Federal Register, Volume 80 Issue 56 (Tuesday, March 24, 2015)

[Federal Register Volume 80, Number 56 (Tuesday, March 24, 2015)]

[Rules and Regulations]

[Pages 15507-15510]

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

[FR Doc No: 2015-06548]




17 CFR Part 1

RIN 3038-AE22

Residual Interest Deadline for Futures Commission Merchants

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.


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

``CFTC'') is amending its regulations to remove the December 31, 2018

automatic termination date for the phased-in compliance schedule for

futures commission merchants (``FCMs'') and provides assurance that the

residual interest deadline, as defined in the regulations (``Residual

Interest Deadline''), will only be revised through a separate

Commission rulemaking.

DATES: The final rule is effective May 26, 2015.


Division of Swap Dealer and Intermediary Oversight: Thomas Smith,

Acting Director, 202-418-5495, [email protected]; Jennifer Bauer, Special

Counsel, 202-418-5472, [email protected]; Joshua Beale, Attorney-Advisor,

202-418-5446, [email protected], Three Lafayette Centre, 1155 21st Street

NW., Washington, DC 20581.

Division of Clearing and Risk: Kirsten V.K. Robbins, Associate

Chief Counsel, 202-418-5313, [email protected], Three Lafayette Centre,

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

Office of the Chief Economist: Stephen Kane, Research Economist,

202-418-5911, [email protected], Three Lafayette Centre, 1155 21st Street

NW., Washington, DC 20581.


I. Background

On October 30, 2013, the Commission amended Regulation 1.22 to

enhance the safety of funds deposited by customers with FCMs as margin

for futures transactions.\1\ The amendments require an FCM to maintain

its own capital (hereinafter referred to as the FCM's ``Residual

Interest'') in customer segregated accounts in an amount equal to or

greater than its customers' aggregate undermargined amounts.\2\ The

Commission established a phased-in compliance schedule for Regulation

1.22 with an initial Residual Interest Deadline of 6:00 p.m. Eastern

Time on the date of the settlement referenced in Regulation

1.22(c)(2)(i) or (c)(4) (the ``Settlement Date''), beginning November

14, 2014.\3\ Amended Regulation 1.22 also directs staff to host a

public roundtable and publish a report for public comment by May 16,

2016 addressing, to the extent information is practically available,

the practicability (for both FCMs and customers) of moving the Residual

Interest Deadline from 6:00 p.m. Eastern Time on the Settlement Date,

to the time of settlement or to some other time of day.\4\ Furthermore,

amended Regulation 1.22 provides that, absent Commission action, the

phased-in compliance period for the Residual Interest Deadline

automatically terminates on December 31, 2018.\5\ In the case of such

automatic termination, the Residual Interest Deadline would change to

the time of settlement on the Settlement Date.


\1\ Enhancing Protections Afforded Customers and Customer Funds

Held by Futures Commission Merchants and Derivatives Clearing

Organizations, Final Rule, 78 FR 68506 (Nov. 14, 2013) (amending 17

CFR parts 1, 3, 22, 30 and 140).

\2\ See 17 CFR 1.22(c)(3)(i). As defined in Regulation

1.22(c)(1), a customer's account is ``undermargined,'' when the

value of the customer funds for a customer's account is less than

the total amount of collateral required by derivatives clearing

organizations for that account's contracts. See 78 FR 68513, n.30.

\3\ See 17 CFR 1.22(c)(5)(ii); See 78 FR at 68578.

\4\ See 17 CFR 1.22(c)(5)(iii)(A).

\5\ See 17 CFR 1.22(c)(5)(iii)(C).


II. The Proposal

On November 3, 2014, the Commission proposed to revise Regulation

1.22 to remove the December 31, 2018 automatic termination of the

phase-in compliance period.\6\ In the NPRM, the Commission stated the

intention to retain the Residual Interest

[[Page 15508]]

Deadline \7\ at 6 p.m. Eastern Time, unless the Commission takes

further action via rulemaking.


