the Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission ...

107 Pages·2012·1.23 MB·English

Vol. 77 Wednesday,
No. 220 November 14, 2012
Part II
Commodity Futures Trading Commission
17 CFR Parts 1, 3, 22 et al.
Enhancing Protections Afforded Customers and Customer Funds Held by
Futures Commission Merchants and Derivatives Clearing Organizations;
Proposed Rule
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67866 Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules
COMMODITY FUTURES TRADING English translation. Comments will be disclosure and financial responsibility
COMMISSION posted as received to http:// framework. Section 4d(a)(2)2of the
www.cftc.gov. You should submit only Commodity Exchange Act (‘‘Act’’)3
17 CFR Parts 1, 3, 22, 30, and 140 information that you wish to make requires each FCM to segregate from its
available publicly. If you wish the own assets all money, securities and
RIN 3038–AD88
Commission to consider information other property deposited by futures
Enhancing Protections Afforded that is exempt from disclosure under the customers to margin, secure, or
Customers and Customer Funds Held Freedom of Information Act, a petition guarantee futures contracts and options
by Futures Commission Merchants for confidential treatment of the exempt on futures contracts traded on
and Derivatives Clearing Organizations information may be submitted according designated contract markets.4Section
to the procedures set forth in §145.9 of 4d(a)(2) further requires an FCM to treat
AGENCY: Commodity Futures Trading the Commission’s regulations.1 and deal with futures customer funds as
Commission. The Commission reserves the right, belonging to the futures customer, and
ACTION: Notice of proposed rulemaking. but shall have no obligation, to review, prohibits an FCM from using the funds
pre-screen, filter, redact, refuse or deposited by a futures customer to
SUMMARY: The Commodity Futures remove any or all of your submission margin or extend credit to any person
Trading Commission (‘‘Commission’’ or
from www.cftc.gov that it may deem to other than the futures customer that
‘‘CFTC’’) is proposing to adopt new
be inappropriate for publication, such as deposited the funds. Section 4d(f) of the
regulations and amend existing
obscene language. All submissions that Act, which was added by section 724(a)
regulations to require enhanced
have been redacted or removed that of the Dodd-Frank Wall Street Reform
customer protections, risk management
contain comments on the merits of the and Consumer Protection Act,5requires
programs, internal monitoring and rulemaking will be retained in the each FCM to segregate from its own
controls, capital and liquidity standards, public comment file and will be assets all money, securities and other
customer disclosures, and auditing and considered as required under the property deposited by Cleared Swaps
examination programs for futures Administrative Procedure Act and other Customers to margin transactions in
commission merchants (‘‘FCMs’’). The applicable laws, and may be accessible Cleared Swaps.6
proposal also addresses certain related under the Freedom of Information Act. The Commission has adopted §§1.20
issues concerning derivatives clearing FORFURTHERINFORMATIONCONTACT: through 1.30, and §1.32, to implement
organizations (‘‘DCOs’’) and chief Division of Swap Dealer and section 4d(a)(2) of the Act, and adopted
compliance officers (‘‘CCOs’’). The Intermediary Oversight: Gary Barnett, Part 22 to implement section 4d(f) of the
proposed rules will afford greater Director, 202–418–5977, Act. The purpose of these regulations is
assurances to market participants that: [email protected]; Thomas Smith, to safeguard funds deposited by futures
customer segregated funds and secured Deputy Director, 202–418–5495, customers and Cleared Swaps
amounts are protected; customers are [email protected]; Frank Fisanich, Chief Customers, respectively.
provided with appropriate notice of the Counsel, 202–418–5949, Regulation 1.20 requires each FCM
risks of futures trading and of the FCMs [email protected]; or Ward P. Griffin, and DCO to separately account for and
with which they may choose to do Associate Chief Counsel, 202–418– to segregate from its own proprietary
business; FCMs are monitoring and 5425, [email protected], Three funds all money, securities, or other
managing risks in a robust manner; the Lafayette Centre, 1155 21st Street property deposited by futures customers
capital and liquidity of FCMs are NW., Washington, DC 20581, or Kevin for trading on designated contract
strengthened to safeguard their Piccoli, Deputy Director, 646–746– markets. Regulation 1.20 also provides
continued operations; and the auditing 9834, [email protected], 140 that an FCM or DCO may deposit
and examination programs of the Broadway, 19th Floor, New York, NY futures customer funds only with a
Commission and the self-regulatory 10005. bank, trust company, and for FCMs
organizations (‘‘SROs’’) are monitoring Division of Clearing and Risk: Robert B. only, a DCO or another FCM. The funds
the activities of FCMs in a prudent and Wasserman, Chief Counsel, 202–418– must be deposited under an account
thorough manner. 5092, [email protected], Three
DATES: Comments must be received on Lafayette Centre, 1155 21st Street 27 U.S.C. 6d(a)(2).
or before January 14, 2013. NW., Washington, DC 20581. 37 U.S.C. 1 et seq.
ADDRESSES: You may submit comments, Office of the Chief Economist: Camden §14.3T(hiiei it)e trom i n’’c fluutduer easn cyu psetorsmoenr ’w’ ihso d uesfiense ad fiunt ures
identified by RIN 3038–AD88, by any of Nunery, Economist, [email protected], commission merchant as an agent in connection
the following methods: 202–418–5723, Three Lafayette with trading in any contract for the purchase or sale
• Agency Web site, via its Comments Centre, 1155 21st Street NW., of a commodity for future delivery or an option on
Online process: http:// Washington, DC 20581. such contract (excluding any proprietary accounts
under §1.3(y)). The Commission adopted the
comments.cftc.gov. Follow the SUPPLEMENTARYINFORMATION: definition of the term ‘‘futures customer’’ on
instructions for submitting comments October 16, 2012 as part of the final rulemaking that
I. Background amended existing Commission regulations to
through the Web site.
• Mail: Send to David A. Stawick, A. General Statutory and Current incorporate swaps. The Federal Register release
adopting the final rules can be accessed at http://
Secretary, Commodity Futures Trading Regulatory Structure www.cftc.gov/ucm/groups/public/@newsroom/
Commission, 1155 21st Street NW., documents/file/federalregister101612.pdf.
