Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organi

Vol. 77

Wednesday,

No. 220

November 14, 2012

Part II

Commodity Futures Trading Commission

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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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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 3, 22, 30, and 140
RIN 3038–AD88

Enhancing Protections Afforded
Customers and Customer Funds Held
by Futures Commission Merchants
and Derivatives Clearing Organizations
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:

The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is proposing to adopt new
regulations and amend existing
regulations to require enhanced
customer protections, risk management
programs, internal monitoring and
controls, capital and liquidity standards,
customer disclosures, and auditing and
examination programs for futures
commission merchants (‘‘FCMs’’). The
proposal also addresses certain related
issues concerning derivatives clearing
organizations (‘‘DCOs’’) and chief
compliance officers (‘‘CCOs’’). The
proposed rules will afford greater
assurances to market participants that:
customer segregated funds and secured
amounts are protected; customers are
provided with appropriate notice of the
risks of futures trading and of the FCMs
with which they may choose to do
business; FCMs are monitoring and
managing risks in a robust manner; the
capital and liquidity of FCMs are
strengthened to safeguard their
continued operations; and the auditing
and examination programs of the
Commission and the self-regulatory
organizations (‘‘SROs’’) are monitoring
the activities of FCMs in a prudent and
thorough manner.
DATES: Comments must be received on
or before January 14, 2013.
ADDRESSES: You may submit comments,
identified by RIN 3038–AD88, by any of
the following methods:
• Agency Web site, via its Comments
Online process: http://
comments.cftc.gov. Follow the
instructions for submitting comments
through the Web site.
• Mail: Send to David A. Stawick,
Secretary, Commodity Futures Trading
Commission, 1155 21st Street NW.,
Washington, DC 20581.
• Hand delivery/Courier: Same as
Mail above.
• Federal eRulemaking Portal: http://
www.regulations.gov/search/index.jsp.
Follow the instructions for submitting
comments.
All comments must be submitted in
English, or if not, accompanied by an

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SUMMARY:

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English translation. Comments will be
posted as received to http://
www.cftc.gov. You should submit only
information that you wish to make
available publicly. If you wish the
Commission to consider information
that is exempt from disclosure under the
Freedom of Information Act, a petition
for confidential treatment of the exempt
information may be submitted according
to the procedures set forth in § 145.9 of
the Commission’s regulations.1
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from www.cftc.gov that it may deem to
be inappropriate for publication, such as
obscene language. All submissions that
have been redacted or removed that
contain comments on the merits of the
rulemaking will be retained in the
public comment file and will be
considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT:
Division of Swap Dealer and
Intermediary Oversight: Gary Barnett,
Director, 202–418–5977,
[email protected]; Thomas Smith,
Deputy Director, 202–418–5495,
[email protected]; Frank Fisanich, Chief
Counsel, 202–418–5949,
[email protected]; or Ward P. Griffin,
Associate Chief Counsel, 202–418–
5425, [email protected], Three
Lafayette Centre, 1155 21st Street
NW., Washington, DC 20581, or Kevin
Piccoli, Deputy Director, 646–746–
9834, [email protected], 140
Broadway, 19th Floor, New York, NY
10005.
Division of Clearing and Risk: Robert B.
Wasserman, Chief Counsel, 202–418–
5092, [email protected], Three
Lafayette Centre, 1155 21st Street
NW., Washington, DC 20581.
Office of the Chief Economist: Camden
Nunery, Economist, [email protected],
202–418–5723, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. General Statutory and Current
Regulatory Structure
The protection of customers—and the
safeguarding of money, securities or
other property deposited by customers
with an FCM—is a fundamental
component of the Commission’s
1 Commission regulations referred to herein are
found at 17 CFR Ch. 1 (2012). Commission
regulations are accessible on the Commission’s Web
site, www.cftc.gov.

