Federal Register, Volume 81 Issue 156 (Friday, August 12, 2016)

[Federal Register Volume 81, Number 156 (Friday, August 12, 2016)]

[Rules and Regulations]

[Pages 53266-53268]

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

[FR Doc No: 2016-19211]




17 CFR Part 1

RIN 3038-AE48

Written Acknowledgment of Customer Funds From Federal Reserve


AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.


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

``Commission'') is amending its regulations to revise or repeal certain

provisions related to the requirement that a derivatives clearing

organization (``DCO'') obtain from a Federal Reserve Bank acting as a

depository for customer funds a written acknowledgment that the Federal

Reserve Bank was informed that the customer funds deposited therein are

those of customers and are being held in accordance with Section 4d of

the Commodity Exchange Act (``CEA'').

DATES: Effective August 12, 2016.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,

202-418-5096, [email protected]; M. Laura Astrada, Associate Director,

202-418-7622, [email protected]; or Parisa Abadi, Attorney-Advisor,

202-418-6620, [email protected], in each case, at the Division of

Clearing and Risk, Commodity Futures Trading Commission, Three

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

SUPPLEMENTARY INFORMATION: On June 2, 2016, the Commission published

for public comment in the Federal Register a proposed order that would

exempt Federal Reserve Banks that provide customer accounts and other

services to certain designated financial market utilities registered

with the Commission from Sections 4d and 22 of the CEA.\1\ The proposed

order would permit Federal Reserve Banks to hold money, securities, and

property deposited into a customer account by certain designated

financial market utilities in accordance with the standards to which

Federal Reserve Banks are held.


\1\ Notice of Proposed Order and Request for Comment on Proposal

to Exempt, Pursuant to the Authority in Section 4(c) of the

Commodity Exchange Act, the Federal Reserve Banks from Sections 4d

and 22 of the Commodity Exchange Act, 81 FR 35337 (June 2, 2016).


In response to the request for public comment, CME Group Inc. noted

that the proposed order would be inconsistent with Regulation

1.20(g)(4)(ii).\2\ Commission Regulation 1.20(g)(4)(ii) requires that a

DCO obtain from a Federal Reserve Bank acting as a depository for

customer funds a written acknowledgment that the customer funds

deposited therein are being held in accordance with Section 4d of the

CEA; however, pursuant to the terms of the proposed order, the Federal

Reserve Banks would be exempt from Section 4d. The Commission

subsequently issued a final exemptive order that is substantively

similar to the proposed order. In the Federal Register notice issuing

the final exemptive order, the Commission noted that, in light of the

comment, it had determined to repeal the written acknowledgment

requirement with respect to customer accounts held with a Federal

Reserve Bank \3\ in a separate Federal Register notice. The final

exemptive order will render these provisions inapplicable, as the

Federal Reserve Banks will not be held to the requirements of Section

4d of the CEA. Therefore, the Commission is amending Regulation 1.20 to

remove the acknowledgment letter requirement for customer funds

deposited by a DCO with a Federal Reserve Bank. The Commission welcomes

any comments and/or questions regarding this amendment.


\2\ 17 CFR 1.20(g)(4)(ii). Regulation 1.20(g)(4)(ii) provides

that a DCO shall obtain from a Federal Reserve Bank only a written

acknowledgment that: (A) The Federal Reserve Bank was informed that

the customer funds deposited therein are those of customers and are

being held in accordance with the provisions of section 4d of the

Act and Commission regulations thereunder; and (B) The Federal

Reserve Bank agrees to reply promptly and directly to any request

from Commission staff for confirmation of account balances or

provision of any other information regarding or related to an

account. Id.

\3\ Specifically, the Commission is revising paragraphs

(g)(4)(i) and (g)(4)(ii) of Regulation 1.20, and repealing

paragraphs (g)(4)(ii)(A) and (g)(4)(ii)(B) of Regulation 1.20.


List of Subjects in 17 CFR Part 1

Brokers, Commodity futures, Consumer protection, Reporting and

recordkeeping requirements.

For the reasons stated in the preamble, the Commodity Futures

Trading Commission amends 17 CFR part 1 as follows:



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


[[Page 53267]]


2. Amend Sec. 1.20 by revising paragraphs (g)(4)(i) and (ii) to read

as follows:

Sec. 1.20 Futures customer funds to be segregated and separately

accounted for.

