customer accounts, see the discussion in section I.B.5.

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

    5. Exceptions

    Regulation 22.2(e) proposed certain exceptions to the

    abovementioned requirements and limitations. Specifically, proposed

    regulation 22.2(e)(1) allowed an FCM to invest Cleared Swaps Customer

    Collateral in accordance with regulation 1.25, as such regulation may

    be amended from time to time. Proposed regulation 22.2(e)(2) permitted

    an FCM to withdraw Cleared Swaps Customer Collateral for such purposes

    as meeting margin calls at a DCO or a Collecting FCM, or to meet

    charges lawfully accruing in connection with a cleared swap, such as

    brokerage or storage charges. Proposed regulation 22.2(e)(3) permitted

    an FCM (i) to place its own property in an FCM Physical Location or

    (ii) to deposit its own property in a Cleared Swaps Customer

    Account.\148\ Finally, as proposed, regulation 22.2(e)(4) clarified

    that, if an FCM places or deposits its own property in an FCM Physical

    Location or a Cleared Swaps Customer Account, as applicable, then that

    property becomes Cleared Swaps Customer Collateral. However, an FCM

    would be permitted to retain a residual financial interest in property

    in excess of that necessary.

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

    \148\ Regulation 22.2(e)(3) proposes to permit an FCM to deposit

    only those securities that are unencumbered and are of the types

    specified in regulation 1.25. Such proposal accords with regulation

    1.23. See regulation 1.23. The Commission notes, however, that this

    proposal does not, and is not meant to, require a DCO to accept all

    of the types of securities or other property specified in regulation

    1.25.

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

    SIFMA and Vanguard argued that the Commission should require an FCM

    to identify when it has used its own capital to meet a Cleared Swap

    Customer's margin obligation and whether such capital can be used by a

    DCO to cure a defaulting Cleared Swap Customer's margin

    obligations.\149\ To address this comment, the Commission is amending

    regulation 22.2(e)(3) to distinguish between (a) cases where an FCM

    uses its own capital to cure a Cleared Swaps Customer's undermargined

    or deficit account and (b) cases where an FCM uses its own capital to

    create a ``buffer'' in the Cleared Swaps Customer Account. The

    Commission notes that in case (a), the FCM has, in essence, provided an

    advance to the Cleared Swaps Customer, and the DCO should be able to

    use such collateral to meet a default by that Cleared Swaps Customer to

    the same extent as if that Cleared Swaps Customer provided the

    collateral. However, in case (b) the FCM has provided collateral that

    does not belong to any specific Cleared Swaps Customer, and thus there

    is no reason to restrict the use of that collateral to any specific

    Cleared Swaps Customer. The Commission also notes that, to the extent

    the DCO permits the FCM to post ``excess'' collateral, the DCO must,

    through its own rules, require that the FCM separately account for the

    separately identified ``buffer collateral'' (which originated from the

    FCM's own capital) and the collateral attributed (at the DCO) to the

    FCM's Cleared Swaps Customers (which belongs to those customers).

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

    \149\ See SIFMA at 10; and Vanguard at 7.

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

    ISDA noted that the use of ``such'' in regulation 22.2(e)(4)(ii) is

    ambiguous and could imply that an FCM has a residual interest only in

    the particular account (i.e., cash versus securities) into which it has

    deposited property. ISDA argued that this might cause unintended

    consequences if the customer deposits a security and the FCM, faced

    with a need to advance variation margin on behalf such customer in

    cash, does not liquidate the security but rather deposits cash secured

    by that security. ISDA suggested that the Commission clarify the

    language by making clear that the FCM has a residual interest in all

    property in Cleared Swaps Customer Accounts in excess of that required

    by the regulation 22.2(f)(4) segregation requirement.\150\ In response,

    the Commission clarifies that an FCM has a residual interest in all

    property in Cleared Swaps Customer Accounts in excess of that required

    by the regulation 22.2(f)(4) segregation requirements.

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

    \150\ See ISDA at 8-9.

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

    e. Requirements As to Amount

    As proposed, regulation 22.2(f) set forth an explicit calculation

    for the amount of Cleared Swaps Customer Collateral that an FCM must

    maintain in segregation, which did not materially differ in the Form 1-

    FR-FCM from the calculation for ``customer funds'' of futures

    customers. First, proposed regulation 22.2(f) defined ``account'' to

    reference an FCM's books and records pertaining to the Cleared Swaps

    Customer Collateral of a particular Cleared Swaps Customer. Second,

    proposed regulation 22.2(f) required an FCM to reflect in its account

    for each Cleared Swaps Customer the market value of any Cleared Swaps

    Collateral that it receives from such customer, as adjusted for:

    Any uses that proposed regulation 22.2(d) permits;

    Any accruals or losses on investments permitted by

    proposed regulation 22.2(e) that, pursuant to the applicable FCM

    customer agreement,

    [[Page 6353]]

    are creditable or chargeable to such Cleared Swaps Customer;

    Any charges lawfully accruing to the Cleared Swaps

    Customer, including any commission, brokerage fee, interest, tax, or

    storage fee; and

    Any appropriately authorized distribution or transfer of

    the Cleared Swaps Collateral.

    Third, proposed regulation 22.2(f) categorized accounts of Cleared

    Swaps Customers as having credit or debit balances. Accounts where the

    market value of Cleared Swaps Customer Collateral is positive after

    adjustments have credit balances. Conversely, accounts where the market

    value of Cleared Swaps Customer Collateral is negative after

    adjustments have debit balances. Fourth, proposed regulation 22.2(f)

    required an FCM to maintain in segregation, in its FCM Physical

    Location and/or its Cleared Swaps Customer Accounts at Permitted

    Depositories, an amount equal to the sum of any credit balances that

    Cleared Swaps Customers have in their accounts, excluding from such sum

    any debit balances that Cleared Swaps Customers have in their accounts

    (the ``Collateral Requirement''). Finally, regulation 22.2(f) proposed

    an exception to the exclusion of debit balances. Specifically, to the

    extent that a Cleared Swaps Customer deposited ``readily marketable

    securities'' with the FCM to secure a debit balance in its account,

    then the FCM must include such balance in the Collateral Requirement.

    ``Readily marketable'' was defined as having a ``ready market'' as such

    latter term is defined in rule 15c3-1(c)(11) of the Securities and

    Exchange Commission (Sec. 241.15c3-1(c)(11) of this title). Proposed

    regulation 22.2(f) deemed a debit balance ``secured'' only if the FCM

    maintains a security interest in the ``readily marketable securities,''

    and holds a written authorization to liquidate such securities in its

    discretion. To determine the amount of the debit balance that the FCM

    must include in the Collateral Requirement, proposed regulation 22.2(f)

    required the FCM (i) to determine the market value of such securities,

    and (ii) to reduce such market value by applicable percentage

    deductions (i.e., ``securities haircuts'') as set forth in rule 15c3-

    1(c)(2)(vi) of the Securities and Exchange Commission. The FCM would

    include in the Collateral Requirement that portion of the debit

    balance, not exceeding 100 percent, which is secured by such reduced

    market value. The Commission requested comment on the Collateral

    Requirement proposed in regulation 22.2(f). Specifically, the

    Commission requested comment on whether the explicit calculation of

    such Collateral Requirement materially differs from the implicit

    calculation in the Part 1 Provisions for segregated ``customer funds''

    of futures customers.

    ISDA expressed concern that the definition of Cleared Swaps

    Customer Collateral may sweep in investment returns, which may be

    inconsistent with regulation 22.10 that allows DCOs and FCMs to keep

    investment returns unless otherwise agreed and regulation

    22.2(f)(2)(ii) that refers to investment returns creditable to a

    customer by agreement.\151\ FIA asked the Commission to clarify whether

    the definition of Cleared Swaps Customer Collateral included the

    interest earned on investments of customer funds, which FCMs have

    traditionally been permitted to retain.\152\ In addition, FIA stated

    that because an FCM is required to include accruals or losses on

    investments of customer collateral under proposed regulation 22.3, the

    provision appears to state that customers can agree to assume all or a

    portion of the losses incurred in connection with the investment of

    customer collateral. FIA ``does not believe that a customer may agree

    to share in losses incurred in connection with investments under Rule

    1.25.'' \153\ The Commission confirms that investment returns are

    includable in Cleared Swaps Customer Collateral only to the extent

    creditable pursuant to the customer agreement. As such, the Commission

    is deleting the words ``or losses'' and ``or chargeable,'' from

    regulation Sec. 22.2(f)(2)(ii). To be clear, Cleared Swaps Customers

    are not responsible for losses on investments made pursuant to, and in

    accordance with, regulation 1.25.

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

    \151\ ISDA at 6-7.

    \152\ See FIA at 7-8 & nn. 25-30.

    \153\ The FIA cited to a number of cases where courts have

    stated that ``Congress intended that futures commission merchants be

    entitled to any and all interest on their investment of customer

    margin funds.'' See id. at n. 29 (citing Marchese v. Shearson Hayden

    Stone, Inc. 644 F.Supp. 1381 (C.D. Cal. 1986), aff'd, 822 F.2d 876

    (9th Cir. 1987); Craig v. Refco, 624 F.Supp 944 (N.D. Ill. 1983),

    aff'd. 816 F.2d 347 (7th Cir. 1987) (confirming that ``the FCM, not

    the customer, bears the risk of any decline in the value of

    investments purchased with customer funds''); and Bibbo v. Dean

    Witter Reynolds, Inc., 151 F.3d 559 (6th Cir. 1998). See also id. at

    8-9 & n. 31.

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

    AII requested that the Commission ``ensure that swaps customers may

    direct the investments in which initial margin is invested, as is done

    today through bilateral agreements with dealer counterparties.'' \154\

    While Cleared Swaps Customers in the Cleared Swaps Customer Account

    Class would share in Investment Risk, the Commission notes that these

    comments are beyond the limited scope of these regulations, and it will

    consider how to address them outside of this rulemaking. However,

    nothing contained herein would limit an FCM from adopting as a policy--

    and commit itself by contract with its customers--to further limit its

    investments of customer funds for all customers of one or more account

    classes (i.e., futures, foreign futures, Cleared Swaps).\155\

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

    \154\ AII at 4. The term ``initial margin'' is defined in

    regulation 1.3(ccc) and means ``money, securities, or property

    posted by a party to a futures, option, or swap as performance bond

    to cover potential future exposures arising from changes in the

    market value of the position.'' The term ``variation margin'' is

    defined in regulation 1.3(fff) and means ``a payment made by a party

    to a futures, option, or swap to cover the current exposure arising

    from changes in the market value of the position since the trade was

    executed or the previous time the position was marked to market.''

    \155\ Because of pro rata distribution, limiting the investments

    of customer funds attributable to individual customers would be

    insufficient to protect such customers from Investment Risk

    attributable to the investment of customer funds attributable to

    other customers within the same account class.

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

    FIA argued that the calculation requirements set forth in

    regulation 22.2 pose an excessive burden because an FCM cannot offset

    negative and positive balances in different currencies. Thus, if a

    Cleared Swaps Customer has a positive balance in USD but a negative

    balance in Euro, the FCM would need to deposit its own capital to cover

    the negative balance in Euro without respect to the Cleared Swaps

    Customer's positive balance in USD. FIA noted that though proposed

    regulation 22.2(g) mirrors existing regulation 1.32(a), there is an

    important difference in circumstances that warrants different treatment

    of the two cases: while relatively few futures contracts traded on U.S.

    DCMs are denominated in a foreign currency, a significant number of

    Cleared Swaps are expected to be denominated in foreign

    currencies.\156\ In response, the Commission recognizes the concerns

    expressed by the FIA. However, efforts to provide that an FCM may, in

    making its segregation calculations, include a debit balance to the

    extent such balance is secured by funds in other currencies, subject to

    appropriate haircuts, are beyond the limited scope of this rulemaking.

    The Commission will, therefore, consider how to address these issues

    outside of this rulemaking.

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

    \156\ See FIA at 10-11.

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

    f. Segregated Account; Daily Computation and Record

    Proposed regulation 22.2(g) required an FCM to compute, as of the

    close of

    [[Page 6354]]

    each business day, on a currency-by-currency basis:

    The aggregate market value of the Cleared Swaps Customer

    Collateral in all FCM Physical Locations and all Cleared Swaps Customer

    Accounts at Permitted Depositories (the ``Collateral Value'');

    The Collateral Requirement; and

    The amount of the residual financial interest that the FCM

    holds in such Cleared Swaps Customer Collateral (i.e., the difference

    between the Collateral Value and the Collateral Requirement).

    Proposed regulation 22.2(g) also required the FCM to complete the

    abovementioned computation prior to noon\157\ on the next business day,

    and to keep all computations, together with supporting data, in

    accordance with regulation 1.31.

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

    \157\ ``Noon'' refers to noon in the time zone where the FCM's

    principal office is located.

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

    The Commission did not receive any comments on regulation 22.2(g)

    and is therefore adopting regulation 22.2(g) as proposed.

    C. Regulation 22.3--Derivatives Clearing Organizations: Treatment of

    Cleared Swaps Customer Collateral

    Regulation 22.3 proposed requirements for DCO treatment of Cleared

    Swaps Customer Collateral from FCMs, as well as the associated Cleared

    Swaps. Specifically, regulation 22.3(a) required a DCO to treat Cleared

    Swaps Customer Collateral deposited by an FCM as belonging to the

    Cleared Swaps Customers of that FCM and not other persons. Moreover,

    regulation 22.3(b) required DCOs to segregate all Cleared Swaps

    Customer Collateral either with itself or a Permitted Depository.

    Proposed regulation 22.3(c) allowed a DCO to commingle the Cleared

    Swaps Customer Collateral that it receives from multiple FCMs on behalf

    of their Cleared Swaps Customers, while prohibiting the DCO from

    commingling Cleared Swaps Customer Collateral with (i) The money,

    securities, or other property belonging to the DCO, (ii) the money,

    securities, or other property belonging to any FCM, or (iii) other

    categories of funds that it receives from an FCM on behalf of

    Customers, including ``customer funds'' (as regulation 1.3 defines such

    term) for futures contracts or the ``foreign futures or foreign options

    secured amount'' (as regulation 1.3 defines such term), except as

    permitted by a Commission rule, regulation or order (or by a

    derivatives clearing organization rule approved pursuant to regulation

    39.15(b)(2)).\158\ Regulations 22.3(d) and (e), on the other hand,

    proposed certain exceptions to the abovementioned requirements and

    limitations. Regulation 22.3(d) as proposed (i) allowed a DCO to place

    money, securities, or other property belonging to an FCM in a DCO

    Physical Location, or deposit such money, securities, or other property

    in the relevant Cleared Swaps Customer Account, pursuant to an

    instruction from the FCM, and (ii) to permit FCM withdrawals of money,

    securities, or other property from a DCO Physical Location or Cleared

    Swaps Customer Account. Proposed regulation 22.3(d) is being deleted

    consistent with the changes to regulation 22.2(e)(3), which require

    delineation between cases where an FCM posts collateral on behalf of a

    particular customer and cases where an FCM posts collateral on behalf

    of its customer account in general. Proposed regulation 22.3(e) (now,

    regulation 22.3(d)) allowed a DCO to invest Cleared Swaps Customer

    Collateral in accordance with regulation 1.25, as such regulation may

    be amended from time to time.

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

    \158\ See 76 FR at 69390-92.

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

    The Commission requested comment on what, if any, changes to

    proposed regulation 22.3 may be appropriate to accommodate the

    possibility that a depository registered with either domestic or

    foreign banking regulators may seek to become a DCO, and that such

    depository may seek to hold Cleared Swaps Customer Collateral, as well

    as other forms of customer property. Specifically, the Commission

    requested comment on (i) whether a DCO that is also a registered

    depository should be permitted to hold both tangible and intangible

    forms of Cleared Swaps Customer Collateral from FCMs itself, (ii) the

    challenges that a DCO holding tangible and intangible forms of Cleared

    Swaps Customer Collateral pose to the protection (including effective

    segregation) of Cleared Swaps Customer Collateral (as well as other

    forms of customer property), and (iii) how any challenges identified in

    (ii) might be addressed.

    ISDA stated that the definition of Cleared Swaps Customer

    Collateral does not distinguish between initial and variation margin.

    Both FIA and ISDA expressed concerns that, if variation margin is

    considered as collateral, regulations 22.3(a) and 22.3(b) would prevent

    a DCO from taking Cleared Swaps Customer Collateral received from one

    FCM as variation margin ``and transferring it to an FCM whose customers

    are on the opposite side of the relevant trades.'' \159\ FIA asked the

    Commission to confirm that a DCO may pass variation margin to the

    receiving party ``if such variation is characterized as collateral and

    not as a settlement payment by the parties to the swap.'' \160\

    Similarly, ICE requested clarification that a DCO that has received

    ``variation or mark-to-market margin (as opposed to initial margin)''

    may be used to settle variation for offsetting swaps. ICE argues that

    without an amendment permitting DCOs to treat ``variation or mark-to-

    market'' margin as a pass-through, ``clearinghouses could effectively

    be prohibited from clearing much of the OTC swaps market as it

    transacts today.'' \161\ The Commission is adopting regulation 22.3 as

    proposed. The Commission recognizes the concerns expressed by

    commenters and confirms that regulation 22.3 is intended to permit DCOs

    to use variation margin collected from Cleared Swaps Customers to pay

    variation margin to, among others, Cleared Swaps Customers.

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

    \159\ ISDA at 5. See FIA at 9.

    \160\ FIA at 9 (emphasis supplied).

    \161\ ICE at 10.

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

    ISDA also observed that a variation margin payment ``may be

    considered as a settlement payment--a realized profit/loss--as in the

    case of listed futures; or as collateralizing current exposure, a

    payment representing unrealized profit/loss, as in the case of

    bilateral (uncleared) swap contracts.'' \162\ ISDA argued that Cleared

    Swaps Customers would be subject to a ``mark-to-market'' tax regime,

    paying ordinary income on swap returns, if a DCO were to treat as a

    contract settlement, a variation margin payment made with respect to a

    Cleared Swap.\163\ Accordingly, ISDA noted that recording daily mark-

    to-market income on swaps would poorly match the periodic realized

    coupon income on the bonds hedged by such swaps.\164\ Similarly, FIA

    noted that it has ``been advised that, because cleared swaps are not

    subject to section 1256 of the Internal Revenue Code, the

    characterization of such payments as settlement payments may have tax

    consequences that may impair the ability of certain financial end-users

    * * * to enter into cleared swaps transactions.'' \165\ ISDA suggested

    that Congress did not intend to change the tax treatment of swaps,

    because section 1601 of the Dodd-Frank Act explicitly exempts Cleared

    Swaps from being treated as ``section 1256 contracts.'' \166\ As such,

    ISDA requested that the

    [[Page 6355]]

    Commission clarify that DCOs can treat variation margin as collateral

    rather than settlement payments.\167\ These comments are beyond the

    limited scope of these regulations and outside the scope of the

    Commission's authority. The Commission does not take any view on the

    proper treatment of variation margin associated with swaps for tax

    purposes. Rather, the Commission believes that the Internal Revenue

    Service is the regulatory body best equipped to address the identified

    taxation issue.

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

    \162\ ISDA at 5.

    \163\ Id.

    \164\ Id. at 6.

    \165\ FIA at 9, n. 33.

    \166\ ISDA at 6.

    \167\ Id.

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

    D. Regulation 22.4--Futures Commission Merchants and Derivatives

    Clearing Organizations: Permitted Depositories

    Proposed regulation 22.4 listed depositories permitted to hold

    Cleared Swaps Customer Collateral (the ``Permitted

    Depositories''),\168\ and noted that an FCM could serve as a Permitted

    Depository, but only if it is a Collecting FCM carrying the Cleared

    Swaps (and related Cleared Swaps Customer Collateral) of a Depositing

    FCM. The Commission sought public comment regarding the appropriateness

    of allowing an FCM to serve as a Permitted Depository only if the FCM

    is a ``Collecting FCM.'' The Commission did not receive any comments in

    response thereto or on regulation 22.4 generally. The Commission is,

    therefore, adopting regulation 22.4 as proposed.

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

    \168\ As proposed, for a DCO or an FCM, a Permitted Depository

    must (subject to regulation 22.9) be: (i) A bank located in the

    United States; (ii) a trust company located in the United States; or

    (iii) a DCO.

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

    E. Regulation 22.5--Futures Commission Merchants and Derivatives

    Clearing Organizations: Written Acknowledgement

    As proposed, regulation 22.5 required a DCO or FCM to obtain

    written acknowledgement letters from depositories (including, by

    implication, depositories located outside the United States) before

    opening a Cleared Swaps Customer Account.\169\ Proposed regulation 22.5

    also set forth substantive requirements for such acknowledgement

    letter. The Commission requested comment on the appropriateness of the

    following: (i) the addition of regulation 1.20 (as the Commission may

    choose to amend such regulation) in proposed regulation 22.5, and (ii)

    the adaptation of any form letter that the Commission may choose to

    promulgate under regulation 1.20 to accommodate Cleared Swaps Customer

    Collateral under regulation 22.5.

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

    \169\ The function of a written acknowledgment letter is to

    ensure and provide evidence that a potential Permitted Depository is

    aware that (i) The FCM or DCO is opening a Cleared Swaps Customer

    Account, (ii) the funds deposited in such account constitute Cleared

    Swaps Customer Collateral, and (iii) such Cleared Swaps Customer

    Collateral is subject to the requirements of section 4d(f) of the

    CEA and Part 22 (when finalized).

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

    ISDA stated that an acknowledgement letter from a foreign

    depository ``may be difficult to get and of little purpose, if

    obtained'' because the letter would not alter the fact that the foreign

    depository would be subject to local bankruptcy jurisdiction.\170\ The

    Commission is adopting regulation 22.5 as proposed. The Commission

    notes that under regulation 1.49(d)(1) depositories in the futures

    market must provide the depositing FCM or DCO with the appropriate

    written acknowledgements required under regulations 1.20 and 1.26. The

    requirements set forth in regulation 22.5 parallel the requirements set

    forth under regulations 1.20 and 1.26. The Commission has no reason to

    believe that written acknowledgements from foreign depositories would

    be any more difficult to obtain in the swaps market than they would be

    in the futures market. Moreover, the written acknowledgment is intended

    to clearly establish the commercial expectations of the parties before

    a bankruptcy or insolvency event. In addition, the written

    acknowledgements could aid a bankruptcy judge's or trustee's allocation

    of assets to the extent a bankruptcy court or other insolvency regime

    finds the commercial expectations of the parties to be helpful

    information.

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

    \170\ ISDA at 8.

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

    F. Regulation 22.6--Futures Commission Merchants and Derivatives

    Clearing Organizations: Naming of Cleared Swaps Customer Accounts

    Proposed regulation 22.6 required an FCM or DCO to ensure that the

    name of each Cleared Swaps Customer Account that it maintains with a

    Permitted Depository (i) clearly identifies the account as a ``Cleared

    Swaps Customer Account,'' and (ii) clearly indicates that the

    collateral therein is ``Cleared Swaps Customer Collateral'' subject to

    segregation in accordance with section 4d(f) of the CEA and Part 22.

    The Commission did not receive any comments on this regulation and is,

    therefore, adopting regulation 22.6 as proposed.

    G. Regulation 22.7--Permitted Depositories: Treatment of Cleared Swaps

    Customer Collateral

    As proposed, under regulation 22.7 a Permitted Depository is (i)

    required to treat all funds in a Cleared Swaps Customer Account as

    Cleared Swaps Customer Collateral and (ii) prohibited from holding,

    disposing of, or using any Cleared Swaps Customer Collateral as

    belonging to any person other than the Cleared Swaps Customers of the

    FCM maintaining such Cleared Swaps Customer Account or the Cleared

    Swaps Customers of the FCMs for which the DCO maintains such Cleared

    Swaps Customer Account. The Commission did not receive any comments on

    this proposed rule and is adopting regulation 22.7 as proposed.

    H. Regulation 22.8--Situs of Cleared Swaps Customer Accounts

    1. Proposed Requirements

    Proposed regulation 22.8 required (i) each FCM to designate the

    United States as the site (i.e., the legal situs) of the FCM Physical

    Location and the ``account'' (as regulation 22.2(f)(1) defines such

    term) that the FCM maintains for each Cleared Swaps Customer, and (ii)

    each DCO to designate the United States as the site (i.e., the legal

    situs) of the DCO Physical Location and the Cleared Swaps Customer

    Account that the DCO maintains on its books and records for the Cleared

    Swaps Customers of each FCM. The Commission sought comment on whether,

    as proposed, regulation 22.8 ensured that Cleared Swaps Customer

    Collateral be treated in accordance with the U.S. Bankruptcy Code, to

    the extent possible, and if it did not achieve this purpose, what

    alternatives the Commission should consider to achieve such purpose.

    Additionally, the Commission requested comment on the benefits and

    costs of proposed regulation 22.8, as well as any alternatives.

    NGX states that the requirement of U.S. situs for a customer

    account may increase legal uncertainty with respect to the insolvency

    regime that would apply to a bankruptcy, and such uncertainty may slow

    down resolution of a clearing participant's default and bankruptcy.

    Moreover, NGX argues that ``it is unclear how the U.S. account situs

    requirement will interact with the choice of law provision'' \171\ of a

    non-U.S. DCO that chooses to apply its home country insolvency regime.

    In light of this uncertainty, NGX recommends that the Commission adopt

    the approach it proposed for foreign non-U.S. clearinghouses seeking

    DCO registration; namely, that the DCO registration application include

    a ``memorandum of local law analyzing

    [[Page 6356]]

    insolvency issues in the [relevant] foreign jurisdiction * * * and

    describing how the applicant has addressed any conflict of law issues,

    which jurisdiction's law is intended to apply to each aspect of the

    applicant's clearing house's operations, and the enforceability of the

    choice of law in the relevant jurisdictions.'' \172\ However, NGX

    requested that the Commission provide greater guidance regarding the

    operation of the proposed rule if it opts to retain the account situs

    requirements, specifically making clear that ``a DCO choice of law rule

    should be able to include both choice of forum as well as the

    substantive law to be applied'' with respect to a clearinghouse's

    insolvency and the remedies available to a clearinghouse in the event

    of a clearing member's default or insolvency.\173\

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

    \171\ NGX at 4.

    \172\ Id. at 5 (citing to the ``Risk Management Requirements for

    Derivative Clearing Organizations,'' 76 FR. 3698, 3742, Jan. 20,

    2011).

    \173\ Id. at 4-5.

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

    The Commission notes that, in the event of an FCM's bankruptcy, the

    legal situs provision is intended to make clear that the insolvency

    regime that will apply to the customers of the FCM is the U.S.

    insolvency regime embodied in Subchapter IV of Chapter 7 of the U.S.

    Bankruptcy Code and Part 190 of the Commission's regulations.\174\

    While a DCO is free to make the choice that local law applies to all

    other aspects of a DCO's relationships with its members, the Commission

    has historically required, and intends to continue requiring, that

    customers of FCMs in bankruptcy be treated in accordance with U.S.

    bankruptcy law.

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

    \174\ As discussed in the NPRM, the Commission does not intend

    for regulation 22.8 to affect the actual location in which an FCM or

    DCO may keep Cleared Swaps Customer Collateral. Though the legal

    situs of an ``account'' (as regulation 22.2(f)(1) defines the term)

    and a Cleared Swaps Customer Account must be in the United States,

    the Commission recognizes that Cleared Swaps Customer Collateral

    may, in actuality, be kept outside the United States in certain

    circumstances. However, the Commission notes that regulation 22.8

    does not override other Commission regulations regarding the

    location of customer funds. Specifically, regulation 22.9, which

    applies regulation 1.49 to Cleared Swaps, requires, among other

    things, FCMs and DCOs to hold, in a segregated account on behalf of

    Cleared Swaps Customers, sufficient United States dollars in the

    United States to meet all United States dollar obligations.

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

    I. Regulation 22.9--Denomination of Cleared Swaps Customer Collateral

    and Location of Depositories

    Proposed regulation 22.9 applies regulation 1.49 to Cleared Swaps

    Customer Collateral. Regulation 1.49 sets forth rules determining the

    permitted denominations of customer funds (i.e., permitted currencies

    and amounts in each currency), permitted locations of customer funds

    (i.e., permitted countries and amounts in each country), and

    qualifications that entities outside of the United States must meet to

    become Permitted Depositories (e.g., minimum regulatory capital).

    Specifically, regulation 1.49(b)(1)(iii) permits an FCM's obligations

    to a customer to be denominated in ``a currency in which funds have

    accrued to the customer as a result of trading conducted on a

    designated contract market or registered derivatives transaction

    execution facility,'' while regulation 1.49(d)(3) requires depositories

    that are located outside the United States to be (i) A bank or trust

    company that meets certain financial requirements, (ii) an FCM, or

    (iii) a DCO. In addition, regulation 22.9 proposed to allow an FCM to

    serve as a Permitted Depository only if the FCM was a Collecting FCM

    carrying the Cleared Swaps, and associated Cleared Swaps Customer

    Collateral, for the Cleared Swaps Customers of a Depositing FCM.

    ISDA stated that regulation 1.49(b)(1)(iii) should be amended to

    reflect the wider scope of execution methods available for Cleared

    Swaps.\175\ In response, the Commission is amending regulation 22.9 to

    allow the FCM's obligations to a Cleared Swaps Customer to be

    denominated in the currency in which funds have accrued to the Cleared

    Swaps Customer as a result of a Cleared Swap carried through such FCM,

    to the extent of such accruals. However, the Commission notes that it

    cannot amend regulation 1.49(b)(1)(iii) at this time because such an

    amendment was not part of the NPRM.

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

    \175\ ISDA at 8.

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

    ISDA also requested that the Commission make plain that central

    securities depositories are acceptable depositories.\176\ Similarly,

    FIA argued that Euroclear, a central securities depository for Euro-

    denominated securities, should be permitted to act as a depository

    under Commission regulations.\177\ The Commission notes that although

    the notion of a central securities depository as an acceptable

    depository for securities has considerable intuitive appeal, CEA Sec.

    4d(f)(3)(A)(i) limits acceptable depositories for commingled funds to

    ``any bank or trust company or * * * a derivatives clearing

    organization.'' \178\ Because these comments are beyond the limited

    scope of these regulations, the Commission will consider how to address

    them outside of this rulemaking.

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

    \176\ Id.

    \177\ See FIA at 11.

    \178\ Section 4d(f)(3)(A)(ii) of the CEA permits customer

    property to be used to margin a cleared swap with a member of a DCO,

    i.e., a collecting FCM. However, the Commission notes that a foreign

    bank that meets the requirements of regulation 1.49(d)(3)(i) is a

    good depository, and such a foreign bank may itself hold foreign

    securities in an account at a foreign central securities depository.