\6\ Residual Interest Deadline for Futures Commission Merchants,

Notice of Proposed Rulemaking, 79 FR 68148 (Nov. 14, 2014) (amending

17 CFR part 1).

\7\ See 17 CFR 1.22(c)(3)(i). The term ``Residual Interest

Deadline'' is defined in Regulation 1.22(c)(5). If an FCM is

required to increase its Residual Interest as a result of customer

undermargined accounts, the FCM must deposit additional funds into

the customer segregated accounts by the specified Residual Interest



In the NPRM, the Commission stated that the removal of the

automatic termination of the phase-in compliance period would provide

the Commission with a greater degree of flexibility to assess all

relevant data, including the costs and benefits of revising the

Residual Interest Deadline. The Commission also retained in Regulation

1.22 the requirement for Commission staff to publish for public comment

a report addressing the practicability and costs and benefits of

revising the Residual Interest Deadline, and the additional requirement

for Commission staff to conduct a public roundtable on the issue.

The Commission invited comments on all aspects of the amendments,

particularly those regarding the practicability and costs and benefits

of revising the Residual Interest Deadline.

III. Comments and Response

The Commission received ten comments on the NPRM. The comments were

submitted by the Futures Industry Association (``FIA''), CME Group

(``CME''), National Futures Association (``NFA''), National Introducing

Brokers Association (``NIBA''), Managed Funds Association (``MFA''),

Coalition of National Producers and Agribusiness (``Agribusiness

Coalition''),\8\ National Grain and Feed Association (``NGFA''),

National Council of Farmer Cooperatives (``NCFC''), the Honorable Heidi

Heitkamp, United States Senate, and Chris Barnard.\9\ All ten comments

supported the proposed amendments.


\8\ The Commission received two comment letters filed by the

Coalition of National Producers and Agribusiness. The second comment

letter was identical to the first with the exception of an amendment

adding two additional signatories.

\9\ The comments are available on the Commission's Web site,



The FIA and its member firms supported the amendments, stating

their willingness to participate in the study and citing concerns that

a residual interest deadline earlier than 6:00 p.m. Eastern Time on the

Settlement Date might impose significant financial and operational

burdens on both customers and FCMs. The NFA encouraged the Commission

to consider industry comment on the timing and parameters of the study

to ensure the Commission has the most complete information available.

The NIBA, NCFC, NGFA, Agribusiness Coalition, and MFA added that an

earlier Residual Interest Deadline could force the pre-funding of

margin by FCMs, in turn causing increased operational costs on FCMs and

their customers, which could result in the possible exit of certain

customers from the marketplace. Senator Heitkamp also supported the

proposed amendments and stated that the rule would provide end users

with the certainty they need to run their businesses.

All commenters supported the position that any future revisions

should be done through separate rulemaking. The FIA and CME further

stated that the opportunity to provide input on the setting of the

Residual Interest Deadline was something consistent with the goals of,

if not required by, the Administrative Procedure Act. Chris Barnard

asked for certainty on the proposed retention of the existing deadline

absent further Commission rulemaking, stating that such a requirement

is open-ended.

The Commission has considered the comments and is adopting the

amendments as proposed. Amending Regulation 1.22 to require the

Commission to conduct a separate rulemaking prior to revising the

Residual Interest Deadline will provide market participants with an

opportunity to review and comment on the Commission's staff's

roundtable and public report. The amendments also provide market

participants with an opportunity to review and to provide comments, via

a rulemaking process, on any Commission proposed revisions to the

Residual Interest Deadline.

IV. Cost-Benefit Considerations

Section 15(a) of the Commodity Exchange Act (``CEA'') requires the

Commission to consider the costs and benefits of its actions before

promulgating a regulation under the CEA or issuing certain orders.\10\

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. The Commission considers the costs and

benefits resulting from its discretionary determinations with respect

to the section 15(a) factors.


\10\ 7 U.S.C. 19(a).


As noted in the NPRM, the status quo baseline with which the costs

and benefits are compared is the Residual Interest Deadline of 6:00

p.m. Eastern Time on the Settlement Date, which would apply until the

Commission takes further action or, in the absence of further action,

until December 31, 2018. The status quo baseline includes the automatic

termination of the phase-in compliance period at December 31, 2018,

which, absent Commission action, would move the Residual Interest

Deadline to the time of settlement referenced in Regulation

1.22(c)(2)(i), or as appropriate, 1.22(c)(4).

As also noted in the NPRM, the status quo baseline is similar to

this final rulemaking and, as such, the Commission believes that there

is not likely to be any material differences between this final

rulemaking and the status quo baseline in terms of the first four

section 15(a) factors. The Commission notes that the amendments will

alter the procedure followed with regard to the removal of the

automatic termination of the phase-in period, which could alter the

cost and benefit with respect to the fifth section 15(a) factor. The

Commission specifically invited comment on the cost and benefit

implications related to the fifth section 15(a) factor (``other public

interest considerations''). However, the Commission received no

comments that contained any quantitative data regarding the monetary

value of any public interest considerations. As such, the Commission

has considered the fifth section 15(a) factor qualitatively.