* * * * *

(g) * * *

(4) * * *

(i) A derivatives clearing organization must obtain a written

acknowledgment from each depository prior to or contemporaneously with

the opening of a futures customer funds account; provided, however,

that a derivatives clearing organization is not required to obtain a

written acknowledgment from a Federal Reserve Bank with which it has

opened a futures customer funds account.

(ii) The written acknowledgment must be in the form as set out in

appendix B to this part.

* * * * *

Issued in Washington, DC, on August 8, 2016, 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 Written Acknowledgment of Customer Funds From Federal

Reserve Banks--Commission Voting Summary, Chairman's Statement, and

Commissioner's Statement

Appendix 1--Commission Voting Summary

On this matter, Chairman Massad and Commissioners Bowen and

Giancarlo voted in the affirmative. No Commissioner voted in the


Appendix 2--Statement of Chairman Timothy G. Massad

Today, the Commission continues its work to ensure the

resiliency of clearinghouses and protect customers in our markets.

To provide the necessary context for these efforts, it is useful to

look back at recent history.

Most participants in our markets will recall what happened at

the beginning of the financial crisis in September 2008, when the

Reserve Fund--a money market fund--``broke the buck'' following the

bankruptcy of Lehman Brothers. Redemptions were suspended and

investors were not able to make withdrawals. As a result, many

futures commission merchants (FCMs) were not able to access customer

funds invested in the Reserve Fund. Absent relief by the CFTC, many

would have been undercapitalized, potentially ending up in

bankruptcy. In addition, clearinghouses could not liquidate

investments in the Reserve Fund. And there could have easily been a

widespread run on money market funds, but for the emergency actions

taken by the U.S. government.

As a result of the crisis, as well as the collapse of MF Global,

the CFTC and our self-regulatory organizations took a number of

actions to better protect customer funds. We required customer funds

to be strictly segregated and limited the ways they can be invested.

We enhanced accounting and auditing procedures at FCMs, including by

requiring daily verification from depositories of the amounts

deposited by FCMs.

Today, CFTC rules require that customer funds be invested in

highly liquid assets and be convertible into cash within one

business day without a material discount in value. Our rules also

require that clearinghouses invest initial margin deposits in a

manner that allows them to promptly liquidate any such investment.

Over the last few years, the Securities and Exchange Commission

(SEC) has also taken action in response to the lessons of the

financial crisis, by adopting a number of measures to address the

potential vulnerabilities of money market funds. One such recent

reform, which takes effect in October of this year, sets forth the

circumstances where prime money market funds are permitted, or in

some circumstances required, to suspend redemptions in order to

prevent the risk of investor runs.

While we recognize the benefit of the SEC's new rule in

preventing investor runs, a suspension of redemptions by a money

market fund would mean investments in such funds are not accessible

and cannot be promptly liquidated. Such an event could result in

customers, FCMs, and clearinghouses being unable to access the funds

necessary to satisfy margin obligations.

Therefore, CFTC staff is today providing guidance making clear

that Commission rules prohibit a clearing member from investing

customer funds, or a clearinghouse from investing amounts deposited

as initial margin, in such money market funds.

Some industry participants have suggested we should interpret or

revise our rules to permit investments of at least some customer

monies in such money market funds unless and until redemptions are

suspended. We have declined to do so, as it would be too late to

protect customers at that point. Moreover, there are alternatives to

prime funds, including certain government money markets funds or

Treasury securities. In fact, investments in prime money market

funds represent a relatively small portion of the total customer

funds on deposit and the total initial margin deposits at

clearinghouses. Some of our clearinghouses and FCMs do not have any

investments in prime funds.

Staff has been careful not to be overly restrictive, and

therefore has issued no-action relief to allow FCMs to invest

certain ``excess'' proprietary funds held in customer accounts in

these money market funds. That is, our existing rules require FCMs

to deposit their own funds (i.e., targeted residual interest) into

customer accounts to make sure that there are sufficient funds in

the segregated customer accounts to cover all obligations due to

customers. FCMs frequently deposit an amount of their own funds that

is in excess of the targeted residual interest amount required under

our rules, and that excess amount can be withdrawn at any time.