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with PROP Ma•ilF aebdoevrea.l eRulemaking Portal: http:// owcotihmthepr a opnnr oeFpnCetM rot—fy t dhisee pa C ofousmintedmdai mbssyei nocntua’slst omers mLaa6wyTR bheeeg uateclarcmteiso s‘n‘eC/dOl eaTatr CheDdttE pSR:w/I/VawpAwsT wCIV.ucEsfttSco/.mginoedvr/e’’ x i.sh dtmef.i ned
D www.regulations.gov/search/index.jsp. in §22.1 as any person entering into a Cleared
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Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules 67867
name that clearly identifies the funds as purchase, margin, or settle cleared swap invest the funds deposited by foreign
belonging to the futures customers of transactions of any person other the futures or foreign option customers in
the FCM or DCO and further shows that Cleared Swaps Customer that deposited accordance with §1.25.
the funds are segregated as required by the funds. Further, §22.2(c) permits an However, unlike §1.20 and Part 22,
section 4d(a)(2) of the Act and FCM to commingle the Cleared Swaps which require an FCM to hold a
Commission regulations. FCMs and Customer Collateral of multiple Cleared sufficient amount of funds in
DCOs also are required to obtain a Swaps Customers into one or more segregation to meet the total account
written acknowledgment from a accounts, and §22.2(e)(1) permits an equities of all of the FCM’s futures
depository stating that the depository FCM to invest Cleared Swaps Customer customers and Cleared Swaps
was informed that funds deposited are Collateral in permitted investments Customers at all times (i.e., the Net
customer funds being held in under §1.25. Liquidating Equity Method), §30.7
accordance with the Act. In addition to holding funds for requires an FCM to maintain in separate
FCMs and DCOs also are restricted in futures customers transacting on accounts an amount of funds only
their use of futures customer funds. designated contract markets and for sufficient to cover the margin required
Regulations 1.20 and 1.22 provide that Cleared Swaps Customers engaging in on open foreign futures contracts, plus
the funds deposited by one futures cleared swap transactions, FCMs also or minus any unrealized gains or losses
customer may not be used to margin or hold funds for persons trading futures on such open positions, plus any funds
to secure the contracts or option contracts listed on foreign boards of representing premiums payable or
positions, or extend credit to any trade. Section 4(b) of the Act provides received on foreign options (including
person, other than the futures customer that the Commission may adopt rules any additional funds necessary to secure
that deposited the funds. An FCM or and regulations proscribing fraud and such options, plus or minus any
DCO, however, may for convenience requiring minimum financial standards, unrealized gains or losses on such
commingle and hold funds deposited as the disclosure of risk, the filing of options) (i.e., the ‘‘Alternative
margin by multiple futures customers in reports, the keeping of books and Method’’). Thus, under the Part 30
the same account or accounts with one records, the safeguarding of the funds Alternative Method an FCM is not
of the recognized depositories. An FCM deposited by persons for trading on required to maintain a sufficient amount
or DCO also may invest futures foreign markets, and registration with of funds in such separate accounts to
customer funds in certain permitted the Commission by any person located pay the full account balances of all of its
investments under §1.25. in the United States who engages in the foreign futures or foreign options
Part 22 of the Commission’s offer or sale of any contract of sale of a customers at all times.
regulations, which governs Cleared commodity for future delivery that is In addition to the segregation
Swaps transactions, implements section made subject to the rules of a board of requirements of sections 4d(a)(2) and
4d(f) of the Act and parallels many of trade located outside of the United 4d(f) of the Act, and the secured amount
the provisions in Part1 addressing the States. Pursuant to the statutory requirements in Part 30 of the
manner in which, and the authority of section 4(b), the Commission’s regulations, FCMs also
responsibilities imposed upon, an FCM Commission adopted Part 30 of its are subject to minimum net capital and
holding funds for futures customers regulations to address foreign futures financial reporting requirements that are
trading on designated contract markets.7 and foreign option transactions. intended to ensure that such firms meet
Regulation 22.2 requires an FCM to treat The segregation provisions for funds their financial obligations in a regulated
and to deal with funds deposited by deposited by foreign futures or foreign marketplace, including their financial
Cleared Swaps Customers as belonging options customers to margin foreign obligations to customers and DCOs.
to such Cleared Swaps Customers and to futures or foreign options transactions Each FCM is required to maintain a
hold such funds separately from the under Part 30, however, are significantly minimum level of ‘‘adjusted net
different from the requirements set forth capital,’’ which is generally defined
FCM’s own funds. Regulation 22.4
in §1.20 for futures customers trading under §1.17 as the firm’s net equity as
provides that an FCM may deposit
on designated contract markets and Part computed under generally accepted
Cleared Swaps Customer Collateral with
22 for Cleared Swaps Customers accounting principles, less all of the
a bank, trust company, DCO, or another
engaging in cleared swap transactions. firm’s liabilities and further excluding
registered FCM. Regulation 22.6
Regulation 30.7 provides that an FCM all assets that are not liquid or readily
requires that the account holding the
may deposit the funds belonging to marketable. Regulation 1.17(c)(5) further
Cleared Swaps Customers Collateral
foreign futures or foreign options requires an FCM to impose capital
must clearly identify the account as an
customers in an account or accounts charges (i.e., deductions) on certain of
account for Cleared Swaps Customers of
maintained at a bank or trust company its liquid assets to protect against
the FCM engaging in cleared swap
located in the United States; a bank or possible market risks in such assets.
transactions and that the funds
trust company located outside of the FCMs also are subject to financial
maintained in the account are subject to
United States that has in excess of $1 recordkeeping and reporting
the segregation provisions of section
billion of regulatory capital; an FCM requirements. FCMs that carry customer
4d(f) of the Act and Commission
registered with the Commission; a DCO; accounts are required under §1.32 to
regulations.
a member of a foreign board of trade; a prepare a schedule each business day
Regulation 22.2(d) also prohibits an
foreign clearing organization; or a demonstrating their compliance with
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PRO 7The Commission approved the part 22 organization. The account with the the calculation to be performed by noon
with regulations on January 11, 2012, with an effective depository must be titled to clearly each business day, reflecting the
D date of April 9, 2012. Compliance with the part 22 specify that the account holds funds account balances and open positions as
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SK67 C63o3m6m (Foedbit. y7 ,B 2ro0k1e2r) .B ankruptcy Provisions, 77 FR markets. An FCM also is permitted to to file with the Commission and with its
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67868 Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules
designated self-regulatory organization source to help cover other risks of the situation that are sometimes referred to
(‘‘DSRO’’) monthly unaudited financial business; yet withdrawing it makes it as ‘‘audits,’’ but they are not full-scale
statements and an annual audited unavailable when it may be most audits as accountants commonly use
financial report, as well as notices of needed. The recent market events that term.
certain predefined events.8Regulation illustrate both the need to: (i) Require In addition, because there are
1.12 requires an FCM to file a notice that care be taken about monitoring multiple SROs who share the same
with the Commission and with the excess segregated and secured funds, member FCMs, to avoid subjecting
firm’s DSRO whenever, among other and the conditions under and the extent FCMs to duplicative examinations from
things, the firm: (1) Fails to maintain to which such funds may be withdrawn; SROs, the Commission has a permissive
compliance with the Commission’s and (ii) place appropriate risk system that allows the SROs to agree
capital requirements; (2) fails to hold management controls around the other how to allocate FCMs amongst them. An
sufficient funds in segregated or secured risks of the business to help relieve (A) SRO who is allocated certain FCMs for
amount accounts to meet its regulatory the likelihood of an exigent event or, (B) such examination is referred to as the
requirements; (3) fails to maintain if such an event occurs, the likelihood DSRO of those FCMs.