All commenters supported the termination of the automatic phase-in

compliance period. The CME stated that removing the automatic moving of

the residual interest deadline will allow impacted market participants,

including customers and FCMs, to provide comments on any proposed rule

change that results from the study. In addition, the FIA stated the

adoption of the amendment will also afford the Commission the

opportunity to carefully consider the results of the staff study

without being bound by an unnecessary deadline.

The Commission agrees with commenters that a separate rulemaking

prior to revising the Residual Interest Deadline will afford the public

an opportunity to participate in any future decision-making concerning

any possible movement of the Residual Interest Deadline. The

termination of the automatic phase-in compliance period will grant the

Commission more opportunity to consider the study and

[[Page 15509]]

the public roundtable, as well as an opportunity to receive and

evaluate additional public comment on any proposed rule change.

V. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') \11\ requires Federal

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

regulations on small entities. The Commission has previously

established certain definitions of ``small entities'' to be used by the

Commission in evaluating the impact of its rules on small entities in

accordance with the RFA.\12\ The final amendments would affect FCMs.

The Commission previously has determined that FCMs are not small

entities for purposes of the RFA, and, thus, the requirements of the

RFA do not apply to FCMs.\13\ The Commission's determination was based,

in part, upon the obligation of FCMs to meet the minimum financial

requirements established by the Commission to enhance the protection of

customers' segregated funds and protect the financial condition of FCMs

generally.\14\ Accordingly, the Chairman, on behalf of the Commission,

hereby certifies pursuant to 5 U.S.C. 605(b) that the final amendments

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

small entities.


\11\ 5 U.S.C. 601 et seq.

\12\ 47 FR 18618 (Apr. 30, 1982).

\13\ Id. at 18619.

\14\ Id.


B. Paperwork Reduction Act

The Paperwork Reduction Act (``PRA'') provides that a Federal

agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless it displays a currently

valid control number issued by the Office of Management and Budget

(``OMB''). This rulemaking amends requirements that contain a

collection of information for which the Commission has previously

received a control number from OMB. The title for this collection of

information is ``Regulations and Forms Pertaining to Financial

Integrity of the Market Place, OMB control number 3038-0024''. This

collection of information is not expected to be impacted by the rule

amendment approved herein, as the calculations which are already

reflected in the burden estimate are not expected to change; the phase-

in period for assessing compliance relative to such calculations is the

sole aspect of the collection of information that will be altered. The

PRA burden hours associated with this collection of information are

therefore not expected to be increased or reduced as a result of the

final amendments.

Accordingly, for purposes of the PRA, these final rule amendments

would not impose any new reporting or recordkeeping requirements.

List of Subjects in 17 CFR Part 1

Brokers, Commodity futures, Consumer protection, Reporting and

recordkeeping requirements.

For the reasons discussed in the preamble, the Commodity Futures

Trading Commission amends 17 CFR part 1 as set forth below:



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, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9,

10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).


2. In Sec. 1.22, revise paragraphs (c)(5)(iii)(B) and (C) to read as


Sec. 1.22 Use of futures customer funds restricted.

* * * * *

(c) * * *

(5) * * *

(iii) * * *

(B) Nine months after publication of the report required by

paragraph (c)(5)(iii)(A) of this section, the Commission may (but shall

not be required to) do either of the following:

(1) Terminate the phase-in period through rulemaking, in which case

the phase-in period shall end as of a date established by a final rule

published in the Federal Register, which date shall be no less than one

year after the date such rule is published; or

(2) Determine that it is necessary or appropriate in the public

interest to propose through rulemaking a different Residual Interest

Deadline. In that event, the Commission shall establish, if necessary,

a phase-in schedule in the final rule published in the Federal


(C) If the phase-in schedule has not been terminated or revised

pursuant to paragraph (c)(5)(iii)(B) of this section, then the Residual

Interest Deadline shall remain 6:00 p.m. Eastern Time on the date of

the settlement referenced in paragraph (c)(2)(i) or, as appropriate,

(c)(4) of this section until such time that the Commission takes

further action through rulemaking.

Issued in Washington, DC, on March 18, 2015, by the Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

Note: The following appendices will not appear in the Code of

Federal Regulations.