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

    Finally, FHLB argued that ``customer collateral should only be held

    in banks or trust companies located in the United States.'' \179\ The

    Commission does not believe it would be appropriate to address this

    comment at this time, as it is beyond the scope of this rulemaking.

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

    \179\ FHLB at 9.

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

    J. Regulation 22.10--Application of Other Regulatory Provisions

    Proposed regulation 22.10 applies 1.27 (Record of

    investments),\180\ 1.28 (Appraisal of obligations purchased with

    customer funds),\181\ 1.29 (Increment or interest resulting from

    investment of customer funds),\182\ and 1.30 (Loans by futures

    commission merchants; treatment of proceeds) \183\ to Cleared Swaps

    Customers and Cleared Swaps Customer Collateral.

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

    \180\ Regulation 1.27 requires FCMs and DCOs investing customer

    funds to maintain specified records concerning such investments.

    \181\ Regulation 1.28 requires FCMs investing customer funds to

    record and report such investment at no greater than market value.

    \182\ Regulation 1.29 permits FCMs and DCOs investing customer

    funds to receive and retain any increment or interest thereon.

    \183\ Regulation 1.30 permits FCMs to loan their own funds to

    customers on a secured basis, and to repledge or sell such security

    pursuant to agreement with such customers. However, regulation 1.30

    does make clear that the proceeds of such loans, when used to

    purchase, margin, guarantee, or secure futures contracts, shall be

    treated as customer funds.

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

    While several commenters cited regulation 22.10, they did so in the

    context of discussion of other regulations. Because the Commission did

    not receive any comments regarding the substance of regulation 22.10,

    it is adopting regulation 22.10 as proposed.

    K. Regulation 22.11--Information To Be Provided Regarding Customers and

    Their Cleared Swaps

    Proposed regulation 22.11 required that (i) each Depositing FCM

    provide to its Collecting FCM and (ii) each FCM member provide to its

    DCO, in each case, information sufficient to identify Cleared Swaps

    Customers on a one-time basis, and information sufficient to identify

    the portfolio of rights and obligations belonging to such customers

    with respect to their Cleared Swaps ``at least once each business

    day.'' If a Depositing FCM or FCM member also serves as a Collecting

    FCM, then it must

    [[Page 6357]]

    provide the specified information with respect to each individual

    Cleared Swaps Customer for which it acts (on behalf of a Depositing

    FCM) as a Collecting FCM. As proposed, regulation 22.11 also held the

    DCO responsible for taking appropriate steps to confirm that the

    information that it receives is accurate and complete, and ensure that

    the information is being produced on a timely basis. However, because

    the DCO may not have a direct relationship with, e.g., a Depositing

    FCM, the regulation required the DCO to take ``appropriate steps'' to

    ensure that its FCM members enter into suitable arrangements with,

    e.g., a Depositing FCM to verify the accuracy and timeliness of

    information. The Commission requested comment on whether (i) The

    proposed requirement in regulation 22.11 for a Depositing FCM to

    provide a Collecting FCM with information sufficient to identify its

    Cleared Swaps Customers raises any competitive concerns, (ii) such

    concerns, if any, could be resolved if the identities of the Cleared

    Swaps Customers are coded, with the DCO, but not the Collecting FCM,

    receiving a copy of such code, and (iii) other methods were available

    to resolve any such concerns.

    ISDA requested that the Commission further clarify the language of

    regulation 22.11 to make explicit that an FCM must provide identifying

    information to the DCO or to the Collecting FCM the first time the FCM

    intermediates a swap for a Cleared Swaps Customer with the particular

    relevant DCO or collecting FCM.\184\ In response, the Commission is

    amending the language of regulation 22.11 to make clear that an FCM

    must provide identifying information to a DCO or Collecting FCM the

    first time it intermediates a Cleared Swap with that DCO or Collecting

    FCM.

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

    \184\ See ISDA at 9.

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

    In addition, a number of commenters raised concerns regarding the

    need for specific recordkeeping and reporting requirements.\185\ These

    commenters requested that the Commission mandate reporting and

    recordkeeping requirements for DCOs and require DCOs to implement rules

    requiring their clearing members to comply with such reporting and

    recordkeeping requirements. FHLB argued that, at a minimum, an FCM

    should have to identify (i) collateral posted by an individual customer

    as cash or securities and (ii) with respect to identifiable securities,

    which customer posted such securities.\186\ CME, by contrast, stated

    that auditing for accuracy of ``a full breakdown of all forms of

    collateral at all levels of clearing for each end customer, allocated

    specifically to each DCO * * * will increase costs exponentially.''

    \187\ CIEBA, CME, ICE, FHLB, SIFMA, BlackRock, and Vanguard stated that

    it is important to be able to ensure that an FCM's books and records

    are accurate in order to support implementation of Cleared Swaps

    Customer Collateral in bankruptcy. The preferred means of addressing

    this problem ranged from increasing recordkeeping and monitoring

    burdens on FCMs and DCOs to abandoning the Complete Legal Segregation

    Model. On the other hand, CME complained that the phrase ``portfolio of

    rights and obligations arising from the Cleared Swaps that such futures

    commission merchant intermediates for such customer'' is unclear as to

    whether it covers the collateral supporting such positions.\188\ CME

    stated that it ``read[s] the proposed regulations as requiring a DCO to

    allocate to each non-defaulting customer its specific required margin

    only * * *,'' and that it intends to ``allocate to any defaulting

    customer the difference between its specific required margin and the

    collateral within the DCO's access and control * * * .''\189\

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

    \185\ See, e.g., ICI at 5; SIFMA at 8; and FHLB at 4.

    \186\ FHLB also argues that this information should be provided

    to Cleared Swaps Customers on a daily basis so that they can correct

    any discrepancies in the records, which would, in turn, reduce

    operational risk. See FHLB at 4.

    \187\ CME at 15, n. 30. Cf. FHLB at 3, n. 2 (stating FHLB's

    understanding that LCH has the technology necessary to track

    individual customer collateral on a real-time basis, but

    acknowledging that it is ``not in a position to calculate the costs

    associated with such technology.'').

    \188\ CME at 6-7.

    \189\ Id. at 7 (emphasis in original).

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

    AII, SIFMA, and Vanguard requested that the Commission require DCOs

    to carefully monitor clearing member compliance with DCO rules,

    including through periodic audits, by amending regulation 22.11(e) to

    provide specific and concrete examples of the steps a DCO must take to

    confirm that information from an FCM is accurate, complete and timely.

    In addition, AII, SIFMA, and Vanguard requested that the words

    ``appropriate steps'' in regulation 22.11(e) be replaced with ``all

    steps necessary.'' \190\ CME argued that regulation 22.11 should

    specify the contents of the daily FCM report to the DCO,\191\ and that

    the Commission should clarify the intent behind the language ``take

    additional steps,'' specifically with respect to what the Commission

    ``intends each DCO to accomplish under the verification requirement.''

    \192\

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

    \190\ See AII at 3; SIFMA at 8; and Vanguard at 6.

    \191\ See CME at 3-4, and 13-15.

    \192\ CME at 15.

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

    FIA noted that the proposed rule does not require the information

    to be provided by any specific time each business day, and recommended

    that the Commission specify such a deadline.\193\ Vanguard, SIFMA and

    AII also suggested that the Commission consider requiring information

    to be provided ``as frequently as necessary'' rather than ``at least

    once each business day.'' \194\ Finally, CME stated that it

    ``presume[d] that the Commission's intention is to continue to treat

    omnibus accounts of a foreign broker clearing through an FCM as a

    single `customer' for purposes of the requirements of Part 22.''\195\

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

    \193\ See FIA at 12. FIA cites to ``Proposed Rule 22.12,'' but

    it is regulation Sec. 22.11 that requires FCMs to provide

    information to a clearing FCM or DCO.

    \194\ AII at 3; SIFMA at 8; and Vanguard at 6-7.

    \195\ CME at 8, n. 20.

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

    The Commission notes that under the Complete Legal Segregation

    Model, DCOs must, in the event of the insolvency of a clearing member

    carrying Cleared Swaps Customer positions, either return to the

    Trustee, or transfer to another FCM, the value of the collateral

    associated with each Cleared Swaps Customer's positions (as adjusted in

    accordance with Commission regulations). This requirement corresponds

    to the margin required for the Cleared Swaps Customer's swaps cleared

    through that DCO, including any individualized surcharge or voluntary

    contribution.\196\ Thus, a DCO has no responsibility to monitor the

    nature or amount of collateral each Cleared Swaps Customer actually

    posts with the FCM, or the provenance of the specific items of

    collateral the DCO receives from the FCM. Rather, the DCO should take

    the steps appropriate, in the professional judgment of its staff, to

    verify that FCM members have and are using systems and appropriate

    procedures to track accurately, and to provide to the DCO accurately,

    the positions of each customer. Furthermore, the Commission is

    clarifying that the responsibilities of a DCO under Part 22 are

    analogous to the responsibilities of a DCM under regulation 1.52 with

    respect to margin (the calculation of which requires an accurate

    accounting of the customer's positions). As noted by one commenter,

    FCMs are already subject to DSRO

    [[Page 6358]]

    audits on an approximately annual basis.\197\

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

    \196\ See regulation 22.13(a)(1)(C).

    \197\ See CME at 15.

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

    At this time, the Commission is not requiring that information be

    provided ``as frequently as necessary'' or by a specific time.

    Regulation 22.11 requires information to be provided ``at least once a

    day,'' thereby permitting DCOs to require by rule the collection of

    this information more frequently. If more frequent collection of such

    information becomes an industry standard at a later point in time, the

    Commission might then consider increasing the frequency of this

    reporting requirement. In addition, the Commission notes that a DCO may

    set, by rule, the time or times by which such information must be

    provided.

    Finally, the Commission confirms the presumption ``that the

    Commission's intention is to continue to treat omnibus accounts of a

    foreign broker clearing through an FCM as a single `customer' for

    purposes of the requirements of Part 22.'' \198\ However, to the extent

    a foreign broker is required to provide individual protection for swaps

    customer collateral under the laws of another jurisdiction, the

    Commission intends that the regulations under Part 22 foster compliance

    with such other laws.

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

    \198\ See id. at 8, n. 20.

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

    L. Regulation 22.12--Information To Be Maintained Regarding Cleared

    Swaps Customer Collateral

    As proposed, regulation 22.12 required DCOs and Collecting FCMs to

    use the information provided pursuant to proposed regulation 22.11 to

    calculate and record, no less frequently than once each business day,

    the amount of collateral required (i) for each relevant Cleared Swaps

    Customer (including each such customer of a Depositing FCM), based on

    the portfolio of rights and obligations arising from its Cleared Swaps;

    and (ii) for all relevant Cleared Swaps Customers.

    SIFMA argued that DCOs and FCMs should be required to perform the

    calculations specified in regulation 22.12 ``as frequently as

    technologically possible'' rather than ``no less frequently than once

    each business day.'' \199\ The Commission is adopting regulation 22.12

    as proposed. The calculations required by regulation 22.12 are based on

    information provided under regulation 22.11, which is sent to the DCOs

    and FCMs ``at least once each business day.'' It would be anomalous for

    the Commission to require a more frequent calculation of collateral

    requirements when the information on which such calculation is based is

    only required to be provided once each business day. However, if more

    frequent collection of such information becomes an industry standard at

    a later point in time, the Commission might then consider requiring

    more frequent calculation of collateral requirements by regulation.

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

    \199\ SIFMA at 9. See also AII at 3.

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

    FIA and ISDA observed that the reference in the NPRM in the

    discussion of regulation 22.12 to an advance by the FCM to a Cleared

    Swaps Customer as a ``loan'' combined with regulation 22.10, which,

    among other things, prohibits an FCM from granting unsecured loans to

    customers, could be read to prohibit unsecured short-term advances of

    margin funds to Cleared Swaps Customers by FCMs. They asked that the

    Commission clarify that unsecured short term advances of margin are

    permissible.\200\ The Commission clarifies that, consistent with

    current practice, unsecured short term advances of margin are not

    considered ``loans'' for purposes of existing regulation 1.30, or new

    regulation 22.10. The Commission notes, however, that such advances

    should be either promptly repaid or promptly replaced with a secured

    loan.

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

    \200\ See ISDA at 9; FIA at 11-12.

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

    M. Regulation 22.13--Additions to Cleared Swaps Customer Collateral

    Regulation 22.13 proposed two tools that DCOs or Collecting FCMs

    may use to manage the risk they incur with respect to individual

    Cleared Swaps Customers. Because the proposed tools were not intended

    to be mandatory or exclusive, the Commission sought comment on how it

    could enable DCOs or Collecting FCMs to use other tools to manage such

    risk. In addition, proposed regulation 22.13(a) clarified that a DCO or

    Collecting FCM could increase the collateral required of a particular

    Cleared Swaps Customer or group of such customers, based on an

    evaluation of the credit risk posed by such customer(s). The proposed

    clarification was not intended to interfere with the right of any FCM

    to increase the collateral requirements with respect to any of its

    customers, and the Commission requested comment regarding whether a DCO

    or a Collecting FCM wished to increase the collateral required for any

    reason other than credit risk. Similarly, proposed regulation 22.13(b)

    provided that collateral deposited by an FCM that is identified as

    collateral in which such FCM has a residual financial interest (i.e.,

    the FCM's own funds) may, to the extent of such residual financial

    interest, be used by the DCO or Collecting FCM to secure the Cleared

    Swaps of any or all Cleared Swaps Customers.

    ISDA suggests that the final rule attribute the collateral

    deposited by an FCM that is identified as collateral in which such FCM

    has a residual financial interest to individual Cleared Swaps Customers

    to determine which Cleared Swaps Customers have a credit balance and

    which have a debit balance.\201\ The Commission notes that collateral

    attributable to an FCM's residual financial interest is, by definition,

    not the property of any Cleared Swaps Customer. Accordingly, there is

    no customer-protection-based reason to deny a DCO or Collecting FCM the

    ability to use such collateral to meet the default of any Cleared Swaps

    Customer. In addition, as mentioned above, the Commission is adding a

    new section 22.13(c), which states that, subject to certain

    requirements, collateral posted by a Cleared Swaps Customer in excess

    of the amount required by a DCO (the ``excess collateral'') may be

    transmitted by the Cleared Swaps Customer's FCM to the DCO.\202\

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

    \201\ See ISDA at 9-10.

    \202\ For further detail, see the discussion above in section

    IV.A.4. under the definition of ``Cleared Swaps Customer

    Collateral.''

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

    N. Regulation 22.14--Futures Commission Merchant Failure To Meet a

    Customer Margin Call in Full

    Proposed regulation 22.14 required a defaulting FCM to transmit to

    the DCO or Collecting FCM, as applicable, Cleared Swaps Customer

    Collateral on deposit at the FCM for each Cleared Swaps Customer whose

    swaps contributed to the call, and the identity and the amount

    transmitted on behalf of, each such customer. Regulation 22.14 also

    proposed a detailed sequence of events following an FCM's default.

    Specifically, proposed regulations 22.14(e) and (f) addressed the issue

    of allocation of the loss of value of collateral (also known as

    Investment Risk) \203\ despite the application of haircuts. The

    Commission sought comment on the proposed allocation of Investment

    Risk.

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

    \203\ See supra at n. 28.

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

    FIA suggested that the regulations make clear that the DCO or

    Collecting FCM may reasonably rely on the information provided by the

    defaulting FCM (or on information previously provided if the defaulting

    FCM does not promptly provide information on the day of the

    default).\204\ In response, the Commission is amending regulation 22.14

    to add subsection (2) to specifically permit such reliance on

    [[Page 6359]]

    information provided by a defaulting FCM.

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

    \204\ See FIA at 12; SIFMA at 10.

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

    Vanguard and SIFMA requested clarification regarding how a DCO

    should handle simultaneous defaults in a futures and Cleared Swaps

    Customer Account, and how the FCM and DCO resources should be allocated

    between the two accounts.\205\ The Commission notes that defaults in

    multiple accounts are already addressed in the Commission's regulations

    and, in particular, Part 190, which treats account classes separately.

    For example, in the event of a default in a futures customer account,

    the default would be treated in accordance with the Futures Model, and

    the FCM would be permitted to apply all customer collateral to meet

    that default and would, after liquidation of positions, return any

    remaining customer collateral to the Trustee for distribution as above.

    A default in the Cleared Swaps Customer Account, on the other hand,

    would be treated in accordance with the Complete Legal Segregation

    Model, with remaining positions and collateral either transferred to

    another FCM or returned to the Trustee. Thus, swaps customer accounts

    and futures customer accounts are treated separately by the DCO, with

    balances that are not transferred being returned to the Trustee for

    distribution.\206\ The Trustee would distribute customer property,

    including collateral received from a DCO, pari passu within each

    account class. Any surplus in any account class would be re-distributed

    in accordance with regulation 190.08. In addition, the Commission notes

    that a separate proprietary account for swaps is not required under

    Commission regulations. Thus, a clearing member's own swaps and futures

    (and related collateral) may be held together in a proprietary account

    and a default in such account should proceed in accordance with

    existing Commission regulations. For example, if there is a default

    only in the proprietary account, property in either customer account

    will not be liable for that default, and such customer property will

    either be transferred along with customer positions to another FCM or,

    after the liquidation of customer positions, would be returned to the

    Trustee for distribution as part of the appropriate account classes

    pursuant to regulation 190.08.

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

    \205\ See Vanguard at 7.

    \206\ Pursuant to regulation 190.06(b)(3)(iii), for a particular

    customer, a negative equity balance in one account class must be

    offset against a positive equity balance in any other account class.

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

    With respect to the application of DCO resources, the Commission

    notes that if there is a shortfall in more than one account class,

    after the application of collateral as permitted in the proposed and

    existing rules, the DCO would apply its default resources to the

    remaining shortfalls in each account in accordance with its then-

    existing rules.

    O. Regulation 22.15: Treatment of Cleared Swaps Customer Collateral on

    an Individual Basis

    As proposed, regulation 22.15 set forth the basic principle of

    individual collateral protection. It required each DCO and each

    Collecting FCM to treat the amount of collateral required with respect

    to the portfolio of rights and obligations arising out of the Cleared

    Swaps intermediated for each Cleared Swaps Customer as belonging to

    that customer, which amount could not be used to margin, guarantee or

    secure the Cleared Swaps, or any other obligations, of an FCM, or of

    any other customer.

    FIA urged the Commission to confirm that, in the event of an FCM

    default, clearing FCMs and DCOs have flexibility to liquidate all

    positions in an omnibus account (with the restriction that proceeds of

    positions of non-defaulting customers may not be used to offset sums

    owed by defaulting customers to the FCM or by the clearing FCM to the

    DCO).\207\ SIFMA stated that proposed regulation 22.15 required that

    ``any temporary misallocation of non-defaulting customer property due

    to [intra-day price movements on the day of a default] * * * be

    rectified as promptly as possible so that the property of non-

    defaulting customers is fully restored.'' \208\ ICI argued that if at

    the time of an FCM default there is a misallocation of Cleared Swaps

    Customer Collateral, the Commission should require such misallocation

    to be corrected as soon as practicable.\209\ Similarly, Vanguard

    requested that the Commission clarify that any initial misallocation

    related to delayed recordkeeping be rectified as promptly as possible

    such that the property of the non-defaulting parties is fully

    restored.\210\ CME cautioned that errors in the Sec. 22.11 information

    from an FCM could heighten the risk of misallocating Cleared Swaps

    Customer Collateral in a default scenario, because a DCO will not have

    the time or legal ability to resolve discrepancies in a portfolio.\211\

    CME asked the Commission to clarify the allocation of this risk among

    Cleared Swaps Customers.\212\ In addition, CME questioned how to

    allocate excess collateral that is posted to a DCO for purposes of

    daily reporting and in response to customer default, \213\ and sought

    confirmation that the Commission intended to preserve the finality of

    the clearing cycle.\214\

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

    \207\ See FIA at 12-13.

    \208\ SIFMA at 10.

    \209\ See ICI at 5.

    \210\ See Vanguard at 7.

    \211\ See CME at 14.

    \212\ See id.

    \213\ See id. at 7-8.

    \214\ See id. at 9.

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

    The Commission has amended regulation 22.15 to make clear that

    clearing FCMs and DCOs have the flexibility to liquidate all positions

    in an omnibus account in the event of the default of a depositing FCM

    or clearing member respectively. In addition, the Commission notes that

    there will not be any unallocated excess collateral because such

    collateral is either collateral in which the FCM has a residual

    interest and does not belong to a customer, or collateral that must be

    attributed to individual Cleared Swaps Customers. Furthermore, any

    temporary misallocation of non-defaulting Cleared Swaps Customer

    property or excess collateral would be resolved by the Trustee, in

    computing the claims by such customers against the estate (or, where

    appropriate, by the estate against such customers). In addition, these

    discrepancies would not be the responsibility of the DCO, even if the

    DCO transferred an amount on behalf of a Cleared Swaps Customer that

    was later found to be too much, nor would such a transfer be subject to

    avoidance.\215\ Finally, it is not the Commission's intent to disrupt

    or unwind a complete and final settlement cycle, and northing in these

    regulations should be construed to do so.

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

    \215\ Cf. 11 U.S.C. 764(b).

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

    P. Regulation 22.16--Disclosures to Customers

    As proposed, regulation 22.16 requires each FCM to disclose, to

    each of its Cleared Swaps Customers, the governing provisions of each

    DCO (or the provisions of the customer agreement with respect to a

    Collecting FCM) relating to use of Cleared Swaps Customer Collateral

    and related matters.

    The FIA advocated that these FCM disclosures be the subject of a

    uniform disclosure document prepared by the industry, subject to

    Commission approval.\216\ Given the diversity of industry practice in

    the swaps market, the Commission is reluctant to mandate the use of a

    uniform disclosure document. Nonetheless, the Commission sees no reason

    to object to an FCM's use of a document prepared

    [[Page 6360]]

    by a committee, so long as the document accurately provides the

    required information for each DCO on which the customer's positions are

    cleared.

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

    \216\ See FIA at 12.

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

    V. Section by Section Analysis: Amendments to Regulation Part 190

    A. Background

    In April of 2010, prior to the enactment of the Dodd-Frank Act, the

    Commission promulgated rules to establish an account class for cleared

    OTC derivatives (and related collateral).\217\ At that time, there were

    questions concerning the Commission's authority to require the

    segregation of cleared OTC derivatives (and related collateral) or to

    establish a separate account class for cleared OTC derivatives in a DCO

    insolvency. As a result, protection for cleared OTC derivatives (and

    related) collateral was limited to those cases where such derivatives

    and collateral were required to be segregated pursuant to the rules of

    a DCO, and the reach of the account class was limited to cases of the

    bankruptcy of a commodity broker that is an FCM. Moreover, while

    section 4d(a)(2) of the CEA permitted the inclusion in the domestic

    futures account class of transactions and related collateral from

    outside that class, there was no similar provision permitting the

    inclusion in the cleared OTC account class of transactions and related

    collateral from outside that latter class.

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

    \217\ See Account Class, 75 FR 17297, Apr. 6, 2010.

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

    Section 724 of the Dodd-Frank Act has resolved these questions. As

    mentioned above, section 4d(f) of the CEA, as amended by the Dodd-Frank

    Act, requires, among other things, segregation of Cleared Swaps and

    Cleared Swaps Customer Collateral. Section 4d(f)(3)(B) of the CEA

    permits the inclusion of positions in other contracts (such as

    exchange-traded futures) and related collateral with Cleared Swaps and

    Cleared Swaps Customer Collateral. Section 724(b) of the Dodd-Frank Act

    amends the Bankruptcy Code to include in the definition of ``commodity

    contracts'' Cleared Swaps with respect to both FCMs and DCOs. Thus,

    this section V proposes amendments to regulation Part 190, pursuant to

    Commission authority under section 20 of the CEA, in order to give

    effect to section 724 of the Dodd-Frank Act, to implement Public Law

    111-16, the Statutory Time-Periods Technical Amendments Act of 2009,

    and to provide technical clarifications. Such amendments conform to

    proposed Part 22.

    B. Definitions

    1. Proposed Amendment to Regulation 190.01(a)--Account Class

    The Commission proposed amendments to regulation 190.01(a) to

    change the definition of account class to include a class for cleared

    swaps accounts, delete commodity option accounts from the definition,

    make clear that options on futures and options on commodities should

    not be grouped into one account class, clarify that Commission orders

    putting futures contracts and related collateral in the cleared swaps

    account class (pursuant to new section 4d(f)(3)(B) of the CEA) are

    treated, for bankruptcy purposes, in a manner analogous to orders

    putting Cleared Swaps and related collateral in the futures account

    class (pursuant to CEA section 4d(a)(2)), and clarify that if, pursuant

    to a Commission rule, regulation or order (or a DCO rule approved

    pursuant to regulation 39.15(b)(2)), positions or transactions that

    would otherwise belong to one class are associated with positions and

    related collateral in commodity contracts in another account class,

    then the former positions and related collateral shall be treated as

    part of the latter account class. The Commission did not receive any

    comments on proposed regulation 190.01(a) and is adopting regulation

    190.01(a) as proposed.

    2. Proposed New Regulation 190.01(e)--Calendar Day

    The Commission proposed defining the term ``calendar day'' to

    include the time from midnight to midnight. The Commission did not

    receive any comments on proposed regulation 190.01(e) and is adopting

    regulation 190.01(e) as proposed.

    3. Proposed Amendment to Regulation 190.01(f)--Clearing Organization

    The Commission proposed to amend the definition of clearing

    organization to remove, as unnecessary, the reference to commodity

    options traded on or subject to the rules of a contract market or board

    of trade. The Commission did not receive any comments on proposed

    regulation 190.01(f) and is adopting regulation 190.01(f) as proposed.

    4. Proposed Amendment to Regulation 190.01(cc)--Non-Public Customer

    The Commission proposed to amend the definition of non-public

    customer to include references to non-public customers under regulation

    30.1(c) (with respect to foreign futures and options customers) and in

    the definition of Cleared Swaps Proprietary Aaccount. The Commission

    did not receive any comments on proposed regulation 190.01(cc) and is

    adopting regulation 190.01(cc) as proposed.

    5. Proposed Amendment to Regulation 190.01(hh)--Principal Contract

    The Commission proposed to amend the definition of principal

    contract to include an exclusion for cleared swaps contracts. The

    Commission did not receive any comments on proposed regulation

    190.01(hh) and is adopting regulation 190.01(hh) as proposed.

    6. Proposed Amendment to Regulation 190.01(ll)--Specifically

    Identifiable Property

    The Commission proposed to amend the definition of specifically

    identifiable property to update references and change terms to conform

    to other proposed changes to Part 190 and other business practices. The

    Commission did not receive any comments on proposed regulation

    190.01(ll) and is adopting regulation 190.01(ll) as proposed.

    7. Proposed Amendment to Regulation 190.01 (pp)--Cleared Swap

    Proposed regulation 190.01(pp) replaced the definition of ``Cleared

    OTC Derivative'' that the Commission previously adopted with a

    definition of cleared swap that includes the definition of that term in

    regulation 22.1. The Commission did not receive any comments on

    proposed regulation 190.01(pp) and is adopting regulation 190.01(pp) as

    proposed.

    C. Proposed Amendments to Regulation 190.02--Operation of the Debtor's

    Estate Subsequent to the Filing Date and Prior to the Primary

    Liquidation Date

    The Commission proposed certain clarifications as well as technical

    amendments to Sec. 190.02 to (1) expand the regulation to apply to

    Cleared Swaps (and related collateral) and (2) change references to

    ``business days'' to ``calendar days,'' and require transfer

    instructions by the sixth calendar day after the order for relief and

    instruct transfers to be completed by the seventh calendar day after

    the order for relief, in order to fall within the protection of section

    764(b) of the U.S. Bankruptcy Code. The Commission did not receive any

    comments on proposed regulation 190.02. However, in light of a recent

    demonstration of the efficiency of transfer arrangements, it appears

    that a full calendar day may not be necessary to execute such

    instructions. Accordingly, the Commission is changing the amendment to

    require transfer instructions to be provided by the seventh calendar

    day after the order

    [[Page 6361]]

    for relief, at an hour to be specified by the trustee.

    D. Proposed Amendments to Regulation 190.03--Operation of the Debtor's

    Estate Subsequent to the Primary Liquidation Date

    The Commission proposed certain technical amendments to regulation

    190.03 to clarify that maintenance margin refers to the maintenance

    margin requirements of the applicable designated contract market or

    swap execution facility. The Commission did not receive any comments on

    proposed regulation 190.03 and is adopting regulation 190.03 as

    proposed.

    E. Proposed Amendments to Regulation 190.04--Operation of the Debtor's

    Estate--General

    Proposed amendments to regulation 190.04 would extend the

    liquidation of open commodity contracts to commodity contracts traded

    on swap execution facilities.\218\ These commodity contracts would be

    liquidated in accordance with the rules of the relevant SEF or DCM.

    Open commodity contracts that are liquidated by book entry may also be

    offset using the settlement price as calculated by the relevant

    clearing organization pursuant to its rules, which rules are required

    to be submitted to the Commission for approval pursuant to section

    5c(c) of the CEA, or approved by the Commission (or its delegate)

    pursuant to regulation 190.10(d). The Commission did not receive any

    comments on proposed regulation 190.04 and is adopting regulation

    190.04 as proposed.

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

    \218\ Open commodity contracts traded on a designated contract

    market would continue to be liquidated in accordance with the rules

    of the relevant designated contract market.

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

    F. Proposed Amendments to Regulation 190.05--Making and Taking Delivery

    on Commodity Contracts

    The Commission proposed technical amendments to regulation 190.05

    to change a reference to ``contract market'' to ``designated contract

    market, swap execution facility, or clearing organization,'' and

    require the submission of rules for approval subject to section 5c(c)

    of the CEA. The Commission did not receive any comments on proposed

    regulation 190.05 and is adopting regulation 190.05 as proposed.

    G. Proposed Amendments to Regulation 190.06--Transfers

    The Commission proposed amendments to regulation 190.06 to (i)

    Clarify that nothing in subparagraph (a) would constrain the

    contractual right of the DCO to liquidate open commodity contracts,

    (ii) permit the trustee to transfer accounts with no open commodity

    contracts, as the Commission has permitted in a number of recent FCM

    bankruptcies, (iii) prohibit the trustee from avoiding pre-petition

    transfers made by a clearing organization as long as the money,

    securities, or other property accompanying such transfer would not

    exceed the funded balance of accounts held for or on behalf of

    customers based on information available as of the close of business on

    the calendar day immediately preceding such transfer minus the value on

    the date of return or transfer of any property previously returned or

    transferred thereto, and (iv) change ``business day'' to ``calendar

    day.'' The Commission did not receive any comments on proposed

    regulation 190.06 and is adopting regulation 190.06 as proposed.