current books and records; or (4) of a failure to prepare for such an event, Under Commission regulations, FCMs
experiences a significant reduction in which in either case could create must have their annual financial
capital from the previous month-end. pressures that result in an inappropriate statements audited by an independent
The purpose of the regulatory notices is withdrawal of customer funds. certified public accountant following
to alert the Commission and the firm’s Although the Commission’s existing U.S. Generally Accepted Auditing
DSRO as early as possible to potential regulations provide an essential Standards (‘‘U.S. GAAS’’). As part of
financial issues at the firm that may foundation to fostering a well- this certified annual report, the
adversely impact the ability of the FCM functioning marketplace, wherein independent accountant also must
to comply with its obligations to customers are protected and conduct appropriate reviews and tests to
safeguard customer funds, or to meet its institutional risks are minimized, recent identify any material inadequacies in
financial obligations to other FCMs or events have demonstrated that systems and controls that could violate
DCOs. additional measures are necessary to the Commission’s segregation or secured
The statutory mandate to segregate effectuate the fundamental purposes of amount requirements. Any such
customer funds—to treat them as the statutory provisions discussed inadequacies are required to be reported
belonging to the customer and not use above. Further, concurrently with the to the FCM’s DSRO and to the
the funds inappropriately—takes on enhanced responsibilities for FCMs that Commission.
greater meaning in light of the are proposed herein, the oversight and
devastating events experienced over the examination systems must be enhanced C. Futures Commission Merchant
past year. Those events, which are to mitigate risks and effectuate the Insolvencies and Failures of Risk
discussed in greater detail below, statutory purposes. Management
demonstrate that the risks of Recent events demonstrate the need
B. Self-Regulatory Structure
misfeasance and malfeasance, and the for revisions to the Commission’s
risks of failing to maintain sufficient The Commission’s oversight structure customer protection regime. Since
excess funds in segregation: (i) Put provides that SROs are the frontline October 2011, two FCMs have entered
customer funds at risk; and (ii) are regulators of FCMs, introducing brokers into insolvency proceedings. On
exacerbated by stresses on the business (‘‘IBs’’), commodity pool operators, and October 31, 2011, MF Global, Inc.
of the FCM. Many of those risks can be commodity trading advisors. In 2000, (‘‘MFGI’’), which was dually-registered
mitigated significantly by better risk Congress affirmed the Commission’s as an FCM with the Commission and as
reliance on SROs by amending section
management systems and controls, a securities broker-dealer (‘‘BD’’) with
3 of the Commodity Exchange Act to
along with an increase in risk-oriented the U.S. Securities and Exchange
state: ‘‘It is the purpose of this Act to
oversight and examination of the FCMs. Commission (‘‘SEC’’), was placed into a
serve the public interests through a
Determining what is a ‘‘sufficient’’ liquidation proceeding under the
system of effective self-regulation of
amount of excess funds in segregation Securities Investor Protection Act by the
trading facilities, clearing systems,
for any particular FCM requires a full Securities Investor Protection
market participants and market
understanding of the business of that Corporation (‘‘SIPC’’). The trustee
professionals under the oversight of the
FCM, including a proper analysis of the appointed to oversee the liquidation of
Commission.’’
factors that affect the actual amount of MFGI has reported a potential $900
As part of its oversight responsibility,
segregated funds held by the FCM million shortfall of funds necessary to
an SRO is required to conduct periodic
relative to the minimum amount of repay the account balances due to
examinations of member FCMs’
segregated funds it is required to hold. customers trading futures on designated
compliance with Commission and SRO
Further, appropriate care must be taken contract markets, and an approximately
financial and related reporting
to avoid withdrawing such excess funds $700 million shortfall in funds
requirements, including the FCMs’
at times of great stress to cover needs immediately available to repay the
holding of customer funds in segregated
unrelated to the purposes for which account balances of customers trading
and secured accounts. The Commission
excess segregated and secured funds are on foreign futures markets.9The
oversees the SROs by examining them
ALS2 mfuanidnst aminaeyd l.o Ionk t ilmikees a onf esatrseys lsi,q euxicdeistys for the performance of their duties. sahccoortufanltls iins cauttsrtiobmutearb slee gbrye gthatee dM FGI
POS More recently, the Commission has Trustee to significant transfers of funds
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TVN1 tfoin baen cpirailm saurrivlye irlelasnpcoen soifb alne fFoCr Mco unndduecrti an gjo oinntg oaiundgi t papers to review. In addition, the 9See Report of the Trustee’s Investigation and
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SK67 aCgormeemmiesnsito snu ubnmdiettre §d 1to.5 a2n. d approved by the scope reviews of FCMs in a ‘‘for cause’’ R27e9co0m (MmGe)n SdIaPtiAo n(Bs,a Innk rre. SM.DF. NGl.oYb. aJul nIn. c4.,, 2N0o1. 21)1. –
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Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules 67869
behalf of customers. The trustee also is the self-regulatory system. In particular, and (3) in-house and affiliate
attempting to recover approximately questions have arisen on the transactions.
$640 million of customer funds that was requirements surrounding the holding In adopted the amendments to §1.25,
deposited by MFGI with its London, and investment of customer funds, the Commission was mindful that
U.K. affiliate, MFGUK, as margin funds including the ability of FCMs to customer segregated funds must be
for trading on foreign markets. The withdraw funds from customer invested by FCMs and DCOs in a
MFGI trustee and the Special segregated accounts and Part 30 secured manner that minimizes their exposure
Administrators handling the liquidation accounts. Additionally, the incidents to credit, liquidity, and market risks
of MFGUK are disputing the legal status have underscored the need for both to preserve their availability to
of the funds and whether they are additional safeguards—such as robust customers and DCOs, and to enable
customer funds under English law. The risk management systems, strengthened investments to be quickly converted to
outcome of this dispute will have a early-warning systems surrounding cash at a predictable value in order to
significant impact on the amount of margin and capital requirements, and avoid systemic risk. The amendments
funds that are returned to MFGI. enhanced public disclosures—to are consistent with the general
In addition, the Commission filed a prudential standard contained in §1.25,
promote the protection of customer
civil injunctive complaint in federal which provides that all permitted
funds and to minimize the systemic risk
district court on July 10, 2012, against investments must be ‘‘consistent with
posed by certain actions of market
Peregrine Financial Group, Inc. (‘‘PFG’’), the objectives of preserving principal
participants. Further questions have
a registered FCM and its Chief Executive and maintaining liquidity.’’
