Public Statements & Remarks

Concurring Statement of Commissioner Caroline D. Pham Regarding Proposed Amendments to Clearing Member Funds Requirements

December 18, 2023

I concur on the Notice of Proposed Rulemaking on Protection of Clearing Member Funds Held by Derivatives Clearing Organizations (DCOs) (Proposed Amendments to Clearing Member Funds Requirements or Proposal) because it seeks to protect the proprietary funds of futures commission merchants (FCMs), and I understand that it essentially codifies the existing good practices most of the CFTC’s registered DCOs already follow. However, with respect to retail participants, I believe that the Commission should consider whether there should be a new registration category for direct clearing retail DCOs. I also renew my call for an Office of the Retail Advocate. Both of these steps would better ensure customer protection in our regulated markets.

I would like to thank Scott Sloan, Tad Polley, Eileen Donovan, and Clark Hutchison in the Division of Clearing and Risk for their work on the Proposal. I appreciate the time staff took to answer my questions.

Existing Protections for Both House Accounts and Customer Funds Have Worked Well For Decades Without Issues

First, to be clear, the Commission already has extensive rules in place for protecting FCM customer funds.[1] Arguably, it is one thing the CFTC is best-known for. For these FCM customers, FCMs must segregate customer funds from their own funds, deposit customer funds under an account name that clearly identifies them as customer funds, and obtain a written acknowledgment from each depository that holds customer funds.[2] This customer protection regime also establishes accounting and reporting requirements applicable to customer funds, and limits both the types of investments that can be made with customer funds and the type of depositories that can hold customer funds.[3]

With respect to clearing member proprietary funds or house accounts,[4] consistent with our system of self-regulation set forth in the Commodity Exchange Act, DCOs have to establish standards and procedures designed to protect and ensure the safety of proprietary funds, and hold them in a manner that will minimize the risk of loss or delay in access by the DCO to the funds.[5] DCOs also have to invest clearing member proprietary funds in instruments with minimal credit, market, and liquidity risks.[6]

Today, the Commission is proposing new regulations for the protection of clearing member funds, based largely on the customer segregation requirements for FCMs and DCOs in Regulation 1.20.[7] The Proposal explains that new safeguards are needed for the direct participants at DCOs because:

(1) the Commission has registered a number of DCOs that clear directly for market participants without the involvement of FCMs (i.e., these DCOs are only clearing for individuals), and

(2) many DCOs that use the traditional FCM clearing model have at least some non-FCM clearing members.

While I appreciate the intent of today’s Proposal, with respect to DCOs that have FCMs as clearing members, I believe we must be careful in changing a regulatory framework that has served our markets without any real issues for decades. I believe that the Commission must have had a good reason when it originally distinguished between house accounts and customer funds. There have been a lot of spectres raised today that have nothing to do with our actual regulated markets. Speaking from a practical perspective, I worry that “if it ain’t broke, don’t fix it.” For example, we should recognize that DCOs might have operational reasons for the accounts distinction in our current rules. I encourage the public to comment on whether the Proposal is workable for DCOs in that regard.

There Should be a New Registration Category for Direct Clearing Retail DCOs and an Office of the Retail Advocate to Ensure Customer Protection

I share the concerns where DCOs clear directly for retail participants without FCMs. I would go further and state that I am concerned that the Proposal’s targeted approach may miss larger issues. When a DCO faces direct retail participants that our rules categorize as clearing members, we effectively allow a model that eliminates intermediaries and the protections that they provide for customers. Intermediaries perform critical functions, and that is why markets all over the world require registered brokers and stringent protections for customers.

If the Commission anticipates this type of DCO clearing model to proliferate, we should step back and consider all issues that these direct clearing retail DCOs raise.[8] These types of concerns around retail participants are why I have proposed that the Commission needs an Office of the Retail Advocate.[9] I continue to believe that having an Office of the Retail Advocate is a tried-and-true way to advance customer protection, and may be especially effective in the area raised by today’s Proposal.

