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2010-19553

  • FR Doc 2010-19553[Federal Register: August 9, 2010 (Volume 75, Number 152)]

    [Proposed Rules]

    [Page 47738-47746]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr09au10-21]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1, 30, and 140

    RIN 3038-AC72

    Acknowledgment Letters for Customer Funds and Secured Amount

    Funds

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is proposing to amend its regulations regarding the required

    content of the acknowledgment letter that a registrant must obtain from

    any depository holding its segregated customer funds or funds of

    foreign futures or foreign options customers, and certain technical

    changes.

    DATES: Submit comments on or before September 8, 2010.

    ADDRESSES: You may submit comments, identified by RIN number, by any of

    the following methods:

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Agency Web Site: http://www.cftc.gov. Follow the

    instructions for submitting comments on the Web site.

    E-mail: acknowledgmentletter@cftc.gov. Include the RIN

    number in the subject line of the message.

    Fax: 202-418-5521.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    FOR FURTHER INFORMATION CONTACT: Phyllis P. Dietz, Associate Director,

    202-418-5449, pdietz@cftc.gov, or Eileen A. Donovan, Special Counsel,

    202-418-5096, edonovan@cftc.gov, Division of Clearing and Intermediary

    Oversight, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    Regulation 1.20 (17 CFR 1.20) requires futures commission merchants

    (FCMs) that accept customer funds and derivatives clearing

    organizations (DCOs) that accept customer funds from FCMs to segregate

    and separately account for those funds.\1\ Currently, Regulation 1.20

    requires such FCMs and DCOs to obtain from the bank, trust company, FCM

    or DCO \2\ holding customer funds in the capacity of a depository

    (each, a ``Depository'') a written acknowledgment that the Depository

    was informed that the customer funds deposited therein are those of

    commodity or option customers and are being held in accordance with the

    provisions of the Commodity Exchange Act (Act) \3\ and CFTC

    regulations.\4\ Regulation 1.26 (17 CFR 1.26), which requires FCMs and

    DCOs to segregate and separately account for instruments purchased with

    customer funds, repeats the requirement to obtain an acknowledgment

    letter. FCMs also must obtain a similar written acknowledgment from

    Depositories holding ``secured amount'' funds \5\ required under

    Regulation 30.7 (17 CFR 30.7), which governs the treatment of money,

    securities, and property held for or on behalf of the FCM's foreign

    futures and foreign options customers.

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    \1\ See 17 CFR 1.3(gg) (defining the term ``customer funds'').

    \2\ Regulation 1.20(a) does not require a written acknowledgment

    to be obtained from ``a derivatives clearing organization that has

    adopted and submitted to the Commission rules that provide for the

    segregation as customer funds, in accordance with all relevant

    provisions of the Act and the rules and orders promulgated

    thereunder, of all funds held on behalf of customers.''

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

    \4\ 17 CFR parts 1-199.

    \5\ See 17 CFR 1.3(rr) (defining the term ``foreign futures or

    foreign options secured amount'').

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    On February 20, 2009, the Commission published proposed amendments

    to Regulations 1.20, 1.26, and 30.7 for public comment.\6\ The proposed

    amendments set out specific representations that would be required in

    the acknowledgment letters in order to reaffirm and clarify the

    obligations that Depositories incur when accepting customer funds or

    secured amount funds. The Commission also proposed several technical

    changes.

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    \6\ 74 FR 7838 (February 20, 2009).

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    In response, the Commission received comment letters from the

    Futures Industry Association (``FIA''), Joint Audit Committee

    (``JAC''), National Futures Association (``NFA''), Managed Funds

    Association (``MFA''), and Katten Muchin Rosenman LLP (``Katten''),

    which are discussed below. In light of the comments received, the

    Commission has determined to re-propose the amendments to Regulations

    1.20, 1.26, and 30.7, with several changes made in response to the

    comments. In addition, the Commission is proposing standard template

    acknowledgment letters that would be required to be used. These are

    proposed for inclusion in a new Appendix A to each of Regulations 1.20,

    1.26, and 30.7. The Commission invites public comment on all aspects of

    the proposed regulations and the proposed letters.

    II. Comments Received

    FIA generally supported the proposed regulations but requested that

    the effective date of the final rule be extended beyond the proposed

    date of 180 days from the date of publication in the Federal Register

    to allow FCMs, DCOs, and Depositories sufficient time to negotiate and

    put in place acknowledgment letters satisfying the proposed Commission

    regulations and also to allow them an opportunity to work together to

    develop a standard template acknowledgment letter that would satisfy

    the proposed regulations. In addition, FIA expressed interest in having

    its member Depositories work with the Commission on a standardized

    notice, authentication, and instruction protocol and encouraged the

    Commission to develop a system for electronic filing of the new

    acknowledgment letters.

    The JAC supported the proposed regulations but requested guidance

    regarding the circumstances that would necessitate updating

    acknowledgment letters (e.g., name change of FCM or depository, merger

    of FCM or depository, addition or deletion of account number) as well

    as acceptable timeframes for such updating. In addition, the JAC

    questioned the benefit of requiring submission of acknowledgment

    letters to the Commission without also requiring documentation

    necessary for verification. Finally, the JAC requested that the

    Commission amend Regulation 30.7 to provide relief, similar to that

    provided under Regulations 1.20 and 1.26, that would exempt DCOs from

    having to provide acknowledgment

    [[Page 47739]]

    letters if they follow the requirements of the CEA.

    NFA supported the proposed regulations but recommended that the

    Commission require that acknowledgment letters be filed with NFA as

    well as the Commission when NFA is the firm's designated self-

    regulatory organization (``DSRO''), so that NFA has ready access to the

    same information that the Commission does. NFA also asked that the

    Commission clarify when acknowledgment letters should be amended for

    changes made after the effective date of the proposed regulations.

    Katten supported the purpose of the proposed regulations but

    suggested several revisions. First, Katten recommended that the

    Commission require an FCM, in opening an account with a Depository, to

    include in the account opening agreement an obligation on the

    Depository to release customer funds ``immediately upon proper notice

    and instruction'' from the FCM or the Commission (the same language

    that would be required in the acknowledgment letter under the proposed

    regulations). Katten expressed concern that a Depository would be

    exposed to potential liability to the FCM if the Depository were to

    honor an instruction from the Commission without the FCM's express

    consent. Second, Katten noted that the proposed regulations set no

    guidelines to be followed or conditions to be met before the Commission

    could issue an instruction to release customer funds. Third, Katten

    recommended that the Commission establish a reasonable means for a

    Depository to authenticate an instruction from the Commission. Fourth,

    Katten asked the Commission to confirm that, in the event that an FCM

    files for bankruptcy, a Depository will have no obligation to release

    customer funds except upon instruction from the bankruptcy trustee or

    pursuant to a court order. Fifth, Katten requested that the Commission

    provide additional guidance on a Depository's obligation to release

    customer funds ``immediately'' upon instruction from the Commission and

    suggested the use of the term ``promptly'' instead. Finally, Katten

    noted that Depositories frequently contract with an FCM depositor to

    advance monies to the FCM intraday, with the understanding that the FCM

    will deposit in the customer segregated account prior to the end of the

    business day (or by the start of the next business day), sums

    sufficient to repay the advance. Katten requested that the Commission

    confirm that, in the event that the FCM fails to repay the advance in a

    timely manner, or in the event of the FCM's bankruptcy, a Depository is

    entitled to recourse against the customer funds account for the amount

    of such funds advanced.