arisen on the system of audits and
Officer (‘‘CEO’’) and sole owner, Russell The Commission also approved final
R. Wasendorf, Sr., alleging that PFG and examinations of FCMs, and whether the regulations that require DCOs to collect
Wasendorf, Sr. committed fraud by system functions adequately to monitor initial customer margin from FCMs on
misappropriating customer funds, FCMs’ activities, verify segregated fund a gross basis.13Under the final
violated customer fund segregation and secured amount balances, and regulations, FCMs are no longer
laws, and made false statements detect fraud. Consequently, the permitted to offset one customer’s
regarding the amount of funds in Commission has taken steps to study margin requirement against another
customer segregated accounts in and address the issues raised by the customer’s margin requirements and
financial statements filed with the incidents, and industry participants deposit only the net margin collateral
Commission. The complaint states that likewise have taken steps to address the with the DCO. As a result of the rule
in July 2012 during an NFA issues. Such steps are described in change, a greater portion of customer
examination PFG falsely represented greater detail in the next section. initial margin will be posted by FCMs
that it held in excess of $220 million of D. Recent Commission Rulemakings and to the DCOs.
The Commission also approved a new
customer funds when in fact it held Other Initiatives Relating to Customer
margining regime for cleared swaps
approximately $5.1 million.10 Protection
Recent incidents also have positions.14Under the traditional
demonstrated the value of establishing Since late 2011, the Commission has futures margining model, DCOs hold an
robust risk management systems within promulgated rules directly impacting FCM’s customer funds on a collective
FCMs and enhanced early warning the protection of customer funds. The basis and are permitted to use the
systems to detect and address capital Commission also has studied the collective margin funds held for the
issues. In particular, problems that arise current regulatory framework FCM’s customers to satisfy a margin
through an FCM’s non-futures-related surrounding customer protection, deficiency caused by a single customer.
business can have a direct and particularly in light of the recent The Commission approved an
significant impact on the FCM’s incidents outlined above, in order to alternative margin rule for cleared swap
regulatory capital, raising questions as identify potential enhancements to the transactions. Under the ‘‘LSOC rule’’
to whether the FCM will be able to systems and Commission regulations (legal segregation with operational
maintain the minimum financial protecting customer funds. The comingling), the DCOs that clear swaps
requirements mandated by the Act and Commission’s efforts have been transactions have greater information
Commission regulations.11 informed, in part, by efforts undertaken regarding the margin collateral of
These recent incidents have by industry participants. The proposed individual Swaps Customers, and each
highlighted weaknesses in the customer rule amendments set forth in this Swaps Customer’s collateral is protected
protection regime prescribed in the release have been informed by the individually all the way to the
Commission’s regulations and through clearinghouse.
efforts detailed below.
The Commission also included
In December 2011, the Commission customer protection enhancements in
10Complaint, U.S. Commodity Futures Trading
Commission v. Peregrine Financial Group, Inc., and adopted final rule amendments revising the final rule for designated contract
Russell R. Wasendorf, Sr., No. 12–cv–5383 (N.D. Ill. the types of investments that an FCM or markets. These provisions codify into
July 10, 2012). A copy of the Commission’s DCO can make with customer funds rules staff guidance on minimum
complaint has been posted to the Commission’s
under §1.25, for the purpose of requirements for SROs regarding their
Web site.
11See, e.g., Edward Krudy, Jed Horowitz and John affording greater protection for such financial surveillance of FCMs.15The
McCrank, ‘‘Knight’s Future in Balance After funds.12Among other changes to §§1.25 rules require that a DCM have
ALS2 Trading Disaster,’’ Reuters (Aug. 3, 2012), available and 30.7, the final rule amendments arrangements and resources for effective
OS at http://in.reuters.com/article/2012/08/03/ removed from the list of permitted
OP knightcapital-loss-idINL2E8J27QE20120803 (noting
PR that a software issue caused the firm to incur a $440 investments: (1) corporate debt 13See Commission Regulation 39.12(g)(8)(i) and
ROD with mf‘‘iPrimellni’oss oncn at prWaidtoailrn)l;gd C wlohisrdsies, ’ wsD UhieiStce hSr iercechpu arreintsdiee nsN tAaetdch cmaoluiuenc Thtsa oTdfeo tn hae, oUbnliitgeadti Sontast enso; t( 2g)u faorraenitgene dso bvye rtehieg n debt; DP8,re o2rvi0vi1sa1ito)iv.n ess a Cnlde aCroinreg POrrignacnipizleasti, o7n6 GFeRn 6e9ra3l3 4 (Nov.
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N1 Be Acquired By Apex Clearing,’’ available at 14See 77 FR 6336 (Feb. 7, 2012).
TV http://online.wsj.com/article/BT-CO-20120531- 12See, Investment of Customer Funds and Funds 15See Core Principles and Other Requirements for
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67870 Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules
rule enforcement and trade and directed at enhancing the protection of provided for customers trading on
financial surveillance programs, customers funds by identifying and designated contract markets.
including the authority to collect exploring technological issues and On July 13, 2012, the Commission
information and examine books and possible solutions relating to the ability approved new FCM financial
records of members and market of the Commission, SROs and customers requirements proposed by the National
participants. The rules also establish to verify the location and status of funds Futures Association (‘‘NFA’’).21The
minimum financial standards for both held in customer segregated accounts. NFA Financial Requirements Section 16
member FCMs and IBs and non- and its related Interpretive Notice
Commission staff hosted an additional
intermediated market participants. The entitled NFA Financial Requirements
roundtable on August 9, 2012, to
Commission expressly noted in the Section 16: FCM Financial Practices and
discuss SRO requirements for
preamble of the Adopting Release that Excess Segregated Funds/Secured
examinations of FCMs and Commission
‘‘a DCM’s duty to set financial standards Amount Disbursements (collectively
oversight of SRO examination programs.
for its FCM members involves setting referred to as ‘‘the Segregated Funds
The roundtable also focused on the role
capital requirements, conducting Provisions’’) were developed in
of the independent public accountant in
surveillance of the potential future consultation with Commission staff.