    H. Proposed Amendments to Regulation 190.07--Calculation of Allowed Net

    Equity

    Proposed amendments to regulation 190.07 clarify that individual

    Cleared Swaps Customer Accounts within an omnibus account are to be

    treated individually, correct a typographical error, change the

    valuation of an open commodity contract so that the value of the

    commodity contract would be derived from the settlement price as

    calculated by the relevant clearing organization pursuant to its rules,

    and change references to securities traded over-the-counter pursuant to

    the National Association of Securities Dealers Automated Quotation

    System to securities not traded on an exchange. The Commission did not

    receive any comments on proposed regulation 190.07. However, the

    Commission is adding ``paragraph (c)'' before ``(1)(ii)'' in regulation

    190.7(c)(1)(i)(A) to clarify the cross reference.

    I. Proposed Amendments to Regulation 190.09--Member Property

    The Commission proposed amendments to regulation 190.09 to include

    references to an account excluded pursuant to the proviso in regulation

    30.1(c) (referring to proprietary accounts in the context of foreign

    futures and options) and to the Cleared Swaps Proprietary Account. The

    Commission did not receive any comments on proposed regulation 190.09

    and is adopting regulation 190.09 as proposed.

    J. Proposed Amendments to Regulation 190.10--General

    Proposed amendments to regulation 190.10 have been made to require

    notice by email and overnight mail. The Commission did not receive any

    comments on proposed regulation 190.10. However, the Commission is

    changing the reference to the ``Division of Clearing and Intermediary

    Oversight'' to the ``Division of Clearing and Risk'' in regulation

    190.10(a) to reflect changes based on a structural reorganization

    within the Commission.

    K. Proposed Amendments to Appendix A to Part 190--Bankruptcy Forms,

    Bankruptcy

    The Commission proposed changes to appendix A, form 1 to include

    references to ``transfers'' generally, and to make certain technical

    amendments to (i) Reflect the addition of section 4d(f) of the CEA by

    section 724 of the Dodd-Frank Act, (ii) clarify that Commission

    approval with respect to the rules of a registered entity that require

    Commission approval means Commission approval under section 5c(c) of

    the CEA, and (iii) conform certain time periods to the proposed changes

    made by the Commission to implement Public Law 111-16, the Statutory

    Time-Periods Technical Amendments Act of 2009. The Commission did not

    receive any comments on the proposed amendments to appendix A and is

    adopting appendix A as proposed.

    L. Proposed Amendments to Appendix B to Part 190--Special Bankruptcy

    Distributions

    The Commission proposed amendments to Framework 1 of Appendix B to

    clarify that the cross margining program is intended to apply only to

    futures customers and customer funds for futures contracts, and to

    Framework 2 of Appendix B to address shortfalls in Cleared Swaps

    Customer Collateral. The Commission did not receive any comments on the

    proposed amendments to appendix B. However, the Commission is making

    certain technical corrections to bring the language of the appendix in

    line with current statutory language.

    VI. Effective Date

    The Commission asked for comment, in the NPRM and at the Second

    Roundtable, on the appropriate timing of effectiveness for the final

    rules, and whether six months after the promulgation of final rules

    would be sufficient.

    At the Second Roundtable, several panelists stated that it would

    take

    [[Page 6362]]

    approximately 18 months to 2 years after finalization of the

    segregation rules to complete all of the documentation and other

    infrastructure work that would be necessary to implement the

    segregation regime selected by the Commission.\219\ These commenters

    indicated that this lead time would be the same for the Legal

    Segregation Models and the Full Physical Segregation Model, but may be

    longer if the Commission were to select the Futures Model.\220\ In

    other words, this 18 month to 2 year time period is ``a cost of moving

    to the cleared world regardless of how it's done.'' Another panelist,

    however, did state that six months did not seem to provide sufficient

    time to complete all of the work that would need to be completed,\221\

    though this commenter acknowledged that ``the real constraining factor

    * * * is getting that final documentation with the clients.'' \222\

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

    \219\ Second Roundtable Tr. at 58, 1.14 to 61, 1.17.

    \220\ Id.

    \221\ Second Roundtable Tr. at 62, 1.11 to 62, 1.19 (Mr. Diplas

    stating that six months ``seems to live within the low side from the

    standpoint in terms of the work, the IT work that needs to take

    place between, like, FCMs and DCOs, the testing, et cetera, and also

    even the agreements that we might have to do in terms of

    consistency, of how these reports should look, and how the client

    IDs should be done, et cetera, so that we don't have--each DCO have

    a different methodology in that respect.'').

    \222\ Second Roundtable Tr. at 63, 1.2 to 63, 1.4.

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

    Comments to the NPRM generally reinforced the need for additional

    time. ISDA recommended that there be a minimum of 18 months between

    final promulgation of the rules and effectiveness.\223\ In addition,

    FIA stated that, according to certain representatives from investment

    management firms, it would take one to two years to implement whatever

    model is chosen by the Commission.\224\ ICE requested that, if a model

    other than the Futures Model is adopted, the Commission provide

    sufficient time to FCMs and DCOs to allow them ``to analyze, develop

    and implement the necessary systems and processes relating to'' the

    selected segregation model.\225\ In addition, ICI stated that market

    participants need time to develop ``the operational and systems

    infrastructure necessary to facilitate a smooth transition to

    clearing.'' \226\

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

    \223\ See ISDA at 11.

    \224\ See FIA at 6.

    \225\ ICE at 11.

    \226\ ICI at 2.

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

    As acknowledged by some commenters, the 18 month to 2 year time

    period is the time period needed to transition to clearing. It is not

    the time period necessary to implement the Complete Legal Segregation

    Model. Because the Commission did not receive any specific comments

    regarding the time period needed to implement the Complete Legal

    Segregation model, the Commission considered adopting the effective

    date that was proposed in the NPRM. However, given representations from

    market participants regarding the amount and tenor of the work that

    would need to be completed to implement clearing, the Commission is

    extending the compliance date for the Part 22 rules to November 8,

    2012, the compliance date set forth in the rules implementing DCO Core

    Principles for the gross margining requirement of Regulation

    39.13(g)(8)(i).

    Given the importance of implementing the time period changes in

    Part 190 as soon as possible, and because the implementation issues

    raised by Part 22 do not apply to Part 190, which imposes obligations

    primarily on bankruptcy trustees, the compliance date for the Part 190

    rules is the effective date of these rules. However, during the period

    between the compliance date for Part 190 and the compliance date for

    Part 22, Commission rules will not require segregation of Cleared Swaps

    or Cleared Swaps Collateral. Accordingly, consistent with the approach

    applicable under current Part 190, where protection for cleared OTC

    derivatives (and related) collateral is limited to those cases where

    such derivatives and collateral are required to be segregated pursuant

    to the rules of a DCO, during that period, the definition of 190.01(pp)

    (``Cleared Swap'') shall be limited to transactions where the rules or

    bylaws of a derivatives clearing organization require that such

    transactions, along with the money, securities, and other property

    margining, guaranteeing or securing such transactions, be held in a

    separate account for Cleared Swaps only.

    VII. Consideration of Costs and Benefits

    A. Introduction

    Section 15(a) of the CEA \227\ requires the Commission to consider

    the costs and benefits of its actions before issuing a rulemaking under

    the CEA. Section 15(a) further specifies that the costs and benefits

    shall be evaluated in light of five broad areas of market and public

    concern: (1) Protection of market participants and the public; (2)

    efficiency, competitiveness, and financial integrity of futures

    markets; (3) price discovery; (4) sound risk management practices; and

    (5) other public interest considerations. To the extent that these new

    rules reflect the statutory requirements of the Dodd-Frank Act, they

    will not create costs and benefits beyond those mandated by Congress in

    passing the legislation. However, the rules may generate costs and

    benefits attributable to the Commission's determinations regarding

    implementation of the Dodd-Frank Act's statutory requirements. The

    costs and benefits of the Commission's determinations are considered in

    light of the five factors set forth in CEA section 15(a).

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

    \227\ 7 U.S.C. 19(a).

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

    1. Business and Legal Context of the Segregation Requirement for

    Cleared Swaps Customer Collateral

    The Commission's Part 22 rules are one component of the regulatory

    infrastructure for clearing \228\ swaps transactions mandated by the

    Dodd-Frank Act. Though a significant fraction of swaps transactions may

    be required to be cleared through DCOs, many swaps transactions may

    voluntarily be cleared though DCOs. Swaps users and some swap dealers

    transact with the DCO through FCMs that the DCO admits as ``clearing

    members'' and who are subject to DCO rules. As described above in

    detail, for every transaction received by or matched through its

    facilities, a DCO acts as the buyer to every seller and the seller to

    every buyer, essentially guaranteeing financial performance.\229\

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

    \228\ As described above, clearing is the process by which

    transactions in derivatives are processed, guaranteed, and settled

    by a central clearing organization, the DCO. See section I.B.

    \229\ For a detailed discussion of clearing as it pertains to

    swap transactions, see section I.B.

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

    2. Overview of the Statute and Regulation

    Proposed Part 22 implements the requirement of the newly enacted

    CEA section 4d(f) that property provided by Cleared Swaps Customers to

    FCMs to serve as collateral for Cleared Swaps transactions be treated

    as the property of the customers, not the FCM or DCO; and that such

    property be maintained in accounts separate from the property of the

    FCM or DCO, although such accounts can hold the commingled collateral

    of more than one Cleared Swaps Customer ``for convenience.'' \230\

    These basic requirements that Cleared

    [[Page 6363]]

    Swaps Customer Collateral be treated as the property of customers and

    maintained in segregated accounts are imposed by the statute

    independently of the Commission's particular implementing regulations

    and, by the terms of the statute, would apply even if the Commission

    promulgated no implementing regulations. Generally, the core statutory

    segregation requirements serve two functions: (1) They help ensure that

    FCMs, DCOs, and other depositories of assets deposited by swaps

    customers to serve as collateral for their Cleared Swaps transactions

    treat such customer collateral as the property of the customers and not

    use it for their own proprietary business purposes; and (2) in

    conjunction with Subchapter IV of Chapter 7 of the Bankruptcy Code,

    they provide protection of Cleared Swaps Customer Collateral from the

    claims of other creditors in the event of the bankruptcy of an FCM.

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

    \230\ Though treating futures customer collateral on a

    collective basis may, at one time, have been practically necessary

    ``for convenience,'' such practice is not standard in the current

    swaps market nor is it as critical in an era where account

    information is stored and processed on an automated basis. For

    example, and as noted above, DCOs are already assessing risks posed

    by clearing members' customers at the individual customer level. See

    supra n.122.

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

    Sections 22.2 through 22.10 implement the basic architecture of a

    system of segregation for swaps customer funds roughly comparable to

    the system used for customer funds for futures contracts under CEA

    sections 4d(a)(2) and 4d(b) and Commission regulations 1.20 through

    1.30 and 1.49.\231\ Some provisions of sections 22.2 through 22.10

    essentially restate the statutory requirements. Other provisions of

    these sections set forth requirements intended to (a) ensure that the

    objectives of the statute are met and (b) clarify FCMs' and DCOs'

    duties under the statute and facilitate carrying out those duties in an

    efficient manner.\232\ The basic architecture established by sections

    22.2 through 22.10 is supplemented by section 22.16, a disclosure

    requirement designed to inform swaps customers of DCO and FCM policies

    regarding the handling of their collateral in case of default and by

    amendments to part 190 of the Commission's rules intended to ensure

    that cleared swaps customer accounts of the sort required by Part 22

    are treated as a separate account class under bankruptcy law in the

    event the relevant FCM files for bankruptcy.\233\

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

    \231\ See discussion in sections IV.B through IV.J.

    \232\ See id.

    \233\ See discussion above in section IV.P and section V.B.1.

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

    Proposed sections 22.11 through 22.15 add to this basic segregation

    architecture provisions designed to implement the Complete Legal

    Segregation Model for protecting swaps customer funds against Fellow-

    Customer Risk.\234\ Proposed sections 22.11, 22.12, and 22.14 are

    intended to ensure that DCOs have available information that will

    enable them to attribute the value of assets in an FCM's customer

    account to individual customers in the event of an FCM's default on

    obligations to the DCO arising in connection with swaps transactions

    cleared for customers.\235\ Section 22.14 also requires certain

    transfers of customer collateral among FCMs in response to margin

    calls.\236\ Section 22.5 prohibits the DCO from using asset value in an

    FCM's customer account attributable to one customer to margin,

    guarantee, or secure the Cleared Swaps or other obligations of the

    relevant FCM or of other customers.\237\ Section 22.13 clarifies that

    DCO's have the right, at their election, to require (on the grounds of

    risk management) larger amounts of collateral from selected

    customers.\238\

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

    \234\ See discussion above in section IV.K through section IV.O.

    \235\ See discussion above in sections IV.K., IV.L. and IV.N.

    Having such information at the DCO can be quite valuable in a

    situation where the FCM is bankrupt.

    \236\ See discussion above in section IV.N.

    \237\ See discussion above in section IV.E.

    \238\ See discussion above in section IV.M.

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

    3. Organization and Focus of the Consideration of Costs and Benefits

    Section VII.B presents the Commission's considerations regarding

    the costs and benefits arising from the Commission's choice of the

    Complete Legal Segregation Model as set forth in sections 22.11 through

    22.15.\239\ The costs and benefits of the Commission's choice of model

    for addressing Fellow-Customer Risk are, in the view of the Commission,

    the most significant cost-benefit issues in this final rulemaking, as

    is reflected in the fact that discussions of cost-benefit issues in

    comments to the NPRM focused almost exclusively on the choice of model.

    This section of the discussion employs the Futures Model--in essence,

    the rule without sections 22.11 through 22.15--as a baseline for

    comparison because this model was favored by several commenters and

    because comparison with this model provides a useful and appropriate

    methodology for isolating, to the extent possible, the relative costs

    and benefits of the alternative models presented by the commenters and

    considered by the Commission.\240\

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

    \239\ As discussed above, in addition to the Futures Model and

    the Complete Legal Segregation Model, the Commission gave

    consideration to other alternatives: the Legal Segregation with

    Recourse Model and the Physical Segregation Model. No commenters

    supported the Legal Segregation with Recourse Model on grounds that

    it involved the same costs as the Legal Segregation Model, but with

    fewer benefits. Accordingly, its costs and benefits are not

    considered further in this analysis. Several commenters did support

    the Physical Segregation Model; however, as noted above, the

    effectiveness of the Physical Segregation Model is limited due to

    the application of the ratable distribution requirements of section

    766(h) of the Bankruptcy Code. As such, these limitations were

    disqualifying.

    \240\ CIEBA, FHLB, SIFMA, and Fidelity argue that the correct

    baseline for making cost and benefit comparisons should be the

    current practice in the uncleared swaps markets rather than the

    Futures Model (See CIEBA Original at 12; FHLB at 9; SIFMA at 7; and

    Fidelity at 7). In principle, using this benchmark rather than the

    Futures Model would change the absolute level of costs and benefits

    of the alternatives under consideration but would not change the

    relative ranking of those alternatives so long as comparisons to the

    benchmark were made in a consistent fashion. There are, however,

    practical advantages to using the Futures Model as a benchmark

    because current practice with regard to protection of collateral in

    the uncleared swaps market is unregulated and the level of

    protection provided varies considerably across transactions.

    Moreover, CEA, as amended by the Dodd-Frank Act, does not permit the

    Commission to retain the current practice regarding uncleared swaps.

    Because the appropriate baseline for the consideration of costs and

    benefits is the Futures Model rather than the uncleared swaps model,

    the costs and benefits of the basic requirement that swaps customer

    collateral be kept in segregated accounts and treated as the

    property of customers rather than the property of FCMs or DCOs are

    included within the baseline and not evaluated separately.

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

    Notably, this comparative analysis pivots, in the first instance,

    on who bears the cost of the most significant cost driver--Fellow-

    Customer Risk. Where the risk is assigned to one constituency (e.g.,

    swap users in the Futures Model baseline) a virtually mirror image risk

    mitigation benefit is conferred on others (e.g., DCOs and clearing

    members in the Futures Model baseline).

    Under any model, however, once such risks are initially assigned,

    the affected entities and market participants, may then attempt to re-

    allocate or shift such assigned risks or costs to other entities or

    market participants. The LSOC Model, in the first instance places

    fellow risk on DCOs and clearing members with corresponding mitigation

    of risk to swaps users. However, as explained in detail below, market

    participants can be expected to adapt to the direct allocation of risk

    associated with one or another of the models in a variety of ways, and

    the ultimate costs and benefits of the rule will reflect both its

    direct allocation of risk and the effect of adaptations to that

    allocation.

    For example, as described below, some, though not all, DCOs

    commented that they would be likely to adapt to the LSOC Model by

    increasing margin levels. To the extent that this occurs, the rule

    would have the effect of reducing the risks of losses to the DCO and

    the FCM because there would be a reduced

    [[Page 6364]]

    likelihood of any given customer incurring losses that exceed the

    margin posted by that customer. In return for the benefit of reduced

    fellow customer risk and legal allocation of the residual risk to DCOs

    and their members, swaps users would incur the opportunity cost of

    having to use more capital as collateral for their Cleared Swaps. Thus,

    to the extent that DCOs adapt to the LSOC Model in this fashion, the

    rule would function in a manner analogous to insurance, with swaps

    users incurring somewhat higher costs in their routine use of swaps in

    return for a lower risk of wholesale loss of collateral as a result of

    some other swaps user's market losses. As also described below, the

    LSOC Model is expected to alter behavioral incentives for market

    participants relative to the Futures Model in variety of other ways

    that will create costs and benefits but that the Commission believes

    will lead to a net increase in monitoring of risky behavior by FCMs and

    that, on balance, will facilitate transfer of customer positions and

    collateral in the event of the simultaneous default of an FCM and one

    or more customers.

    B. Benefits and Costs of Complete Legal Segregation Model Relative to

    Futures Model

    1. Introduction

    As noted above, the Complete Legal Segregation Model is intended to

    provide swaps customers with protection against Fellow-Customer

    Risk.\241\

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

    \241\ For a discussion of Fellow-Customer Risk, see supra

    section I.B.6.

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

    The basic difference between the Complete Legal Segregation Model

    and the Futures Model thus relates to a difference in the allocation of

    loss arising out of a double default of both a customer and the

    customer's FCM. Under the Futures Model, this risk is borne by

    customers in the form of ``Fellow-Customer Risk''-- the risk that a

    customer will lose some or all of the value of its collateral due to

    the default of some other swaps customer or customers of the clearing

    FCM. Under the LSOC Model, this risk to customers is substantially,

    though not completely, eliminated. However, the corresponding loss, in

    the event of a double default, falls on the DCO and, through the

    guaranty fund, its non-defaulting members. In practice, under the LSOC

    Model, DCOs can be expected to take measures to protect themselves

    against the risk of loss from a double default, and some of the

    material benefits and costs are likely to flow from a DCO's adaptations

    to the rule.

    The next section reviews, respectively, the material benefits and

    costs that the Commission believes will arise from the Commission's

    selection of the LSOC Model.

    2. Material Benefits and Costs Arising From the Complete Legal

    Segregation Model

    a. Benefits to Customers of Protection Against Fellow-Customer Risk

    The primary benefit of the Complete Legal Segregation Model to

    customers is the protection of non-defaulting Cleared Swaps Customers

    against loss of the value of their collateral due to the use of such

    value by the relevant DCO in the event of a double default.\242\ The

    associated cost to those customers is the payment they will be required

    to make for protection against this risk, where this payment will

    likely originate from some combination of the capital cost of posting

    higher initial margins and/or higher fees for swaps transactions (see

    subsection b below).

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

    \242\ According to comments on the ANPR, the direct benefit to

    customers in the form of reduced risk of loss of collateral stemming

    from the activities of fellow customers may generate indirect

    benefits. For example, commenters indicated that increased security

    for collateral could increase their ability to use swaps for

    business purposes, although this effect could be counterbalanced by

    increased dollar costs. Commenters also stated that the increased

    protection against Fellow-Customer Risk would reduce their need to

    incur costs to protect against the effects of loss of Cleared Swaps

    Customer Collateral.

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

    Comments regarding this rulemaking have indicated that, as a result

    of the statutory clearing requirements in the Dodd-Frank Act, once the

    cleared swaps market has matured, Cleared Swaps Customers would be

    posting upwards of $500 billion in collateral to secure their Cleared

    Swaps positions.\243\ The Commission notes that the precise amount will

    depend on how the market evolves and can be expected to change over

    time.\244\ Under the Futures Model, the value of this collateral will

    be exposed to greater Fellow-Customer Risk than under the other models

    considered. In addition, it does not appear possible to reliably

    quantify the probability of the actual loss of value of collateral by a

    given customer due to Fellow-Customer Risk for a number of reasons. By

    their nature, double defaults are rare events, though potentially

    important if they involve major FCMs. Because the mandatory clearing of

    swaps under the Dodd-Frank Act has not yet gone into effect, there is,

    as yet no body of experience with such clearing in practice, and a

    fortiori no experience with FCM defaults under the Dodd-Frank clearing

    regime.\245\ There has been experience with FCM default in the futures

    industry, but the numbers are too small to permit reliable

    extrapolation.\246\ In addition, a number of commenters suggested that

    Fellow-Customer Risk may be greater in the cleared swaps market than in

    the futures market because swaps are less liquid than exchange-traded

    futures (thereby resulting in greater volatility of prices,

    particularly in times of financial stress) and because the aggregate

    value of transactions in the swaps market is many times greater than

    the aggregate value of transactions in the futures market.\247\ The

    Commission notes these commenters requested increased protection for

    their funds to guard against Fellow-Customer Risk.

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

    \243\ CME Comment on ANPR at 7 (estimated $500 billion in

    collateral for swaps expected to be cleared by CME); ISDA February

    16, 2011 Comment on ANPR at 2 (estimated $833 billion industry-

    wide).

    \244\ Id.

    \245\ Several clearing houses do, however, have experience

    clearing swaps on a voluntary basis. For example, LCH has been

    clearing interest rate swaps for over a decade, and ICE actively

    clears credit default swaps. In addition, while there are examples

    of FCM defaults related to clearing futures (e.g., Griffin Trading

    Co., Klein Futures, Inc. and Lehman Brothers, Inc.), there have been

    no FCM failures related to the clearing of swaps transactions.

    \246\ In the past two decades, there have been only two cases of

    double defaults in the futures markets: Griffin Trading Co. and

    Klein Futures, Inc. See Trustee v. Griffin, 440 B.R. 148 (2010);

    CFTC Division of Trading and Markets, Report on Lessons Learned from

    the Failure of Klein & Co. Futures, Inc., July 2001, available at

    http://www.cftc.gov/files/tm/tmklein_report071101.pdf. With respect

    to FCM defaults generally in the futures markets, one commenter

    observed, ``The United States, fortunately has seen only a handful

    of FCM failures in recent decades. As a result, the FCM liquidation

    process, including the availability of porting, has not been tested

    under a wide variety of circumstances.'' ISDA at 3.

    \247\ See, e.g., Second Roundtable Tr. at 165, 283-84

    (characteristics of swaps may make it more difficult to liquidate or

    transfer customer positions in case of an FCM insolvency than for

    futures).

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

    Notwithstanding its inability to reasonably quantify the value of

    benefits associated with Fellow-Customer Risk elimination, the

    Commission, in light of comments received in response to both the ANPR

    and NPRM, believes that the Complete Legal Segregation Model confers

    benefits to swaps users. In fact, buy-side commenters represented that

    they desired the protection afforded through the Complete Legal

    Segregation Model, notwithstanding the costs associated with that

    protection.\248\ The

    [[Page 6365]]

    ability of a swaps customer to determine Fellow-Customer Risk at a

    particular FCM is limited, because confidentiality restraints

    inherently limit the amount of information that an FCM can provide

    customers with respect to the creditworthiness, swaps positions, and,

    in some cases, even identity of its other customers.\249\ This, in

    turn, impairs (if not completely precludes) the customer's ability to

    evaluate Fellow-Customer Risk, hindering their ability to manage it,

    insure against it, or appropriately account for it in business

    decision-making.\250\

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

    \248\ E.g. MFA at 7-8; BlackRock at 7; Fidelity at 6; LCH at 2.

    The numerical estimates of higher margin and guaranty fund levels

    for Complete Legal Segregation relative to the Futures Model

    described in the text below were also described in the NPRM so swaps

    users who commented in response to the NPRM presumably were aware of

    them. However, some commenters who supported Complete Legal

    Segregation indicated that they did not give full credence to the

    higher of the cost estimates. E.g., MFA at 7-8.

    \249\ Id. See also Second Roundtable Tr. at 183-185.

    \250\ E.g., Tudor at 2; Fidelity at 3; MFA at 3-8. See also

    supra at 50-51.

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

    Both the benefit to customers of greater protection for their

    collateral provided under the Complete Legal Segregation Model as well

    as the associated costs depends, to an extent, on customer behavior in

    advance of a double default. Prior to an FCM insolvency, customers have

    the right to find another FCM to carry their accounts, and to have

    their existing FCM transfer their positions and collateral to that

    clearing FCM.\251\ Under the extreme assumption that all customers

    costlessly anticipate the default and move their positions to another

    FCM before the default occurs, the Complete Legal Segregation Model

    offers no apparent greater benefit to customers over the Futures Model.

    However, on this assumption the Complete Legal Segregation model also

    imposes no additional losses to the DCO compared with the Futures Model

    since, in this instance, under neither model is the collateral of non-

    defaulting customers available to the DCO to cure the default. As a

    result, the extent to which customers can anticipate a fellow-customer

    default will tend to decrease both the benefits and the costs of the

    Complete Legal Segregation Model.

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

    \251\ See 76 FR at 69442.

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

    b. ``Risk Costs'' and Potential Effects on Margin Levels and DCO

    Guaranty Fund Levels in Response To Complete Legal Segregation.

    Risk Costs refer to the costs associated with the allocation of

    loss in the event of a default under the Complete Legal Segregation

    Model relative to the Futures Model. This can usefully be divided into

    direct and indirect costs (and associated benefits). The direct cost of

    the Complete Legal Segregation Model is the increased risk the DCO will

    face when a Cleared Swaps Customer and its FCM default, which equals

    the probability of a default by a Cleared Swaps Customer and its FCM,

    multiplied by the expected contribution that fellow customers would

    have provided toward the uncovered loss. (As discussed in the previous

    section, there is a corresponding gain to Cleared Swaps Customers which

    is the value they place on avoiding this same cost, i.e., the value of

    having the equivalent of insurance against Fellow-Customer Risk.) \252\

    Thus, the Complete Legal Segregation Model will potentially result in a

    decrease in the financial resources package available to the DCO in the

    event of default. Maintaining the same assurance of performance of the

    DCO's function as central counterparty in the circumstances of a double

    default may require the DCO to, therefore, raise additional financial

    resources.\253\ The comments submitted to the Commission by DCOs and

    others have suggested two possible ways by which DCO's default resource

    structure under the Complete Legal Segregation Model might differ from

    the Futures Model: Either through higher initial customer margins or by

    increasing the size of the DCO's guaranty fund.\254\ Of course, actual

    DCOs could use a mixture of adjustments to margins and guaranty funds.

    Commenters who estimated higher costs resulting from Complete Legal

    Segregation therefore estimated potential effects on margins and

    guaranty funds in isolation, while generally recognizing that this is a

    simplification of what actual practice is likely to be.\255\

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

    \252\ In addition, as discussed in section VII.B.3.b.iv., there

    are efficiency gains in centralizing FCM monitoring in a small

    number of parties. Moreover, because of confidentiality

    considerations, among other things, DCOs have greater access to

    information from their Clearing Members than Cleared Swaps Customers

    do. As a result of this greater access to information and because of

    the increased incentive on DCOs to actively monitor the risks posed

    by their Clearing Member FCMs and Cleared Swaps Customers, the

    overall effectiveness of risk management may be increased.

    \253\ Section 725(c)(2)(B)(ii) of the Dodd-Frank Act requires

    that a DCO possess financial resources that, at a minimum, would

    allow the DCO to meet its financial obligations notwithstanding a

    default by the member or participant creating the largest financial

    exposure for that organization in extreme but plausible market

    conditions. See also 76 FR at 69344-45. In determining what

    financial resources are needed to comply with section

    725(c)(2)(B)(ii) and its implementing regulations, a DCO will need

    to evaluate and take into consideration the effect of Complete Legal

    Segregation. However, within limits, the statute and regulations

    permit the exercise of judgment by the DCO as to the methods it will

    use to do this. As is indicated in the discussion in the text below,

    in comments to the proposed rulemaking, different DCOs have

    suggested that they may differ in their evaluation of the practical

    effects of Complete Legal Segregation, in the value they ascribe to

    fellow-customer collateral as a resource, and in the steps they will

    take to maintain adequate financial resources in light of their

    evaluation.

    \254\ A guaranty fund is a fund created by a DCO to which the

    clearing members contribute, in proportion generally set by DCO

    rule. See supra section I.B.4 and n. 27. The assets in the fund are

    then available to cover losses resulting from defaults by one or

    more clearing members, whether in their proprietary capacity or due

    to customer accounts, to the extent those losses are not covered by

    available collateral provided by the defaulting Clearing Member

    (limited to proprietary collateral for a default in the clearing

    member's proprietary account, or including customer collateral for a

    customer default). In addition, a DCO may retain by rule the right

    to call upon the members to contribute additional assets, up to a

    defined amount, if the pre-funded default resources are insufficient

    (referred to as an ``assessment power'').

    \255\ ICE contends that DCOs will choose to adjust to Complete

    Legal Segregation entirely by increasing margins rather than

    guaranty funds because Complete Legal Segregation increases the risk

    that assets in guaranty funds will actually be used to cover losses

    in the event of a double default. According to ICE, excessive

    reliance on margin is undesirable because guaranty funds offer the

    DCO more flexibility in responding to defaults and may be more

    liquid than assets used as margin. See ICE at 6-7. However, while

    ICE may be correct that clearing member FCMs, all other things being

    equal, would prefer less risk of loss of assets contributed to

    guaranty funds, there may be counterbalancing factors. For example,

    clearing customers may prefer a DCO with a larger guaranty fund and

    lower margin levels. Similarly, if a structure of default resources

    with an excessive ratio of margin to guaranty fund is, in fact, less

    effective or efficient for dealing with FCM defaults, a DCO that

    employs such a structure might be at a competitive disadvantage.

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

    Assuming no change in guaranty fund levels, ISDA suggested that the

    Complete Legal Segregation Model would require an increase of roughly

    60% in initial margins relative to the Futures Model.\256\ A number of

    other participants in the Commission's roundtables thought that the

    method used to arrive at the estimate was a reasonable way to roughly

    model the effect of Complete Legal Segregation on margin levels.\257\

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

    \256\ ISDA January 18, 2011 Comment on ANPR at 9. The assumption

    that DCOs would use a 99.9% confidence level under Complete Legal

    Segregation was based on ``suggestions'' made at the Commission's

    First Roundtable. See First Roundtable Tr. at 110-111.