For example, perhaps there should be a distinct registration category and requirements for direct clearing retail DCOs because they raise singular issues, risks, and concerns—foremost, who provides retail customer protection when there are no brokers or intermediaries.

Frankly, I dislike a model where DCOs have clearing members that are retail. To achieve the same market structure outcome, I think it is better that a DCO has an affiliated FCM that only provides services for its retail participants on an affiliated DCM and DCO and would provide customer protections required under our rules. This would, therefore, not disrupt our existing regulatory framework and the current scope and application of the Bank Secrecy Act.[10]


I believe the Commission should further study the direct clearing model for retail participants, together with the increase in retail binary option contracts. I hope that my proposal for an Office of the Retail Advocate comes to fruition, and that this is one of the first issues that we tackle.

Again, I thank staff for the hard work on the Proposal. I look forward to the public’s comments on the Proposed Amendments to Clearing Member Funds Requirements. Thank you.

[1] Commodity Exchange Act (CEA) Section 4d, 7 U.S.C. § 6d, and Regulations 1.20-1.39, 17 CFR §§ 1.20-1.39 (futures customer funds), 22.1-22.17, 17 CFR  §§ 22.1-22.17 (cleared swaps customer collateral) and 30.7, 17 CFR  § 30.7 (foreign futures) establish a comprehensive customer protection regime to safeguard the funds belonging to customers of FCMs.

[2] See 17 CFR §§ 1.20, 22.5, and 30.7. The acknowledgment letters must adhere to specific templates in the Commission’s regulations, and require a depository to acknowledge, among other things, that the accounts opened by the FCM hold funds that belong to the FCM’s customers.

[3] See 17 CFR §§ 1.32, 1.33, 1.25, and 1.49.

[4] Regulation 1.3, 17 CFR § 1.3, defines a “customer” as “any person who uses [an FCM], introducing broker, [CTA or CPO] as an agent in connection with trading in any commodity interest.” DCOs have to apply many of the customer protection requirements that apply to FCMs to the customer funds DCOs receive from FCM clearing members. DCOs must segregate the customer funds of their FCM clearing members from their own funds, deposit customer funds under an account name that identifies the funds as customer funds, obtain acknowledgment letters from depositories, limit the investment of customer funds to instruments listed in Regulation 1.25, and limit depositories for customer funds to those listed in Regulations 1.20 and 1.49. See 17 CFR §§ 1.20(g)(1), 39.15 (b), 22.3(b)(1), 1.20(g)(1) and (g)(4), and 22.5. However, these protections do not apply to DCO clearing members (i.e., those that are not FCMs).

[5] See CEA Section 5b(c)(2)(F), 7 U.S.C. § 7a-1(c)(2)(F) (Core Principle F), and 17 CFR § 39.15.

[6] Id.

[7] For instance, the Commission is proposing to require a DCO to hold proprietary funds separately from the DCO’s own funds, in accounts that are named to clearly identify the funds as belonging to clearing members, to prohibit a DCO or any depository from using proprietary funds in any way other than as belonging to the clearing member, to have DCOs review, on a daily basis, the amount of funds owed to each clearing member with respect to each of its accounts, both customer (including, as relevant, futures and cleared swaps) and proprietary, and to reconcile those figures to the amount of funds held in aggregate in each such type of account across all of the DCO’s depositories, and, to have DCOs obtain proprietary funds acknowledgment letters.

[8] The Commission provided exemptions from the current regulations for these DCOs in 2020. See Derivatives Clearing Organization General Provisions and Core Principles, 85 FR 4800 (Jan. 27, 2020). However, I am suggesting a more holistic assessment of these DCOs and their clearing members.

[9] Keynote Address by Commissioner Caroline D. Pham at CordaCon 2022 (Sept. 27, 2022), available at

[10] 31 U.S.C. 5311 et seq.