    MFA commended the Commission for the proposed rulemaking and stated

    that it believes the proposed rules would provide customers with

    greater clarity with respect to their deposited funds.

    The Commission's response to the comments received is discussed

    below.

    III. Discussion of the Proposed Regulations

    A. Regulation 1.20

    In its original proposal, the Commission set out specific

    representations that Depositories would have to include in the

    acknowledgment letter required under Regulation 1.20. The proposed

    changes to Regulation 1.20 would have required the Depository to

    acknowledge in the letter that: (1) The FCM or DCO has established the

    account for the purpose of depositing customer funds; (2) the customer

    funds deposited therein are those of commodity or option customers of

    the FCM, or clearing members of the DCO, and that those funds are to be

    segregated in accordance with the provisions of the Act and Part 1 of

    the CFTC regulations; (3) the customer funds shall not be subject to

    any right of offset, or lien, for or on account of any indebtedness,

    obligations or liabilities owed by the FCM or DCO; (4) the Depository

    must treat the customer funds in accordance with the Act and CFTC

    regulations; and (5) the Depository must immediately release the

    customer funds upon proper notice and instruction from the FCM or DCO

    or from the Commission.

    As noted above, FIA recommended the development of a standard

    template acknowledgment letter that would satisfy the proposed

    regulations. The Commission agrees with this recommendation, and the

    specific representations that the Commission originally proposed for

    the letter have been incorporated into a standard template

    acknowledgment letter that would be adopted as Appendix A to Regulation

    1.20. An FCM or DCO would be required to use this letter to satisfy the

    requirements of Regulation 1.20.

    The Commission also has accepted the recommendation to develop a

    system for electronic filing of the acknowledgment letters. As

    initially proposed, paragraphs (d)(2) and (e)(2) of Regulation 1.20

    would have required that a copy of the acknowledgment letter be filed

    with the regional office of the Commission with jurisdiction over the

    state in which the FCM or DCO's principal place of business is located;

    to reflect the change to electronic filing, paragraphs (d)(2) and

    (e)(2) now require that a copy of the letter be filed ``with the

    Commission in the manner specified by the Commission.'' The Commission

    will offer guidance on electronic filing procedures for the

    acknowledgment letters before a final rule takes effect but expects

    that filing will be done through ``WinJammerTM,'' an

    application currently used by FCMs to file their financial reports with

    the Commission. The use of WinJammerTM will ensure that only

    those individuals authorized by an FCM to submit an acknowledgment

    letter on its behalf will be able to do so, and it also will allow NFA

    and other DSROs to have access to the acknowledgment letters.

    Regulation 1.20 currently does not address the circumstances under

    which an FCM or a DCO must amend an existing acknowledgment letter or

    the amount of time allowed for doing so. Proposed paragraphs (d)(3) and

    (e)(3) require the acknowledgment letter to be amended within 60 days

    of any changes in the following: the name of the FCM or DCO depositing

    the customer funds; the name of the bank, trust company, DCO or FCM

    receiving the customer funds; or the account number(s) under which the

    customer funds are held.

    The proposed standard template acknowledgment letter includes

    language that requires the Depository to acknowledge that it must

    ``immediately'' release customer funds upon ``proper notice and

    instruction'' from the FCM or DCO or from the Commission. The

    Commission recognizes that the release of customer funds may be delayed

    by practical considerations (e.g., Fedwire is unavailable), but the

    Depository must make every effort to execute the transfer as soon as

    possible. The transfer of customer funds from a segregated account

    cannot be delayed due to concerns about the financial status of the FCM

    or DCO that deposited the funds.

    The Commission is not proposing specific standards for what

    constitutes ``proper notice'' from the Commission to the Depository.

    This is because reasonable actions could vary, depending on the

    situation. For example, in certain circumstances, it may not be

    possible to expeditiously provide written notice, and a telephone call

    would be sufficient and even preferable. However, the Commission would

    confirm the instruction in writing as soon as practicable.

    As noted above, the Commission received a comment letter expressing

    concern that a Depository would be exposed to potential liability to

    the FCM

    [[Page 47740]]

    if the Depository were to honor an instruction from the Commission

    without the FCM's express consent. The Commission believes that the

    acknowledgment letter and Regulation 1.20, as proposed, would provide

    sufficient legal basis for the Depository to act on any such

    instruction from the Commission. The letter, which must be agreed to

    and signed by both the FCM (or DCO) and the Depository, states: ``We

    will not hold you responsible for acting pursuant to any instruction

    from the CFTC upon which you have relied after having taken reasonable

    measures to assure that such instruction was provided to you by a duly

    authorized officer or employee of the CFTC.'' The Commission would

    issue such an instruction only when, in the judgment of the Commission,

    it is necessary to do so for the protection of customer funds. For

    example, the prospective insolvency of the FCM could prompt an

    instruction from the Commission to release the customer funds. However,

    the standard template acknowledgment letter does include language

    confirming that, in the event that the FCM becomes subject to a

    voluntary or involuntary petition for relief under the U.S. Bankruptcy

    Code, the Depository will have no obligation to release the customer

    funds except upon instruction from the bankruptcy trustee or pursuant

    to a court order.

    One of the comment letters also noted that Depositories frequently

    contract with an FCM depositor to advance monies to the FCM intraday,

    with the understanding that the FCM will deposit in the customer

    segregated account prior to the end of the business day (or by the

    start of the next business day), sums sufficient to repay the advance.

    The Commission was asked to confirm that, in the event that the FCM

    fails to repay the advance in a timely manner, or in the event of the

    FCM's bankruptcy, a Depository is entitled to recourse against the

    customer funds account for the amount of such funds advanced. The

    Commission believes that Section 4d of the Act \7\ does not permit such

    an arrangement because the advance is made to the FCM account holder

    and Section 4d expressly prohibits ``any person, including* * *any

    depository, that has received any money, securities, or property for

    deposit in a [customer segregated account], to hold, dispose of, or use

    any such money, securities, or property as belonging to the depositing

    futures commission merchant or any person other than the customers of

    such futures commission merchant.'' \8\

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    \7\ 7 U.S.C. 6d.

    \8\ See Section 4d(b) of the Act, 7 U.S.C. 6d(b). The

    arrangement outlined in the comment letter is distinguishable from

    other arrangements involving segregated funds that the Commission

    has previously allowed. For example, CFTC Interpretative Letter No.