Appendices to Residual Interest Deadline for Futures Commission

Merchants--Commission Voting Summary, Chairman's Statement, and

Commissioners' Statements

Appendix 1--Commission Voting Summary

On this matter, Chairman Massad and Commissioners Wetjen, Bowen,

and Giancarlo voted in the affirmative. No Commissioner voted in the


Appendix 2--Statement of Chairman Timothy G. Massad

Today we are finalizing a change to a rule that concerns one of

the most important objectives of the Commission, which is to protect

customer funds. In addition, today's action reflects one of my key

priorities since taking office, which is to make sure our rules do

not impose undue burdens or unintended consequences for the

nonfinancial commercial businesses that depend on the derivatives

markets to hedge commercial risks.

Today's action concerns Regulation 1.22, regarding the posting

of collateral. When a customer's account has insufficient margin, a

futures commission merchant must commit its own capital--often

referred to as the FCM's ``residual interest''--to make up the

difference. Regulation 1.22 sets the deadline for posting residual

interest. That deadline, in turn, affects when customers must post

collateral. The regulation provided that the deadline, which is

currently 6:00 p.m. on the next day, would automatically become

earlier in a couple years, without any Commission action or

opportunity for public input.

Last fall, we proposed to amend the rule so that the FCM's

deadline to post ``residual interest'' will not become earlier than

6:00 p.m. without an affirmative Commission action and an

opportunity for public comment. Today, we are finalizing that


An earlier deadline can help make sure that FCMs always hold

sufficient margin and do not use one customer's margin to support

another customer, but it can also impose costs on customers who must

deliver margin sooner. We will do a study of how well the current

rule and deadline are working, the practicability of changing the

deadline, and the costs and benefits of any change. Today's action

will make sure that the Commission considers all those issues and

that customers will have an opportunity to provide us with input on

any future change the Commission may consider.

Appendix 3--Statement of Commissioner Mark P. Wetjen

In the fall of 2013, the Commission made some important changes

to rule 1.22, to which registered futures commission

[[Page 15510]]

merchants (FCMs) are subject. The revision to this rule, known as

the ``residual-interest requirement'', clarified that one customer's

funds could not be used by an FCM to cover another customer's margin

deficit, but phased in a deadline for stricter compliance with this

clarified standard. The change was designed to reduce risks to those

customer funds placed in the care of FCMs, and were among a host of

regulatory enhancements adopted by the Commission after two failures

of large, registered FCMs in 2011 and 2012--MF Global and Peregrine


I supported those regulatory enhancements--including the

revision to rule 1.22--because of the importance of the matter

addressed in each: The safekeeping of customer money, which is the

most sacrosanct duty that any financial institution owes to its

customers. Today, the overall framework of regulatory requirements

that registered FCMs must comply with is substantially different

today than in 2011. For example, FCMs are no longer permitted to use

customer funds for in-house lending through repurchase agreements;

they are subject to restrictions on the types of securities that

customer funds can be invested in; they must pass on customer

initial margin on a gross basis to the clearinghouse; through LSOC

(legal segregation with operational comingling) they must legally

segregate cleared swaps customer collateral on an individual basis;

and they were required to significantly enhance their supervision of

and accounting for customer funds. As a result, the risks posed to

customers funds stewarded by FCMs have been significantly reduced.

The recent customer protection rulemakings all were well

intentioned, but indisputably carried some additional costs and

burdens for both FCMs and their customers. The analysis was made at

the time, however, that those burdens and costs were outweighed by

the benefits to FCM customers, especially against the very recent

backdrop of hundreds of millions of dollars of customer funds having

been stolen, or tied up in a bankruptcy proceeding, for at least a

period of time.

The release before us essentially re-weighs the cost or burden

on one hand, and the benefit on the other, and comes up with a

slightly different, but well supported, conclusion regarding the

residual-interest requirement. The costs or burdens revisited in the

release: (1) Uncertainty to the marketplace invited by a time-of-

settlement compliance deadline that was subject to future review by

the Commission staff, which suggested a change could come to the

requirements, but might not; and (2) the anticipated costs to FCMs

of having to finance the funding to top up their customers' margin

deficits, or the cost to customers of pre-funding their margin

accounts with FCMs. And the benefit at issue in the release: The

value to an FCM customer of ensuring that its funds will never be

borrowed by an FCM to cover another customer's deficit.