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disclosure and financial responsibility
framework. Section 4d(a)(2) 2 of the
Commodity Exchange Act (‘‘Act’’) 3
requires each FCM to segregate from its
own assets all money, securities and
other property deposited by futures
customers to margin, secure, or
guarantee futures contracts and options
on futures contracts traded on
designated contract markets.4 Section
4d(a)(2) further requires an FCM to treat
and deal with futures customer funds as
belonging to the futures customer, and
prohibits an FCM from using the funds
deposited by a futures customer to
margin or extend credit to any person
other than the futures customer that
deposited the funds. Section 4d(f) of the
Act, which was added by section 724(a)
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act,5 requires
each FCM to segregate from its own
assets all money, securities and other
property deposited by Cleared Swaps
Customers to margin transactions in
Cleared Swaps.6
The Commission has adopted §§ 1.20
through 1.30, and § 1.32, to implement
section 4d(a)(2) of the Act, and adopted
Part 22 to implement section 4d(f) of the
Act. The purpose of these regulations is
to safeguard funds deposited by futures
customers and Cleared Swaps
Customers, respectively.
Regulation 1.20 requires each FCM
and DCO to separately account for and
to segregate from its own proprietary
funds all money, securities, or other
property deposited by futures customers
for trading on designated contract
markets. Regulation 1.20 also provides
that an FCM or DCO may deposit
futures customer funds only with a
bank, trust company, and for FCMs
only, a DCO or another FCM. The funds
must be deposited under an account
27

U.S.C. 6d(a)(2).
U.S.C. 1 et seq.
4 The term ’’ futures customer’’ is defined in
§ 1.3(iiii) to include any person who uses a futures
commission merchant as an agent in connection
with trading in any contract for the purchase or sale
of a commodity for future delivery or an option on
such contract (excluding any proprietary accounts
under § 1.3(y)). The Commission adopted the
definition of the term ‘‘futures customer’’ on
October 16, 2012 as part of the final rulemaking that
amended existing Commission regulations to
incorporate swaps. The Federal Register release
adopting the final rules can be accessed at http://
www.cftc.gov/ucm/groups/public/@newsroom/
documents/file/federalregister101612.pdf.
5 See Dodd-Frank Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
may be accessed at http://www.cftc.gov/
LawRegulation/OTCDERIVATIVES/index.htm.
6 The term ‘‘Cleared Swaps Customer’’ is defined
in § 22.1 as any person entering into a Cleared
Swap, but excludes: (1) Any owner or holder of a
Cleared Swaps Proprietary Account with respect to
the Cleared Swaps in such account; and (2) A
clearing member of a DCO with respect to Cleared
Swaps cleared on that DCO.
37

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
name that clearly identifies the funds as
belonging to the futures customers of
the FCM or DCO and further shows that
the funds are segregated as required by
section 4d(a)(2) of the Act and
Commission regulations. FCMs and
DCOs also are required to obtain a
written acknowledgment from a
depository stating that the depository
was informed that funds deposited are
customer funds being held in
accordance with the Act.
FCMs and DCOs also are restricted in
their use of futures customer funds.
Regulations 1.20 and 1.22 provide that
the funds deposited by one futures
customer may not be used to margin or
to secure the contracts or option
positions, or extend credit to any
person, other than the futures customer
that deposited the funds. An FCM or
DCO, however, may for convenience
commingle and hold funds deposited as
margin by multiple futures customers in
the same account or accounts with one
of the recognized depositories. An FCM
or DCO also may invest futures
customer funds in certain permitted
investments under § 1.25.
Part 22 of the Commission’s
regulations, which governs Cleared
Swaps transactions, implements section
4d(f) of the Act and parallels many of
the provisions in Part1 addressing the
manner in which, and the
responsibilities imposed upon, an FCM
holding funds for futures customers
trading on designated contract markets.7
Regulation 22.2 requires an FCM to treat
and to deal with funds deposited by
Cleared Swaps Customers as belonging
to such Cleared Swaps Customers and to
hold such funds separately from the
FCM’s own funds. Regulation 22.4
provides that an FCM may deposit
Cleared Swaps Customer Collateral with
a bank, trust company, DCO, or another
registered FCM. Regulation 22.6
requires that the account holding the
Cleared Swaps Customers Collateral
must clearly identify the account as an
account for Cleared Swaps Customers of
the FCM engaging in cleared swap
transactions and that the funds
maintained in the account are subject to
the segregation provisions of section
4d(f) of the Act and Commission
regulations.
Regulation 22.2(d) also prohibits an
FCM from using the funds deposited by
one Cleared Swaps Customer to
7 The Commission approved the part 22
regulations on January 11, 2012, with an effective
date of April 9, 2012. Compliance with the part 22
regulations is required by November 8, 2012. See,
Protection of Cleared Swaps Customer Contracts
and Collateral; Conforming Amendments to the
Commodity Broker Bankruptcy Provisions, 77 FR
6336 (Feb. 7, 2012).