the FCM examination process, and
exposure of each FCM as compared to NFA’s Segregated Funds Provisions
its capital, and taking appropriate action proposals addressing various require each FCM to: (1) Maintain
in light of the results of such alternatives to the current system for written policies and procedures
surveillance.’’16Further, the rules segregating customer funds. governing the deposit of the FCM’s
mandate that DCMs adopt rules for the In developing the proposals set forth proprietary funds (i.e., excess or
protection of customer funds, including in this release, the Commission also has residual funds) in customer segregated
the segregation of customer and been informed by efforts undertaken by accounts and Part 30 secured accounts;
proprietary funds, the custody of industry participants. On February 29, (2) maintain a targeted amount of excess
customer funds, the investment 2012, the Futures Industry Association funds in segregate accounts and Part 30
standards for customer funds, (‘‘FIA’’) initiated steps to educate secured accounts; (3) file on a daily
intermediary default procedures and customers on the extent of the basis the FCM’s segregation and Part 30
related recordkeeping. protections provided under the current secured amount computations with
In addition to the rulemaking efforts regulatory structure. FIA issued a list of NFA; (4) obtain the approval of senior
outlined above, the Commission has Frequently Asked Questions (‘‘FAQ’’) management prior to a withdrawal that
sought additional information through a prepared by members of the FIA Law is not for the benefit of customers,
series of roundtables and other and Compliance Division addressing the whenever the withdrawal equals 25
meetings. On February 29 and March 1, basics of segregation, collateral percent or more of the excess segregated
2012, the Commission solicited management and investments, capital or Part 30 secured amount funds; (5) file
comments and held a public roundtable requirements and other issues for FCMs a notice with NFA of any withdrawal
to solicit input on customer protection
and joint FCM/BDs, and clearinghouse that is not for the benefit of customers,
issues from a broad cross-section of the
guaranty funds.19The FAQ is intended whenever the withdrawal equals 25
futures industry, including market
to provide existing and potential percent or more of the excess segregated
participants, FCMs, DCOs, SROs,
customers with a better understanding or Part 30 secured amount funds; (6) file
securities regulators, foreign clearing
of the risks of engaging in futures detailed information regarding the
organizations, and academics.17The
trading and a clear explanation of the depositories holding customer funds
roundtable focused on issues relating to
extent of the protections provided to and the investments made with
the advisability and practicality of
customers and their funds under the Act customer funds as of the 15th day (or
modifying the segregation models for
and Commission regulations. the next business day if the 15th is not
customer funds; alternative models for
a business day) and the last business
the custody of customer collateral; FIA also issued a series of initial
day of each month; and (7) file
enhancing FCM controls over the recommendations for the protection of
additional monthly net capital and
disbursement of customer funds; customer funds.20The
leverage information with NFA.
increasing transparency surrounding an recommendations were prepared by the
Significantly, NFA’s Segregated
FCM’s holding and investment of Financial Management Committee,
Funds Provisions also require FCMs to
customer funds; and lessons learned whose members include representatives
compute their Part 30 secured amount
from recent commodity brokerage of FIA member firms, DCOs and
requirement and compute their targeted
bankruptcy proceedings. depository institutions. The initial
excess Part 30 secured funds using the
The Commission also hosted a public recommendations address enhanced
same Net Liquidating Equity Method
meeting of the Technology Advisory disclosure on the protection of customer
that is required by the Act and
Committee (‘‘TAC’’) on July 26, 2012.18 funds, reporting on segregated funds Commission regulations for computing
Panelists and TAC members discussed balances by FCMs, FCM internal the segregation requirements for
potential technological solutions controls surrounding the holding and customers trading on U.S. contract
disbursement of customer funds, and markets under section 4d of the Act.
16Id. at 36646. revisions to Part 30 regulations to make FCMs are not permitted under the NFA
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P Web site. See http://www.cftc.gov/PressRoom/ 19The FIA’s release addressing FAQs on the requirement. The failure of an FCM to
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PR Events/opaevent_cftcstaff022912 (relating to Feb. protection of customer funds is accessible on the maintain its targeted amount of excess
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N1 submitted by meeting participants, has been posted accessible on the FIA’s Web site at http:// 21For more information relating to the new FCM
TV to the Commission’s Web site. See http:// www.futuresindustry.org/downloads/ financial requirements, see http://
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Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules 67871
Liquidating Equity Method may result the non-futures business of FCMs—and II. Section by Section Analysis of
in NFA initiating a Membership the currently regulatory framework Proposed Commission Regulations and
Responsibility Action (‘‘MRA’’) against evince a need for enhanced customer Proposed Amendments to Existing
the firm. protections, risk management programs, Commission Regulations
In addition, in setting the target disclosure requirements, and auditing
A. Proposed Amendments to §1.10:
amount of excess funds, the FCM’s
and examination programs. The Financial Reports of Futures
management must perform a due
amendments proposed herein address Commission Merchants and Introducing
diligence inquiry and consider various
these issues in several ways. Brokers
factors relating, as applicable, to the
nature of the FCM’s business, including First, recognizing problems Regulation 1.10 requires each FCM to
the type and general creditworthiness of surrounding the treatment of customer file with the Commission and with the
the FCM’s customers, the trading segregated funds and foreign futures or firm’s DSRO an unaudited financial
activity of the customers, the types and foreign options secured amounts, the report each month. The financial report
volatility of the markets and products Commission is proposing to amend must be prepared using Form 1–FR–
traded by the FCM’s customers, and the several components of Parts 1, 22, and FCM. An FCM, however, that is dually-
FCM’s own liquidity and capital needs. 30 of the Commission’s regulations. The registered as a BD, may file a Financial
The FCM’s Board of Directors (or similar Commission believes that the proposed and Operational Combined Uniform
governing body), CEO or Chief Financial amendments will provide greater Single Report under the Securities
Officer (‘‘CFO’’) must approve in writing certainty to market participants that the Exchange Act of 1934 (‘‘FOCUS
the FCM’s targeted residual amount, any customer funds entrusted to FCMs will Report’’) in lieu of the Form 1–FR–FCM.
changes thereto, and any material Each FCM also is required to file an
be protected. Second, to address
changes in the FCM’s written policies annual report certified by an
shortcomings in the risk management of
and procedures. independent public accountant with the
FCMs, the Commission is proposing a
The NFA Board of Directors also Commission and with its DSRO.