The inherent risk to this common practice by FCMs is that should

an FCM become insolvent after it posts required margin to the

clearinghouse, but before it collects margin deficits from all of

its customers, the customers whose funds were used to cover a

deficit might not see those funds again, or perhaps only after a

protracted bankruptcy proceeding. This practice also is not

technically compliant with how rule 1.22 is written, which prohibits

FCMs from ``using, or permitting the use of, the futures customer

funds of one futures customer to purchase, margin, or settle the

trades, contracts, or commodity options of, or to secure or extend

the credit of, any person other than such futures customer.''

This final rule keeps the residual-interest deadline at the

close of business on the day following the margin-deficit

calculation and eliminates the future deadline of the time of

settlement on the day following the margin-deficit calculation. The

Commission staff is still required to perform a feasibility study to

determine whether future, more aggressive residual-interest

deadlines would be desirable.

The comment file overwhelmingly supported the change in today's

final rule--in other words, commenters took the view that the

potential costs associated with the 2013 residual-interest rule

appear to outweigh the risk that some of their funds could be lost

in the event their FCM becomes insolvent after the time of

settlement, but before an FCM collects margin deficits. Indeed, the

risk that an FCM becomes insolvent during this precise timeframe

without some prior notice to its customers of financial stress at

the FCM is very low. Notably, many comments supporting this final

rule were filed by FCM customers, the constituency rule 1.22 is

designed to protect, and who appreciate the aforementioned risk. The

Commission must respect the comment process and the FCM-customer

viewpoint that today's rule better balances the cost and benefits of

rule 1.22.

Another relevant factor that supports the change to rule 1.22 is

the risk of concentration within the FCM community as a whole, and

what that means for the costs to customers of trading in derivatives

and its related impacts on liquidity in those markets. The number of

registered FCMs has decreased in recent years, which may make it

more difficult for customers to manage their risk by limiting their

ability to access the markets, or by making it more difficult for

them to allocate funds between multiple FCMs to minimize

concentration risk.

The results of the public comment process, when considered in

the context of the overall stronger regulatory framework for FCMs

and the concentration in the FCM community described above, give me

the comfort needed to support the changes to 1.22 contained in

today's release.

On the other hand, without the five-year phase-in period, we

might see a reluctance by the industry to move as swiftly to

streamline margin-collection practices and to take advantage of any

technological solutions that may be developed. Some recent

technology advances hold the promise to reduce the very sorts of

risks addressed by rule 1.22 by facilitating real-time margin

collection and settlement. To be sure, those advances would have

been more seriously and expeditiously tested and--if they

demonstrate merit--embraced without the change to rule 1.22 we are

releasing today. In other words, just as in 2013 when the existing

rule was finalized, I continue to believe that the most costly

solutions for complying with rule 1.22 that were anticipated by many

commenters should not be the ones ultimately embraced by the

marketplace. Moreover, given regulatory requirements imposed by

other regulators, today members of the clearing ecosystem are

exploring a variety of solutions to new compliance and capital

burdens that also would ease and enable stricter compliance with

rule 1.22, thus minimizing further the likelihood that pre-funding

customer margin accounts with FCMs will become the preferred

solution to compliance.

Finally, I note that a study and roundtable to review these

advancements, and how they might lower risks and related costs,

still are mandated by law, and I ask the Chairman to direct staff to

move swiftly to comply with these regulatory requirements so that

the Commission may act appropriately when and if it needs to. I look

forward to continuing to collaborate with staff and market

participants as we work towards enhancing the safety and efficiency

of our markets.

Appendix 4--Statement of Commissioner J. Christopher Giancarlo

I support the Commission's action to change the residual

interest deadline, if necessary or appropriate, only upon a

Commission rulemaking following a public comment period. This

approach will allow the Commission to better understand the market

impacts and operational challenges of moving the residual interest

deadline. This approach is especially important given the likely

negative impacts on smaller futures commission merchants who provide

our farmers, ranchers and rural producers with critical risk

management services.

I call on the Commission to take the same deliberative approach

to the de minimis exception to the swap dealer definition so that

the de minimis level does not automatically adjust from $8 billion

to $3 billion, absent a rulemaking with proper notice and comment.

Like today's proposal, the Commission should only adjust the de

minimis threshold if necessary or appropriate after it has

considered the data and weighed public comments.

[FR Doc. 2015-06548 Filed 3-23-15; 8:45 am]



Last Updated: March 24, 2015