    86-9 confirmed that, when there is sufficient aggregate value in the

    form of cash and securities, but insufficient cash, in the customer

    segregated account to meet a customer margin or variation call, a

    bank may allow an overdraft in the account in order to meet the call

    and may settle the overdraft by offsetting securities held in the

    customer segregated account. The letter allowed such offsetting only

    to meet the obligations of customers, not obligations of the FCM.

    Similarly, CFTC No-Action Letter No. 04-26 confirmed that an FCM

    that holds excess funds in segregation and has a residual interest

    in such funds may pay account service charges directly out of a

    customer segregated account as a reduction of such residual

    interest, subject to additional conditions set forth in the letter.

    Although the letter allowed the charges to be paid from the customer

    segregated account, the funds being used had to belong to the FCM

    and not to its customers.

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    B. Regulation 1.26

    The proposed changes to Regulation 1.26 would affirm that the

    written acknowledgment required for instruments in which customer funds

    are invested is identical to the written acknowledgment required under

    Regulation 1.20 and therefore must meet the requirements set out in

    Regulation 1.20. The Commission also is proposing a standard template

    acknowledgment letter to be used when customer funds are invested in

    money market mutual funds, which would be adopted as Appendix A to

    Regulation 1.26.\9\

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    \9\ Regulation 1.25(c) sets forth the requirements for

    investment of customer funds in money market mutual funds. Among

    them is the requirement that if the FCM or DCO ``holds its shares of

    the fund with the fund's shareholder servicing agent, the sponsor of

    the fund and the fund itself are required to provide the

    acknowledgement letter required by Sec. 1.26.'' See 17 CFR

    1.25(c)(3).

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    C. Regulation 30.7

    In its original proposal, the Commission proposed to amend

    Regulation 30.7 to set out specific representations that Depositories

    holding secured amount funds would have to include in the

    acknowledgment letter required by the regulation.\10\ The proposed

    changes to Regulation 30.7 would have required the Depository to

    acknowledge in the letter that: (1) It meets the requirement set out in

    Regulation 30.7(c)(1), which lists the types of depositories that may

    accept secured amount funds; (2) the FCM has established the account

    for the purpose of depositing money, securities, or property for or on

    behalf of customers that include, but are not limited to, foreign

    futures and foreign options customers; (3) the money, securities, or

    property deposited therein are held on behalf of foreign futures and

    foreign options customers of the FCM and may not be commingled with the

    FCM's own funds or any other funds that the Depository may hold, in

    accordance with the provisions of the Act and Part 30 of the CFTC

    regulations; (4) the money, securities, or property shall not be

    subject to any right of offset, or lien, for or on account of any

    indebtedness, obligations or liabilities owed by the FCM; (5) the

    Depository must treat the money, securities, or property in accordance

    with the provisions of the Act and CFTC regulations; and (6) the

    Depository must release immediately, subject to requirements of

    applicable foreign law, the money, securities, or property upon proper

    notice and instruction from the FCM or the Commission.

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    \10\ The Commission has issued an interpretative statement with

    respect to the secured amount requirement set forth in Regulation

    30.7. See 17 CFR part 30, App. B.

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    As noted above, the Commission now is proposing a standard template

    acknowledgment letter under Regulations 1.20 and 1.26, and the

    Commission is doing the same for Regulation 30.7. The specific

    representations that the Commission originally proposed for the letter

    required under Regulation 30.7 have been incorporated into a standard

    template acknowledgment letter that would be adopted as Appendix A to

    Regulation 30.7.

    Also as noted above, the Commission has decided to develop a system

    for electronic filing of the acknowledgment letters. As initially

    proposed, paragraph (c)(2)(iii) of Regulation 30.7 would have required

    the FCM to file a copy of the written acknowledgment with the regional

    office of the Commission with jurisdiction over the state in which the

    FCM's principal place of business is located; to reflect the change to

    electronic filing, paragraph (c)(2)(ii) now requires that a copy of the

    letter be filed ``with the Commission in the manner specified by the

    Commission.'' The Commission will offer guidance on electronic filing

    procedures for the acknowledgment letters before a final rule takes

    effect but expects that filing will be done through

    ``WinJammerTM,'' an application currently used by FCMs to

    file their financial reports with the Commission. The use of

    WinJammerTM will ensure that only those individuals

    authorized by an FCM to submit an acknowledgment letter on its behalf

    will be able to do so, and it also will allow NFA and other DSROs to

    have access to the acknowledgment letters.

    Regulation 30.7 currently does not address the circumstances under

    which an FCM must amend an existing

    [[Page 47741]]

    acknowledgment letter or the amount of time allowed for doing so.

    Proposed paragraph (c)(2)(iii) requires the acknowledgment letter to be

    amended within 60 days of any changes in the following: the name of the

    FCM; the name of the Depository; \11\ or the account number(s) under

    which the secured amount funds are held.

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    \11\ Regulation 30.7(c)(1) (17 CFR 30.7(c)(1)) sets out certain

    requirements that an entity must meet to qualify as a depository

    that may accept from an FCM the money, securities, and property

    representing the foreign futures or foreign options secured amount.

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    The proposed standard template acknowledgment letter includes

    language that requires the Depository to acknowledge that it must

    ``immediately'' release, subject to the requirements of U.S. or non-

    U.S. law as applicable,\12\ secured amount funds upon ``proper notice

    and instruction'' from the FCM or from the Commission. The Commission

    recognizes that the release of secured amount funds may be delayed by

    practical considerations (e.g., Fedwire is unavailable), but the

    Depository must make every effort to execute the transfer as soon as

    possible. The transfer cannot be delayed due to concerns about the

    financial status of the FCM that deposited the funds.

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    \12\ The Commission notes that under the laws of some foreign

    countries, immediate release of customer funds may not always be

    possible. Regulation 30.6(a) (17 CFR 30.6(a)) requires FCMs to

    furnish customers with a separate written disclosure statement

    containing the language set forth in Regulation 1.55(b) (17 CFR

    1.55(b)). Regulation 1.55(b)(7) states in relevant part:

    No domestic organization regulates the activities of a foreign

    exchange * * * and no domestic regulator has the power to compel

    enforcement of the rules of the foreign exchange or the laws of the

    foreign country. Moreover, such laws or regulations will vary

    depending on the foreign country in which the transaction occurs. *

    * * [F]unds received from customers to margin foreign futures

    transactions may not be provided the same protections as funds

    received to margin futures transactions on domestic exchanges.

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    The Commission is not proposing specific standards for what

    constitutes ``proper notice'' from the Commission to the Depository.

    This is because reasonable actions could vary, depending on the

    situation. For example, in certain circumstances, it may not be

    possible to expeditiously provide written notice, and a telephone call

    would be sufficient and even preferable. However, the Commission would

    confirm the instruction in writing as soon as practicable.