new §1.11 that will establish robust risk
approved on August 16, 2012, The unaudited monthly and certified
management programs. Third, the
amendments to NFA financial annual financial reports are required to
requirements for FCMs that will require Commission determined that the current contain basic financial statements
each FCM to provide its DSRO with regulatory framework should be re- including a statement of financial
view-only access via the Internet to oriented to implement a more risk- condition, a statement of income (loss),
account information for each of the based, forward-looking perspective, and a statement of changes in
FCM’s customer segregated funds affording the Commission and SROs ownership equity. The financial
account(s) maintained and held at a with read-only access to accounts statements also are required to include
bank or trust company. The same holding customer funds and additional additional schedules designed to
requirement would apply to the FCM’s information on depositories and the address specific regulatory objectives to
customer secured account(s) held for customer assets held in such demonstrate that the FCM is in
customers trading on foreign futures depositories. The proposed amendments compliance with minimum capital and
exchanges. to §§1.10, 1.12, 1.20, 1.26, and 1.32 customer funds segregation
In addition, the NFA rule address those and other issues. Fourth, requirements. These additional
amendments provide that if a bank or schedules include a statement of
given the difficulties that can arise in an
trust company is unable to allow the changes in liabilities subordinated to
FCM’s business, and the direct and
FCM to provide its DSRO with view- claims of general creditors, a statement
significant impact on the FCM’s
only full access via the Internet, the of the computation of the minimum
regulatory capital that can result from
bank or trust company will not be capital requirements (‘‘Capital
such difficulties, the Commission is
deemed an acceptable depository to Computation Schedule’’), a statement of
proposing to amend §1.17(a)(4) to
hold customer segregated and secured segregation requirements and funds in
ensure that an FCM’s capital and
accounts. NFA intends to expand its segregation for customers trading on
liquidity are sufficient to safeguard the
oversight of FCMs under the amended U.S. commodity exchanges
rules, once the amendments are continuation of operations at the FCM. (‘‘Segregation Schedule’’) and a
implemented, to receive daily reports Fifth, to effect the change in orientation statement of secured amounts and funds
from all depositories for customer needed in FCM examinations programs, held in separate accounts for foreign
segregated and secured accounts, as well as to assure quality control over futures and foreign options customers
including FCMs that are clearing program contents, administration and (‘‘Secured Amount Schedule’’). In
members of DCOs. NFA plans to oversight, the Commission is proposing addition, the certified annual report
develop a program to compare the to amend §1.52, which, among other must contain a reconciliation of material
balances reported by the depositories things, addresses the formation of Joint differences between the Capital
with the balances reported by the FCMs Audit Committees and the Computation Schedule, the Segregation
in their daily segregation reports. An implementation of Joint Audit Schedule, and the Secured Amount
immediate alert would be generated for Programs. And sixth, recognizing the Schedule contained in the certified
any material discrepancies. need to increase the information annual report and the unaudited
provided to customers concerning the monthly report for the FCM’s year-end
ALS2 E. Commission’s Proposal risks of futures trading and the FCMs month.
POS The incidents outlined above, with which they may choose to conduct The Forms 1–FR–FCM and the
O coupled with the information generated FOCUS Reports are necessary financial
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SK67QT rFuClMes .b Iuns pinaertsisc ouplaerr,a atnio enxsa—minincalutidoinn og f greater detail in the next Section. othpee rFaCtiMon’ss aobfi tlhitey ftiorm m tahinatt amina y impact
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67872 Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules
compliance with Commission residual interest to exceed the sum of swaps positions. As part of the
requirements and the protection of such margin deficits. implementation of section 724(a) of the
customer funds. The Form 1–FR–FCM As more fully discussed in Section Dodd-Frank Act, the Commission
and FOCUS Reports are filed II.B below, proposed §1.11 will require adopted §22.2(g) which requires an
electronically with the Commission and each FCM that carries customer funds to FCM to compute, as of the close of
are subject to automated edits by the determine a necessary level of excess business each business day, a
Commission’s financial statement segregated and secured funds that the segregation computation demonstrating
surveillance software. Alerts and edit firm should hold in segregated or compliance with its obligation to hold
checks, which may indicate a need for secured accounts to ensure against sufficient funds in segregated accounts
further analysis and follow-up by staff, becoming undersegregated or in an amount sufficient to cover the
are generated by the financial undersecured as a result of the total Net Liquidating Equity of each of
withdrawal of proprietary funds from the FCM’s Cleared Swaps Customers.26
surveillance software and major issues
segregated or secured accounts. Each The proposed Cleared Swaps
are immediately and automatically
FCM is required under proposed §1.11 Segregation Schedule will be
forwarded to Commission staff for
to compute or determine the necessary comparable to the current Segregation
review.
target of residual interest based upon Schedule and will allow the
The Segregation Schedule and the appropriate due diligence and Commission and the FCM’s DSRO to
Secured Amount Schedule generally consideration of various factors relating obtain information on the FCM’s
indicate, respectively, the total amount to the nature of the FCM’s business,24 holding of Cleared Swaps Customer
of funds held by the FCM in segregated including the type and general Collateral to ensure that such funds are
or secured accounts, the total amount of creditworthiness of the customer base, held in accordance with the provisions
funds that the FCM must hold in the amount of the undermargined of Part 22 of the Commission’s
segregated or secured accounts to meet customer accounts on any given day, regulations and that the FCM is
its regulatory obligations to futures and the volatility and liquidity of the reporting that it has sufficient funds in
customers and foreign futures or foreign markets and products traded by segregated accounts to meet its
options customers, and whether the firm customers. obligations to all of its Cleared Swaps
holds excess segregated or secured The disclosure of the targeted amount Customers computed under the Net
funds in the segregated or secured of the FCM’s residual interest in Liquidating Equity Method.
accounts as of the reporting date. The segregated or secured accounts will The Commission previously proposed
Commission is proposing to amend allow the Commission and DSRO to a Cleared Swaps Segregation Schedule
§1.10 to require each FCM to also assess the size of the target relative to as part of its proposed regulations to
disclose in the Segregation Schedule both the total funds held in segregation adopt capital requirements for swap
and in the Secured Amount Schedule22 or secured accounts and to compare the dealers and major swap participants.27
target to other FCMs. Such information In light of the Commission’s decision to
a target amount of ‘‘residual interest’’
will assist the Commission and DSROs revise the Cleared Swaps Segregation
(denoting the FCM’s proprietary funds)
in assessing the potential risk that a firm Schedule from the version that was
that the FCM is required to maintain in
may become undersegregated or published for comment as part of the
customer segregated accounts and
undersecured, and will enhance the Commission’s proposed capital rules for
secured accounts based upon its written
Commission’s and DSRO’s ability to swap dealers and major swap
policies and procedures for computing a
protect customer funds. participants by requiring the FCM to
targeted amount required under the new
The Commission also is proposing to separately disclose its targeted residual
risk management provisions in §1.11
revise Form 1–FR–FCM to adopt a new interest in Cleared Swaps Customer
discussed in Section II.B below.23In
‘‘Statement of Cleared Swap Customer Accounts and the sum of margin deficits
addition to the target amount of residual
Segregation Requirements and Funds in for such accounts, the Commission is
interest, the FCM also will be required
Cleared Swap Customer Accounts republishing the Cleared Swaps
to report on the Segregation Schedule
Under Section 4d(f) of the Act’’ Segregation Schedule as part of this
and the Secured Amount Schedule the
(‘‘Cleared Swaps Segregation proposal to provide the public with an
sum of outstanding margin deficits of
Schedule’’). The Commission is opportunity to comment on the
the relevant customers for each
proposing the Cleared Swaps proposal.28
computation, to ensure that the residual Segregation Schedule to implement The Commission also is proposing to
interest is at all times in excess of such provisions in section 724(a) of the amend §1.10(g)(2) to provide that the
sum, demonstrating compliance with Dodd-Frank Act.25Section 724(a) Cleared Swaps Segregation Schedule is
the newly proposed procedures in amended section 4d of the Act, and a public document. Regulation 1.10
§§1.22 and 1.23, which shall require requires an FCM to segregate from its currently provides that the Commission
own assets any money, securities and will treat the monthly Form 1–FR–FCM
22The Commission also proposes to revise the other property deposited by a Cleared
title of the ‘‘Secured Amount Schedule’’ by adding Swaps Customer to margin its cleared 26See 77 FR 6336 (February 7, 2012).
the term ‘‘30.7 Customer’’ to specify that the 27See Capital Requirements of Swap Dealers and
secured amount will include both U.S.-domiciled Major Swap Participants, 76 FR 27802 (May 12,
and foreign-domiciled customers consistent with 24The term ‘‘Cleared Swaps Customer Collateral’’ 2011).