    \257\ See, e.g., First Roundtable Tr. at 110-114; Second

    Roundtable Tr. at 255-57.

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

    CME estimated that Complete Legal Segregation would require an

    increase in margin in the range of 60% to 90%.\258\ CME did not specify

    the quantitative assumptions underlying its estimate.\259\ To

    illustrate effects on margin in dollar terms, CME made the assumption

    that, in a mature swaps market, it might expect to clear interest rate

    swaps with a notional value of $200 trillion. On this assumption, CME

    projected required margin from

    [[Page 6366]]

    customers clearing through CME of $500 billion under the Futures Model

    and $800-900 billion under Complete Legal Segregation.\260\ ISDA

    estimated that, industry-wide, Complete Legal Segregation would require

    $581 billion more margin than the Futures Model (a 69.75% increase over

    a baseline, for the Futures Modal, of $833 billion). ISDA made clear

    that this estimate was based on a number of assumptions about future

    market activity and on data obtained from only four FCMs. Therefore,

    this figure is best construed as an estimate of the general magnitude

    of the effects expected by ISDA and not as a precise predicted dollar

    figure.\261\ Nonetheless and notwithstanding this estimate of higher

    initial margin, ISDA concluded that Complete Legal Segregation was

    ``the most appropriate choice of holding model for cleared swaps

    collateral'' of the models proposed in the NPRM and supported this

    approach because it facilitated porting of customer positions in the

    event of an FCM default.\262\

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

    \258\ CME Comment on ANPR at 7-8.

    \259\ See CME Comment on ANPR at 8 (describing methodology used

    in general terms).

    \260\ CME Comment on ANPR at 7-8.

    \261\ ISDA January 18, 2011 Comment on ANPR at 10.

    \262\ ISDA at 1. For a more detailed discussion of the benefits

    of Complete Legal Segregation for porting, see section VII.B.3.b.ii.

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

    Although the above estimates were based on data for interest rate

    swaps, commenters and participants in roundtable discussions indicated

    that somewhat higher margin levels might be needed to maintain adequate

    default resources in connection with credit default swaps because of

    the high volatility and idiosyncratic risks associated with this type

    of swap.\263\ Using data concerning credit default swaps it currently

    clears, albeit not under the Dodd-Frank legal regime, ICE estimated

    that the required initial margin increases would range from 40% to

    371%.

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

    \263\ Second Roundtable Tr. at 255.

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

    These estimates assume that the entire default resource shortfall

    resulting from the DCO's lost reliance on collateral posted as margin

    by non-defaulting customers is reflected in higher initial margins. To

    illustrate the other extreme, CME estimated the cost of responding to

    Complete Legal Segregation purely by means of an increase in its

    guaranty fund. According to CME, it would be necessary to double the

    size of the guaranty fund using this approach, although their comment

    indicates that this should be taken as a rough estimate likely to be

    adjusted based on experience in the future.\264\ Under its assumption

    that in the future it might clear a notional value of $200 trillion in

    interest rate swaps, CME estimates that it would require a guaranty

    fund of $50 billion under the Futures Model and $100 billion under

    Complete Legal Segregation. CME also stated that it might prove

    possible to adapt to Complete Legal Segregation using ``what is

    traditionally called `concentration' margin whereby the DCO sets a

    level of risk at which it would begin to charge higher margins based on

    indicative stress-test levels.'' According to CME, if it proved

    possible to implement such a system, likely ``concentration charges''

    would fall in the range of $50-$250 billion.\265\ However, CME stated

    that it currently lacked sufficient information to precisely assess an

    appropriate methodology using this approach and that this approach

    could have disadvantages which would need to be addressed before it was

    considered as a practical approach.\266\ ISDA estimated that industry-

    wide guaranty funds under the Futures Model would come to $128

    billion.\267\ ISDA apparently did not independently estimate the effect

    of Complete Legal Segregation on guaranty funds, but, relying upon DCO

    estimates that they would approximately double, estimated an increment

    of an additional $128 billion for Complete Legal Segregation industry-

    wide.\268\ If guaranty funds are larger as a result of Complete Legal

    Segregation, it is likely that some or all of the cost would be passed

    on by FCMs to their customers in the form of higher fees. However, in

    the absence of more information about future competitive conditions in

    the cleared swaps market and similar matters, it is not possible to

    reliably estimate the extent to which this would occur.

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

    \264\ CME Comment on ANPR at 7-8. The comment states that under

    Complete Legal Segregation CME, in determining the size of the

    guaranty fund ``would likely change [from an approach treating

    customer margin accounts as diversified unitary pools] to an

    approach geared toward assessing the largest loss associated with a

    certain number of the largest individual customer accounts.

    Currently, we presume that five such customer accounts would be our

    target, although experience and prudence would be our guide. In any

    event, our stress-test loss profile of the largest customer accounts

    would almost certainly generate larger `worst loss' results [under

    Complete Legal Segregation] than under [the Futures Model].'' Id.

    \265\ Id. at 8-9.

    \266\ Id.

    \267\ ISDA January 18, 2011 Comment on ANPR at 10. ISDA stated

    that this estimate referred to the funded component of guaranty

    funds and did not include DCO's right to call for more assets from

    member FCMs when needed.

    \268\ ISDA January 18, 2011 Comment on ANPR at 9-10 and n.8

    (referring to CME estimate).

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

    By contrast to CME, ICE, and ISDA, LCH stated that it is not

    appropriate to attribute higher margins and/or guaranty funds to the

    Complete Legal Segregation Model than to the Futures Model and that the

    appropriate level of default resources for DCOs, is the same under both

    models.\269\ LCH has a more than a decade's worth of experience

    clearing OTC swaps. LCH states that a methodology in which no

    diversification of customer collateral is assumed represents their

    current practice, and is appropriately ``conservative'' in terms of

    capital adequacy.\270\ LCH maintains that, even if it is legally

    permissible for a DCO to take advantage of fellow customer collateral,

    it is imprudent to assume that any funds in the omnibus Cleared Swaps

    Customer Account will remain at the time of default.\271\ In the event

    that default occurs not as a sudden shock, but rather, as the end of a

    process of credit deterioration taking place over a number of days

    (potentially a number of weeks), the Cleared Swaps Customers may have

    time (and, if subject to Fellow-Customer Risk, strong incentive) to

    port (i.e., transfer) their Cleared Swaps Contracts and associated

    collateral away from the defaulting FCM.\272\ CME also has noted that

    an FCM default is likely to be preceded by a period of financial

    turmoil: ``In a situation where an FCM has defaulted on its obligations

    to one or more DCOs, it is entirely possible that the FCM or its parent

    company has been under severe financial stress for some period of

    time.'' \273\

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

    \269\ Evaluating the Costs of Complete Legal Segregation, Aug.

    2011, at 6-11 (``LCH White Paper'').

    \270\ 76 FR at 33847, n. 177.

    \271\ LCH White Paper at 8.

    \272\ LCH at 3.

    \273\ CME at 14. See also id. (describing a situation where ``an

    increasing number of customers were removing their assets and

    accounts.'').

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

    Thus, according to the logic of LCH's approach, the size of the

    guaranty fund and/or initial margin levels would need to be as high

    under the Futures Model as under the Complete Legal Segregation

    Model.\274\

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

    \274\ LCH White Paper at 8.

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

    The divergence in the approaches of LCH and the other two

    clearinghouse commenters is due in part to different implicit

    assumptions about fellow customer behavior, and how such behavior

    should affect a DCO's design of default resources. Under Complete Legal

    Segregation, such an approach likely requires an assessment of the

    largest stressed loss on a small (or concentrated) number of the

    largest customers of the given FCM since, in this instance, the DCO

    would not have access to the collateral of non-defaulting customers.

    Under the Futures Model, by contrast, consideration of the largest

    [[Page 6367]]

    stressed loss might occur over an expanded (and, to a degree, more

    diversified) pool of customers because the DCO is permitted to use the

    mutualized pool of customer collateral. Hence, the Complete Legal

    Segregation Model effectively prohibits the DCO from using the

    mutualized pool of customer deposits as a resource in the event of

    double default. It follows that the extent to which the Complete Legal

    Segregation Model actually affects the DCO's resources relative to the

    Futures Model depends upon the degree to which non-defaulting Cleared

    Swaps Customers collateral will be present following a default. If all

    Cleared Swaps Customer Contracts remained with the defaulting FCM

    through the default, then the DCO could potentially measure the

    adequacy of guaranty funds based on a fully diversified pool of

    customer positions. Conversely, if all customers would transfer their

    positions to a different FCM in anticipation of the default, then the

    diversification (and its consequence for the DCO's financial resources

    package) would be eliminated.

    More generally, the extent to which the Complete Legal Segregation

    Model leads to a higher guaranty fund or higher levels of margin per

    customer than the Futures Model depends on the extent to which Cleared

    Swaps Customer Contracts can be expected to remain with the defaulting

    FCM during the period immediately preceding a default. Since the

    circumstances of particular FCM defaults will vary, DCOs, in

    determining their financial resources package, should be expected to

    take into consideration the possibility that, at least for some FCM

    defaults, there will be warning signs, resulting in a portion of

    Cleared Swaps Customer Collateral being transferred out of the Cleared

    Swaps Customer Account maintained by the defaulting FCM.

    While determining the appropriate assumptions regarding customer

    behavior under the Futures Model is central to the issue of the

    adequacy of a DCO's default resources, it may prove less central to the

    consideration of relative costs and benefits under this rule, since

    both of those costs and benefits depend on the extent to which Cleared

    Swaps Customers will transfer their Cleared Swaps Contracts. In

    general, the greater the extent to which customers will move their

    positions, the lower the benefits of the Complete Legal Segregation

    Model over the Futures Model. However, this benefit afforded the

    customer needs to be balanced against the cost to the DCO of insuring

    against the uncertainty.\275\ Both the capital costs and associated

    benefits of the LSOC Model relative to the Futures Model will tend to

    be lower to the extent customers are likely to move their positions in

    advance of an FCM default and higher to the extent customers are

    unlikely to be able to do so. Differing assumptions about customer

    mobility in advance of default are, therefore, likely to have smaller

    implications for the relative costs and benefits between approaches

    than they do for the Risk Costs considered in isolation.

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

    \275\ In addition, and as discussed above, section 724(a) of the

    Dodd-Frank Act added a new paragraph (f) to section 4(d) of the CEA,

    which requires that neither an FCM nor a DCO may not use the

    collateral of one customer to cover the obligations of another

    customer or the obligations of the FCM or the DCO.

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

    A distinct question in evaluating Risk Cost is how to translate a

    margin or guaranty fund increase into a cost increase. A customer that

    is required to post an additional $100 of margin is not adversely

    affected in the amount of $100. Moreover, the cost to the customer is,

    at least in part, offset by the benefit to the DCO. The cost to a

    customer of a margin increase of $100 is the difference between the

    gain he or she would have received by retaining that $100, and the

    return he or she will receive on the asset while it is on deposit with

    the FCM or DCO. For example, the customer might invest the $100 in

    buying and holding grain over the pendency of the swap if the initial

    margin were not increased, while he or she is limited to the return on

    assets the DCO will accept as margin payment (e.g., the T-bill rate)

    under the new, higher margins. The exact difference in rate of returns

    is dependent on the individual customer's investment options as well as

    his/her risk tolerance, and hence is difficult to calculate precisely.

    Offsetting this cost are the statutory goal of protecting customer

    funds and the gain to the DCO of having additional assets available in

    the event of a combined Cleared Swaps Customer and FCM default, which

    may enable it to obtain a higher rate of return on some of its other

    assets.\276\ Similarly, the cost to an FCM of a guaranty fund

    contribution increase is equal to the difference in return between

    acceptable instruments for deposit to the guaranty fund and the FCM's

    potential return on those additional funds if they were not deposited

    to the guaranty fund.\277\

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

    \276\ An additional offset to this cost is the value that

    customers assign to the increased safety of their collateral from

    Fellow-Customer Risk, as discussed in section VII.B.2.

    \277\ There will also be an implicit cost to the FCM reflecting

    the risk that the contributed assets will need to be used by the DCO

    to cover losses in a default situation.

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

    c. Effects on Likelihood That Customer Swaps Positions Will Be

    ``Ported'' to New FCMs Rather Than Liquidated in the Event of an FCM

    Default

    According to several commenters, a central issue to consider when

    designing a customer collateral protection regime is the ability of

    customers to ``port,'' i.e., transfer, their swaps positions to a

    solvent FCM in the event that their current FCM defaults.\278\

    Following a default by an FCM, the swaps positions of the FCM's

    customers either have to be moved to another FCM, or closed. Moving a

    position to another FCM allows the DCO to maintain its net position in

    that contract at zero, which is generally a goal of a DCO. It also

    relieves the customer of the necessity of reestablishing a position,

    which potentially can be costly, especially in a stressed economic

    state.\279\ Finally, according to commenters, the ability to port

    rather than liquidate customer positions can have important systematic

    benefits for the market at large, because the forced liquidation of the

    swaps cleared by a major FCM could have severe disruptive effects on

    prices and market conditions.\280\

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

    \278\ Black Rock at 2; Fidelity at 5; FIA at 4; MFA at 4.

    \279\ See ISDA February 16, 2011 Comment on ANPR at 2.

    \280\ See, e.g., id. at 2-4; and MFA at 4.

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

    Rules governing customer collateral accounts have an indirect, but

    potentially important, effect on the likelihood of successful porting

    in the event of an FCM default. If swaps positions are transferred to a

    new FCM, the new FCM will have to add to its customer account with the

    DCO enough collateral to secure the ``ported'' swaps. The most ready

    source of such collateral is the customer account of the defaulting

    FCM, which already contains collateral securing the relevant swaps.

    However, if collateral from the defaulting FCM's customer account

    cannot be transferred, then porting of market positions requires

    customers to, at least temporarily, provide the new FCM with new

    collateral. This is, at best, a burden, and may, in some cases, make

    porting infeasible--particularly the prompt porting of numerous

    customers with varied financial resources and liquidity.

    From the perspective of porting, the Complete Legal Segregation

    Model has several related advantages over the Futures Model in

    circumstances of a double default. As discussed above, under the

    Futures Model, if even a

    [[Page 6368]]

    single customer is in default, the DCO is entitled to as much of the

    customer account as is necessary to make up its loss. As a result, the

    DCO has incentives to postpone transfer of the customer account until

    the full ramifications of the customer default--and thus the size of

    the DCO's claim against the account--are resolved. By contrast, under

    Complete Legal Segregation, the DCOs claim against the customer account

    is limited by law to that portion of the account attributable to

    individual customers in default. The DCO will therefore have little or

    no incentive to resist transfer of that portion of the account

    attributable to other customers. At the same time, the Complete Legal

    Segregation Model, unlike the Futures Model, provides a legal framework

    for attributing the value of the customer account to individual

    customers. Further, it requires that FCMs provide DCOs with the

    necessary information and that DCOs make the attribution at least once

    daily, so as to be prepared for a possible FCM default. As a result,

    the Complete Legal Segregation Model, has clear advantages over the

    Futures Model in terms of facilitating the transfer of the collateral

    of non-defaulting customers in circumstances where one or more

    customers have defaulted.\281\

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

    \281\ For a more detailed discussion of the operation of the

    segregation models in an FCM bankruptcy, see supra section I.D.

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

    Because of the infrequent occurrence of double default situations

    it is not possible to predict how frequently Complete Legal Segregation

    will permit porting in circumstances where porting would not be

    possible, or would be delayed, under the Futures Model. Nevertheless,

    the structural advantages of Complete Legal Segregation for purposes of

    facilitating porting, and the analysis in ISDA's comment, imply that

    this is an important benefit of this model.

    d. Effects on Incentives for DCOs and Customers to Monitor and Control

    Risky Behavior by FCMs

    CME and other commenters have argued that the Complete Legal

    Segregation Model could potentially reduce the incentives of individual

    customers to carefully evaluate clearing FCMs and only do business with

    the least risky.\282\ In effect, they argue that because the financial

    condition of the FCM, and of the FCM's other customers, will be less

    relevant to the customer's exposure to loss in the event of a fellow

    customer's default than under the Futures Model, the customer will

    devote less effort to monitoring the FCM and its other customers.

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

    \282\ Second Roundtable Tr. at 253, l.17; FIA at 5; Newedge at

    4. Cf. MFA at 4-5; BlackRock at 8.

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

    However, while it is possible that the protection against Fellow-

    Customer Risk provided by the Complete Legal Segregation Model may

    cause customers, on average, to devote less effort to monitoring the

    activities of their respective FCMs than under the Futures Model, that

    incentive is not removed. For example, customers remain exposed to

    Operational Risk.

    Moreover, the Complete Legal Segregation Model creates offsetting

    increased monitoring incentives on the DCO and its member FCMs, to the

    benefit of customers. Because of the increased likelihood that a

    customer default would impact the guaranty fund under the Complete

    Legal Segregation Model, increased incentives exist to protect that

    fund through more careful monitoring by the suppliers of the guaranty

    fund and their agent (the DCO). Indeed, commenters observe that the

    availability of fellow-customer collateral as a buffer reduces the

    incentives of DCOs to provide vigorous oversight.\283\ The net effect

    of these incentive changes on the incentive to monitor is difficult to

    quantify. However, the basic economics of monitoring suggest that there

    are efficiency gains to centralizing monitoring in a small number of

    parties.\284\ This is because of ``free rider'' effects associated with

    diffuse exposure to risk of loss. When the risk of loss from the

    activities of a firm, such as an FCM, is spread over a large number of

    agents, each individual agent gains little from devoting resources to

    monitoring the firm relative to the total potential benefit of

    monitoring to the affected agents as a group.\285\ This effect is

    compounded by an information effect; even if the incentive exists, it

    is difficult for individual customers to gain access to real-time

    information about the financial condition of the FCM, and even more so

    to gain real-time information about the financial condition of their

    fellow customers. In contrast, the DCO is in a position to obtain good

    information about the financial condition of FCMs and customers since,

    via its rules, it can require FCMs to provide such information as a

    condition for becoming and remaining clearing members. Based on these

    considerations, there is reason to believe that, while Complete Legal

    Segregation may reduce incentives for customers to monitor their FCMs,

    it will increase incentives for monitoring of FCMs by DCOs and, on

    balance is likely to increase the effectiveness and efficiency with

    which risk taking by clearing FCMs is monitored.

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

    \283\ Blackrock at 8; Freddie Mac at 2; Vanguard at 5.

    \284\ See e.g., Kevin Dowd, Re-Examining the Case for Government

    Deposit Insurance, 59 S. Econ. J. 363, 370 (1993).

    \285\ See, e.g., Andrei Shleifer and Robert W. Vishny, A Survey

    of Corporate Governance, 52 J. Fin. 737, 753 (1997) (discussing

    effect of ``free rider'' issues on monitoring in context of

    corporate governance).

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

    e. Operational Costs

    As discussed above, in order for the Complete Legal Segregation

    Model to work better than the Futures Model in the event of a double

    default, the DCO must have information that will enable it to attribute

    the assets in the defaulting FCM's customer account to individual

    customers of the FCM.\286\ Moreover, because the occurrence of a double

    default is rare, and because an FCM in the process of default may not

    (despite its regulatory obligations) be able to provide a DCO with

    accurate and timely information on its customers, section 22.11

    requires clearing FCMs to provide the necessary information to DCOs on

    at least a daily basis. The Commission notes that section 22.12

    similarly requires DCOs to use this information to calculate and record

    the amount of collateral required to support each customer's Cleared

    Swaps transactions on at least a daily basis. This daily information

    processing is not provided under the Futures Model and will add to the

    operational costs of clearing.

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

    \286\ See discussion at section VII.A.2; supra n.224.

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

    The NPRM discussed the likely magnitude of increased operational

    costs associated with the more extensive information requirement.\287\

    The Commission noted there that one estimate suggested the operational

    costs of the Complete Legal Segregation Model (relative to the Futures

    Model) were likely to be slightly less than $1 million per year per

    FCM, with one-time costs of about $700,000.\288\ A DCO's cost of

    accommodating this additional information was estimated to be of the

    same general magnitude. Another comment observed that the operational

    costs would be the same across all models being considered given a

    requirement for DCOs to collect margin on a gross basis.\289\ The

    Commission

    [[Page 6369]]

    received no alternative quantitative estimates in response to the

    NPRM,\290\ although Fidelity suggested that some of the operational

    costs associated with Complete Legal Segregation will be incurred

    regardless of the segregation model that is chosen because other CFTC

    rulemakings (i.e., the real time reporting rulemaking and the reporting

    of certain post-enactment swap transactions rulemaking) require similar

    reporting.\291\

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

    \287\ 76 FR at 33845-33846.

    \288\ Id. (citing ISDA estimates for operational costs received

    in response to the ANPR).

    \289\ LCH at 2 (``If the Commission adopts [the gross margining

    requirement for DCOs], any DCO offering any swaps clearing service

    under any of the models outlined by the Commission in the Proposed

    Rulemaking will be required to track margin on an individual client

    basis and FCMs will be required to do the same.''). See also 76 FR

    at 69374-76. In addition, some individual customer information

    already resides at the DCO. See CME at 9 (``At the end of each

    trading day, CME Clearing calculates, for each FCM's cleared swaps

    customer account* * * the net margin requirement for each customer

    in the account.'').

    \290\ In fact, FHLB states that the costs and risks associated

    with the additional operational complexity ``may be difficult to

    quantify.'' FHLB at 4.

    \291\ Fidelity at 6.

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

    Based on estimates by CME and ISDA described above, the expected

    scale of the cleared swaps market will require hundreds of billions of

    dollars of collateral to adequately secure swaps positions under any

    segregation model, and will thus potentially expose this collateral to

    some degree of Fellow-Customer Risk. In light of the projected

    magnitude of the customer funds at stake, the Commission believes that

    operational costs of the Complete Legal Segregation Model are a

    relatively minor factor in choosing a model that would protect customer

    funds consistent with section 4d(f) of the CEA, and that this would be

    true even if operational costs proved to be considerably higher than

    the estimate described in the NPRM.

    f. Additional Potential Sources of Costs and Benefits Arising From

    Complete Legal Segregation

    As discussed in section I.D.1 above, the Complete Legal Segregation

    Model provides a significant advantage compared to the Futures Model

    with respect to fostering transfer. Specifically, under the Complete

    Legal Segregation Model, information about the Cleared Swaps Customers

    as a whole, and about each individual Cleared Swaps Customer's

    positions, are transmitted to the DCO every day, an information flow

    (and store) that is not present in the Futures Model. Thus, in the

    event of an FCM bankruptcy, each DCO will have important information on

    a customer by customer basis that can be used to facilitate and

    implement transfers, thereby making the DCO less reliant upon the FCM

    for that information.

    3. Application to CEA Section 15(a) Considerations

    a. Protection of Market Participants

    As discussed above, the primary benefit of the Complete Legal

    Segregation Model is the protection of Cleared Swaps Customers from the

    risk of losing the value of their collateral as a result of a double

    default. Based on estimates by CME and ISDA, the cleared swaps market

    is likely to require upwards of $500 billion in customer collateral

    regardless of the segregation model chosen by the Commission.\292\

    These assets will be potentially exposed to Fellow-Customer Risk. It is

    not possible to reliably quantify the likelihood of fellow customer

    losses in the absence of Complete Legal Segregation for reasons

    discussed in section VII.B.2.a. above. In addition, the magnitude of

    Fellow-Customer Risk in particular default situations will be affected

    by the extent to which customers foresee or anticipate a default and

    accordingly move their accounts to other FCMs; and the extent to which

    a default is foreseeable or anticipated will vary in different

    defaults. The risk cost imposed on DCOs and their members by Complete

    Legal Segregation will be affected by the foreseeability of default in

    a roughly parallel way.

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

    \292\ See supra n. 243.

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

    Notwithstanding these uncertainties, swaps users who participated

    in this rulemaking process, with only limited exceptions, consistently

    placed great value on protection against Fellow-Customer Risk and

    supported either Complete Legal Segregation or stronger measures to

    provide such protection despite estimates of high dollar costs in the

    form of the capital cost of higher margins or guaranty funds.\293\

    Since swaps users most likely ultimately will bear, directly or

    indirectly, most of the dollar costs of protection against Fellow-

    Customer Risk, the Commission places substantial weight on their

    valuation of such protection.

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

    \293\ See, e.g., Second Roundtable Tr. at 245-249; Second

    Roundtable Tr. at 140, l.12 (Mr. MacFarlane stating that ``Tudor

    would happily pay the incremental costs, both in terms of collateral

    and operational costs [for greater protection].'').

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

    b. Efficiency, Competitiveness, and Financial Integrity of Markets

    i. Dollar Costs and Swaps Usage

    Complete Legal Segregation could add materially to the dollar cost

    of clearing swaps, affecting competitiveness in particular.\294\

    Moreover, there were estimates (albeit somewhat speculative estimates)

    that Complete Legal Segregation might require on the order of 70%

    higher margins, 100% higher DCO guaranty funds, or some combination of

    smaller increases in both. In light of the expected large scale of the

    cleared swaps market, these estimates imply industry wide increments in

    margin on the order of $500 billion or more, increments in guaranty

    funds of over $100 billion, or a combination of smaller increments of

    both.\295\ The cost of these measures would not be the dollar amount of

    margin or guaranty fund contributions, but, rather, the opportunity

    cost of using capital for these purposes rather than other business

    purposes. Considerable uncertainty is added to the evaluation of these

    estimates of the dollar cost of Complete Legal Segregation by the fact

    that DCOs do not yet have experience clearing under the Dodd-Frank

    regime (although they do currently clear swaps pursuant to the rules of

    the exchanges) and by LCH's observation that, under the method it uses

    to determine needed financial resources to protect against default, the

    same level of resources is required under both Complete Legal

    Segregation and the Futures Model.\296\

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

    \294\ This analysis is also informed by the extent to which

    clearing certain types of swaps is mandatory, as well as by the cost

    already incurred in the uncleared swaps market.

    \295\ See supra n. 243.

    \296\ See supra n. 269.

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

    If Complete Legal Segregation results in higher dollar costs to

    swaps users, this may discourage some use of swaps for hedging or other

    beneficial economic uses. The Commission does not have precise

    information about the price responsiveness of swaps usage that would

    make it possible to quantify this effect. A countervailing

    consideration is that comments to this rulemaking indicate that

    customers are already transacting in uncleared swaps, and are paying

    for full segregation of the collateral they are posting because of the

    importance to them of protection of that collateral against the

    defaults of others. Moreover, as some commenters noted, concern over

    exposure to Fellow-Customer Risk that they currently pay for and

    receive could discourage swaps usage in the absence of Complete Legal

    Segregation or other protection against such risk.\297\ Comments by

    swaps users indicated that such effects would occur though they did not

    provide quantitative estimates. The evidence from the comments,

    specifically the statements of swap users regarding their willingness

    to pay for legal segregation, suggests that the demand-enhancing

    [[Page 6370]]

    effects of the increased safety associated with Complete Legal

    Segregation are larger than the demand-reducing effects of higher

    margins and/or fees associated with it.\298\

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

    \297\ See e.g., Second Roundtable at 141, l.3 (Mr. MacFarlane

    stating''the uncertainty that's created by not knowing who we're

    sharing risk in the omnibus pool would cause us to pull our capital

    back from the market.'').

    \298\ See e.g., Second Roundtable Tr. at 245 (Mr. Thum stating

    that ``we're prepared to bear the cost to provide for the margin

    protection that our clients need.'').

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

    ii. Financial Integrity of Markets

    Complete Legal Segregation is likely to have several effects on the

    financial integrity of markets, the specifics of which are discussed in

    more detail under other headings.\299\ As explained above, Complete

    Legal Segregation is expected to lead to a net improvement in the

    monitoring of risky behavior by FCMs, with the effects of increased

    incentives for such monitoring by DCOs outweighing the effects of

    reduced incentives for such monitoring by customers. This net

    improvement in monitoring of FCMs can be expected to enhance the

    financial integrity of the markets in which clearing FCMs participate.

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

    \299\ See discussion at sections VII.B.2.b, VII.B.2.c,

    VII.B.2.d, and VII.B.3.b.i.

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

    By facilitating porting, Complete Legal Segregation is expected to

    enhance the financial integrity of cleared swaps markets in financial

    stress situations involving FCMs by reducing the likelihood that a

    double default will result in the need to liquidate large volumes of

    swaps positions with resulting costs to customers and the DCO and the

    potential to seriously disrupt the market at large.

    By prohibiting DCOs from using the collateral of non-defaulting

    customers in a double default situation, Complete Legal Segregation

    potentially could have a negative effect on the financial integrity of

    DCOs by reducing the financial resources available to apply to losses

    arising from double defaults. However, the record indicates that DCOs

    would substitute additional resources in the form of higher margin

    levels, larger guaranty funds, or a combination of both as need to

    maintain the ability to cover losses from FCM and customer

    defaults.\300\ Importantly, prohibiting DCOs from using the collateral

    of non-defaulting customers to protect a DCO from risks within a DCO's

    control is consistent with the statute's goal of protecting customer

    funds. As a result, the loss of the ability to rely on the collateral

    of non-defaulting customers would be expected to translate to higher

    dollar costs than under the Futures Model rather than reduced financial

    integrity.

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

    \300\ See supra n. 255.

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

    c. Price Discovery

    Complete Legal Segregation is not expected to have a significant

    effect on price discovery under normal market conditions. In

    circumstances of a double default involving a large FCM, Complete Legal

    Segregation may help protect price discovery in the swaps markets by

    reducing the likelihood of the need for a large scale liquidation of

    swaps positions that would disrupt normal pricing.

    d. Sound Risk Management Practices

    As discussed above,\301\ Complete Legal Segregation is expected to

    produce a net improvement in the monitoring of risky behavior by FCMs.

    While there may be some reduction in the incentives to Cleared Swaps

    Customers to monitor their FCMs, there is a corresponding increase in

    the incentives by DCOs to do so. There are efficiency gains in

    centralizing this responsibility in a small number of parties, and the

    DCOs (as membership organizations) have greater access to information

    from their Clearing Members, in contrast to Cleared Swaps Customers,

    who (due to considerations of confidentiality) may have little ability

    to obtain information about an FCM's activities with respect to fellow-

    customers.

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

    \301\ See supra section VII.B.2.d.

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

    e. Other Public Interest Considerations

    By better protecting Cleared Swaps Customer Collateral against

    fellow-customer risk, the LSOC Model will enhance compliance with the

    values of CEA Section 4d(f), which requires that the property of each

    individual customer be protected.