    D. Technical Amendments

    Regulation 1.20(a) imposes upon ``[e]ach registrant'' the

    requirement to obtain and retain a written acknowledgment when customer

    funds are deposited with ``any bank, trust company, clearing

    organization, or another futures commission merchant.'' Regulation

    1.20(a) applies to FCMs, as distinguished from Regulation 1.20(b),

    which applies to DCOs. Therefore, the Commission proposes to substitute

    the term ``futures commission merchant'' for the term ``registrant'' to

    more accurately reflect the intent and meaning of Regulation 1.20(a).

    In connection with this, the Commission further proposes to insert the

    word ``other'' before the term ``futures commission merchant'' that

    appears subsequently in the same sentence, to distinguish between the

    FCM holding the funds of its own customers and an FCM holding customer

    funds of another FCM.

    Regulations 1.20, 1.26, and 30.7 currently require that

    acknowledgment letters be retained for the period specified in

    Regulation 1.31, which applies to all recordkeeping required by the Act

    and CFTC regulations. Regulation 1.31 requires records to be kept for

    five years and to be readily accessible for the first two years of that

    five-year period. The proposed revisions would make clear that an

    acknowledgment letter is to be kept readily accessible for as long as

    the account remains open and that the retention requirements that would

    otherwise apply under Regulation 1.31 would only take effect once the

    account has been closed. For example, if the account remains open for

    ten years, the letter must be kept readily accessible for twelve years

    (the ten years during which the account is open plus the two years

    required by Regulation 1.31) and then for an additional three years,

    also as required by Regulation 1.31.

    Regulations 1.20 and 1.26 use the term ``clearing organization'' to

    describe an entity that performs clearing functions. The Act, as

    amended by the Commodity Futures Modernization Act of 2000,\13\ now

    provides that a clearing organization for a contract market must

    register as a ``derivatives clearing organization.'' \14\ To be

    consistent with the Act and other CFTC regulations, the Commission

    proposes to replace the term ``clearing organization,'' wherever it

    appears in Regulations 1.20 and 1.26, with the term ``derivatives

    clearing organization.''

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    \13\ Appendix E of Public Law 106-554, 114 Stat. 2763 (2000).

    \14\ See Section 5b of the Act, 7 U.S.C. 7a-1. See also Section

    1a(9) of the Act, 7 U.S.C. 1a(9) (defining the term ``derivatives

    clearing organization'').

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    Finally, the Commission also is proposing technical amendments to

    Regulation 140.91 to explicitly delegate to the Director of the

    Division of Clearing and Intermediary Oversight the authority to

    perform certain functions that are reserved to the Commission under the

    proposed changes to Regulations 1.20, 1.26, and 30.7. Thus, for

    example, the Director of the Division of Clearing and Intermediary

    Oversight would have delegated authority to instruct a Depository to

    release customer funds or secured amount funds.

    E. Proposed Effective Date

    FCMs and DCOs will need to obtain new acknowledgment letters that

    comply with the proposed regulations before the final regulations take

    effect. The Commission recognizes the need for time to obtain the

    letters. However, the adoption of a standard template acknowledgment

    letter would eliminate the need for FCMs and Depositories to negotiate

    new acknowledgment letters that satisfy the proposed regulations.

    Therefore, the proposed effective date of the amendments to Regulations

    1.20, 1.26, and 30.7 is 90 days from the date of publication of the

    final regulations in the Federal Register.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \15\ requires Federal

    agencies, in promulgating regulations, to consider the impact of those

    regulations on small businesses. The amendments adopted herein will

    affect FCMs and DCOs. The Commission has previously established certain

    definitions of ``small entities'' to be used by the Commission in

    evaluating the impact of its regulations on small entities in

    accordance with the RFA.\16\ The Commission has previously determined

    that FCMs \17\ and DCOs \18\ are not small entities for the purpose of

    the RFA. Accordingly, pursuant to 5 U.S.C. 605(b), the Chairman, on

    behalf of the Commission, certifies that the proposed regulations will

    not have a significant economic impact on a substantial number of small

    entities.

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    \15\ 5 U.S.C. 601 et seq.

    \16\ 47 FR 18618 (Apr. 30, 1982).

    \17\ Id. at 18619.

    \18\ 66 FR 45604, 45609 (Aug. 29, 2001).

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    B. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \19\ imposes certain

    requirements on Federal agencies in connection with their conducting or

    sponsoring any collection of information as defined by the PRA. The

    regulations to be amended under this proposal are part of an approved

    collection of information (OMB Control No. 3038-0024). The proposed

    amendments would not result

    [[Page 47742]]

    in any material modification to this approved collection. Accordingly,

    for purposes of the PRA, the Commission certifies that these proposed

    amendments, if promulgated in final form, would not impose any new

    reporting or recordkeeping requirements.

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    \19\ 44 U.S.C. 3501 et seq.

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    C. Cost-Benefit Analysis

    Section 15(a) of the Act requires that the Commission, before

    promulgating a regulation under the Act or issuing an order, consider

    the costs and benefits of its action. By its terms, Section 15(a) does

    not require the Commission to quantify the costs and benefits of a new

    regulation or determine whether the benefits of the regulation outweigh

    its costs. Rather, Section 15(a) simply requires the Commission to

    ``consider the costs and benefits'' of its action.

    Section 15(a) further specifies that costs and benefits shall be

    evaluated in light of the following considerations: (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. Accordingly, the Commission could, in its discretion,

    give greater weight to any one of the five considerations and could, in

    its discretion, determine that, notwithstanding its costs, a particular

    regulation was necessary or appropriate to protect the public interest

    or to effectuate any of the provisions or to accomplish any of the

    purposes of the Act.

    The Commission has evaluated the costs and benefits of the proposed

    regulations in light of the specific considerations identified in

    Section 15(a) of the Act, as follows:

    1. Protection of market participants and the public. The proposed

    regulations would benefit FCMs and DCOs, as well as customers of the

    futures and options markets, by reaffirming the legal obligation of

    Depositories holding customer funds or secured amount funds to treat

    those funds in accordance with the requirements of the Act and CFTC

    regulations.

    2. Efficiency and competition. The proposed regulations are not

    expected to have an effect on efficiency or competition.

    3. Financial integrity of futures markets and price discovery. The

    proposed regulations would enhance and strengthen the protection of

    customer funds and secured amount funds, thus contributing to the

    financial integrity of the futures and options markets as a whole.

    This, in turn, would further support the price discovery and risk

    transfer functions of such markets.

    4. Sound risk management practices. The proposed regulations would

    reinforce the sound risk management practices already required of FCMs

    and DCOs holding customer funds or secured amount funds.

    5. Other public considerations. Requiring specific representations

    in a Depository's written acknowledgment would reduce the likelihood

    that the Depository would misinterpret its obligations in connection

    with the safekeeping and administration of customer funds and secured

    amount funds. The Commission recognizes that there are certain

    administrative costs associated with obtaining new acknowledgment

    letters. However, the Commission believes those costs are minimal and

    are outweighed by the benefits. For example, because a template letter

    is required, FCMs and DCOs will not have to expend resources to

    negotiate new letters with their Depositories.