OSALS2 tCbheoelmo pwmro.i pssoisoend Raemgeunladtmioennst ds itsoc uPsasret d3 0in o fS tehceti on II.R iomsr e doretchfhienarne pdt r oionrp b§eyr2t ay2 .dr1ee tcroiev imvateeidav nebs ya c lall e mfaurotiunnregey so, rcsgoeacmnuimrziaitsiteisosion, n roefg 2ti8hsRete eFrgeoudrlm aFt Ci1oM–nF /1RB.–D1F0 mC(hMa)y p pfriroloevv iaidd eFesOd tC hthUaatS ta Ra dlelup aolrlyt -i n lieu
OP 23The NFA recently adopted a similar from, for, or on behalf of a Cleared Swaps Customer information that is required to be included in the
PR amendment to its rules, mandating that its member to margin a Cleared Swap or the settlement value Form 1–FR–FCM is included in the FOCUS Report.
with FCMs maintain written policies and procedures of a Cleared Swap, and includes any accruals on Currently, dual-registrant FCM/BDs include a
D identifying a target amount that the FCM will seek such Cleared Swap transactions. Segregation Schedule and a Secured Amount
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R to maintain as its residual interest in customer 25See Dodd-Frank Wall Street Reform and Schedule in the FOCUS Report filings as
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N1 segregated and secured accounts. See NFA Notice Consumer Protection Act, Public Law 111–203, 124 supplemental schedules. If the Commission were to
TV I–12–14 (July 18, 2012), available at http:// Stat. 1376 (2010). The text of the Dodd-Frank Act adopt a Cleared Swaps Segregation Schedule, dual-
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Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules 67873
reports and monthly FOCUS Reports as Commission also is proposing to revise conforming amendment to §3.3(f)(2) to
exempt from mandatory public current line item 27.J. to require the reflect the proposed 60-day deadline.
disclosure for purposes of the Freedom FCM to disclose its obligation to retail The Commission is proposing to add
of Information Act and the Government forex customers. Currently, an FCM’s a new requirement in §1.10(b)(5) to
in the Sunshine Act, except for certain obligation to retail forex customers is require each FCM to file with the
capital numbers and other financial included with other miscellaneous Commission on a monthly basis its
information including the Segregation liabilities and reported under current balance sheet leverage ratio. FCMs
Schedules and the Secured Amount line item 27.J. ‘‘Other.’’ The separate currently are required to file the same
Schedules contained in the financial reporting of an FCM’s retail forex leverage information with the NFA on a
reports. The Commission is proposing to obligation will provide greater monthly basis. The Commission does
amend §1.10(g)(2) to provide that the transparency on the Statement of not expect the imposition of this
Cleared Swaps Segregation Schedule is Financial Condition regarding the firm’s regulation to have any significant
a public document in the same manner obligations to its retail counterparties in impact on the FCMs as the ratio is
as the Segregation Schedule and off-exchange foreign currency calculated from existing reported
Secured Amount Schedule, and is transactions, and is appropriate given balances and already provided to NFA.
available by requesting copies from the the Commission’s direct jurisdiction The leverage ratio will provide
Commission. over such activities under section 2(c) of information regarding the amount of
Making the Cleared Swaps the Act when conducted by an FCM. assets supported by the FCM’s capital
Segregation Schedule publicly available base. The Commission views leverage
The Commission also is proposing to
will benefit customers and potential information as an important element in
amend §1.10(b)(1)(ii) to require that an
customers by allowing them to review assessing the financial condition of an
FCM submit its certified annual report
an FCM’s compliance with its regulatory FCM as a high degree of balance sheet
to the Commission and to its DSRO
obligations and will provide a certain leverage may indicate that the firm does
within 60 days of its year-end date.
amount of detail as to how the FCM not have the capital to support its
Currently, an FCM is required to submit
holds customer funds, which customers investment decisions, particularly if
the annual certified financial statements
and potential customers will be able to such investments loose a significant
within 90 days of the firm’s year-end
assess from a risk perspective and also amount of their value in a short period
date, except for FCMs that are dually-
use to compare to other firms. This of time or require substantial margin
registered as FCM/BDs, which are
information, coupled with additional payments or other payments to support.
require to submit the certified annual
firm risk disclosures that the The Commission also is proposing to
report within 60 days of the year-end
Commission is proposing in §1.55 and amend §1.10(c)(2)(i) to require that all
date under both Commission and SEC
discussed in detail in Section II.P monthly unaudited Forms 1–FR–FCM
regulations. Therefore, the proposal will
below, will provide customers with or FOCUS Reports be filed
only impact FCMs that are not dually-
greater transparency regarding the risks electronically with the Commission.
registered as BDs.
of entrusting their funds and engaging The Commission also is proposing to
The proposal will align the filing
in transactions with particular FCMs. amend §1.10(c)(2)(i) to require an FCM
deadlines for both FCMs and dual
Customers also will be able to view the to file its certified financial statement in
registrant FCMs/BDs. The annual
total amount of the targeted residual electronic format.