Indeed, if an FCM should default, customers--and the system as a

whole--are better off if excess funds are on deposit, and we do not

wish to incentivize FCMs to withdraw such excess funds from the

segregated account. Therefore, the no action relief makes clear that

FCMs can continue to invest their own funds in excess of their

targeted residual interest in such money market funds, even though

they cannot invest the customer funds--or any proprietary funds they

are required to deposit--in this manner.

Finally, the Commission is taking action today that will further

ensure the safety of customer funds. We are issuing an order that

will help make it possible for systemically important clearinghouses

to deposit customer funds at Federal Reserve Banks. Our order makes

clear that a Federal Reserve Bank that opens such an account would

be subject to the same standards of liability that generally apply

to it as a depository, rather than any potentially conflicting

standard under the commodity laws.

Although Federal Reserve accounts for customer funds held by

systemically important clearinghouses do not exist today, they are

allowed under the Dodd-Frank Act, and we have been working with the

Board of Governors to facilitate them. The two clearinghouses

designated as systemically important in our markets have been

approved to open Federal Reserve Bank accounts for their proprietary

funds. We hope that with today's action, accounts for customer funds

can be opened soon. Doing so will help protect customer funds and

enhance the resiliency of clearinghouses.

I thank the dedicated CFTC staff and my fellow Commissioners for

their work on these matters.

Appendix 3--Concurring Statement of Commissioner Sharon Y. Bowen

I am pleased to concur with the two Commission actions: the

``Order Exempting the Federal Reserve Banks from Sections 4d and 22

of the Commodity Exchange Act'' and ``Written Acknowledgment of

Customer Funds from Federal Reserve Banks.'' I have long believed

that, in order to protect customer funds, we need to keep that money

at our central bank. In the event of a major market event, I, and I

believe the rest of the American people, would feel much better

knowing that investors' money is at the Federal Reserve instead of

at multiple central counterparties. I am glad that our agency and

the Federal Reserve have come to an agreement on an effective way to

accomplish this.

I am similarly pleased with the Division of Clearing and Risk's

(DCR) ``Staff Interpretation Regarding CFTC Part 39 In Light Of

Revised SEC Rule 2a-7,'' which clearly outlines the staff's

understanding that, given the limitations that the Securities and

Exchange Commission (SEC) has imposed on redemptions for prime money

market funds, that they are no longer considered Rule 1.25 assets.

This is the correct interpretation. The key feature in a Rule 1.25

asset is that it must be available quickly in times of crisis or

illiquidity. And

[[Page 53268]]

we know that funds are more likely to close the gates on redemptions

when market dislocation happens. That is just the time when futures

commission merchants (FCMs) and customers would need access to their

money, and a multi-day delay can mean catastrophe for some


For that very reason, I have concerns about the Division of Swap

Dealer and Intermediary Oversight's (DSIO) ``No-Action Relief With

Respect to CFTC Regulation 1.25 Regarding Money Market Funds.''

While the 4(c) exemption and the DCR interpretation are clearly

customer protection initiatives, the DSIO no action letter is not.

This no action letter would allow FCMs to keep money in segregated

customer accounts that actually would not be readily available in a

crisis. Thus, while it may appear that an FCM had considerable funds

available to settle customer accounts during a market dislocation,

in fact that would be only be an illusion; a portion of those funds

could be locked down behind the prime money market funds' gates and

therefore not actually be available when needed.

I do not think that the staff of the Commission should be

supporting this kind of ``window dressing''--giving the impression

of greater security than there actually is. If the funds are not

suitable investments for customer funds, then they are not suitable

for the additional capital that the FCMs put in those accounts to

protect against potential shortfalls. Having lived through

bankruptcies, such as MF Global and Peregrine, I have a healthy

respect for the importance of having strong clearing members with a

large cushion of funds that can be accessed when needed. This no

action letter undermines that effort. Given the importance of this

topic to the general public, we should at least have asked for

comments or even held a roundtable before making this change. I

therefore hope to reexamine this subject in the near future.

[FR Doc. 2016-19211 Filed 8-11-16; 8:45 am]



Last Updated: August 12, 2016