    Accordingly, after considering the five factors enumerated in the

    Act, the Commission has determined to propose the regulations set forth

    below.

    List of Subjects in 17 CFR Parts 1, 30, and 140

    Commodity futures, Consumer protection.

    For the reasons stated in the preamble, the Commission proposes to

    amend 17 CFR parts 1, 30, and 140 as follows:

    PART 1--GENERAL REGULATIONS

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

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c,

    13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity

    Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554,

    114 Stat. 2763 (2000).

    2. Revise Sec. 1.20 to read as follows:

    Sec. 1.20 Customer funds to be segregated and separately accounted

    for.

    (a) All customer funds shall be separately accounted for and

    segregated as belonging to commodity or option customers. Such customer

    funds when deposited with any bank, trust company, derivatives clearing

    organization or another futures commission merchant shall be deposited

    under an account name which clearly identifies them as such and shows

    that they are segregated as required by the Act and this part. Each

    futures commission merchant shall obtain and maintain readily

    accessible in its files in accordance with Sec. 1.31, for as long as

    the account remains open, and thereafter for the period provided in

    Sec. 1.31, a written acknowledgment from such bank, trust company,

    derivatives clearing organization, or other futures commission

    merchant, in accordance with the requirements of paragraph (d) of this

    section: Provided, however, that an acknowledgment need not be obtained

    from a derivatives clearing organization that has adopted and submitted

    to the Commission rules that provide for the segregation as customer

    funds, in accordance with all relevant provisions of the Act and the

    rules and orders promulgated thereunder, of all funds held on behalf of

    customers. Under no circumstances shall any portion of customer funds

    be obligated to a derivatives clearing organization, any member of a

    contract market, a futures commission merchant, or any depository

    except to purchase, margin, guarantee, secure, transfer, adjust or

    settle trades, contracts or commodity option transactions of commodity

    or option customers. No person, including any derivatives clearing

    organization or any depository, that has received customer funds for

    deposit in a segregated account, as provided in this section, may hold,

    dispose of, or use any such funds as belonging to any person other than

    the option or commodity customers of the futures commission merchant

    which deposited such funds.

    (b) All customer funds received by a derivatives clearing

    organization from a member of the derivatives clearing organization to

    purchase, margin, guarantee, secure or settle the trades, contracts or

    commodity options of the clearing member's commodity or option

    customers and all money accruing to such commodity or option customers

    as the result of trades, contracts or commodity options so carried

    shall be separately accounted for and segregated as belonging to such

    commodity or option customers, and a derivatives clearing organization

    shall not hold, use or dispose of such customer funds except as

    belonging to such commodity or option customers. Such customer funds

    when deposited in a bank or trust company shall be deposited under an

    account name which clearly shows that they are the customer funds of

    the commodity or option customers of clearing members, segregated as

    required by the Act and these regulations. The derivatives clearing

    organization shall obtain and maintain readily accessible in its files

    in accordance with Sec. 1.31, for as long as the account remains open,

    and

    [[Page 47743]]

    thereafter for the period provided in Sec. 1.31, a written

    acknowledgment from such bank or trust company, in accordance with the

    requirements of paragraph (e) of this section.

    (c) Each futures commission merchant shall treat and deal with the

    customer funds of a commodity customer or of an option customer as

    belonging to such commodity or option customer. All customer funds

    shall be separately accounted for, and shall not be commingled with the

    money, securities or property of a futures commission merchant or of

    any other person, or be used to secure or guarantee the trades,

    contracts or commodity options, or to secure or extend the credit, of

    any person other than the one for whom the same are held: Provided,

    however, That customer funds treated as belonging to the commodity or

    option customers of a futures commission merchant may for convenience

    be commingled and deposited in the same account or accounts with any

    bank or trust company, with another person registered as a futures

    commission merchant, or with a derivatives clearing organization, and

    that such share thereof as in the normal course of business is

    necessary to purchase, margin, guarantee, secure, transfer, adjust, or

    settle the trades, contracts or commodity options of such commodity or

    option customers or resulting market positions, with the derivatives

    clearing organization or with any other person registered as a futures

    commission merchant, may be withdrawn and applied to such purposes,

    including the payment of premiums to option grantors, commissions,

    brokerage, interest, taxes, storage and other fees and charges,

    lawfully accruing in connection with such trades, contracts or

    commodity options: Provided, further, That customer funds may be

    invested in instruments described in Sec. 1.25.

    (d)(1) The written acknowledgment required by paragraph (a) of this

    section is set out in Appendix A to this section.

    (2) The futures commission merchant shall file a copy of the

    written acknowledgment with the Commission in the manner specified by

    the Commission.

    (3) The written acknowledgment shall be amended within 60 days of

    any changes in the following:

    (i) The name of the futures commission merchant depositing customer

    funds;

    (ii) The name of the bank, trust company, derivatives clearing

    organization or futures commission merchant receiving customer funds;

    or

    (iii) The account number(s) under which customer funds are held.

    (e)(1) The language set forth in the written acknowledgment

    required under paragraph (b) of this section shall be as set out in

    Appendix A to this section.

    (2) The derivatives clearing organization shall file a copy of the

    written acknowledgment with the Commission in the manner specified by

    the Commission.

    (3) The written acknowledgment shall be amended within 60 days of

    any changes in the following:

    (i) The name of the derivatives clearing organization depositing

    customer funds;

    (ii) The name of the bank or trust company receiving customer

    funds; or

    (iii) The account number(s) under which customer funds are held.

    Appendix Sec. 1.20--Acknowledgment Letter for CFTC Regulation 1.20

    Customer Segregated Account

    [Date]

    [Name and Address of Bank, Trust Company, Derivatives Clearing

    Organization or Futures Commission Merchant]

    We refer to the Segregated Account(s) which [Name of Futures

    Commission Merchant or Derivatives Clearing Organization] (``we'' or

    ``our'') have opened or will open with [Name of Bank, Trust Company,

    Derivatives Clearing Organization or Futures Commission Merchant]

    (``you'' or ``your'') entitled:

    [Name of Futures Commission Merchant or Derivatives Clearing

    Organization] CFTC Regulation 1.20 Customer Segregated Account

    Account Number(s):

    (collectively, the ``Account(s)'').

    You acknowledge and agree that we have opened or will open the

    above-referenced Account(s) for the purpose of depositing, as

    applicable, money, securities and other property (collectively the

    ``Funds'') of our customers who trade commodities, options, cleared

    OTC derivatives products and other products, as required by

    Commodity Futures Trading Commission (``CFTC'') Regulation 1.20, as

    amended; that the Funds held by you, hereafter deposited in the

    Account(s) or accruing to the credit of the Accounts, will be

    separately accounted for and segregated on your books from our own

    Funds and all other accounts maintained by us in accordance with the

    provisions of the Commodity Exchange Act, as amended (the ``Act''),

    and Part 1 of the CFTC's regulations, as amended; and that the Funds

    must otherwise be treated in accordance with the provisions of the

    Act and CFTC regulations.