    C. Conclusion

    The Commission has carefully considered the available evidence

    regarding the costs and benefits of Complete Legal Segregation Model

    and has concluded that the Complete Legal Segregation Model best

    accomplishes the statutory objective of protecting customer deposits.

    In terms of benefits, customers have much greater assurance of the

    safety of their margin deposits against Fellow-Customer Risk under the

    Complete Legal Segregation Model than under the Futures Model. In

    addition, Complete Legal Segregation will facilitate porting rather

    than liquidation of customer positions in double default situations

    with associated benefits to customers and, for defaults of large FCMs,

    reduced risk of disruption of markets as a result of large volumes of

    customer positions. Complete Legal Segregation also will increase

    incentives for DCOs to monitor risky behavior by member FCMs and that

    this effect can be expected to outweigh reduced incentives for

    customers to monitor their FCMs. In determining that Complete Legal

    Segregation is the appropriate model, the Commission has placed weight

    on, among other considerations, the comments of many swaps users that

    they place great value on assurance of their margins and their

    positions and are willing to incur substantial costs to achieve such

    assurance and on comments by a range of market participants placing

    great importance on porting of customer positions as a response to FCM

    defaults.

    On the cost side, several DCOs that employ the Futures Model for

    the futures-side of their business and other commenters argued that

    Complete Legal Segregation will require some combination of

    substantially higher margin levels and guaranty fund contributions than

    the Futures Model. However, one major DCO reported that, under the

    approach it uses to establish margin and guaranty fund level, these

    levels would be the same under Complete Legal Segregation and the

    Futures Model. Complete Legal Segregation will impose some operational

    costs but such costs are small enough to be a minor consideration

    relative to the other aspects of cost; e.g., the potential increases in

    margins and guaranty funds.

    The Commission notes that, as discussed above, there are a number

    of sources of uncertainty in evaluating the costs and benefits of

    Complete Legal Segregation, such as market participants not yet having

    experience clearing swaps under the Dodd-Frank legal regime and the

    infrequency of double defaults. However, the costs and benefits of all

    the models considered by the Commission are subject to similar

    uncertainties as to the probability of double defaults and customer

    behavior in anticipation of such defaults. Accordingly, such

    uncertainties do not militate against the selection of the Complete

    Legal Segregation Model as the preferred alternative.

    VIII. Related Matters

    A. Paperwork Reduction Act

    1. Introduction

    Sections 22.2(g), 22.5(a), 22.11, 22.12, and 22.16 of these rules

    impose new information disclosure and recordkeeping requirements that

    constitute the collection of information

    [[Page 6371]]

    within the meaning of the Paperwork Reduction Act of 1995

    (``PRA'').\302\ Under the PRA, an agency may not conduct or sponsor,

    and a person is not required to respond to, a collection of information

    unless it displays a currently valid control number.\303\ The

    Commission therefore has requested that the Office of Management and

    Budget (``OMB'') assign a control number for this collection of

    information. The Commission has also submitted the NPRM, this final

    rule release, and supporting documentation to OMB for review in

    accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for this

    collection of information is ``Disclosure and Retention of Certain

    Information Relating to Cleared Swaps Customer Collateral,'' OMB

    Control Number 3038-0091. This collection of information will be

    mandatory. The information in question will be held by private entities

    and, to the extent it involves consumer financial information, may be

    protected under Title V of the Gramm-Leach-Bliley Act as amended by the

    Dodd-Frank Act.\304\ OMB has not yet approved the collection of this

    information.

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

    \302\ 44 U.S.C. 3501 et seq.

    \303\ Id.

    \304\ See generally, Notice of Proposed Rulemaking, Privacy of

    Consumer Financial Information; Conforming Amendments Under Dodd-

    Frank Act, 75 FR 66014, Oct. 27, 2010.

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

    2. Comments Received on Collection of Information Proposed in NPRM

    Sections 22.2(g), 22.5(a), 22.11, 22.12, and 22.16 and estimates of

    the expected information collection burden were published for comment

    in the NPRM. The collection of information required by the final

    versions of these rules and the associated information collection

    burden is identical to that of the rules as proposed. Comments were

    received regarding proposed sections 22.5(a), 22.11, 22.12, and 22.16.

    The substance of these comments and the Commission's response to them

    is set forth above in sections IV.E, IV.K, IV.L., and IV.P of this

    preamble.

    In addition, in response to a comment on the definition of

    ``Cleared Swaps Customer Collateral'' by the FIA requesting that the

    Commission confirm that the term ``Cleared Swaps Customer Collateral''

    includes all assets provided to an FCM by a Cleared Swaps Customer,

    including amounts in excess of the amount required to margin a Cleared

    Swap by the relevant DCO, the Commission has included in the final rule

    a new permissive provision, subsection 22.13(c)(2). Subsection

    22.13(c)(2) provides that an FCM may transmit to a DCO collateral

    posted by a Cleared Swaps Customer in excess of the amount required by

    the DCO if (1) the rules of the DCO permit such transmission; and (2)

    the DCO provides a mechanism by which the FCM is able to, and maintains

    rules requiring the FCM to, identify each business day, for each

    Cleared Swaps Customer, the amount of collateral posted in excess of

    the amount required by the DCO. This rule subsection may have the

    effect of causing some FCMs to perform a daily computation of the

    amount of collateral posted in excess of the amount required by the

    relevant DCO. In the view of the Commission, this provision does not

    materially change, or add to the burden of, the information collection

    required by the Part 22 rules as proposed. This is so because the

    computation of the amount of collateral posted in excess of the amount

    required by the relevant DCO will be performed using same data sources

    that would be used for the information collections required by

    subsections 22.2(g), 22.11, and 22.12. Moreover, this burden would only

    be imposed (and enforced) by voluntary action of the DCO in permitting,

    and the FCM in transmitting, such additional collateral.

    There were no comments specifically addressing the Commission's

    numerical estimates of information collection burden in section VII.B.2

    of the NPRM.

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \305\ requires that

    agencies consider whether their rules will have a significant economic

    impact on a substantial number of small entities and, if so, provide a

    regulatory flexibility analysis of that impact. These Part 22 rules and

    amendments to Part 190 apply to DCOs and FCMs. In the NPRM, the

    Chairman, pursuant to section 605(b) of the RFA, 5 U.S.C. 605(b),

    certified on behalf of the Commission that these rules and amendments

    will not have a significant economic impact on a substantial number of

    small entities based on previous determinations by the Commission that

    DCOs and FCMs are not small entities for purposes of the RFA.\306\

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

    \305\ 5 U.S.C. 601 et seq.

    \306\ See 66 FR 45605, 45609 (Aug. 29, 2001) (DCOs); 47 FR

    18618, 18619-20 (April 30, 1982) (FCMs).

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

    List of Subjects

    17 CFR Part 22

    Brokers, Clearing, Consumer protection, Reporting and recordkeeping

    requirements, Swaps.

    17 CFR Part 190

    Bankruptcy, Brokers, Commodity futures, Reporting and recordkeeping

    requirements, Swaps.

    IX. Text of Final Rules

    For the reasons stated in this release, the Commission hereby

    amends Chapter 17 as follows:

    0

    1. Add Part 22 to read as follows:

    PART 22--CLEARED SWAPS

    Sec.

    22.1 Definitions.

    22.2 Futures Commission Merchants: Treatment of Cleared Swaps

    Customer Collateral.

    22.3 Derivatives Clearing Organizations: Treatment of Cleared Swaps

    Customer Collateral.

    22.4 Futures Commission Merchants and Derivatives Clearing

    Organizations: Permitted Depositories.

    22.5 Futures Commission Merchants and Derivatives Clearing

    Organizations: Written Acknowledgement.

    22.6 Futures Commission Merchants and Derivatives Clearing

    Organizations: Naming of Cleared Swaps Customer Accounts.

    22.7 Permitted Depositories: Treatment of Cleared Swaps Customer

    Collateral.

    22.8 Situs of Cleared Swaps Customer Accounts.

    22.9 Denomination of Cleared Swaps Customer Collateral and Location

    of Depositories.

    22.10 Application of other Regulatory Provisions.

    22.11 Information to be Provided Regarding Customers and their

    Cleared Swaps.

    22.12 Information to be Maintained Regarding Cleared Swaps Customer

    Collateral.

    22.13 Additions to Cleared Swaps Customer Collateral.

    22.14 Futures Commission Merchant Failure to Meet a Customer Margin

    Call in Full.

    22.15 Treatment of Cleared Swaps Customer Collateral on an

    Individual Basis.

    22.16 Disclosures to Customers.

    Authority: 7 U.S.C. 1a, 6d, 7a-1 as amended by Pub. L. 111-203,

    124 Stat. 1376.

    Sec. 22.1 Definitions.

    For the purposes of this part:

    Cleared Swap. This term refers to a transaction constituting a

    ``cleared swap'' within the meaning of section 1a(7) of the Act.

    (1) This term shall exclude any swap (along with money, securities,

    or other property received to margin, guarantee, or secure such a swap)

    that, pursuant to a Commission rule, regulation, or order, is (along

    with such money, securities, or other property) commingled with a

    commodity future or option (along with money, securities, or other

    property

    [[Page 6372]]

    received to margin, guarantee, or secure such a future or option) that

    is segregated pursuant to section 4d(a) of the Act.

    (2) This term shall include any trade or contract (along with

    money, securities or other property received to margin, guarantee, or

    secure such a trade or contract), that

    (i) Would be required to be segregated pursuant to section 4d(a) of

    the Act, or

    (ii) Would be subject to Sec. 30.7 of this chapter, but which is,

    in either case, pursuant to a Commission rule, regulation, or order (or

    a derivatives clearing organization rule approved in accordance with

    Sec. 39.15(b)(2) of this chapter), commingled with a swap (along with

    money, securities, or other property received to margin, guarantee, or

    secure such a swap) in an account segregated pursuant to section 4d(f)

    of the Act.

    Cleared Swaps Customer. This term refers to any person entering

    into a Cleared Swap, but shall exclude:

    (1) Any owner or holder of a Cleared Swaps Proprietary Account with

    respect to the Cleared Swaps in such account; and

    (2) A clearing member of a derivatives clearing organization with

    respect to Cleared Swaps cleared on that derivatives clearing

    organization. A person shall be a Cleared Swaps Customer only with

    respect to its Cleared Swaps.

    Cleared Swaps Customer Account. This term refers to any account for

    the Cleared Swaps of Cleared Swaps Customers and associated Cleared

    Swaps Customer Collateral that:

    (1) A futures commission merchant maintains on behalf of Cleared

    Swaps Customers (including, in the case of a Collecting Futures

    Commission Merchant, the Cleared Swaps Customers of a Depositing

    Futures Commission Merchant) or

    (2) A derivatives clearing organization maintains for futures

    commission merchants on behalf of Cleared Swaps Customers thereof.

    Cleared Swaps Customer Collateral. (1) This term means all money,

    securities, or other property received by a futures commission merchant

    or by a derivatives clearing organization from, for, or on behalf of a

    Cleared Swaps Customer, which money, securities, or other property:

    (i) Is intended to or does margin, guarantee, or secure a Cleared

    Swap; or

    (ii) Constitutes, if a Cleared Swap is in the form or nature of an

    option, the settlement value of such option.

    (2) This term shall also include accruals, i.e., all money,

    securities, or other property that a futures commission merchant or

    derivatives clearing organization receives, directly or indirectly,

    which is incident to or results from a Cleared Swap that a futures

    commission merchant intermediates for a Cleared Swaps Customer.

    Cleared Swaps Proprietary Account. (1) This term means an account

    for Cleared Swaps and associated collateral that is carried on the

    books and records of a futures commission merchant for persons with

    certain relationships with that futures commission merchant,

    specifically:

    (i) Where such account is carried for a person falling within one

    of the categories specified in paragraph (2) of this definition, or

    (ii) Where ten percent or more of such account is owned by a person

    falling within one of the categories specified in paragraph (2) of this

    definition, or

    (iii) Where an aggregate of ten percent or more of such account is

    owned by more than one person falling within one or more of the

    categories specified in paragraph (2) of this definition.

    (2) The relationships to the futures commission merchant referred

    to in paragraph (1) of this definition are as follows:

    (i) Such individual himself, or such partnership, corporation or

    association itself;

    (ii) In the case of a partnership, a general partner in such

    partnership;

    (iii) In the case of a limited partnership, a limited or special

    partner in such partnership whose duties include:

    (A) The management of the partnership business or any part thereof;

    (B) The handling, on behalf of such partnership, of:

    (1) The Cleared Swaps of Cleared Swaps Customers or

    (2) The Cleared Swaps Customer Collateral;

    (C) The keeping, on behalf of such partnership, of records

    pertaining to

    (1) the Cleared Swaps of Cleared Swaps Customers or

    (2) the Cleared Swaps Customer Collateral; or

    (D) The signing or co-signing of checks or drafts on behalf of such

    partnership;

    (iv) In the case of a corporation or association, an officer,

    director, or owner of ten percent or more of the capital stock of such

    organization;

    (v) An employee of such individual, partnership, corporation or

    association whose duties include:

    (A) The management of the business of such individual, partnership,

    corporation or association or any part thereof;

    (B) The handling, on behalf of such individual, partnership,

    corporation, or association, of the Cleared Swaps of Cleared Swaps

    Customers or the Cleared Swaps Customer Collateral;

    (C) The keeping of records, on behalf of such individual,

    partnership, corporation, or association, pertaining to the Cleared

    Swaps of Cleared Swaps Customers or the Cleared Swaps Customer

    Collateral; or

    (D) The signing or co-signing of checks or drafts on behalf of such

    individual, partnership, corporation, or association;

    (vi) A spouse or minor dependent living in the same household of

    any of the foregoing persons;

    (vii) A business affiliate that, directly or indirectly, controls

    such individual, partnership, corporation, or association; or

    (viii) A business affiliate that, directly or indirectly, is

    controlled by or is under common control with, such individual,

    partnership, corporation or association. Provided, however, that an

    account owned by any shareholder or member of a cooperative association

    of producers, within the meaning of section 6a of the Act, which

    association is registered as a futures commission merchant and carries

    such account on its records, shall be deemed to be a Cleared Swaps

    Customer Account and not a Cleared Swaps Proprietary Account of such

    association, unless the shareholder or member is an officer, director,

    or manager of the association.

    Clearing Member. This term means any person that has clearing

    privileges such that it can process, clear and settle trades through a

    derivatives clearing organization on behalf of itself or others. The

    derivatives clearing organization need not be organized as a membership

    organization.

    Collecting Futures Commission Merchant. A futures commission

    merchant that carries Cleared Swaps on behalf of another futures

    commission merchant and the Cleared Swaps Customers of the latter

    futures commission merchant, and as part of carrying such Cleared

    Swaps, collects Cleared Swaps Customer Collateral.

    Commingle. To commingle two or more items means to hold such items

    in the same account, or to combine such items in a transfer between

    accounts.

    Customer. This term means any customer of a futures commission

    merchant, other than a Cleared Swaps Customer, including, without

    limitation:

    (1) Any ``customer'' or ``commodity customer'' within the meaning

    of Sec. 1.3 of this chapter; and

    [[Page 6373]]

    (2) Any ``foreign futures or foreign options customer'' within the

    meaning of Sec. 30.1(c) of this chapter.

    Depositing Futures Commission Merchant. A futures commission

    merchant that carries Cleared Swaps on behalf of its Cleared Swaps

    Customers through another futures commission merchant and, as part of

    carrying such Cleared Swaps, deposits Cleared Swaps Customer Collateral

    with such futures commission merchant.

    Permitted Depository. This term shall have the meaning set forth in

    Sec. 22.4 of this part.

    Segregate. To segregate two or more items is to keep them in

    separate accounts, and to avoid combining them in the same transfer

    between two accounts.

    Sec. 22.2 Futures Commission Merchants: Treatment of Cleared Swaps

    and Associated Cleared Swaps Customer Collateral.

    (a) General. A futures commission merchant shall treat and deal

    with the Cleared Swaps of Cleared Swaps Customers and associated

    Cleared Swaps Customer Collateral as belonging to Cleared Swaps

    Customers.

    (b) Location of Cleared Swaps Customer Collateral. (1) A futures

    commission merchant must segregate all Cleared Swaps Customer

    Collateral that it receives, and must either hold such Cleared Swaps

    Customer Collateral itself as set forth in paragraph (b)(2) of this

    section, or deposit such collateral into one or more Cleared Swaps

    Customer Accounts held at a Permitted Depository, as set forth in

    paragraph (b)(3) of this section.

    (2) If a futures commission merchant holds Cleared Swaps Customer

    Collateral itself, then the futures commission merchant must:

    (i) Physically separate such collateral from its own property;

    (ii) Clearly identify each physical location in which it holds such

    collateral as a ``Location of Cleared Swaps Customer Collateral'' (the

    ``FCM Physical Location'');

    (iii) Ensure that the FCM Physical Location provides appropriate

    protection for such collateral; and

    (iv) Record in its books and records the amount of such Cleared

    Swaps Customer Collateral separately from its own funds.

    (3) If a futures commission merchant holds Cleared Swaps Customer

    Collateral in a Permitted Depository, then:

    (i) The Permitted Depository must qualify pursuant to the

    requirements set forth in Sec. 22.4 of this part, and

    (ii) The futures commission merchant must maintain a Cleared Swaps

    Customer Account with each such Permitted Depository.

    (c) Commingling. (1) A futures commission merchant may commingle

    the Cleared Swaps Customer Collateral that it receives from, for, or on

    behalf of multiple Cleared Swaps Customers.

    (2) A futures commission merchant shall not commingle Cleared Swaps

    Customer Collateral with either of the following:

    (i) Funds belonging to the futures commission merchant, except as

    expressly permitted in paragraph (e)(3) of this section; or

    (ii) Other categories of funds belonging to Customers of the

    futures commission merchant, including customer funds (as Sec. 1.3 of

    this chapter defines such term) and the foreign futures or foreign

    options secured amount (as Sec. 1.3 of this chapter defines such

    term), except as expressly permitted by Commission rule, regulation, or

    order, or by a derivatives clearing organization rule approved in

    accordance with Sec. 39.15(b)(2) of this chapter.

    (d) Limitations on Use. (1) No futures commission merchant shall

    use, or permit the use of, the Cleared Swaps Customer Collateral of one

    Cleared Swaps Customer to purchase, margin, or settle the Cleared Swaps

    or any other trade or contract of, or to secure or extend the credit

    of, any person other than such Cleared Swaps Customer. Cleared Swaps

    Customer Collateral shall not be used to margin, guarantee, or secure

    trades or contracts of the entity constituting a Cleared Swaps Customer

    other than in Cleared Swaps, except to the extent permitted by a

    Commission rule, regulation or order.

    (2) A futures commission merchant may not impose or permit the

    imposition of a lien on Cleared Swaps Customer Collateral, including

    any residual financial interest of the futures commission merchant in

    such collateral, as described in paragraph (e)(4) of this section.

    (3) A futures commission merchant may not include, as Cleared Swaps

    Customer Collateral,

    (i) Money invested in the securities, memberships, or obligations

    of any derivatives clearing organization, designated contract market,

    swap execution facility, or swap data repository, or

    (ii) Money, securities, or other property that any derivatives

    clearing organization holds and may use for a purpose other than those

    set forth in Sec. 22.3 of this part.

    (e) Exceptions. Notwithstanding the foregoing:

    (1) Permitted Investments. A futures commission merchant may invest

    money, securities, or other property constituting Cleared Swaps

    Customer Collateral in accordance with Sec. 1.25 of this chapter,

    which section shall apply to such money, securities, or other property

    as if they comprised customer funds or customer money subject to

    segregation pursuant to section 4d(a) of the Act and the regulations

    thereunder.

    (2) Permitted Withdrawals. Such share of Cleared Swaps Customer

    Collateral as in the normal course of business shall be necessary to

    margin, guarantee, secure, transfer, adjust, or settle a Cleared Swaps

    Customer's Cleared Swaps with a derivatives clearing organization, or

    with a Collecting Futures Commission Merchant, may be withdrawn and

    applied to such purposes, including the payment of commissions,

    brokerage, interest, taxes, storage, and other charges, lawfully

    accruing in connection with such Cleared Swaps.

    (3) Deposits of Own Money, Securities, or Other Property.

    (i) In order to ensure that it is always in compliance with

    paragraph (f) of this section, a futures commission merchant may place

    in an FCM Physical Location or deposit in a Cleared Swaps Customer

    Account its own money, securities, or other property (provided, that

    such securities or other property are unencumbered and are of the types

    specified in Sec. 1.25 of this chapter).

    (ii) Money, securities, or other property deposited by a futures

    commission merchant pursuant to 22.13(b) and available to a derivatives

    clearing organization or Collecting Futures Commission Merchant to meet

    the obligations of the futures commission merchant's Cleared Swaps

    Customers collectively, shall be maintained in an account separate from

    the Cleared Swaps Customer Account.

    (4) Residual Financial Interest. (i) If, in accordance with

    paragraph (e)(3)(i) of this section, a futures commission merchant

    places in an FCM Physical Location or deposits in a Cleared Swaps

    Customer Account its own money, securities, or other property, then

    such money, securities, or other property (including accruals thereon)

    shall constitute Cleared Swaps Customer Collateral.

    (ii) The futures commission merchant shall have a residual

    financial interest in any portion of such money, securities, or other

    property in excess of that necessary for compliance with paragraph

    (f)(4) of this section.

    (iii) The futures commission merchant may withdraw money,

    securities, or other property from the FCM Physical

    [[Page 6374]]

    Location or Cleared Swaps Customer Account, to the extent of its

    residual financial interest therein. At the time of such withdrawal,

    the futures commission merchant shall ensure that the withdrawal does

    not cause its residual financial interest to become less than zero.

    (f) Requirements as to Amount. (1) For purposes of this Sec.

    22.2(f), the term ``account'' shall reference the entries on the books

    and records of a futures commission merchant pertaining to the Cleared

    Swaps Customer Collateral of a particular Cleared Swaps Customer.

    (2) The futures commission merchant must reflect in the account

    that it maintains for each Cleared Swaps Customer the market value of

    any Cleared Swaps Customer Collateral that it receives from such

    customer, as adjusted by:

    (i) Any uses permitted under Sec. 22.2(d) of this part;

    (ii) Any accruals on permitted investments of such collateral under

    Sec. 22.2(e) of this part that, pursuant to the futures commission

    merchant's customer agreement with that customer, are creditable to

    such customer;

    (iii) Any charges lawfully accruing to the Cleared Swaps Customer,

    including any commission, brokerage fee, interest, tax, or storage fee;

    and

    (iv) Any appropriately authorized distribution or transfer of such

    collateral.

    (3) If the market value of Cleared Swaps Customer Collateral in the

    account of a Cleared Swaps Customer is positive after adjustments, then

    that account has a credit balance. If the market value of Cleared Swaps

    Customer Collateral in the account of a Cleared Swaps Customer is

    negative after adjustments, then that account has a debit balance.

    (4) The futures commission merchant must maintain in segregation,

    in its FCM Physical Locations and/or its Cleared Swaps Customer

    Accounts at Permitted Depositories, an amount equal to the sum of any

    credit balances that the Cleared Swaps Customers of the futures

    commission merchant have in their accounts, excluding from such sum any

    debit balances that the Cleared Swaps Customers of the futures

    commission merchant have in their accounts.

    (5) Notwithstanding the foregoing, the futures commission merchant

    must include, in calculating the sum referenced in paragraph (f)(4) of

    this section, any debit balance that a Cleared Swaps Customer may have

    in its account, to the extent that such balance is secured by ``readily

    marketable securities'' that the Cleared Swaps Customer deposited with

    the futures commission merchant.

    (i) For purposes of this section, ``readily marketable'' shall be

    defined as having a ``ready market'' as such latter term is defined in

    Rule 15c3-1(c)(11) of the Securities and Exchange Commission (Sec.

    241.15c3-1(c)(11) of this title).

    (ii) In order for a debit balance to be deemed secured by ``readily

    marketable securities,'' the futures commission merchant must maintain

    a security interest in such securities, and must hold a written

    authorization to liquidate the securities at the discretion of the

    futures commission merchant.

    (iii) To determine the amount secured by ``readily marketable

    securities,'' the futures commission merchant shall:

    (A) Determine the market value of such securities; and

    (B) Reduce such market value by applicable percentage deductions

    (i.e., ``securities haircuts'') as set forth in Rule 15c3-1(c)(2)(vi)

    of the Securities and Exchange Commission (Sec. 240.15c3-1(c)(2)(vi)

    of this title). The portion of the debit balance, not exceeding 100 per

    cent, that is secured by the reduced market value of such readily

    marketable securities shall be included in calculating the sum referred

    to in paragraph (f)(4) of this section.

    (g) Segregated Account; Daily Computation and Record. (1) Each

    futures commission merchant must compute as of the close of each

    business day, on a currency-by-currency basis:

    (i) The aggregate market value of the Cleared Swaps Customer

    Collateral in all FCM Physical Locations and all Cleared Swaps Customer

    Accounts held at Permitted Depositories (the ``Collateral Value'');

    (ii) The sum referenced in paragraph (f)(4) of this section (the

    ``Collateral Requirement''); and

    (iii) The amount of the residual financial interest that the

    futures commission merchant holds in such Cleared Swaps Customer

    Collateral, which shall equal the difference between the Collateral

    Value and the Collateral Requirement.

    (2) The futures commission merchant must complete the daily

    computations required by this section prior to noon on the next

    business day and must keep such computations, together with all

    supporting data, in accordance with the requirements of Sec. 1.31 of

    this chapter.

    Sec. 22.3 Derivatives Clearing Organizations: Treatment of Cleared

    Swaps Customer Collateral.

    (a) General. A derivatives clearing organization shall treat and

    deal with the Cleared Swaps Customer Collateral deposited by a futures

    commission merchant as belonging to the Cleared Swaps Customers of such

    futures commission merchant and not other persons, including, without

    limitation, the futures commission merchant.

    (b) Location of Cleared Swaps Customer Collateral. (1) The

    derivatives clearing organization must segregate all Cleared Swaps

    Customer Collateral that it receives from futures commission merchants,

    and must either hold such Cleared Swaps Customer Collateral itself as

    set forth in paragraph (b)(2) of this section, or deposit such

    collateral into one or more Cleared Swaps Customer Accounts held at a

    Permitted Depository, as set forth in paragraph (b)(3) of this section.

    (2) If a derivatives clearing organization holds Cleared Swaps

    Customer Collateral itself, then the derivatives clearing organization

    must:

    (i) Physically separate such collateral from its own property, the

    property of any futures commission merchant, and the property of any

    other person that is not a Cleared Swaps Customer of a futures

    commission merchant;

    (ii) Clearly identify each physical location in which it holds such

    collateral as ``Location of Cleared Swaps Customer Collateral'' (the

    ``DCO Physical Location'');

    (iii) Ensure that the DCO Physical Location provides appropriate

    protection for such collateral; and

    (iv) Record in its books and records the amount of such Cleared

    Swaps Customer Collateral separately from its own funds, the funds of

    any futures commission merchant, and the funds of any other person that

    is not a Cleared Swaps Customer of a futures commission merchant.

    (3) If a derivatives clearing organization holds Cleared Swaps

    Customer Collateral in a Permitted Depository, then:

    (i) The Permitted Depository must qualify pursuant to the

    requirements set forth in Sec. 22.4 of this part; and

    (ii) The derivatives clearing organization must maintain a Cleared

    Swaps Customer Account with each such Permitted Depository.

    (c) Commingling. (1) A derivatives clearing organization may

    commingle the Cleared Swaps Customer Collateral that it receives from

    multiple futures commission merchants on behalf of their Cleared Swaps

    Customers.

    (2) A derivatives clearing organization shall not commingle the

    Cleared Swaps Customer Collateral that it receives from a futures

    commission merchant on behalf of Cleared Swaps Customers with any of

    the following:

    [[Page 6375]]

    (i) The money, securities, or other property belonging to the

    derivatives clearing organization;

    (ii) The money, securities, or other property belonging to any

    futures commission merchant; or

    (iii) Other categories of funds that it receives from a futures

    commission merchant on behalf of Customers, including customer funds

    (as Sec. 1.3 of this chapter defines such term) and the foreign

    futures or foreign options secured amount (as Sec. 1.3 of this chapter

    defines such term), except as expressly permitted by Commission rule,

    regulation or order, (or a derivatives clearing organization rule

    approved in accordance with Sec. 39.15(b)(2) of this chapter).

    (d) Exceptions; Permitted Investments. Notwithstanding the

    foregoing and Sec. 22.15 of this part, a derivatives clearing

    organization may invest the money, securities, or other property

    constituting Cleared Swaps Customer Collateral in accordance with Sec.

    1.25 of this chapter, which section shall apply to such money,

    securities, or other property as if they comprised customer funds or

    customer money subject to segregation pursuant to section 4d(a) of the

    Act and the regulations thereunder.

    Sec. 22.4 Futures Commission Merchants and Derivatives Clearing

    Organizations: Permitted Depositories.

    In order for a depository to be a Permitted Depository:

    (a) The depository must (subject to Sec. 22.9) be one of the

    following types of entities:

    (1) A bank located in the United States;

    (2) A trust company located in the United States;

    (3) A Collecting Futures Commission Merchant registered with the

    Commission (but only with respect to a Depositing Futures Commission

    Merchant providing Cleared Swaps Customer Collateral); or

    (4) A derivatives clearing organization registered with the

    Commission; and

    (b) The futures commission merchant or the derivatives clearing

    organization must hold a written acknowledgment letter from the

    depository as required by Sec. 22.5 of this part.

    Sec. 22.5 Futures Commission Merchants and Derivatives Clearing

    Organizations: Written Acknowledgement.

    (a) Before depositing Cleared Swaps Customer Collateral, the

    futures commission merchant or derivatives clearing organization shall

    obtain and retain in its files a separate written acknowledgment letter

    from each depository in accordance with Sec. Sec. 1.20 and 1.26 of

    this chapter, with all references to ``customer funds'' modified to

    apply to Cleared Swaps Customer Collateral, and with all references to

    section 4d(a) or 4d(b) of the Act and the regulations thereunder

    modified to apply to section 4d(f) of the Act and the regulations

    thereunder.

    (b) The futures commission merchant or derivatives clearing

    organization shall adhere to all requirements specified in Sec. Sec.

    1.20 and 1.26 of this chapter regarding retaining, permitting access

    to, filing, or amending the written acknowledgment letter, in all cases

    as if the Cleared Swaps Customer Collateral comprised customer funds

    subject to segregation pursuant to section 4d(a) or 4d(b) of the Act

    and the regulations thereunder.