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purchase, margin, or settle cleared swap
transactions of any person other the
Cleared Swaps Customer that deposited
the funds. Further, § 22.2(c) permits an
FCM to commingle the Cleared Swaps
Customer Collateral of multiple Cleared
Swaps Customers into one or more
accounts, and § 22.2(e)(1) permits an
FCM to invest Cleared Swaps Customer
Collateral in permitted investments
under § 1.25.
In addition to holding funds for
futures customers transacting on
designated contract markets and for
Cleared Swaps Customers engaging in
cleared swap transactions, FCMs also
hold funds for persons trading futures
contracts listed on foreign boards of
trade. Section 4(b) of the Act provides
that the Commission may adopt rules
and regulations proscribing fraud and
requiring minimum financial standards,
the disclosure of risk, the filing of
reports, the keeping of books and
records, the safeguarding of the funds
deposited by persons for trading on
foreign markets, and registration with
the Commission by any person located
in the United States who engages in the
offer or sale of any contract of sale of a
commodity for future delivery that is
made subject to the rules of a board of
trade located outside of the United
States. Pursuant to the statutory
authority of section 4(b), the
Commission adopted Part 30 of its
regulations to address foreign futures
and foreign option transactions.
The segregation provisions for funds
deposited by foreign futures or foreign
options customers to margin foreign
futures or foreign options transactions
under Part 30, however, are significantly
different from the requirements set forth
in § 1.20 for futures customers trading
on designated contract markets and Part
22 for Cleared Swaps Customers
engaging in cleared swap transactions.
Regulation 30.7 provides that an FCM
may deposit the funds belonging to
foreign futures or foreign options
customers in an account or accounts
maintained at a bank or trust company
located in the United States; a bank or
trust company located outside of the
United States that has in excess of $1
billion of regulatory capital; an FCM
registered with the Commission; a DCO;
a member of a foreign board of trade; a
foreign clearing organization; or a
depository selected by the member of a
foreign board of trade or foreign clearing
organization. The account with the
depository must be titled to clearly
specify that the account holds funds
belonging to the foreign futures or
foreign options customers of the FCM
that are trading on foreign futures
markets. An FCM also is permitted to

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invest the funds deposited by foreign
futures or foreign option customers in
accordance with § 1.25.
However, unlike § 1.20 and Part 22,
which require an FCM to hold a
sufficient amount of funds in
segregation to meet the total account
equities of all of the FCM’s futures
customers and Cleared Swaps
Customers at all times (i.e., the Net
Liquidating Equity Method), § 30.7
requires an FCM to maintain in separate
accounts an amount of funds only
sufficient to cover the margin required
on open foreign futures contracts, plus
or minus any unrealized gains or losses
on such open positions, plus any funds
representing premiums payable or
received on foreign options (including
any additional funds necessary to secure
such options, plus or minus any
unrealized gains or losses on such
options) (i.e., the ‘‘Alternative
Method’’). Thus, under the Part 30
Alternative Method an FCM is not
required to maintain a sufficient amount
of funds in such separate accounts to
pay the full account balances of all of its
foreign futures or foreign options
customers at all times.
In addition to the segregation
requirements of sections 4d(a)(2) and
4d(f) of the Act, and the secured amount
requirements in Part 30 of the
Commission’s regulations, FCMs also
are subject to minimum net capital and
financial reporting requirements that are
intended to ensure that such firms meet
their financial obligations in a regulated
marketplace, including their financial
obligations to customers and DCOs.
Each FCM is required to maintain a
minimum level of ‘‘adjusted net
capital,’’ which is generally defined
under § 1.17 as the firm’s net equity as
computed under generally accepted
accounting principles, less all of the
firm’s liabilities and further excluding
all assets that are not liquid or readily
marketable. Regulation 1.17(c)(5) further
requires an FCM to impose capital
charges (i.e., deductions) on certain of
its liquid assets to protect against
possible market risks in such assets.
FCMs also are subject to financial
recordkeeping and reporting
requirements. FCMs that carry customer
accounts are required under § 1.32 to
prepare a schedule each business day
demonstrating their compliance with
the segregation and secured amount
requirements. Regulation 1.32 requires
the calculation to be performed by noon
each business day, reflecting the
account balances and open positions as
of the close of business on the previous
business day.
Each FCM also is required by § 1.10
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designated self-regulatory organization
(‘‘DSRO’’) monthly unaudited financial
statements and an annual audited
financial report, as well as notices of
certain predefined events.8 Regulation
1.12 requires an FCM to file a notice
with the Commission and with the
firm’s DSRO whenever, among other
things, the firm: (1) Fails to maintain
compliance with the Commission’s
capital requirements; (2) fails to hold
sufficient funds in segregated or secured
amount accounts to meet its regulatory
requirements; (3) fails to maintain
current books and records; or (4)
experiences a significant reduction in
capital from the previous month-end.
The purpose of the regulatory notices is
to alert the Commission and the firm’s
DSRO as early as possible to potential
financial issues at the firm that may
adversely impact the ability of the FCM
to comply with its obligations to
safeguard customer funds, or to meet its
financial obligations to other FCMs or
DCOs.
The statutory mandate to segregate
customer funds—to treat them as
belonging to the customer and not use
the funds inappropriately—takes on
greater meaning in light of the
devastating events experienced over the
past year. Those events, which are
discussed in greater detail below,
demonstrate that the risks of
misfeasance and malfeasance, and the
risks of failing to maintain sufficient
excess funds in segregation: (i) Put
customer funds at risk; and (ii) are
exacerbated by stresses on the business
of the FCM. Many of those risks can be
mitigated significantly by better risk
management systems and controls,
along with an increase in risk-oriented
oversight and examination of the FCMs.
Determining what is a ‘‘sufficient’’
amount of excess funds in segregation
for any particular FCM requires a full
understanding of the business of that
FCM, including a proper analysis of the
factors that affect the actual amount of
segregated funds held by the FCM
relative to the minimum amount of
segregated funds it is required to hold.
Further, appropriate care must be taken
to avoid withdrawing such excess funds
at times of great stress to cover needs
unrelated to the purposes for which
excess segregated and secured funds are
maintained. In times of stress, excess
funds may look like an easy liquidity
8 The term ‘‘self-regulatory organization’’ is
defined by § 1.3 to mean a contract market, a swap
execution facility, or a registered futures
association. A DSRO is the SRO that is appointed
to be primarily responsible for conducting ongoing
financial surveillance of an FCM under a joint audit
agreement submitted to and approved by the
Commission under § 1.52.