    Furthermore, you acknowledge and agree that such Funds may not

    be used by you or by us to secure or guarantee any obligations we

    may have owing to you, nor used by us to secure credit from you. You

    further acknowledge and agree that the Funds in the Account(s) shall

    not be subject to any right of offset or lien for or on account of

    any indebtedness, obligations or liabilities we may now or in the

    future have owing to you. This prohibition does not affect your

    right to recover funds advanced in the form of cash transfers you

    make in lieu of liquidating assets held in the Account(s) for

    purposes of variation settlement or posting original margin.

    In addition, you agree that the Account(s) may be examined at

    any reasonable time by an appropriate officer, agent or employee of

    the CFTC or a self-regulatory organization, and this letter

    constitutes the authorization and direction of the undersigned to

    permit any such examination or audit to take place.

    You acknowledge and agree that the Funds in the Account(s) shall

    be released immediately, subject to the requirements of U.S. or non-

    U.S. law as applicable, upon proper notice and instruction from an

    appropriate officer or employee of us or of the CFTC. We will not

    hold you responsible for acting pursuant to any instruction from the

    CFTC upon which you have relied after having taken reasonable

    measures to assure that such instruction was provided to you by a

    duly authorized officer or employee of the CFTC. You further

    acknowledge that we will provide to the CFTC a copy of this

    acknowledgment.

    In the event that we become subject to either a voluntary or

    involuntary petition for relief under the U.S. Bankruptcy Code, we

    acknowledge that you will have no obligation to release the Funds

    held in the Account(s), except upon instruction of the Trustee in

    Bankruptcy or pursuant to the Order of the respective U.S.

    Bankruptcy Court.

    Notwithstanding anything in the foregoing to the contrary,

    nothing contained herein shall be construed as limiting your right

    to assert any right of set off against or lien on assets other than

    assets maintained in the Account(s) nor to impose such charges

    against us or any proprietary account maintained by us with you.

    Further, it is understood that amounts represented by checks, drafts

    or other items shall not be considered to be part of the Account(s)

    until finally collected. Accordingly, checks, drafts and other items

    credited to the Account(s) and subsequently dishonored or otherwise

    returned to you, or reversed, for any reason and any claims relating

    thereto, including but not limited to claims of alteration or

    forgery, may be charged back to the Account(s), and we shall be

    responsible to you as a general endorser of all such items whether

    or not actually so endorsed.

    You may conclusively presume that any withdrawal from the

    Account(s) and the balances maintained therein are in conformity

    with the Act and CFTC regulations without any further inquiry, and

    you shall not in any manner not expressly agreed to herein be

    responsible for ensuring compliance by us with the provisions of the

    Act and CFTC regulations.

    You may, and are hereby authorized to, obey the order, judgment,

    decree or levy of any court of competent jurisdiction or any

    governmental agency with jurisdiction, which order, judgment, decree

    or levy relates in whole or in part to the Account(s). In any event,

    you shall not be liable by reason of any such action or omission to

    act, to us or to any other person, firm, association or corporation

    [[Page 47744]]

    even if thereafter any such order, decree, judgment or levy shall be

    reversed, modified, set aside or vacated.

    This letter agreement constitutes the entire understanding of

    the parties with respect to its subject matter and supersedes and

    replaces all prior writings, including any applicable agreement

    between the parties in connection with the Account(s), with respect

    thereto. This letter agreement shall be governed by and construed in

    accordance with the laws of [Insert governing law] without regard to

    the principles of choice of law.

    Please acknowledge that you agree to abide by the requirements

    and conditions set forth above by signing and returning the enclosed

    copy of this letter.

    [Name of Futures Commission Merchant or Derivatives Clearing

    Organization]

    By:

    Name:

    Title:

    ACKNOWLEDGED AND AGREED:

    [Name of Bank, Trust Company, Derivatives Clearing Organization or

    Futures Commission Merchant]

    By:

    Name:

    Title:

    DATE:

    3. Revise Sec. 1.26 to read as follows:

    Sec. 1.26 Deposit of instruments purchased with customer funds.

    (a) Each futures commission merchant who invests customer funds in

    instruments described in Sec. 1.25, except for investments in money

    market mutual funds, shall separately account for such instruments and

    segregate such instruments as belonging to such commodity or option

    customers. Such instruments, when deposited with a bank, trust company,

    derivatives clearing organization or another futures commission

    merchant, shall be deposited under an account name which clearly shows

    that they belong to commodity or option customers and are segregated as

    required by the Act and this part. Each futures commission merchant

    upon opening such an account shall obtain and maintain readily

    accessible in its files in accordance with Sec. 1.31, for as long as

    the account remains open, and thereafter for the period provided in

    Sec. 1.31, a written acknowledgment from such bank, trust company,

    derivatives clearing organization or other futures commission merchant,

    in accordance with the requirements of paragraph (d) of Sec. 1.20:

    Provided, however, that an acknowledgment need not be obtained from a

    derivatives clearing organization that has adopted and submitted to the

    Commission rules that provide for the segregation as customer funds, in

    accordance with all relevant provisions of the Act and the rules and

    orders promulgated thereunder, of all funds held on behalf of customers

    and all instruments purchased with customer funds. Such bank, trust

    company, derivatives clearing organization or other futures commission

    merchant shall allow inspection of such instruments at any reasonable

    time by representatives of the Commission.

    (b) Each derivatives clearing organization which invests money

    belonging or accruing to commodity or option customers of its clearing

    members in instruments described in Sec. 1.25, except for investments

    in money market mutual funds, shall separately account for such

    instruments and segregate such instruments as belonging to such

    commodity or option customers. Such instruments, when deposited with a

    bank or trust company, shall be deposited under an account name which

    will clearly show that they belong to commodity or option customers and

    are segregated as required by the Act and this part. Each derivatives

    clearing organization upon opening such an account shall obtain and

    maintain readily accessible in its files in accordance with Sec. 1.31,

    for as long as the account remains open, and thereafter for the period

    provided in Sec. 1.31, a written acknowledgment from such bank or

    trust company, in accordance with the requirements of paragraph (e) of

    Sec. 1.20. Such bank or trust company shall allow inspection of such

    instruments at any reasonable time by representatives of the

    Commission.

    (c) Each futures commission merchant or derivatives clearing

    organization which invests customer funds in money market mutual funds,

    as permitted by Sec. 1.25, shall separately account for such funds and

    segregate such funds as belonging to such commodity or option

    customers. Such funds shall be deposited under an account name which

    clearly shows that they belong to commodity or option customers and are

    segregated as required by the Act and this part. Each futures

    commission merchant or derivatives clearing organization, upon opening

    such an account, shall obtain and maintain readily accessible in its

    files in accordance with Sec. 1.31, for as long as the account remains

    open, and thereafter for the period provided in Sec. 1.31, a written

    acknowledgment from the money market mutual fund as set out in Appendix

    A to this section.