    (c) Notwithstanding paragraph (a) of this section, an

    acknowledgement letter need not be obtained from a derivatives clearing

    organization that has made effective, pursuant to section 5c(c) of the

    Act and the regulations thereunder, rules that provide for the

    segregation of Cleared Swaps Customer Collateral, in accordance with

    all relevant provisions of the Act and the regulations thereunder.

    Sec. 22.6 Futures Commission Merchants and Derivatives Clearing

    Organizations: Naming of Cleared Swaps Customer Accounts.

    The name of each Cleared Swaps Customer Account that a futures

    commission merchant or a derivatives clearing organization maintains

    with a Permitted Depository shall:

    (a) Clearly identify the account as a ``Cleared Swaps Customer

    Account'' and

    (b) Clearly indicate that the collateral therein is ``Cleared Swaps

    Customer Collateral'' subject to segregation in accordance with the Act

    and this part.

    Sec. 22.7 Permitted Depositories: Treatment of Cleared Swaps Customer

    Collateral.

    A Permitted Depository shall treat all funds in a Cleared Swaps

    Customer Account as Cleared Swaps Customer Collateral. A Permitted

    Depository shall not hold, dispose of, or use any such Cleared Swaps

    Customer Collateral as belonging to any person other than:

    (a) The Cleared Swaps Customers of the futures commission merchant

    maintaining such Cleared Swaps Customer Account or;

    (b) The Cleared Swaps Customers of the futures commission merchants

    for which the derivatives clearing organization maintains such Cleared

    Swaps Customer Account.

    Sec. 22.8 Situs of Cleared Swaps Customer Accounts.

    The situs of each of the following shall be located in the United

    States:

    (a) Each FCM Physical Location or DCO Physical Location;

    (b) Each ``account,'' within the meaning of Sec. 22.2(f)(1), that

    a futures commission merchant maintains for each Cleared Swaps

    Customer; and

    (c) Each Cleared Swaps Customer Account on the books and records of

    a derivatives clearing organization with respect to the Cleared Swaps

    Customers of a futures commission merchant.

    Sec. 22.9 Denomination of Cleared Swaps Customer Collateral and

    Location of Depositories.

    (a) Subject to paragraph (b) of this section, futures commission

    merchants and derivatives clearing organizations may hold Cleared Swaps

    Customer Collateral in the denominations, at the locations and

    depositories, and subject to the same segregation requirements

    specified in Sec. 1.49 of this chapter, which section shall apply to

    such Cleared Swaps Customer Collateral as if it comprised customer

    funds subject to segregation pursuant to section 4d(a) of the Act.

    (b) Notwithstanding the requirements set forth in Sec. 1.49 of

    this chapter, a futures commission merchant's obligations to a Cleared

    Swaps Customer may be denominated in a currency in which funds have

    accrued to the customer as a result of a Cleared Swap carried through

    such futures commission merchant, to the extent of such accruals.

    (c) Each depository referenced in paragraph (a) of this section

    shall be considered a Permitted Depository for purposes of this part.

    Provided, however, that a futures commission merchant shall only be

    considered a Permitted Depository to the extent that it is acting as a

    Collecting Futures Commission Merchant (as Sec. 22.1 of this part

    defines such term).

    Sec. 22.10 Application of other Regulatory Provisions.

    Sections 1.27, 1.28, 1.29, and 1.30 of this chapter shall apply to

    the Cleared Swaps Customer Collateral held by futures commission

    merchants and derivatives clearing organizations to the same extent as

    if such sections referred to:

    (a) ``Cleared Swaps Customer Collateral'' in place of ``customer

    funds;''

    (b) ``Cleared Swaps Customers'' instead of ``commodity or option

    customers'' or ``customers or option customers;''

    [[Page 6376]]

    (c) ``Cleared Swaps Contracts'' instead of ``trades, contracts, or

    commodity options;'' and

    (d) ``Section 4d(f) of the Act'' instead of ``section 4d(a)(2) of

    the Act.''

    Sec. 22.11 Information To Be Provided Regarding Customers and Their

    Cleared Swaps.

    (a) Each Depositing Futures Commission Merchant shall:

    (1) The first time that the Depositing Futures Commission Merchant

    intermediates a Cleared Swap for a Cleared Swaps Customer with a

    Collecting Futures Commission Merchant, provide information sufficient

    to identify such customer to the relevant Collecting Futures Commission

    Merchant; and

    (2) At least once each business day thereafter, provide information

    to the relevant Collecting Futures Commission Merchant sufficient to

    identify, for each Cleared Swaps Customer, the portfolio of rights and

    obligations arising from the Cleared Swaps that the Depositing Futures

    Commission Merchant intermediates for such customer.

    (b) If an entity serves as both a Depositing Futures Commission

    Merchant and a Collecting Futures Commission Merchant, then:

    (1) The information that such entity must provide to its Collecting

    Futures Commission Merchant pursuant to paragraph (a)(1) of this

    section shall also include information sufficient to identify each

    Cleared Swaps Customer of the Depositing Futures Commission Merchant

    for which such entity serves as a Collecting Futures Commission

    Merchant; and

    (2) The information that such entity must provide to its Collecting

    Futures Commission Merchant pursuant to paragraph (a)(2) of this

    section shall also include information sufficient to identify, for each

    Cleared Swaps Customer referenced in paragraph (b)(1) of this section,

    the portfolio of rights and obligations arising from the Cleared Swaps

    that such entity intermediates as a Collecting Futures Commission

    Merchant, on behalf of its Depositing Futures Commission Merchant, for

    such customer.

    (c) Each futures commission merchant that intermediates a Cleared

    Swap for a Cleared Swaps Customer, on or subject to the rules of a

    derivatives clearing organization, directly as a Clearing Member shall:

    (1) The first time that such futures commission merchant

    intermediates a Cleared Swap for a Cleared Swaps Customer, provide

    information to the relevant derivatives clearing organization

    sufficient to identify such customer; and

    (2) At least once each business day thereafter, provide information

    to the relevant derivatives clearing organization sufficient to

    identify, for each Cleared Swaps Customer, the portfolio of rights and

    obligations arising from the Cleared Swaps that such futures commission

    merchant intermediates for such customer.

    (d) If the futures commission merchant referenced in paragraph (c)

    of this section is a Collecting Futures Commission Merchant, then:

    (1) The information that it must provide to the derivatives

    clearing organization pursuant to paragraph (c)(1) of this section

    shall also include information sufficient to identify each Cleared

    Swaps Customer of any entity that acts as a Depositing Futures

    Commission Merchant in relation to the Collecting Futures Commission

    Merchant (including, without limitation, each Cleared Swaps Customer of

    any Depositing Futures Commission Merchant for which such entity also

    serves as a Collecting Futures Commission Merchant); and

    (2) The information that it must provide to the derivatives

    clearing organization pursuant to paragraph (c)(2) of this section

    shall also include information sufficient to identify, for each Cleared

    Swaps Customer referenced in paragraph (d)(1) of this section, the

    portfolio of rights and obligations arising from the Cleared Swaps that

    the Collecting Futures Commission Merchant intermediates, on behalf of

    the Depositing Futures Commission Merchant, for such customer.

    (e) Each derivatives clearing organization shall:

    (1) Take appropriate steps to confirm that the information it

    receives pursuant to paragraphs (c)(1) or (c)(2) of this section is

    accurate and complete, and

    (2) Ensure that the futures commission merchant is providing the

    derivatives clearing organization the information required by

    paragraphs (c)(1) or (c)(2) of this section on a timely basis.

    Sec. 22.12 Information To Be Maintained Regarding Cleared Swaps

    Customer Collateral.

    (a) Each Collecting Futures Commission Merchant receiving Cleared

    Swaps Customer Funds from an entity serving as a Depositing Futures

    Commission Merchant shall, no less frequently than once each business

    day, calculate and record:

    (1) the amount of collateral required at such Collecting Futures

    Commission Merchant for each Cleared Swaps Customer of the entity

    acting as Depositing Futures Commission Merchant (including, without

    limitation, each Cleared Swaps Customer of any Depositing Futures

    Commission Merchant for which such entity also serves as a Collecting

    Futures Commission Merchant); and

    (2) the sum of the individual collateral amounts referenced in

    paragraph (a)(1) of this section.

    (b) Each Collecting Futures Commission Merchant shall calculate the

    collateral amounts referenced in paragraph (a) of this section with

    respect to the portfolio of rights and obligations arising from the

    Cleared Swaps that the Collecting Futures Commission Merchant

    intermediates, on behalf of the Depositing Futures Commission Merchant,

    for each Cleared Swaps Customer referenced in paragraph (a)(1) of this

    section.

    (c) Each derivatives clearing organization receiving Cleared Swaps

    Customer Funds from a futures commission merchant shall, no less

    frequently than once each business day, calculate and record:

    (1) the amount of collateral required at such derivatives clearing

    organization for each Cleared Swaps Customer of the futures commission

    merchant; and

    (2) the sum of the individual collateral amounts referenced in

    paragraph (c)(1) of this section.

    (d) If the futures commission merchant referenced in paragraph (c)

    of this section is a Collecting Futures Commission Merchant, then the

    derivatives clearing organization shall also perform and record the

    results of the calculation required in paragraph (c) of this section

    for each Cleared Swaps Customer of an entity acting as a Depositing

    Futures Commission Merchant in relation to the Collecting Futures

    Commission Merchant (including, without limitation, any Cleared Swaps

    Customer for which such entity is also acting as a Collecting Futures

    Commission Merchant).

    (e) Each futures commission merchant shall calculate the collateral

    amounts referenced in paragraph (c) of this section with respect to the

    portfolio of rights and obligations arising from the Cleared Swaps that

    the futures commission merchant intermediates (including, without

    limitation, as a Collecting Futures Commission Merchant on behalf of a

    Depositing Futures Commission Merchant), for each Cleared Swaps

    Customer referenced in paragraphs (c)(1) and (d) of this section.

    (f) The collateral requirement referenced in paragraph (a) of this

    [[Page 6377]]

    section with respect to a Collecting Futures Commission Merchant shall

    be no less than that imposed by the relevant derivatives clearing

    organization with respect to the same portfolio of rights and

    obligations for each relevant Cleared Swaps Customer.

    Sec. 22.13 Additions to Cleared Swaps Customer Collateral.

    (a)(1) At the election of the derivatives clearing organization or

    Collecting Futures Commission Merchant, the collateral requirement

    referred to in Sec. Sec. 22.12(a), (c), and (d) of this part

    applicable to a particular Cleared Swaps Customer or group of Cleared

    Swaps Customers may be increased based on an evaluation of the credit

    risk posed by such customer or group, in which case the derivatives

    clearing organization or Collecting Futures Commission Merchant shall

    collect and record such higher amount as provided in Sec. 22.12 of

    this part.

    (2) Nothing in paragraph (a)(1) of this section is intended to

    interfere with the right of a futures commission merchant to increase

    the collateral requirements at such futures commission merchant with

    respect to any of its Cleared Swaps Customers or Customers.

    (b) Any collateral deposited by a futures commission merchant

    (including a Depositing Futures Commission Merchant) pursuant to Sec.

    22.2(e)(3)(ii) of this part, which collateral is identified as such

    futures commission merchant's own property may be used by the

    derivatives clearing organization or Collecting Futures Commission

    Merchant, as applicable, to margin, guarantee or secure the Cleared

    Swaps of any or all of such Cleared Swaps Customers.

    (c) A futures commission merchant may transmit to a derivatives

    clearing organization any collateral posted by a Cleared Swaps Customer

    in excess of the amount required by the derivatives clearing

    organization if:

    (1) the rules of the derivatives clearing organization expressly

    permit the futures commission merchant to transmit collateral in excess

    of the amount required by the derivatives clearing organization; and

    (2) the derivatives clearing organization provides a mechanism by

    which the futures commission merchant is able to, and maintains rules

    pursuant to which the futures commission merchant is required to,

    identify each Business Day, for each Cleared Swaps Customer, the amount

    of collateral posted in excess of the amount required by the

    derivatives clearing organization.

    Sec. 22.14 Futures Commission Merchant Failure To Meet a Customer

    Margin Call in Full.

    (a) A Depositing Futures Commission Merchant which receives a call

    for either initial margin or variation margin with respect to a Cleared

    Swaps Customer Account from a Collecting Futures Commission Merchant,

    which call such Depositing Futures Commission Merchant does not meet in

    full, shall, with respect to each Cleared Swaps Customer of such

    Depositing Futures Commission Merchant whose Cleared Swaps contribute

    to such margin call,

    (1) Transmit to the Collecting Futures Commission Merchant an

    amount equal to the lesser of

    (i) The amount called for; or

    (ii) The remaining Cleared Swaps Collateral on deposit at such

    Depositing Futures Commission Merchant for that Cleared Swaps Customer;

    and

    (2) Advise the Collecting Futures Commission Merchant of the

    identity of each such Cleared Swaps Customer, and the amount

    transmitted on behalf of each such customer.

    (b) If the entity acting as Depositing Futures Commission Merchant

    referenced in paragraph (a) of this section is also a Collecting

    Futures Commission Merchant, then:

    (1) Such entity shall include in the transmission required in

    paragraph (a)(1) of this section any amount that it receives, pursuant

    to paragraph (a)(1) of this section, from a Depositing Futures

    Commission Merchant for which such entity acts as a Collecting Futures

    Commission Merchant; and

    (2) Such entity shall present its Collecting Futures Commission

    Merchant with the information that it receives, pursuant to paragraph

    (a)(2) of this section, from a Depositing Futures Commission Merchant

    for which such entity acts as a Collecting Futures Commission Merchant.

    (c) A futures commission merchant which receives a call for either

    initial or variation margin with respect to a Cleared Swaps Customer

    Account from a derivatives clearing organization, which call such

    futures commission merchant does not meet in full, shall, with respect

    to each Cleared Swaps Customer of such futures commission merchant

    whose Cleared Swaps contribute to such margin call:

    (1) Transmit to the derivatives clearing organization an amount

    equal to the lesser of

    (i) The amount called for; or

    (ii) The remaining Cleared Swaps Collateral on deposit at such

    futures commission merchant for each such Cleared Swaps Customer; and

    (2) Advise the derivatives clearing organization of the identity of

    each such Cleared Swaps Customer, and the amount transmitted on behalf

    of each such customer.

    (d) If the futures commission merchant referenced in paragraph (c)

    is a Collecting Futures Commission Merchant, then:

    (1) Such Collecting Futures Commission Merchant shall include in

    the transmission required in paragraph (c)(1) of this section any

    amount that it receives from a Depositing Futures Commission Merchant

    pursuant to paragraph (a)(1) of this section; and

    (2) Such Collecting Futures Commission shall present the

    derivatives clearing organization with the information that it receives

    from a Depositing Futures Commission Merchant pursuant to paragraph

    (a)(2) of this section.

    (e) If,

    (1) On the business day prior to the business day on which the

    Depositing Futures Commission Merchant fails to meet a margin call with

    respect to a Cleared Swaps Customer Account, such Collecting Futures

    Commission Merchant referenced in paragraph (a) of this section held,

    with respect to such account, Cleared Swaps Collateral of a value no

    less than the amount specified in Sec. 22.12(a)(2) of this part, after

    the application of haircuts specified by policies applied by such

    Collecting Futures Commission Merchant in its relationship with the

    Depositing Futures Commission Merchant, and

    (2) As of the close of business on the business day on which the

    margin call is not met, the market value of the Cleared Swaps

    Collateral held by the derivatives clearing organization or Collecting

    Futures Commission Merchant is, due to changes in such market value,

    less than the amount specified in Sec. 22.12(a)(2) of this part, then

    the amount of such collateral attributable to each Cleared Swaps

    Customer pursuant to Sec. 22.12(a)(1) of this part shall be reduced by

    the percentage difference between the amount specified in Sec.

    22.12(a)(2) of this part and such market value.

    (f) If:

    (1) On the business day prior to the business day on which the

    futures commission merchant fails to meet a margin call with respect to

    a Cleared Swaps Customer Account, the derivatives clearing organization

    referenced in paragraph (c) of this section held, with respect to such

    account, Cleared Swaps Collateral of a value no less than the amount

    specified in Sec. 22.12(c)(2) of this part, after the application of

    haircuts specified by the

    [[Page 6378]]

    rules and procedures of such derivatives clearing organization, and

    (2) As of the close of business on the business day on which the

    margin call is not met, the market value of the Cleared Swaps

    Collateral held by the derivatives clearing organization is, due to

    changes in such market value, less than the amount specified in Sec.

    22.12(c)(2) of this part, then the amount of collateral attributable to

    each Cleared Swaps Customer pursuant to Sec. 22.12(c)(1) of this part

    shall be reduced by the percentage difference between the amount

    specified in Sec. 22.12(c)(2) and such market value.

    (g) A derivatives clearing organization or Collecting Futures

    Commission Merchant is entitled to reasonably rely upon any information

    provided by a defaulting futures commission merchant under Sec. 22.14.

    If the defaulting futures commission merchant does not provide such

    information on the date of the futures commission merchant's default, a

    derivatives clearing organization or Collecting Futures Commission

    Merchant may rely on the information previously provided to it by the

    defaulting futures commission merchant.

    Sec. 22.15 Treatment of Cleared Swaps Customer Collateral on an

    Individual Basis.

    Subject to Sec. 22.3(d) of this part, each derivatives clearing

    organization and each Collecting Futures Commission Merchant receiving

    Cleared Swaps Customer Collateral from a futures commission merchant

    shall treat the value of collateral required with respect to the

    portfolio of rights and obligations arising out of the Cleared Swaps

    intermediated for each Cleared Swaps Customer, and collected from the

    futures commission merchant, as belonging to such customer, and such

    amount shall not be used to margin, guarantee, or secure the Cleared

    Swaps or other obligations of the futures commission merchant or of any

    other Cleared Swaps Customer or Customer. Nothing contained herein

    shall be construed to limit, in any way, the right of a derivatives

    clearing organization or Collecting Futures Commission Merchant to

    liquidate any or all positions in a Cleared Swaps Customer Account in

    the event of default of a clearing member or Depositing Futures

    Commission Merchant.

    Sec. 22.16 Disclosures to Customers.

    (a) A futures commission merchant shall disclose, to each of its

    Cleared Swaps Customers, the governing provisions, as described in

    paragraph (c) of this section, relating to use of Cleared Swaps

    Customer Collateral, transfer, neutralization of the risks, or

    liquidation of Cleared Swaps in the event of a default by the futures

    commission merchant relating to the Cleared Swaps Customer Account, as

    well as any change in such governing provisions.

    (b) If the futures commission merchant referenced in paragraph (a)

    of this section is a Depositing Futures Commission Merchant, then such

    futures commission merchant shall disclose, to each of its Cleared

    Swaps Customers, the governing provisions, as described in paragraph

    (c) of this section, relating to use of Cleared Swaps Customer

    Collateral, transfer, neutralization of the risks, or liquidation of

    Cleared Swaps in the event of a default by:

    (1) Such futures commission merchant or

    (2) Any relevant Collecting Futures Commission Merchant relating to

    the Cleared Swaps Customer Account, as well as any change in such

    governing provisions.

    (c) The governing provisions referred to in paragraphs (a) and (b)

    of this section are the rules of each derivatives clearing

    organization, or the provisions of the customer agreement between the

    Collecting Futures Commission Merchant and the Depositing Futures

    Commission Merchant, on or through which the Depositing Futures

    Commission Merchant will intermediate Cleared Swaps for such Cleared

    Swaps Customer.

    PART 190--BANKRUPTCY

    0

    2. The authority citation for part 190 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,

    and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise

    noted.

    Sec. Sec. 190.01, 190.02, 190.03, 190.05, 190.06, 190.07,

    190.10 [Amended]

    0

    3. In 17 CFR part 190:

    0

    a. Remove the words ``commodity account'' and add, in their place, the

    words ``commodity contract account'' in:

    0

    i. Sections 190.01(w), (y), and (kk)(6);

    0

    ii. Sections 190.02(d)(1), (6), and (7);

    0

    iii. Section 190.06(g)(3); and

    0

    iv. Section 190.10(d)(1).

    0

    b. Remove the words ``commodity futures account'' and add, in their

    place, the words ``commodity contract account'' in:

    0

    i. Section 190.03(a)(2); and

    0

    ii. Section 190.10(h).

    0

    c. Remove the words ``commodity transactions'' and add, in their place,

    the words ``commodity contract transactions'' in Sec. 190.02(d)(3).

    0

    d. Remove the words ``commodity futures contract'' and add, in their

    place, the words ``commodity contract'' in Sec. 190.05(a)(1) and

    (b)(1).

    0

    e. Remove the words ``commodity accounts'' and add, in their place, the

    words ``commodity contract accounts'' in Sec. 190.06(g)(1)(i) and

    (ii).

    0

    f. Remove the words ``board of trade'' and add, in their place, the

    words ``designated contract market'' in Sec. 190.07(e)(1).

    0

    g. Remove the words ``contract market'' and add, in their place, the

    words ``designated contract market'' in Sec. 190.07(e)(2)(ii)(B).

    0

    4. In Sec. 190.01,

    0

    a. Redesignate paragraphs (e) through (oo) as (f) through (pp);

    0

    b. Add a new paragraph (e); and

    0

    c. Revise paragraphs (a), and newly redesignated paragraphs (f), (cc),

    (hh), (ll)(2)(ii), (ll)(4), (ll)(5), and (pp) to read as follows:

    Sec. 190.01 Definitions.

    * * * * *

    (a)(1) Account class means each of the following types of customer

    accounts which must be recognized as a separate class of account by the

    trustee: futures accounts, foreign futures accounts, leverage accounts,

    delivery accounts as defined in Sec. 190.05(a)(2) of this part, and

    cleared swaps accounts.

    (2)(i) To the extent that the equity balance, as defined in Sec.

    190.07 of this part, of a customer in a commodity option, as defined in

    Sec. 1.3 of this chapter, may be commingled with the equity balance of

    such customer in any domestic commodity futures contract pursuant to

    regulations under the Act, the aggregate shall be treated for purposes

    of this part as being held in a futures account.

    (ii) To the extent that such equity balance of a customer in a

    commodity option may be commingled with the equity balance of such

    customer in any cleared swaps account pursuant to regulations under

    this act, the aggregate shall be treated for purposes of this part as

    being held in a cleared swaps account.

    (iii) If positions or transactions in commodity contracts that

    would otherwise belong to one account class (and the money, securities,

    or other property margining, guaranteeing, or securing such positions

    or transactions), are, pursuant to a Commission rule, regulation, or

    order (or a derivatives clearing organization rule approved in

    accordance with Sec. 39.15(b)(2) of this chapter), held separately

    from other positions and transactions in that account class, and are

    commingled with positions or transactions in commodity

    [[Page 6379]]

    contracts of another account class (and the money, securities, or other

    property margining, guaranteeing, or securing such positions or

    transactions), then the former positions (and the relevant money,

    securities, or other property) shall be treated, for purposes of this

    part, as being held in an account of the latter account class.

    * * * * *

    (e) Calendar day. A calendar day includes the time from midnight to

    midnight.

    (f) Clearing organization shall have the same meaning as that set

    forth in section 761(2) of the Bankruptcy Code.

    * * * * *

    (cc) Non-public customer means any person enumerated in the

    definition of Proprietary Account in Sec. 1.3 or Sec. 31.4(e) of this

    chapter, any person excluded from the definition of ``foreign futures

    or foreign options customer'' in the proviso to section 30.1(c) of this

    chapter, or any person enumerated in the definition of Cleared Swaps

    Proprietary Account in Sec. 22.1 of this chapter, in each case, if

    such person is defined as a ``customer'' under paragraph (k) of this

    section.

    * * * * *

    (hh) Principal contract means a contract which is not traded on a

    designated contract market, and includes leverage contracts and dealer

    options, but does not include:

    (1) Transactions executed off the floor of a designated contract

    market pursuant to rules approved by the Commission or rules which the

    designated contract market is required to enforce, or pursuant to rules

    of a foreign board of trade located outside the United States, its

    territories or possessions; or

    (2) Cleared swaps contracts.

    * * * * *

    (ll) * * *

    (2) * * *

    (ii) Is a bona fide hedging position or transaction as defined in

    Sec. 1.3 of this chapter or is a commodity option transaction which

    has been determined by the registered entity to be economically

    appropriate to the reduction of risks in the conduct and management of

    a commercial enterprise pursuant to rules which have been approved by

    the Commission pursuant to section 5c(c) of the Commodity Exchange Act;

    and

    * * * * *

    (4) Any cash or other property deposited prior to the entry of the

    order for relief to pay for the taking of physical delivery on a long

    commodity contract or for payment of the strike price upon exercise of

    a short put or a long call option contract on a physical commodity,

    which cannot be settled in cash, in excess of the amount necessary to

    margin such commodity contract prior to the notice date or exercise

    date, which cash or other property is identified on the books and

    records of the debtor as received from or for the account of a

    particular customer on or after three calendar days before the first

    notice date or three calendar days before the exercise date

    specifically for the purpose of payment of the notice price upon taking

    delivery or the strike price upon exercise, respectively, and such

    customer takes delivery or exercises the option in accordance with the

    applicable designated contract market rules.

    (5) The cash price tendered for any property deposited prior to the

    entry of the order for relief to make physical delivery on a short

    commodity contract or for exercise of a long put or a short call option

    contract on a physical commodity, which cannot be settled in cash, to

    the extent it exceeds the amount necessary to margin such contract

    prior to the notice date or exercise date, which property is identified

    on the books and records of the debtor as received from or for the

    account of a particular customer on or after three calendar days before

    the first notice date or three calendar days before the exercise date

    specifically for the purpose of a delivery or exercise, respectively,

    and such customer makes delivery or exercises the option in accordance

    with the applicable contract market rules.

    * * * * *

    (pp) Cleared Swap. This term shall have the same meaning as set

    forth in Sec. 22.1 of this chapter.

    0

    5. In Sec. 190.02, revise paragraphs (a), (b)(1), (b)(2), (d)(11),

    (e), (f)(1)(i), (f)(1(ii) and (g)(2)(i) to read as follows:

    Sec. 190.02 Operation of the debtor's estate subsequent to the filing

    date and prior to the primary liquidation date.

    * * * * *

    (a) Notices to the Commission and Designated Self-Regulatory

    Organizations.

    (1) General. Each commodity broker which files a petition in

    bankruptcy shall, at or before the time of such filing, and each

    commodity broker against which such a petition is filed shall, as soon

    as possible, but no later than one calendar day after the receipt of

    notice of such filing, notify the Commission and such broker's

    designated self-regulatory organization, if any, in accordance with

    Sec. 190.10(a) of the filing date, the court in which the proceeding

    has been filed, and the docket number assigned to that proceeding by

    the court.

    (2) Of transfers under section 764(b) of the Bankruptcy Code. As

    soon as possible, but in no event later than the close of business on

    third calendar day after the order for relief, the trustee, the

    applicable self-regulatory organization, or the commodity broker must

    notify the Commission in accordance with Sec. 190.10(a) whether such

    entity or organization intends to transfer or to apply to transfer open

    commodity contracts on behalf of the commodity broker in accordance

    with section 764(b) of the Bankruptcy Code and Sec. 190.06 (e) or (f).

    (b) Notices to customers. (1) Specifically identifiable property

    other than commodity contracts. The trustee must use its best efforts

    to promptly, but in no event later than two calendar days after entry

    of the order for relief, commence to publish in a daily newspaper or

    newspapers of general circulation approved by the court serving the

    location of each branch office of the commodity broker, for two

    consecutive days a notice to customers stating that all specifically

    identifiable property of customers other than open commodity contracts

    which has not otherwise been liquidated will be liquidated commencing

    on the sixth calendar day after the second publication date if the

    customer has not instructed the trustee in writing on or before the

    fifth calendar day after the second publication date to return such

    property pursuant to the terms for distribution of specifically

    identifiable property contained in Sec. 190.08(d)(1) and, on the

    seventh calendar day after such second publication date, if such

    property has not been returned in accordance with such terms on or

    prior to that date. Such notice must describe specifically identifiable

    property in accordance with the definition in this part and must

    specify the terms upon which that property may be returned. Publication

    of the form of notice set forth in the appendix to this part will

    constitute sufficient notice for purposes of this paragraph (b)(1).

    (2) Request for instructions regarding transfer of open commodity

    contracts. The trustee must use its best efforts to request promptly,

    but in no event later than two calendar days after entry of an order

    for relief, customer instructions concerning the transfer or

    liquidation of the specifically identifiable open commodity contracts,

    if any, not required to be liquidated under paragraph (f)(1) of this

    section. The request for customer instructions required by this

    paragraph (b)(2) must state that the trustee is required to liquidate

    any such commodity contract for which transfer instructions have not

    [[Page 6380]]

    been received on or before the seventh calendar day after entry of the

    order for relief, at an hour specified by the trustee, and any such

    commodity contract for which instructions have been received which has

    not been transferred in accordance with Sec. 190.08(d)(2) on or before

    the seventh calendar day after entry of the order for relief. A form of

    notice is set forth in the appendix to this part.

    * * * * *

    (d) * * *

    (11) Whether the claimant's positions in security futures products

    are held in a futures account or a securities account, as these terms

    are defined in Sec. 1.3 of this chapter;

    * * * * *

    (e) Transfers--(1) All cases. The trustee for a commodity broker

    must immediately use its best efforts to effect a transfer in

    accordance with Sec. 190.06 (e) and (f) no later than the seventh

    calendar day after the order for relief of the open commodity contracts

    and equity held by the commodity broker for or on behalf of its

    customers.

    (2) Involuntary cases. A commodity broker against which an

    involuntary petition in bankruptcy is filed, or the trustee if a

    trustee has been appointed in such case, must use its best efforts to

    effect a transfer in accordance with Sec. 190.06 (e) and (f) of all

    open commodity contracts and equity held by the commodity broker for or

    on behalf of its customers and such other property as the Commission in

    its discretion may authorize, on or before the seventh calendar day

    after the filing date, and immediately cease doing business: Provided,

    however, That the commodity broker may trade for liquidation only,

    unless otherwise directed by the Commission, by any applicable self-

    regulatory organization or by the court: And, Provided further, That if

    the commodity broker demonstrates to the Commission within such period

    that it was in compliance with the segregation and financial

    requirements of this chapter on the filing date, and the Commission

    determines, in its sole discretion, that such transfer or liquidation

    is neither appropriate nor in the public interest, the commodity broker

    may continue in business subject to applicable provisions of the

    Bankruptcy Code and of this chapter.

