Federal Register, Volume 81 Issue 156 (Friday, August 12, 2016)
[Federal Register Volume 81, Number 156 (Friday, August 12, 2016)]
[Rules and Regulations]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19211]
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
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
\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
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 1 as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
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
2. Amend Sec. 1.20 by revising paragraphs (g)(4)(i) and (ii) to read
Sec. 1.20 Futures customer funds to be segregated and separately
* * * * *
(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
Appendices to Written Acknowledgment of Customer Funds From Federal
Reserve Banks--Commission Voting Summary, Chairman's Statement, and
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
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
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]
BILLING CODE 6351-01-P
Last Updated: August 12, 2016