    Appendix A Sec. 1.26--Acknowledgment Letter for CFTC Regulation 1.26

    Customer Segregated Money Market Mutual Fund Account

    [Date]

    [Name and Address of Money Market Mutual Fund]

    We propose to invest funds held by [Name of Futures Commission

    Merchant or Derivatives Clearing Organization] (``we'' or ``our'')

    on behalf of our commodity futures and options customers in shares

    of [Name of Money Market Mutual Fund] (``you'' or ``your'') under

    account(s) entitled (or shares issued to):

    [Name of Futures Commission Merchant or Derivatives Clearing

    Organization] CFTC Regulation 1.26 Customer Segregated Money Market

    Mutual Fund Account

    Account Number(s):

    (collectively, the ``Account(s)'').

    You acknowledge and agree that we are holding these funds,

    including any shares issued and amounts accruing in connection

    therewith (collectively the ``Funds''), for the benefit of our

    customers who trade commodities, options, cleared OTC derivatives

    products and other products (``Commodity Customers''), as required

    by Commodity Futures Trading Commission (``CFTC'') Regulation 1.26,

    as amended; that the Funds held by you, hereafter deposited in the

    Account(s) or accruing to the credit of the Accounts, will be

    separately accounted for and segregated on your books from our own

    funds and from any other funds held by us in accordance with the

    provisions of the Commodity Exchange Act, as amended (the ``Act''),

    and Part 1 of the CFTC's regulations, as amended; and that the Funds

    must otherwise be treated in accordance with the provisions of the

    Act and CFTC regulations.

    Furthermore, you acknowledge and agree that such Funds may not

    be used by you or by us to secure or guarantee any obligations we

    may have owing to you, nor used by us to secure credit from you. You

    further acknowledge and agree that the Funds in the Account(s) shall

    not be subject to any right of offset or lien for or on account of

    any indebtedness, obligations or liabilities we may now or in the

    future have owing to you. In addition, you agree that the Account(s)

    may be examined at any reasonable time by an appropriate officer,

    agent or employee of the CFTC or a self-regulatory organization, and

    this letter constitutes the authorization and direction of the

    undersigned to permit any such examination or audit to take place.

    You acknowledge and agree that the Funds in the Account(s) shall

    be released immediately, subject to the requirements of U.S. or non-

    U.S. law as applicable, upon proper notice and instruction from an

    appropriate officer or employee of us or of the CFTC. We will not

    hold you responsible for acting pursuant to any instruction from the

    CFTC upon which you have relied after having taken reasonable

    measures to assure that such instruction was provided to you by a

    duly authorized officer or employee of the CFTC. You further

    acknowledge that we will provide to the CFTC a copy of this

    acknowledgment.

    In the event we become subject to either a voluntary or

    involuntary petition for relief under the U.S. Bankruptcy Code, we

    acknowledge that you will have no obligation to release the Funds

    held in the Account(s), except upon instruction of the Trustee in

    [[Page 47745]]

    Bankruptcy or pursuant to the Order of the respective U.S.

    Bankruptcy Court.

    Notwithstanding anything in the foregoing to the contrary,

    nothing contained herein shall be construed as limiting your right

    to assert any right of setoff against or lien on assets other than

    assets maintained in the Account(s) nor to impose such charges

    against us or any proprietary account maintained by us with you.

    Further, it is understood that amounts represented by checks, drafts

    or other items shall not be considered to be part of the Account(s)

    until finally collected. Accordingly, checks, drafts and other items

    credited to the Account(s) and subsequently dishonored or otherwise

    returned to you, or reversed, for any reason and any claims relating

    thereto, including but not limited to claims of alteration or

    forgery, may be charged back to the Account(s), and we shall be

    responsible to you as a general endorser of all such items whether

    or not actually so endorsed.

    You may conclusively presume that any withdrawal from the

    Account(s) and the balances maintained therein are in conformity

    with the Act and CFTC regulations without any further inquiry, and

    you shall not in any manner not expressly agreed to herein be

    responsible for ensuring compliance by us with the provisions of the

    Act and CFTC regulations.

    You may, and are hereby authorized to, obey the order, judgment,

    decree or levy of any court of competent jurisdiction or any

    governmental agency with jurisdiction, which order, judgment, decree

    or levy relates in whole or in part to the Account(s). In any event,

    you shall not be liable by reason of any such action or omission to

    act, to us or to any other person, firm, association or corporation

    even if thereafter any such order, decree, judgment or levy shall be

    reversed, modified, set aside or vacated. We are permitted to invest

    our Commodity Customers' funds in money market mutual funds pursuant

    to CFTC Regulation 1.25. That rule sets forth the following

    conditions, among others, with respect to any investment in a money

    market mutual fund:

    (1) The net asset value of the fund must be computed by 9:00

    a.m. of the business day following each business day and be made

    available to us by that time;

    (2) The fund must be legally obligated to redeem an interest in

    the fund and make payment in satisfaction thereof by the close of

    the business day following the day on which we make a redemption

    request except as otherwise specified in CFTC Regulation

    1.25(c)(5)(ii); and

    (3) The agreement under which we invest our Commodity Customers'

    funds must not contain any provision that would prevent us from

    pledging or transferring fund shares to a third party permitted to

    receive the shares under the rules of the SEC.

    This letter agreement constitutes the entire understanding of

    the parties with respect to its subject matter and supersedes and

    replaces all prior writings, including any applicable agreement

    between the parties in connection with the Account(s), with respect

    thereto.

    This letter agreement shall be governed by and construed in

    accordance with the laws of [Insert governing law] without regard to

    the principles of choice of law.

    Please acknowledge that you agree to abide by the requirements

    and conditions set forth above by signing and returning the enclosed

    copy of this letter.

    [Name of Futures Commission Merchant or Derivatives Clearing

    Organization]

    By:

    Name:

    Title:

    ACKNOWLEDGED AND AGREED:

    [Name of Money Market Mutual Fund]

    By:

    Name:

    Title:

    DATE:

    PART 30--FOREIGN FUTURES AND OPTIONS TRANSACTIONS

    4. The authority citation for part 30 continues to read as follows:

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

    noted.

    5. Revise paragraph (c)(2) of Sec. 30.7 to read as follows:

    Sec. 30.7 Treatment of foreign futures or foreign options secured

    amount.

    * * * * *

    (c) * * *

    (2)(i) Each futures commission merchant must obtain and maintain

    readily accessible in its files in accordance with Sec. 1.31, for as

    long as the account remains open, and thereafter for the period

    provided in Sec. 1.31, a written acknowledgment from such depository

    as set out in Appendix E to this part.

    (ii) The futures commission merchant shall file a copy of the

    written acknowledgment with the Commission in the manner specified by

    the Commission.

    (iii) The written acknowledgment shall be amended within 60 days of

    any changes in the following:

    (A) The name of the futures commission merchant;

    (B) The name of the depository; or

    (C) The account number(s) under which money, securities, and

    property representing the foreign futures or foreign options secured

    amount are held.