certified financial report is a key
interest each FCM holds and to assess FCMs currently file the monthly
component of the Commission’s and
for themselves the adequacy of the unaudited financial statements with the
DSROs’ financial surveillance program,
targeted residual interest and whether Commission using the WinJammer
as it represents that an independent
the FCM holds funds in excess of the Online Filing System (‘‘WinJammer’’)
entity has conducted an audit following
targeted residual interest. electronic filing system, and the
The Commission also is proposing to U.S. generally accepted auditing proposed amendments are simply
amend several statements in the Form standards for the purpose of expressing codifying current practices.29Annual
1–FR–FCM. The Commission is an opinion on the financial statements certified financial reports currently are
proposing to amend the Statement of of the FCM. Requiring standalone FCMs required to be filed in paper form, and
Financial Condition by adding a new to submit the certified financial are required to contain the manual
line item 1.D. Line 1 currently statements within 60 days of the firm’s signature of the public accountant that
separately details the amount of funds year-end date will allow Commission conducted the examination. Under the
in segregation or separate accounts for and DSRO staff to review the financial Commission’s proposal, an FCM will
futures customers and foreign futures or statements on a more timely basis to use the WinJammer system to file its
foreign option customers. Proposed line identify and address accounting or certified financial report as a ‘‘PDF’’
item 1.D. will set forth the amount of auditing issues that may impact the document. The electronic filing of
funds held by the FCM in segregated financial condition of the FCM. certified annual reports will ensure that
accounts for Cleared Swaps Customers. In addition, the Commission notes such documents are received in a timely
This amendment is necessary due to the that, pursuant to §3.3(f)(2), the annual manner and will allow Commission staff
adoption of the Part 22 regulations, report of an FCM’s CCO must be to initiate prompt reviews of the public
which require the segregation of Cleared furnished electronically to the accountant’s report to identify any
Swaps Customer Collateral and the Commission simultaneously with the accounting issues or material
ALS2 proposed adoption of the Cleared Swaps submission of Form 1–FR–FCM, as inadequacies that might have been
OS Segregation Schedule as part of the required under §1.10(b)(2)(ii); identified during the examination. The
P
RO Form 1–FR–FCM. simultaneously with the FOCUS Report,
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R Condition by adding a new line item condition report, as required under Exchange (‘‘CME’’) and the NFA. FCMs currently
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TVN1 22.F., which requires the separate section 4s(f) of the Act, as applicable. uFsOeC WUiSn RJaempmoretsr, taon tdra ontshmeri tf iFnoarnmcsia 1l –inFRfo–rFmCaMtio, n
Q disclosure of the FCM’s liability to Given the 60-day deadline proposed
SK67 Cleared Swaps Customers. The herein, the Commission is proposing a aSnRdO rse. gulatory notices to the Commission and to the
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67874 Federal Register/Vol. 77, No. 220/Wednesday, November 14, 2012/Proposed Rules
timely review of the certified financial independent from the business unit be for foreign futures and options
statements will enhance customer established to administer the risk customers. The definition makes clear
protections as deficiencies and other management program. that the requirements of §1.11 applies
accounting issues will be promptly Paragraph (b) of proposed §1.11 to all customer funds that may be held
identified and reviewed. establishes definitions for the terms by an FCM.
The Commission also is proposing a ‘‘Customer,’’ ‘‘Customer Account,’’ Proposed §1.11(c)(4) requires FCMs
technical amendment to §1.10(c)(1). ‘‘Business Unit,’’ ‘‘Governing Body,’’ to provide copies of the risk
Regulation 1.10(c)(1) provides that any ‘‘Segregated Funds,’’ and ‘‘Senior management policies and procedures to
report or information required to be Management.’’ the Commission and the FCM’s DSRO in
provided to the Commission by an IB or ‘‘Business Unit’’ is defined to clearly order to allow the Commission and
FCM will be considered filed when delineate the separation of the risk DSROs to monitor the status of risk
received by the Commission Regional management unit required by the management practices among FCMs.
office with jurisdiction over the state in proposed rule from the other personnel Submission of such policies and
which the FCM has its principal place of an FCM. procedures to the Commission without
of business. To ensure that reports are The term ‘‘Customer’’ is defined further comment or action by the
filed expeditiously with the correct broadly to include futures customers (as Commission or Commission staff should
Commission Regional office, the defined in §1.3) trading futures not be construed as an endorsement of
Commission’s proposed amendment to contracts or options on futures contracts the completeness or effectiveness of the
§1.10(c)(1) cross-references §140.02, listed on designated contract markets, risk management policies and
which sets forth the jurisdiction of each 30.7 Customers (as proposed to be procedures and no FCM should make a
of the Commission’s three Regional defined in §30.1) trading futures representation to the contrary. The
offices. contract or options on futures contracts Commission invites comments on the
The Commission requests comment listed on foreign contract markets, and submission of risk management policies
on all aspects the proposed amendments Cleared Swaps Customers (as defined in and procedures and, more generally, on
to §1.10. Specifically, the Commission §22.1) engaging in cleared swap whether the provisions of §1.11 have
requests comments on the following transactions. achieved a sufficient level of detail for
The term ‘‘Customer Funds’’ is
questions: the purposes of designing a
• Should other schedules in the Form defined to mean funds deposited by comprehensive risk management
1–FR–FCM be amended to provide futures customers, 30.7 Customers, and program.
additional information to the Cleared Swap Customers as margin or Proposed §1.11(e) provides for a non-
funds accruing to such customers from
Commission and the FCM’s SROs? exclusive list of the elements that must
• The Commission is proposing to open futures or cleared swap be a part of the risk management
require FCMs to submit to the transactions. Existing Commission program of an FCM. Such policies and
Commission and the firm’s DSRO a regulations require FCMs to hold each procedures should include: (1)
monthly computation of the FCM’s of these types of customer deposited identifying risks (including risks posed
balance sheet leverage. The proposal is funds, as applicable, in separate by affiliates, all lines of business of the
consistent with the leverage accounts and to segregate such FCM, and all other trading activity of
computation set forth in the rules of the Customer Funds from the FCM’s own the FCM) and setting of risk tolerance
NFA. Are there other measures of funds and from each other type. limits; (2) providing periodic risk
The term ‘‘Governing Body’’ is
leverage that the Commission should exposure reports to senior management
defined as the sole proprietor, if the
consider adopting? Are there other and the governing body; (3) operational
FCM is a sole proprietorship; a general
financial statement ratios in addition to risk controls; (4) capital controls; and (5)
partner, if the FCM is a partnership; the
leverage that the Commission should establishing a risk management program
board of directors, if the FCM is a
consider requiring FCMs to submit to that takes into account risks associated
corporation; and the chief executive
the Commission and DSROs? with the safekeeping and segregation of
officer, chief financial officer, the
customer funds.
B. Proposed §1.11: Risk Management manager, the managing member, or
In regard to customer funds, the
Program for Futures Commission those members vested with the
Commission notes that FCMs are
Merchants management authority if the FCM is a
required by the Act and Commission
Proposed §1.11 requires each FCM limited liability company or limited regulations to segregate and safeguard
that carries customer accounts30to partnership. ‘‘Senior Management’’ is funds deposited by customers for
establish a risk management program defined to mean any officer or officers trading futures and/or swap contracts.
designed to monitor and manage the specifically granted the authority and Recent events have emphasized that it is
risks associated with the FCM’s responsibility to fulfill the requirements essential that FCMs maintain adequate
activities as an FCM. It further provides: of senior management by the Governing systems of internal controls, involving
(1) That such risk management program Body. These definitions, as used in the participation and review of the
consist of written policies and proposed §1.11, are designed to ensure firm’s senior management, in order to
procedures; (2) that such policies and that there is accountability at the properly safeguard customer funds.
procedures be approved by the highest levels for the FCM’s key internal Accordingly, proposed §1.11(e)(3)(i)
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