    (f) * * *

    (1) * * *

    (i) Dealer option contracts, if the dealer option grantor is not

    the debtor, which cannot be transferred on or before the seventh

    calendar day after the order for relief; and

    (ii) Specifically identifiable commodity contracts as defined in

    Sec. 190.01(kk)(2) for which an instruction prohibiting liquidation is

    noted prominently in the accounting records of the debtor and timely

    received under paragraph (b)(2) of this section. Notwithstanding the

    foregoing, an open commodity contract must be offset if: such contract

    is a futures contract or a Cleared Swaps contract which cannot be

    settled in cash and which would otherwise remain open either beyond the

    last day of trading (if applicable), or the first day on which notice

    of intent to deliver may be tendered with respect thereto, whichever

    occurs first; such contract is a long option on a physical commodity

    which cannot be settled in cash and would be automatically exercised,

    has value and would remain open beyond the last day for exercise; such

    contract is a short option on a physical commodity which cannot be

    settled in cash; or, as otherwise specified in these rules.

    * * * * *

    (g) * * *

    (2) * * *

    (i) 100% of the maintenance margin requirements of the applicable

    designated contact market or swap execution facility, if any, with

    respect to the open commodity contracts in such account; or

    * * * * *

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    6. In Sec. 190.03, revise paragraphs (a)(3), (b)(3), (b)(4), (b)(5),

    and (c) to read as follows:

    Sec. 190.03 Operation of the debtor's estate subsequent to the

    primary liquidation date.

    * * * * *

    (a) * * *

    (3) Margin calls. The trustee must promptly issue margin calls with

    respect to any account referred to under paragraph (a)(1) of this

    section in which the balance does not equal or exceed 100% of the

    maintenance margin requirements of the applicable designated contact

    market or swap execution facility, if any, with respect to the open

    commodity contracts in such account, or if there are no such

    maintenance margin requirements, 100% of the clearing organization's

    initial margin requirements applicable to the open commodity contracts

    in such account, or if there are no such maintenance margin

    requirements or clearing organization initial margin requirements, then

    50% of the customer initial margin applicable to the commodity

    contracts in such account: Provided, That no margin calls need be made

    to restore customer initial margin.

    * * * * *

    (b) * * *

    (3) The trustee has received no customer instructions with respect

    to such contract by the sixth calendar day after entry of the order for

    relief;

    (4) The commodity contract has not been transferred in accordance

    with Sec. 190.08(d)(2) on or before the seventh calendar day after

    entry of the order for relief; or

    (5) The commodity contract would otherwise remain open (e.g.,

    because it cannot be settled in cash) beyond the last day of trading in

    such contract (if applicable) or the first day on which notice of

    delivery may be tendered with respect to such contract, whichever

    occurs first.

    (c) Liquidation of specifically identifiable property other than

    open commodity contracts. All specifically identifiable property other

    than open commodity contracts which have not been liquidated prior to

    the primary liquidation date, and for which no customer instructions

    have been timely received must be liquidated, to the extent reasonably

    possible, no later than the sixth calendar day after final publication

    of the notice referred to in Sec. 190.02(b)(1). All other specifically

    identifiable property must be liquidated or returned, to the extent

    reasonably possible, no later than the seventh calendar day after final

    publication of such notice.

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    7. In Sec. 190.04, revise paragraph (d)(1) to read as follows:

    Sec. 190.04 Operation of the debtor's estate--general.

    * * * * *

    (d) Liquidation -- (1) Order of Liquidation. (i) In the Market.

    Liquidation of open commodity contracts held for a house account or

    customer account by or on behalf of a commodity broker which is a

    debtor shall be accomplished pursuant to the rules of a clearing

    organization, a designated contract market, or a swap execution

    facility, as applicable. Such rules shall ensure that the process for

    liquidating open commodity contracts, whether for the house account or

    the customer account, results in competitive pricing, to the extent

    feasible under market conditions at the time of liquidation. Such rules

    must be submitted to the Commission for approval, pursuant to section

    5c(c) of the Act, and be approved by the Commission. Alternatively,

    such rules must otherwise be submitted to and approved by the

    Commission (or its delegate pursuant to Sec. 190.10(d) of this part)

    prior to their application.

    (ii) Book entry. Notwithstanding paragraph (d)(1) of this section,

    in appropriate cases, upon application by

    [[Page 6381]]

    the trustee or the affected clearing organization, the Commission may

    permit open commodity contracts to be liquidated, or settlement on such

    contracts to be made, by book entry. Such book entry shall offset open

    commodity contracts, whether matched or not matched on the books of the

    commodity broker, using the settlement price for such commodity

    contracts as determined by the clearing organization. Such settlement

    price shall be determined by the rules of the clearing organization,

    which shall ensure that such settlement price is established in a

    competitive manner, to the extent feasible under market conditions at

    the time of liquidation. Such rules must be submitted to the Commission

    for approval pursuant to section 5c(c) of the Act, and be approved by

    the Commission. Alternatively, such rules must otherwise be approved by

    the Commission (or its delegate pursuant to Sec. 190.10(d) of this

    part) prior to their application.

    * * * * *

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    8. In Sec. 190.05, revise paragraph (b) introductory text to read as

    follows:

    Sec. 190.05 Making and taking delivery on commodity contracts.

    * * * * *

    (b) Rules for deliveries on behalf of a customer of a debtor.

    Except in the case of a commodity contract which is settled in cash,

    each designated contract market, swap execution facility, or clearing

    organization shall adopt, maintain in effect and enforce rules which

    have been submitted in accordance with section 5c(c) of the Act for

    approval by the Commission, which:

    * * * * *

    0

    9. In Sec. 190.06,

    0

    a. Remove paragraph (e)(1)(iv) and redesignate paragraph (e)(1)(v) as

    (e)(1)(iv);

    0

    b. Revise paragraphs (a), (e)(1)(iii), (e)(2), (f)(3)(i), (g)(2) and

    0

    c. Add paragraph (g)(1)(iii) to read as follows:

    Sec. 190.06 Transfers.

    (a) Transfer rules. No clearing organization or other self-

    regulatory organization may adopt, maintain in effect or enforce rules

    which:

    (1) Are inconsistent with the provisions of this part;

    (2) Interfere with the acceptance by its members of open commodity

    contracts and the equity margining or securing such contracts from

    futures commission merchants, or persons which are required to be

    registered as futures com-mission merchants, which are required to

    transfer accounts pursuant to Sec. 1.17(a)(4) of this chapter; or

    (3) Prevent the acceptance by its members of transfers of open

    commodity contracts and the equity margining or securing such contracts

    from futures commission merchants with respect to which a petition in

    bankruptcy has been filed, if such transfers have been approved by the

    Commission. Provided, however, that this paragraph shall not limit the

    exercise of any contractual right of a clearing organization or other

    registered entity to liquidate open commodity contracts.

    * * * * *

    (e) * * *

    (1) * * *

    (iii) Dealer option accounts, if the debtor is the dealer option

    grantor with respect to such accounts; or

    * * * * *

    (2) Amount of equity which may be transferred. In no case may

    money, securities or property be transferred in respect of any eligible

    account if the value of such money, securities or property would exceed

    the funded balance of such account based on available information as of

    the calendar day immediately preceding transfer less the value on the

    date of return or transfer of any property previously returned or

    transferred with respect thereto.

    (f) * * *

    (3) * * *

    (i) Of the customer estate. If all eligible customer accounts held

    by a debtor cannot be transferred under this section, a partial

    transfer may nonetheless be made. The Commission will not disapprove

    such a transfer for the sole reason that it was a partial transfer if

    it would prefer the transfer of accounts, the liquidation of which

    could adversely affect the market or the bankrupt estate. Any dealer

    option contract held by or for the account of a debtor which is a

    futures commission merchant from or for the account of a customer which

    has not previously been transferred, and is eligible for transfer, must

    be transferred on or before the seventh calendar day after entry of the

    order for relief.

    * * * * *

    (g) * * *

    (1) * * *

    (iii) The transfer prior to the order for relief by a clearing

    organization of one or more accounts held for or on behalf of customers

    of the debtor, provided that (I) the money, securities, or other

    property accompanying such transfer did not exceed the funded balance

    of each account based on available information as of the close of

    business on the business day immediately preceding such transfer less

    the value on the date of return or transfer of any property previously

    returned or transferred thereto, and (II) the transfer is not

    disapproved by the Commission.

    (2) Post-relief transfers. On or after the entry of the order for

    relief, the following transfers to one or more transferees may not be

    avoided by the trustee:

    (i) The transfer of a customer account eligible to be transferred

    under paragraph (e) or (f) of this section made by the trustee of the

    commodity broker or by any self-regulatory organization of the

    commodity broker:

    (A) On or before the seventh calendar day after the entry of the

    order for relief; and

    (B) The Commission is notified in accordance with Sec.

    190.02(a)(2) prior to the transfer and does not disapprove the

    transfer; or

    (ii) The transfer of a customer account at the direction of the

    Commission on or before the seventh calendar day after the order for

    relief upon such terms and conditions as the Commission may deem

    appropriate and in the public interest.

    * * * * *

    0

    10. In Sec. 190.07,

    0

    a. Redesignate paragraph (b)(2)(xiii) as paragraph (b)(2)(xiv);

    0

    b. Add a new paragraph (b)(2)(xiii); and

    0

    c. Revise paragraphs (b)(2)(viii), (b)(2)(ix), (b)(3)(v), (c)(1)(i),

    (e) introductory text, (e)(1) and (e)(4) to read as follows:

    Sec. 190.07 Calculation of allowed net equity.

    * * * * *

    (b) * * *

    (2) * * *

    (viii) Subject to paragraph (b)(2)(ix) of this section, the futures

    accounts, leverage accounts, options accounts, foreign futures

    accounts, delivery accounts (as defined in Sec. 190.05(a)(2)), and

    cleared swaps accounts of the same person shall not be deemed to be

    held in separate capacities: Provided, however, that such accounts may

    be aggregated only in accordance with paragraph (b)(3) of this section.

    (ix) An omnibus customer account of a futures commission merchant

    maintained with a debtor shall be deemed to be held in a separate

    capacity from the house account and any other omnibus customer account

    of such futures commission merchant.

    * * * * *

    (xiii) With respect to the cleared swaps account class, each

    individual customer account within each omnibus customer account

    referred to in

    [[Page 6382]]

    paragraph (ix) of this section shall be deemed to be held in a separate

    capacity from each other such individual customer account; subject to

    the provisions of paragraphs (b)(2)(i) through (xii) of this paragraph

    (b)(2).

    * * * * *

    (3) * * *

    (v) The rules pertaining to separate capacities and permitted

    setoffs contained in this section must be applied subsequent to the

    entry of an order for relief; prior to the filing date, the provisions

    of Sec. 1.22 of this chapter and of sections 4d(a)(2) and 4d(f) of the

    Act (and, in each case, the regulations promulgated thereunder) shall

    govern what setoffs are permitted.

    * * * * *

    (c) * * *

    (1) * * *

    (i) Multiplying the ratio of the amount of the net equity claim

    less the amounts referred to in paragraph (c)(1)(ii) of this section of

    such customer for any account class bears to the sum of the net equity

    claims less the amounts referred to in paragraph (c)(1)(ii) of this

    section of all customers for accounts of that class by the sum of:

    (A) The value of the money, securities or property segregated on

    behalf of all accounts of the same class less the amounts referred to

    in paragraph (c)(1)(ii) of this section;

    (B) The value of any money, securities or property which must be

    allocated under Sec. 190.08 to customer accounts of the same class;

    and

    (C) The amount of any add-back required under paragraph (b)(4) of

    this section; and

    * * * * *

    (e) Valuation. In computing net equity, commodity contracts and

    other property held by or for a commodity broker must be valued as

    provided in this paragraph (e): Provided, however, that for all

    commodity contracts other than those listed in paragraph (e)(1) of this

    section, if identical commodity contracts, securities, or other

    property are liquidated on the same date, but cannot be liquidated at

    the same price, the trustee may use the weighted average of the

    liquidation prices in computing the net equity of each customer holding

    such contracts, securities, or property.

    (1) Commodity Contracts. Unless otherwise specified in this

    paragraph (e), the value of an open commodity contract shall be equal

    to the settlement price as calculated by the clearing organization

    pursuant to its rules: Provided, that such rules must either be

    submitted to the Commission, pursuant to section 5c(c)(4) of the Act

    and be approved by the Commission, or such rules must be otherwise

    approved by the Commission (or its delegate pursuant to Sec. 190.10(d)

    of this part) prior to their application; Provided, further, that if

    such contract is transferred its value shall be determined as of the

    end of the settlement cycle in which it is transferred; and Provided,

    finally, that if such contract is liquidated, its value shall be equal

    to the net proceeds of liquidation.

    * * * * *

    (4) Securities. The value of a listed security shall be equal to

    the closing price for such security on the exchange upon which it is

    traded. The value of all securities not traded on an exchange shall be

    equal in the case of a long position, to the average of the bid prices

    for long positions, and in the case of a short position, to the average

    of the asking prices for the short positions. If liquidated prior to

    the primary liquidation date, the value of such security shall be equal

    to the net proceeds of its liquidation. Securities which are not

    publicly traded shall be valued by the trustee, subject to approval of

    the court, using such professional assistance as the trustee deems

    necessary in its sole discretion under the circumstances.

    * * * * *

    0

    11. In Sec. 190.09, revise paragraph (b) to read as follows:

    Sec. 190.09 Member property.

    * * * * *

    (b) Scope of Member Property. Member property shall include all

    money, securities and property received, acquired, or held by a

    clearing organization to margin, guarantee or secure, on behalf of a

    clearing member, the proprietary account, as defined in Sec. 1.3 of

    this chapter, any account not belonging to a foreign futures or foreign

    options customer pursuant to the proviso in Sec. 30.1(c), and any

    Cleared Swaps Proprietary Account, as defined in Sec. 22.1: Provided,

    however, that any guaranty deposit or similar payment or deposit made

    by such member and any capital stock, or membership of such member in

    the clearing organization shall also be included in member property

    after payment in full of that portion of the net equity claim of the

    member based on its customer account and of any obligations due to the

    clearing organization which may be paid therefrom in accordance with

    the by-laws or rules of the clearing organization, including

    obligations due from the clearing organization to customers or other

    members.

    0

    12. In Sec. 190.10, revise paragraph (a) to read as follows:

    Sec. 190.10 General.

    (a) Notices. Unless instructed otherwise by the Commission, all

    mandatory or discretionary notices to be given to the Commission under

    this part shall be directed by electronic mail to

    bankruptcyfilings@cftc.gov, with a copy sent by overnight mail to

    Director, Division of Clearing and Risk, Commodity Futures Trading

    Commission, Three Lafayette Centre, 1155 21st Street NW., Washington,

    DC 20581. For purposes of this part, notice to the Commission shall be

    deemed to be given only upon actual receipt.

    * * * * *

    0

    13. Revise appendix A to part 190 to read as follows:

    Appendix A to Part 190--Bankruptcy Forms

    Bankruptcy Appendix Form 1--Operation of the Debtor's Estate--Schedule

    of Trustee's Duties

    For the convenience of a prospective trustee, the Commission has

    constructed an approximate schedule of important duties which the

    trustee should perform during the early stages of a commodity broker

    bankruptcy proceeding. The schedule includes duties required by this

    part, subchapter IV of chapter 7 of the Bankruptcy Code as well as

    certain practical suggestions, but it is only intended to highlight

    the more significant duties and is not an exhaustive description of

    all the trustee's responsibilities. It also assumes that the

    commodity broker being liquidated is an FCM. Moreover, it is

    important to note that the operating facts in a particular

    bankruptcy proceeding may vary the schedule or obviate the need for

    any of the particular activities.

    All Cases

    Date of Order for Relief

    1. Assure that the commodity broker has notified the Commission,

    its designated self-regulatory organization (``DSRO'') (if any), and

    all applicable clearing organizations of which it is a member that a

    petition or order for relief has been filed (Sec. 190.02(a)(1)).

    2. Attempt to effectuate the transfer of entire customer

    accounts wherein the commodity contracts are transferred together

    with the money, securities, or other property margining,

    guaranteeing, or securing the commodity contracts (hereinafter the

    ``transfer'').

    3. Attempt to estimate shortfall of customer funds segregated

    pursuant to sections 4d(a) and (b) of the Act; customer funds

    segregated pursuant to section 4f of the Act; and the foreign

    futures or foreign options secured amount, as defined in Sec. 1.3

    of this chapter.

    a. The trustee should:

    i. Contact the DSRO (if any) and the clearing organizations and

    attempt to effectuate a transfer with such shortfall under section

    764(b) of the Code; notify the Commission for assistance (Sec.

    190.02(a)(2) and

    [[Page 6383]]

    (e)(1), Sec. 190.06(b)(2), (e), (f)(3), (g)(2), and (h)) but

    recognize that if there is a substantial shortfall, a transfer of

    such funds or amounts is highly unlikely.

    ii. If a transfer cannot be effectuated, liquidate all customer

    commodity contracts that are margined, guaranteed, or secured by

    funds or amounts with such shortfall, except dealer options and

    specifically identifiable commodity contracts which are bona fide

    hedging positions (as defined in Sec. 190.01(kk)(2)) with

    instructions not to be liquidated. (See Sec. Sec. 190.02(f) and

    190.06(d)(1)). (In this connection, depending upon the size of the

    debtor and other complications of liquidation, the trustee should be

    aware of special liquidation rules, and in particular the

    availability under certain circumstances of book-entry liquidation

    (Sec. 190.04(d)(1)(ii)).

    b. If there is a small shortfall in any of the funds or amounts

    listed in paragraph 2, negotiate with the clearing organization to

    effect a transfer; notify the Commission (Sec. Sec. 190.02(a)(2)

    and (e)(1), 190.06(b)(2), (e), (f)(3), (g)(2), and (h)).

    4. Whether or not a transfer has occurred, liquidate or offset

    open commodity contracts not eligible for transfer (e.g., deficit

    accounts) (Sec. 190.06(e)(1)).

    5. Offset all futures contracts and Cleared Swaps contracts

    which cannot be settled in cash and which would otherwise remain

    open either beyond the last day of trading (if applicable) or the

    first day on which notice of intent to deliver may be tendered with

    respect thereto, whichever occurs first; offset all long options on

    a physical commodity which cannot be settled in cash, have value and

    would be automatically exercised or would remain open beyond the

    last day of exercise; and offset all short options on a physical

    commodity which cannot be settled in cash (Sec. 190.02(f)(1)).

    6. Compute estimated funded balance for each customer commodity

    contract account containing open commodity contracts (Sec.

    190.04(b)) (daily thereafter).

    7. Make margin calls if necessary (Sec. 190.02(g)(1)) (daily

    thereafter).

    8. Liquidate or offset any open commodity contact account for

    which a customer has failed to meet a margin call (Sec.

    190.02(f)(1)) (daily thereafter).

    9. Commence liquidation or offset of specifically identifiable

    property described in Sec. 190.02(f)(2)(i) (property which has lost

    10% or more of value) (and as appropriate thereafter).

    10. Commence liquidation or offset of property described in

    Sec. 190.02(f)(3) (``all other property'').

    11. Be aware of any contracts in delivery position and rules

    pertaining to such contracts (Sec. 190.05).

    First Calendar Day After the Entry of an Order for Relief

    1. If a transfer occurred on the date of entry of the order for

    relief:

    a. Liquidate any remaining open commodity contracts, except any

    dealer option or specifically identifiable commodity contract

    [hedge] (See Sec. 190.01(kk)(2) and Sec. 190.02(f)(1)), and not

    otherwise transferred in the transfer.

    b. Primary liquidation date for transferred or liquidated

    commodity contracts (Sec. 190.01(ff)).

    2. If no transfer has yet been effected, continue attempt to

    negotiate transfer of open commodity contracts and dealer options

    (Sec. 190.02(c)(1)).

    3. Provide the clearing organization or Collecting Futures

    Commission Merchant (as such term is defined in Sec. 22.1) with

    assurances to prevent liquidation of open commodity contract

    accounts available for transfer at the customer's instruction or

    liquidate all open commodity contracts except those available for

    transfer at a customer's instruction and dealer options.

    Second Calendar Day After the Entry of an Order for Relief

    If no transfer has yet been effected, request directly customer

    instructions regarding transfer of open commodity contracts and

    publish notice for customer instructions regarding the return of

    specifically identifiable property other than commodity contracts

    (Sec. Sec. 190.02(b) (1) and (2)).

    Third Calendar Day After the Entry of an Order for Relief

    1. Second publication date for customer instructions (Sec.

    190.02(b)(1)) (publication is to be made on two consecutive days,

    whether or not the second day is a business day).

    2. Last day on which to notify the Commission with regard to

    whether a transfer in accordance with section 764(b) of the

    Bankruptcy Code will take place (Sec. 190.02(a)(2) and Sec.

    190.06(e)).

    Sixth Calendar Day After the Entry of an Order for Relief

    Last day for customers to instruct the trustee concerning open

    commodity contracts (Sec. 190.02(b)(2)).

    Seventh Calendar Day After the Entry of an Order for Relief

    1. If not previously concluded, conclude transfers under Sec.

    190.06(e) and (f). (See Sec. 190.02(e)(1) and Sec.

    190.06(g)(2)(i)(A)).

    2. Transfer all open dealer option contracts which have not

    previously been transferred (Sec. 190.06(f)(3)(i)).

    3. Primary liquidation date (Sec. 190.01(ff)) (assuming no

    transfers and liquidation effected for all open commodity contracts

    for which no customer instructions were received by the sixth

    calendar day).

    4. Establishment of transfer accounts (Sec. 190.03(a)(1))

    (assuming this is the primary liquidation date); mark such accounts

    to market (Sec. 190.03(a)(2)) (daily thereafter until closed).

    5. Liquidate or offset all remaining open commodity contracts

    (Sec. 190.02(b)(2)).

    6. If not done previously, notify customers of bankruptcy and

    request customer proof of claim (Sec. 190.02(b)(4)).

    Eighth Calendar Day After the Entry of an Order for Relief

    Customer instructions due to trustee concerning specifically

    identifiable property (Sec. 190.02(b)(1)).

    Ninth Calendar Day After the Entry of an Order for Relief

    Commence liquidation of specifically identifiable property for

    which no arrangements for return have been made in accordance with

    customer instructions (Sec. Sec. 190.02(b)(1), 190.03(c)).

    Tenth Calendar Day After the Entry of an Order for Relief

    Complete liquidation to the extent reasonably possible of

    specifically identifiable property which has yet to be liquidated

    and for which no customer instructions have been received (Sec.

    190.03(c)).

    Separate Procedures for Involuntary Petitions for Bankruptcy

    1. Within one calendar day after notice of receipt of filing of

    the petition in bankruptcy, the trustee should assure that proper

    notification has been given to the Commission, the commodity

    broker's designated self-regulatory organization (Sec.

    190.02(a)(1)) (if any), and all applicable clearing organizations;

    margin calls should be issued if necessary (Sec. 190.02(g)(2)).

    2. On or before the seventh calendar day after the filing of a

    petition in bankruptcy, the trustee should use his best efforts to

    effect a transfer in accordance with Sec. 190.06(e) and (f) of all

    open commodity contracts and equity held for or on behalf of

    customers of the commodity broker (Sec. 190.02(e)(2)) unless the

    debtor can provide certain assurances to the trustee.

    Bankruptcy Appendix Form 2-- Request for Instructions Concerning Non-

    Cash Property Deposited With (Commodity Broker)

    Please take notice: On (date), a petition in bankruptcy was

    filed by [against] (commodity broker). Those customers of (commodity

    broker) who deposited certain kinds of non-cash property (see below)

    with (commodity broker) may instruct the trustee of the estate to

    return their property to them as provided below.

    As no customer may obtain more than his or her proportionate

    share of the property available to satisfy customer claims, if you

    instruct the trustee to return your property to you, you will be

    required to pay the estate, as a condition to the return of your

    property, an amount determined by the trustee. If your property is

    not margining an open contract, this amount will approximate the

    difference between the market value of your property and your pro

    rata share of the estate, as estimated by the trustee. If your

    property is margining an open commodity contract, this amount will

    be approximately the full fair market value of the property on the

    date of its return.

    Kinds of Property to Which This Notice Applies

    1. Any security deposited as margin which, as of (date petition

    was filed), was securing an open commodity contract and is:

    --registered in your name,

    --not transferrable by delivery, and

    --not a short-term obligation.

    2. Any fully-paid, non-exempt security held for your account in

    which there were no open commodity contracts as of (date

    [[Page 6384]]

    petition was filed). (Rather than the return, at this time, of the

    specific securities you deposited with (commodity broker), you may

    instead request now, or at any later time, that the trustee purchase

    ``like-kind'' securities of a fair market value which does not

    exceed your proportionate share of the estate).

    3. Any warehouse receipt, bill of lading or other document of

    title deposited as margin which, as of (date petition was filed),

    was securing an open commodity contract and--can be identified in

    (commodity broker)'s records as being held for your account, and--is

    neither in bearer form nor otherwise transferable by delivery.

    4. Any warehouse receipt bill of lading or other document of

    title, or any commodity received, acquired or held by (commodity

    broker) to make or take delivery or exercise from or for your

    account and which--can be identified in (commodity broker)'s records

    as received from or for your account as held specifically for the

    purpose of delivery or exercise.

    5. Any cash or other property deposited to make or take delivery

    on a commodity contract may be eligible to be returned. The trustee

    should be contacted directly for further information if you have

    deposited such property with (commodity broker) and desire its

    return.

    Instructions must be received by (the 5th calendar day after 2d

    publication date) or the trustee will liquidate your property. (If

    you own such property but fail to provide the trustee with

    instructions, you will still have a claim against (commodity broker)

    but you will not be able to have your specific property returned to

    you).

    Note: Prior to receipt of your instructions, circumstances may

    require the trustee to liquidate your property, or transfer your

    property to another broker if it is margining open commodity

    contracts. If your property is transferred and your instructions

    were received within the required time, your instructions will be

    forwarded to the new broker.

    Instructions should be directed to: (Trustee's name, address,

    and/or telephone).

    Even if you request the return of your property, you must also

    pay the trustee the amount he specifies and provide the trustee with

    proof of your claim before (the 7th calendar day after 2d

    publication date) or your property will be liquidated. (Upon receipt

    of customer instructions to return property, the trustee will mail

    the sender a form which describes the information he must provide to

    substantiate his claim).

    Note: The trustee is required to liquidate your property despite

    the timely receipt of your instructions, money, and proof of claim

    if, for any reason, your property cannot be returned by (close of

    business on the 7th calendar day after 2d publication date).

    Bankruptcy Appendix Form 3--Request for Instructions Concerning

    Transfer of Your Hedge Contracts Held by (Commodity Broker)

    United States Bankruptcy Court ----District of ----In re ----,

    Debtor, No. ----.

    Please take notice: On (date), a petition in bankruptcy was filed by

    [against] (commodity broker).

    You indicated when your hedge account was opened that the

    commodity contracts in your hedge account should not be liquidated

    automatically in the event of the bankruptcy of (commodity broker),

    and that you wished to provide instructions at this time concerning

    their disposition.

    Instructions to transfer your commodity contracts and a cash

    deposit (as described below) must be received by the trustee by (the

    6th calendar day after entry of order for relief) or your commodity

    contracts will be liquidated.

    If you request the transfer of your commodity contracts, prior

    to their transfer, you must pay the trustee in cash an amount

    determined by the trustee which will approximate the difference

    between the value of the equity margining your commodity contracts

    and your pro rata share of the estate plus an amount constituting

    security for the nonrecovery of any overpayments. In your

    instructions, you should specify the broker to which you wish your

    commodity contracts transferred.

    Be further advised that prior to receipt of your instructions,

    circumstances may, in any event, require the trustee to liquidate or

    transfer your commodity contracts. If your commodity contracts are

    so transferred and your instructions are received, your instructions

    will be forwarded to the new broker.

    Note also that the trustee is required to liquidate your

    positions despite the timely receipt of your instructions and money

    if, for any reason, you have not made arrangements to transfer and/

    or your contracts are not transferred by (7 calendar days after

    entry of order for relief).

    Instructions should be sent to: (Trustee's or designee's name,

    address, and/or telephone). [Instructions may also be provided by

    phone].

    Bankruptcy Appendix Form 4--Proof of Claim

    [Note to trustee: As indicated in Sec. 190.02(d), this form is

    provided as a guide to the trustee and should be modified as

    necessary depending upon the information which the trustee needs at

    the time a proof of claim is requested and the time provided for a

    response.]

    Proof of Claim

    United States Bankruptcy Court ----District of ----In re ----,

    Debtor, No. ----.

    Return this form by ---- or your claim will be barred (unless

    extended, for good cause only).

    I. [If claimant is an individual claiming for himself] The

    undersigned, who is the claimant herein, resides at ----.

    [If claimant is a partnership claiming through a member] The

    undersigned, who resides at ----, is a member of ----, a

    partnership, composed of the undersigned and ----, of ----, and

    doing business at ----, and is duly authorized to make this proof of

    claim on behalf of the partnership.

    [If claimant is a corporation claiming though a duly authorized

    officer] The undersigned, who resides at ---- is the ---- of ----, a

    corporation organized under the laws of ---- and doing business at

    ----, and is duly authorized to make this proof of claim on behalf

    of the corporation.

    [If claim is made by agent] The undersigned, who resides at ----

    , is the agent of ----, and is duly authorized to make this proof of

    claim on behalf of the claimant.

    II. The debtor was, at the time of the filing of the petition

    initiating this case, and still is, indebted to this claimant for

    the total sum of $ ----.

    III. List EACH account on behalf of which a claim is being made

    by number and name of account holder[s], and for EACH account,

    specify the following information:

    a. Whether the account is a futures, foreign futures, leverage,

    option (if an option account, specify whether exchange-traded,

    dealer or cleared swap), ``delivery'' account, or a cleared swaps

    account. A ``delivery'' account is one which contains only documents

    of title, commodities, cash, or other property identified to the

    claimant and deposited for the purposes of making or taking delivery

    on a commodity underlying a commodity contract or for payment of the

    strike price upon exercise of an option.

    b. The capacity in which the account is held, as follows (and if

    more than one is applicable, so state):

    1. [The account is held in the name of the undersigned in his

    individual capacity];

    2. [The account is held by the undersigned as guardian,

    custodian, or conservator for the benefit of a ward or a minor under

    the Uniform Gift to Minors Act];

    3. [The account is held by the undersigned as executor or

    administrator of an estate];

    4. [The account is held by the undersigned as trustee for the

    trust beneficiary];

    5. [The account is held by the undersigned in the name of a

    corporation, partnership, or unincorporated association];

    6. [The account is held as an omnibus customer account of the

    undersigned futures commission merchant];

    7. [The account is held by the undersigned as part owner of a

    joint account];

    8. [The account is held by the undersigned in the name of a plan

    which, on the date the petition in bankruptcy was filed, had in

    effect a registration statement in accordance with the requirements

    of Sec. 1031 of the Employee Retirement Income Security Act of 1974

    and the regulations thereunder]; or

    9. [The account is held by the undersigned as agent or nominee

    for a principal or beneficial owner (and not described above in

    items 1-8 of this II, b)].