    * * * * *

    6. Add appendix E to read as follows:

    Appendix E to Part 30--Acknowledgment Letter for CFTC Regulation 30.7

    Customer Secured Account

    [Date]

    [Name and Address of Depository]

    We refer to the Secured Amount Account(s) which [Name of Futures

    Commission Merchant] (``we'' or ``our'') have opened or will open

    with [Name of Depository] (``you'' or ``your'') entitled:

    [Name of Futures Commission Merchant] CFTC Regulation 30.7 Customer

    Secured Account

    Account Number(s):

    (collectively, the ``Account(s)'').

    You acknowledge and agree that we have opened or will open the

    above-referenced Account(s) for the purpose of depositing, as

    applicable, money, securities and other property (collectively

    ``Funds'') for or on behalf of our customers who trade commodities,

    options, cleared OTC derivatives products and other products, that

    include, but are not limited to, customers who are entering into

    foreign futures and/or foreign options transactions (as such terms

    are defined in U.S. Commodity Futures Trading Commission (``CFTC'')

    Regulation 30.1, as amended). The Funds deposited in the Account(s)

    or accruing to the credit of the Accounts will be kept separate and

    apart and separately accounted for on your books from our own funds

    in accordance with the provisions of the Commodity Exchange Act, as

    amended (the ``Act''), and Part 30 of the CFTC's regulations, as

    amended, and may not be commingled with our own Funds in any

    proprietary account we maintain with you and the Funds must

    otherwise be treated in accordance with the provisions of the Act

    and CFTC regulations.

    Furthermore, you acknowledge and agree that such Funds may not

    be used by you or by us to secure or guarantee any obligations we

    may have owing to you, nor used by us to secure credit from you. You

    further acknowledge and agree that the Funds in the Account(s) shall

    not be subject to any right of offset or lien for or on account of

    any indebtedness, obligations or liabilities we may now or in the

    future have owing to you, and that you understand the nature of the

    Funds held or hereafter deposited in the Account(s) and that you

    will treat and maintain such Funds in accordance with the provisions

    of the Act and CFTC regulations. This prohibition does not affect

    your right to recover funds advanced in the form of cash transfers

    you make in lieu of liquidating assets held in the Account(s) for

    purposes of variation settlement or posting original margin.

    In addition, you agree that the Account(s) may be examined at

    any reasonable time by an appropriate officer, agent or employee of

    the CFTC or a self-regulatory organization, and this letter

    constitutes the authorization and direction of the undersigned to

    permit any such examination or audit to take place.

    You acknowledge and agree that you meet the requirements

    detailed for depositories in CFTC Regulation 30.7, as amended. You

    further acknowledge and agree that the Funds in the Account(s) shall

    be released immediately, subject to the requirements of US or non-

    U.S. law as applicable, upon proper notice and instruction from an

    appropriate officer or employee of us or of the CFTC. We will not

    hold you responsible for acting pursuant to any instruction from the

    CFTC upon which you have relied after having taken reasonable

    measures to assure that such instruction was provided to you by a

    duly authorized officer or employee of the CFTC. You further

    acknowledge that we will provide to the CFTC a copy of this

    acknowledgment.

    [[Page 47746]]

    In the event we become subject to either a voluntary or

    involuntary petition for relief under the U.S. Bankruptcy Code, we

    acknowledge that you will have no obligation to release the Funds

    held in the Account(s), except upon instruction of the Trustee in

    Bankruptcy or pursuant to the Order of the respective U.S.

    Bankruptcy Court. Notwithstanding anything in the foregoing to the

    contrary, nothing contained herein shall be construed as limiting

    your right to assert any right of set off against or lien on assets

    other than assets maintained in the Account(s) nor to impose such

    charges against us or any proprietary account maintained by us with

    you. Further, it is understood that amounts represented by checks,

    drafts or other items shall not be considered to be part of the

    Account(s) until finally collected. Accordingly, checks, drafts and

    other items credited to the Account(s) and subsequently dishonored

    or otherwise returned to you, or reversed, for any reason and any

    claims relating thereto, including but not limited to claims of

    alteration or forgery, may be charged back to the Account(s), and we

    shall be responsible to you as a general endorser of all such items

    whether or not actually so endorsed.

    You may conclusively presume that any withdrawal from the

    Account(s) and the balances maintained therein are in conformity

    with the Act and CFTC regulations without any further inquiry, and

    you shall not in any manner not expressly agreed to herein be

    responsible for ensuring compliance by us with the provisions of the

    Act and CFTC regulations.

    You may, and are hereby authorized to, obey the order, judgment,

    decree or levy of any court of competent jurisdiction or any

    governmental agency with jurisdiction, which order, judgment, decree

    or levy relates in whole or in part to the Account(s). In any event,

    you shall not be liable by reason of any such action or omission to

    act, to us or to any other person, firm, association or corporation

    even if thereafter any such order, decree, judgment or levy shall be

    reversed, modified, set aside or vacated.

    This letter agreement constitutes the entire understanding of

    the parties with respect to its subject matter and supersedes and

    replaces all prior writings, including any applicable agreement

    between the parties in connection with the Account(s), with respect

    thereto.

    This letter agreement shall be governed by and construed in

    accordance with the laws of [Insert governing law] without regard to

    the principles of choice of law.

    Please acknowledge that you agree to abide by the requirements

    and conditions set forth above by signing and returning the enclosed

    copy of this letter.

    [Name of Futures Commission Merchant]

    By:

    Name:

    Title:

    ACKNOWLEDGED AND AGREED:

    [Name of Depository]

    By:

    Name:

    Title:

    DATE:

    PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

    7. The authority citation for part 140 continues to read as

    follows:

    Authority: 7 U.S.C. 2 and 12a.

    7. In Sec. 140.91, redesignate paragraphs (a)(7) and (a)(8) as

    paragraphs (a)(8) and (a)(11) respectively; add new paragraphs (a)(7),

    (a)(9), and (a)(10); and revise newly designated paragraph (a)(11) to

    read as follows:

    Sec. 140.91 Delegation of authority to the Director of the Division

    of Clearing and Intermediary Oversight.

    (a) * * *

    (7) All functions reserved to the Commission in Sec. 1.20 of this

    chapter.

    * * * * *

    (9) All functions reserved to the Commission in Sec. 1.26 of this

    chapter.

    (10) All functions reserved to the Commission in Sec. 30.7 of this

    chapter.

    (11) All functions reserved to the Commission in Sec. 41.41 of

    this chapter. Any action taken pursuant to the delegation of authority

    under this paragraph (a)(11) shall be made with the concurrence of the

    General Counsel or, in his or her absence, a Deputy General Counsel.

    * * * * *

    Issued in Washington, DC, on August 3, 2010, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-19553 Filed 8-6-10; 8:45 am]

    BILLING CODE P

    Last Updated: August 9, 2010



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