    10. [The account is held in any other capacity not described

    above in items 1-9 of this II, b. Specify the capacity].

    c. The equity, as of the date the petition in bankruptcy was

    filed, based on the commodity contracts in the account.

    d. Whether the person[s] (including a general partnership,

    limited partnership, corporation, or other type of association) on

    whose behalf the account is held is one of the following persons OR

    whether one of the following persons, alone or jointly, owns 10% or

    more of the account:

    1. [If the debtor is an individual--

    A. Such individual;

    B. Relative (as defined below in item 8 of this III.d) of the

    debtor or of a general partner of the debtor;

    [[Page 6385]]

    C. Partnership in which the debtor is a general partner;

    D. General partner of the debtor; or

    E. Corporation of which the debtor is a director, officer, or

    person in control];

    2. [If the debtor is a partnership--

    A. Such partnership;

    B. General partner in the debtor;

    C. Relative (as defined in item 8 of this III.d) of a general

    partner in, general partner of, or person in control of the debtor;

    D. Partnership in which the debtor is a general partner;

    E. General partner of the debtor; or

    F. Person in control of the debtor];

    3. [If the debtor is a limited partnership--

    A. Such limited partnership;

    B. A limited or special partner in such partnership whose duties

    include:

    i. The management of the partnership business or any part

    thereof;

    ii. The handling of the trades or customer funds of customers of

    such partnership;

    iii. The keeping of records pertaining to the trades or customer

    funds of customers of such partnership; or

    iv. The signing or co-signing of checks or drafts on behalf of

    such partnership];

    4. [If the debtor is a corporation or association (except a

    debtor which is a futures commission merchant and is also a

    cooperative association of producers)--

    A. Such corporation or association;

    B. Director of the debtor;

    C. Officer of the debtor;

    D. Person in control of the debtor;

    E. Partnership in which the debtor is a general partner;

    F. General partner of the debtor;

    G. Relative (as defined in item 8 of this III.d) of a general

    partner, director, officer, or person in control of the debtor;

    H. An officer, director or owner of ten percent or more of the

    capital stock of such organization];

    5. [If the debtor is a futures commission merchant which is a

    cooperative association of producers--

    Shareholder or member of the debtor which is an officer,

    director or manager];

    6. [An employee of such individual, partnership, limited

    partnership, corporation or association whose duties include:

    A. The management of the business of such individual,

    partnership, limited partnership, corporation or association or any

    part thereof;

    B. The handling of the trades or customer funds of customers of

    such individual, partnership, limited partnership, corporation or

    association;

    C. The keeping of records pertaining to the trades or funds of

    customers of such individual, partnership, limited partnership,

    corporation or association; or

    D. The signing or co-signing of checks or drafts on behalf of

    such individual, partnership, limited partnership, corporation or

    association];

    7. [Managing agent of the debtor];

    8. [A spouse or minor dependent living in the same household of

    ANY OF THE FOREGOING PERSONS, or any other relative, regardless of

    residency, (unless previously described in items 1-B, 2-C, or 4-G of

    this III.d) defined as an individual related by affinity or

    consanguinity within the third degree as determined by the common

    law, or individual in a step or adoptive relationship within such

    degree];

    9. [``Affiliate'' of the debtor, defined as:

    A. Entity that directly or indirectly owns, controls, or holds

    with power to vote, 20 percent or more of the out-standing voting

    securities of the debtor, other than an entity that holds such

    securities--

    i. In a fiduciary or agency capacity without sole discretionary

    power to vote such securities; or

    ii. Solely to secure a debt, if such entity has not in fact

    exercised such power to vote;

    B. Corporation 20 percent or more of whose outstanding voting

    securities are directly or indirectly owned, con-trolled, or held

    with power to vote, by the debtor, or by an entity that directly or

    indirectly owns, controls, or holds with power to vote, 20 percent

    or more of the outstanding voting securities of the debtor, other

    than an entity that holds such securities--

    i. In a fiduciary or agency capacity without sole discretionary

    power to vote such securities; or

    ii. Solely to secure a debt, if such entity has not in fact

    exercised such power to vote;

    C. Person whose business is operated under a lease or operating

    agreement by the debtor, or person substantially all of whose

    property is operated under an operating agreement with the debtor;

    D. Entity that otherwise, directly or indirectly, is controlled

    by or is under common control with the debtor];

    E. Entity that operates the business or all or substantially all

    of the property of the debtor under a lease or operating agreement;

    or

    F. Entity that otherwise, directly or indirectly, controls the

    debtor; or

    10. [Any of the persons listed in items 1-7 above of this III.d

    if such person is associated with an affiliate (see item 9 above) of

    the debtor as if the affiliate were the debtor].

    e. Whether the account is a discretionary account. (If it is,

    the name in which the ``attorney in fact'' is held).

    f. If the account is a joint account, the amount of the

    claimant's percentage interest in the account. (Also specify whether

    participants in a joint account are claiming separately or jointly).

    g. Whether the claimant's positions in security futures products

    are held in a futures account or securities account, as those terms

    are defined in Sec. 1.3 of this chapter.

    IV. Describe all claims against the debtor not based upon a

    commodity contract account of the claimant (e.g., if landlord, for

    rent; if customer, for misrepresentation or fraud).

    V. Describe all claims of the DEBTOR against the CLAIMANT not

    already included in the equity of a commodity contract account[s] of

    the claimant (see III.c above).

    VI. Describe any deposits of money, securities or other property

    held by or for the debtor from or for the claimant, and indicate if

    any of this property was included in your answer to III.c above.

    VII. Of the money, securities, or other property described in VI

    above, identify any which consists of the following:

    a. With respect to property received, acquired, or held by or

    for the account of the debtor from or for the account of the

    claimant to margin, guarantee or secure an open commodity contract,

    the following:

    1. Any security which as of the filing date is:

    A. Held for the claimant's account;

    B. Registered in the claimant's name;

    C. Not transferable by delivery; and

    D. Not a short term obligation; or

    2. Any warehouse receipt, bill of lading or other document of

    title which as of the filing date:

    A. Can be identified on the books and records of the debtor as

    held for the account of the claimant; and

    B. Is not in bearer form and is not otherwise transferable by

    delivery.

    b. With respect to open commodity contracts, and except as

    otherwise provided below in item g of this VII, any such contract

    which:

    1. As of the date the petition in bankruptcy was filed, is

    identified on the books and records of the debtor as held for the

    account of the claimant;

    2. Is a bona fide hedging position or transaction as defined in

    Rule 1.3 of the Commodity Futures Trading Commission (``CFTC'') or

    is a commodity option transaction which has been determined by a

    registered entity to be economically appropriate to the reduction of

    risks in the conduct and management of a commercial enterprise

    pursuant to rules which have been approved by the CFTC pursuant to

    section 5c(c) of the Commodity Exchange Act;

    3. Is in an account designated in the accounting records of the

    debtor as a hedging account.

    c. With respect to warehouse receipts, bills of lading or other

    documents of title, or physical commodities received, acquired, or

    held by or for the account of the debtor for the purpose of making

    or taking delivery or exercise from or for the claimant's account,

    any such document of title or commodity which as of the filing date

    can be identified on the books and records of the debtor as received

    from or for the account of the claimant specifically for the purpose

    of delivery or exercise.

    d. Any cash or other property deposited prior to bankruptcy to

    pay for the taking of physical delivery on a long commodity contract

    or for payment of the strike price upon exercise of a short put or a

    long call option contract on a physical commodity, which cannot be

    settled in cash, in excess of the amount necessary to margin such

    commodity contract prior to the notice date or exercise date which

    cash or other property is identified on the books and records of the

    debtor as received from or for the account of the claimant within

    three or less days of the notice date or three or less days of the

    exercise date specifically for the purpose of payment of the notice

    price upon taking delivery or the strike price upon exercise.

    e. The cash price tendered for any property deposited prior to

    bankruptcy to make physical delivery on a short commodity contract

    or for exercise of a long put or a short call option contract on a

    physical commodity, which cannot be settled in cash,

    [[Page 6386]]

    to the extent it exceeds the amount necessary to margin such

    contract prior to the notice exercise date which property is

    identified on the books and records of the debtor as received from

    or for the account of the claimant within three or less days of the

    notice date or of the exercise date specifically for the purpose of

    a delivery or exercise.

    f. Fully paid, non-exempt securities identified on the books and

    records of the debtor as held by the debtor for or on behalf of the

    commodity contract account of the claimant for which, according to

    such books and records as of the filing date, no open commodity

    contracts were held in the same capacity.

    g. Open commodity contracts transferred to another futures

    commission merchant by the trustee.

    VIII. Specify whether the claimant wishes to receive payment in

    kind, to the extent possible, for any claim for securities.

    IX. Attach copies of any documents which support the information

    provided in this proof of claim, including but not limited to

    customer confirmations, account statements, and statements of

    purchase or sale.

    This proof of claim must be filed with the trustee no later than

    ----, or your claim will be barred unless an extension has been

    granted, available only for good cause.

    Return this form to:

    (Trustee's name (or designee's) and address)

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

    Dated:-----------------------------------------------------------------

    (Signed)---------------------------------------------------------------

    Penalty for Presenting Fraudulent Claim. Fine of not more than

    $5,000 or imprisonment for not more than five years or both--Title

    18, U.S.C. 152.

    (Approved by the Office of Management and Budget under control

    number 3038-0021)

    0

    14. Revise appendix B to part 190 to read as follows:

    Appendix B to Part 190--Special Bankruptcy Distributions

    Framework 1--Special Distribution of Customer Funds for Futures

    Contracts When FCM Participated in Cross-Margining

    The Commission has established the following distributional

    convention with respect to ``customer funds'' (as Sec. 1.3 of this

    chapter defines such term) for futures contracts held by a futures

    commission merchant (FCM) that participated in a cross-margining

    (XM) program which shall apply if participating market professionals

    sign an agreement that makes reference to this distributional rule

    and the form of such agreement has been approved by the Commission

    by rule, regulation or order:

    All customer funds for futures contracts held in respect of XM

    accounts, regardless of the product that customers holding such

    accounts are trading, are required by Commission order to be

    segregated separately from all other customer segregated funds. For

    purposes of this distributional rule, XM accounts will be deemed to

    be commodity interest accounts and securities held in XM accounts

    will be deemed to be received by the FCM to margin, guarantee or

    secure commodity interest contracts. The maintenance of property in

    an XM account will result in subordination of the claim for such

    property to certain non-XM customer claims and thereby will operate

    to cause such XM claim not to be treated as a customer claim for

    purposes of the Securities Investors Protection Act and the XM

    securities to be excluded from the securities estate. This creates

    subclasses of futures customer accounts, an XM account and a non-XM

    account (a person could hold each type of account), and results in

    two pools of segregated funds belonging to futures customers: An XM

    pool and a non-XM pool. In the event that there is a shortfall in

    the non-XM pool of customer class segregated funds and there is no

    shortfall in the XM pool of customer segregated funds, all futures

    customer net equity claims, whether or not they arise out of the XM

    subclass of accounts, will be combined and will be paid pro rata out

    of the total pool of available XM and non-XM customer funds for

    futures contracts. In the event that there is a shortfall in the XM

    pool of customer segregated funds and there is no shortfall in the

    non-XM pool of customer segregated funds, then futures customer net

    equity claims arising from the XM subclass of accounts shall be

    satisfied first from the XM pool of customer segregated funds, and

    futures customer net equity claims arising from the non-XM subclass

    of accounts shall be satisfied first from the non-XM customer

    segregated funds. Furthermore, in the event that there is a

    shortfall in both the non-XM and XM pools of customer segregated

    funds: (1) If the non-XM shortfall as a percentage of the

    segregation requirement in the non-XM pool is greater than or equal

    to the XM shortfall as a percentage of the segregation requirement

    in the XM pool, all futures customer net equity claims will be paid

    pro rata; and (2) if the XM shortfall as a percentage of the

    segregation requirement in the XM pool is greater than the non-XM

    shortfall as a percentage of the segregation requirement of the non-

    XM pool, non-XM futures customer net equity claims will be paid pro

    rata out of the available non-XM segregated funds, and XM futures

    customer net equity claims will be paid pro rata out of the

    available XM segregated funds. In this way, non-XM customers will

    never be adversely affected by an XM shortfall.

    The following examples illustrate the operation of this

    convention. The examples assume that the FCM has two customers, one

    with exclusively XM accounts and one with exclusively non-XM

    accounts. However, the examples would apply equally if there were

    only one customer, with both an XM account and a non-XM account.

    BILLING CODE 6351-01-P

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    Issued in Washington, DC on January 11, 2012, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Protection of Cleared Swaps Customer Contracts and

    Collateral; Conforming Amendments to the Commodity Broker Bankruptcy

    Provisions--Commission Voting Summary and Statements of Commissioners

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

    Federal Regulations

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia and Wetjen voted in the affirmative; Commissioner Sommers

    voted in the negative

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rules on segregation of customer funds for

    cleared swaps. These rules are an important step forward in

    protecting customers and reducing the risk of swaps trading. The

    rules carry out the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (Dodd-Frank Act) mandate that futures commission

    merchants (FCMs) and derivatives clearing organizations (DCOs)

    segregate customer collateral supporting cleared swaps. FCMs and

    DCOs must hold customer collateral in a separate account from that

    belonging to the FCM or DCO. It prohibits clearing organizations

    from using the collateral of non-defaulting, innocent customers to

    protect themselves and their clearing members. For the first time,

    customer money must be protected individually all the way to the

    clearinghouse.

    We received a tremendous amount of public input on this rule,

    including through two roundtables, as well as through comments on an

    advanced notice of proposed rulemaking and a proposal. This rule

    builds on customer protections included in the clearinghouse core

    principles rule we finalized in October requiring DCOs to collect

    initial margin on a gross basis for their clearing members' customer

    accounts.

    Appendix 3--Statement of Commissioner Scott D. O'Malia

    Today, the Commodity Futures Trading Commission (the

    ``Commission'') is voting to finalize a rulemaking on protection of

    cleared swaps customer collateral.\307\ Whereas I support this

    rulemaking, I believe that it is important to detail its

    limitations, so that we do not offer market participants a

    misleading sense of comfort in light of the collapse of MF Global,

    Inc. (``MF Global''). As I will explain further, the Commission has

    much more work to do to increase confidence in the customer

    protections that our regulations offer.

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

    \307\ Protection of Cleared Swaps Customer Contracts and

    Collateral; Conforming Amendments to the Commodity Broker Bankruptcy

    Provisions (to be codified at 17 CFR parts 22 and 190) (referenced

    herein as the ``rulemaking''), available at: http://www.cftc.gov/PressRoom/Events/opaevent_cftcdoddfrank011112.

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

    This rulemaking does not address MF Global.

    First, this rulemaking does not address MF Global. The

    rulemaking is entitled, in part, Protection of Cleared Swaps

    Customer Contracts and Collateral. Therefore, it benefits cleared

    swaps customers, and not futures customers (who are bearing the

    brunt of MF Global). This rulemaking would not have prevented a

    shortfall in the customer funds of the ranchers and farmers that

    transact daily in the futures market. Nor would it have expedited

    the transfer of positions and collateral belonging to such customers

    in the event of a collapse similar to that of MF Global.

    This rulemaking may expose swaps customers to more risk.

    Second, this rulemaking only addresses one of three categories

    of risk that an intermediary--like MF Global--can pose to its

    customers. The three categories of risk are (i) ``fellow-customer''

    risk, (ii) operational risk, and (iii) investment risk. By its own

    admission, this rulemaking only protects against ``fellow-customer''

    risk. It does not protect against operational risk--namely, the risk

    that an intermediary improperly segregates cleared swaps customer

    collateral.\308\ Moreover, it does not protect against investment

    risk--namely, the risk that an intermediary experiences losses on

    its investment of cleared swaps customer collateral, which it cannot

    cover using its capital.\309\ To be plain, I support limiting

    intermediaries from investing customer collateral in risky

    instruments--regardless of whether such collateral margins futures

    or swaps contracts.\310\ However, I am not na[iuml]ve enough to

    believe that such limitations--without additional Commission

    oversight or action--would be sufficient. I have warned against

    complacency in the past.\311\ I reiterate such warning here.

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    \308\ See section I(D)(2) of the preamble to this rulemaking.

    \309\ Id.

    \310\ See sections 22.2(e)(1) and 22.3(d) of the rule text to

    this rulemaking (to be codified at 17 CFR 22.2(e)(1) and 22.3(d))

    (limiting an FCM and a DCO to investing cleared swaps customer

    collateral in instruments enumerated in regulation 1.25).

    \311\ See ``Opening Statement of Commissioner Scott D.

    O'Malia'', dated December 5, 2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement120511.

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

    Under this rulemaking, what happens if an intermediary--like MF

    Global--becomes insolvent as operational or investment

    irregularities are revealed? Basically, under the Bankruptcy

    Code,\312\ cleared swaps customers would share pro rata in any

    shortfall. A shortfall would complicate the porting of cleared swaps

    customer contracts and associated collateral, notwithstanding the

    enhanced recordkeeping and reporting requirements of this

    rulemaking.

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    \312\ See section 766(h) of the Bankruptcy Code, 11 U.S.C.

    766(h).

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    By not protecting against operational and investment risk, this

    rulemaking may have the effect of exposing some swaps customers to

    more risk than they currently bear in the over-the-counter markets.

    Since December 2, 2011, we have received eight comment letters from

    end-users, many of which explicitly asked the Commission to not

    finalize this rulemaking until it explores other alternatives that

    may provide greater protection.\313\ These end-users include

    Fidelity Investments, the Committee on Investment of Employee

    Benefit Assets (``CIEBA''), and the Federal Home Loan Banks.

    According to many of these comment letters, swaps customers in the

    over-the-counter markets currently have the option to enter into

    tri-party custody agreements. In general, these agreements may

    provide superior protection to this rulemaking against not only

    fellow-customer risk, but also operational and investment risk.\314\

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    \313\ See comment letters from (i) Managed Funds Association,

    dated December 2, 2011; (ii) Fidelity Investments, dated December 8,

    2011; (iii) Och-Ziff Capital Management Group, dated circa December

    12, 2011; (iv) State Street Corporation, dated December 14, 2011;

    (v) the Committee on Investment of Employee Benefit Assets, dated

    December 22, 2011; (vi) the European Federation for Retirement

    Provision (``EFRP'') and APG Algemene Pensioen Groep, N.V.

    (``APG''), dated December 23, 2011; (vii) the Federal Home Loan

    Banks, dated January 9, 2012; and (viii) BlueMountain Capital

    Management, LLC, Elliot Management Corporation, Moore Capital

    Management, LP, Paulson & Co. Inc., and Tudor Investment

    Corporation, dated January 9, 2012 (the ``Moore et. al. letter'').

    In each case, the comment letters were filed in answer to the notice

    of proposed rulemaking on the Protection of Cleared Swaps Customer

    Contracts and Collateral; Conforming Amendments to the Commodity

    Broker Bankruptcy Provisions, 76 FR 33818, Jun. 9, 2011. All comment

    letters to such notice are available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-10737a.pdf.

    \314\ See, e.g., comment letters from (i) Fidelity Investments,

    dated December 8, 2011; (ii) Och-Ziff Capital Management Group,

    dated circa December 12, 2011; and (iii) CIEBA, dated December 22,

    2011.

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    I understand that staff has been directed to ``carefully

    analyze'' various proposals that commenters have advanced ``with the

    goal of developing proposed rules that provide additional protection

    for collateral belonging to market participants.'' \315\ This is a

    laudable goal. I only hope that we achieve this goal before

    mandatory clearing becomes effective.\316\ Otherwise, we may be

    subjecting

    [[Page 6408]]

    a substantial portion of cleared swaps customer collateral to

    operational risk and investment risk. To provide some context, such

    collateral--in the aggregate--may amount to anywhere from $500

    billion to $833 billion.\317\ As one commenter stated, ``[i]t would

    seem to be a perverse result that, because of rulemaking promulgated

    under the Dodd-Frank * * * Act, which was * * * meant to enhance the

    safety of the over-the-counter markets by reducing systemic and

    counterparty risks, market participants were to be placed [in] [sic]

    a worse position with regard to risk than they are currently.''

    \318\ Other commenters supported this statement.\319\

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

    \315\ Section I(F) of the preamble to this rulemaking.

    \316\ See comment letter from CIEBA, dated December 22, 2011

    (stating that ``* * * the Commission should not permit mandatory

    clearing of swaps to become effective until a physical segregation

    option, such as the individual settlement account * * * or another

    satisfactory structure, has been made available to swaps

    customers.'' [emphasis original]).

    This rulemaking does attempt to resolve one request repeated in

    the comment letters filed since December 2, 2011. In section I(F) of

    the preamble, the rulemaking makes clear that the Commission's 2005

    Amendment to Financial and Segregation Interpretation No. 10, 70 FR

    24768, May 11, 2005 (``Segregation Interpretation 10-1''), does not

    apply to cleared swaps. Therefore, Segregation Interpretation 10-1

    would not prohibit an intermediary from entering into a tri-party

    custody agreement with a cleared swaps customer. However, this

    rulemaking similarly makes clear that Segregation Interpretation No.

    10, which the Commission issued in 1984, would continue to apply to

    collateral segregated according to a tri-party custody agreement. In

    other words, cleared swaps customers could not avoid the pro rata

    distribution provisions of the Bankruptcy Code (as well as

    regulation Part 190). Therefore, the resolution in this rulemaking

    may provide commenters with cold comfort.

    \317\ Section VII(B)(2) of the preamble to this rulemaking

    (citing estimates provided by CME Group, Inc. and the International

    Swaps and Derivatives Association, Inc.).

    \318\ Comment letter from Och-Ziff Capital Management Group,

    dated circa December 12, 2011.

    \319\ See the Moore et. al. letter (stating ``[g]iven the

    crucial role that central clearing will play in reducing systemic

    risk in the swaps market, we see no valid argument to suggest that

    customers to cleared swaps should be subject to weaker regulatory

    protections than those afforded counterparties to uncleared

    swaps.''); and comment letter from EFRP and APG, dated December 23,

    2011 (stating ``EFRP and APG support the CFTC's efforts to reduce

    risk, enhance transparency, and promote market integrity, as the

    U.S. Congress intended by enacting Title VII of the Dodd-Frank * * *

    Act. It should be clear though that such reform will only improve

    financial stability, if it is prudent from the perspective of end

    users, such as pension funds. However, as currently framed the

    Proposed Rules subject us to increased risks.'').

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

    This rulemaking may imperfectly address fellow-customer risk.

    Let me now say a few words on ``fellow-customer'' risk.

    Preliminarily, what is it? According to this rulemaking, it is the

    risk that a derivatives clearing organization (``DCO'') will access

    the collateral of non-defaulting cleared swaps customers to cure the

    default of an intermediary.\320\ Under what circumstances could a

    DCO access such collateral? Under this rulemaking, there are two

    circumstances and they have to occur simultaneously. First, a swaps

    customer would need to default to an intermediary. Second, as a

    result of such default, the intermediary must be unable to meet its

    DCO obligations. In short, swaps customer losses must exceed the

    capitalization of the intermediary.\321\ As this rulemaking

    acknowledges, ``fellow-customer'' risk is rare.\322\ In comparison,

    according to notices received by the Commission, operational risk is

    far more prevalent.\323\

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

    \320\ Section I(B)(6) of the preamble to this rulemaking.

    \321\ Id.

    \322\ Section VII(B)(2) of the preamble to this rulemaking

    (stating that ``double defaults are rare events.'').

    \323\ Regulation 1.12(h) requires an intermediary that knows or

    should know that it is under-segregated to report to the Commission

    and its designated self-regulatory organization. Usually, under-

    segregation results from minor operational failure, and does not

    lead to the collapse of an intermediary. However, a pattern of

    operational failure would draw greater attention and inquiry.

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

    Of course, just because a risk is rare does not mean that the

    Commission should not protect against it. But let us take a closer

    look at the protection that this rulemaking is offering. First,

    although it is close to 230 pages, with nearly 100 pages in rule

    text, only a couple of the provisions of this rulemaking address

    ``fellow-customer'' risk. They are regulations 22.11 to 22.16.\324\

    The remainder of regulation Part 22, as well as the majority of

    changes to regulation Part 190 (Bankruptcy), simply aligns the

    cleared swaps segregation regime with the existing futures

    segregation regime.\325\ As MF Global reveals, the futures

    segregation regime may have some vulnerabilities. In this

    rulemaking, the Commission is unthinkingly replicating these

    vulnerabilities.

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

    \324\ Sections 22.11 to 22.16 of the rule text to this

    rulemaking (to be codified at 17 CFR 22.11 (Information to be

    Provided Regarding Customers and Their Cleared Swaps), 22.12

    (Information to be Maintained Regarding Cleared Swaps Customer

    Collateral), 22.13 (Additions to Cleared Swaps Customer Collateral),

    22.14 (Futures Commission Merchant Failure to Meet a Customer Margin

    Call in Full), 22.15 (Treatment of Cleared Swaps Collateral on an

    Individual Basis), 22.16 (Disclosures to Customers)).

    \325\ See, e.g., section 22.10 to the rule text of this

    rulemaking (to be codified at 17 CFR 22.10 Application of other

    Regulatory Provisions).

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

    Second, this rulemaking only offers protection to a portion of

    the cleared swaps customer collateral that an intermediary holds. In

    general, cleared swaps customer collateral may fall within two

    categories: (i) collateral needed to support contracts; and (ii)

    collateral in excess of that needed to support contracts (``Excess

    Collateral''). The Commission, in its final rulemaking on

    Derivatives Clearing Organization General Provisions and Core

    Principles, states that a DCO must require its clearing members to

    collect Excess Collateral.\326\ However, as certain commenters have

    astutely observed, and as this rulemaking readily admits, this

    rulemaking does not protect Excess Collateral deposited outside of

    the DCO.\327\ So, the Commission has required cleared swaps

    customers to provide collateral that it then does not protect.

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

    \326\ See Derivatives Clearing Organization General Provisions

    and Core Principles, 76 FR 69334, 69438, Nov. 8, 2011 (to be

    codified at 17 CFR 39.13(g)(8)).

    \327\ See section III(B) of the preamble to this rulemaking

    (stating ``CME notes that a portion of the Cleared Swaps Customer

    Collateral will be held at the FCM, not the DCO, and that this

    collateral will not be protected by Complete Legal Segregation in

    the event that an FCM becomes insolvent. This proposition is true

    but is of little or no relevance to the comparison of Complete Legal

    Segregation with the Futures Model favored by these commenters.'').

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

    Third, this rulemaking cites, as a major benefit, the

    possibility of enhanced portability of cleared swaps customer

    contracts, as well as associated collateral, after an intermediary

    defaults due to ``fellow-customer'' risk.\328\ The rulemaking sets

    forth more stringent recordkeeping and reporting requirements as a

    foundation for enhanced portability. As commenters have identified,

    these requirements have two significant weaknesses.

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

    \328\ Section I(D)(2) of the preamble to this rulemaking. To be

    fair, this rulemaking does make the point that enhanced

    recordkeeping and reporting requirements may also foster portability

    in the event of operational or investment risk.

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

    Preliminarily, to maximize portability, each intermediary must

    (i) keep complete and accurate records and (ii) comply with

    reporting requirements. As MF Global and earlier intermediary

    collapses have demonstrated, a distressed intermediary may not

    prioritize recordkeeping and reporting.\329\

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

    \329\ See, e.g., comment letters from (i) the Federal Home Loan

    Banks, dated January 9, 2012 and (ii) CIEBA, dated December 22,

    2011. See also the Moore et. al. letter.

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

    Secondarily, despite requests from various commenters (including

    the Association of Institutional Investors and Vanguard), this

    rulemaking does not provide guidance on the concrete steps that a

    DCO should take to ensure that an intermediary is providing accurate

    and complete information. Instead, the rulemaking states: ``* * *

    the DCO should take the steps appropriate, in the professional

    judgment of its staff, to verify that [intermediaries] have and are

    using systems and appropriate procedures to track accurately, and to

    provide to the DCO accurately, the positions of each customer.''

    \330\ In light of MF Global, the Commission should give this

    provision--and the requests of commenters--more thought.

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

    \330\ Section IV(K) of the preamble to this rulemaking.

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

    Finally, this rulemaking is silent on one important factor that

    may affect the portability of cleared swaps customer contracts, as

    well as associated collateral--namely, whether the intermediary is

    both a futures commission merchant and a securities broker-dealer. I

    am touching on this issue in the interest of full disclosure.

    A comprehensive solution is needed.

    Despite its limitations, I ultimately support this rulemaking.

    As I have stated previously, the Commission must immediately take

    action to renew public confidence in our customer protection

    regime.\331\ Although this rulemaking largely replicates futures

    segregation, this rulemaking--if it works as promised in an

    intermediary bankruptcy--may enhance portability for cleared swaps

    customers in the event of ``fellow-customer'' risk. Even the

    possibility of such enhancement is non-negligible--especially in the

    volatile economic environment that exists today.

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

    \331\ See Statement on MF Global: Next Steps, dated November 16,

    2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement111611.

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

    However, this rulemaking also vividly illustrates some of my

    concerns regarding our Dodd-Frank rulemaking process. First, the

    Commission has a duty to regulate the swaps market. It also owes a

    duty to futures customers. Right now, it is unclear from this

    rulemaking how the Commission means to address futures customer

    concerns. I understand that the investigation into the MF Global

    collapse is ongoing. However, the Commission could examine the

    manner in

    [[Page 6409]]

    which operational and investment risks contribute to

    undersegregation. Our undersegregation reports would help us with

    such an examination, as well as the detection of potential causal

    patterns for undersegregation.\332\

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

    \332\ See supra note 17.

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

    Second, instead of rushing to complete this rulemaking, I would

    have preferred that the Commission focus on providing a more

    comprehensive solution to operational, investment, and ``fellow-

    customer'' risk. Moreover, I would have preferred that the

    Commission more fully explore the alternatives that various

    commenters have advanced, which may provide greater protection for

    futures, as well as cleared swaps customer, collateral. Further, it

    would have been helpful for the Commission to have weighed, in one

    analysis, the benefits and costs of offering a combination of (i)

    this rulemaking and (ii) one or more alternatives.

    Finally, the Commission needs to contemplate whether any

    alternative would be workable in light of the pro rata distribution

    provisions of the Bankruptcy Code. If not, the Commission should

    contemplate recommending to Congress changes to the Bankruptcy Code.

    After MF Global, the Commission needs to provide market

    participants with real, fully developed reforms. I look forward to

    the Commission taking such action.

    [FR Doc. 2012-1033 Filed 2-6-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: February 7, 2012