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source to help cover other risks of the
business; yet withdrawing it makes it
unavailable when it may be most
needed. The recent market events
illustrate both the need to: (i) Require
that care be taken about monitoring
excess segregated and secured funds,
and the conditions under and the extent
to which such funds may be withdrawn;
and (ii) place appropriate risk
management controls around the other
risks of the business to help relieve (A)
the likelihood of an exigent event or, (B)
if such an event occurs, the likelihood
of a failure to prepare for such an event,
which in either case could create
pressures that result in an inappropriate
withdrawal of customer funds.
Although the Commission’s existing
regulations provide an essential
foundation to fostering a wellfunctioning marketplace, wherein
customers are protected and
institutional risks are minimized, recent
events have demonstrated that
additional measures are necessary to
effectuate the fundamental purposes of
the statutory provisions discussed
above. Further, concurrently with the
enhanced responsibilities for FCMs that
are proposed herein, the oversight and
examination systems must be enhanced
to mitigate risks and effectuate the
statutory purposes.
B. Self-Regulatory Structure
The Commission’s oversight structure
provides that SROs are the frontline
regulators of FCMs, introducing brokers
(‘‘IBs’’), commodity pool operators, and
commodity trading advisors. In 2000,
Congress affirmed the Commission’s
reliance on SROs by amending section
3 of the Commodity Exchange Act to
state: ‘‘It is the purpose of this Act to
serve the public interests through a
system of effective self-regulation of
trading facilities, clearing systems,
market participants and market
professionals under the oversight of the
Commission.’’
As part of its oversight responsibility,
an SRO is required to conduct periodic
examinations of member FCMs’
compliance with Commission and SRO
financial and related reporting
requirements, including the FCMs’
holding of customer funds in segregated
and secured accounts. The Commission
oversees the SROs by examining them
for the performance of their duties.
More recently, the Commission has
moved to conducting quarterly reviews
of the SROs’ FCM examination program
in which the Commission selects a
small sample of the SRO’s FCM work
papers to review. In addition, the
Commission also conducts limitedscope reviews of FCMs in a ‘‘for cause’’

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situation that are sometimes referred to
as ‘‘audits,’’ but they are not full-scale
audits as accountants commonly use
that term.
In addition, because there are
multiple SROs who share the same
member FCMs, to avoid subjecting
FCMs to duplicative examinations from
SROs, the Commission has a permissive
system that allows the SROs to agree
how to allocate FCMs amongst them. An
SRO who is allocated certain FCMs for
such examination is referred to as the
DSRO of those FCMs.
Under Commission regulations, FCMs
must have their annual financial
statements audited by an independent
certified public accountant following
U.S. Generally Accepted Auditing
Standards (‘‘U.S. GAAS’’). As part of
this certified annual report, the
independent accountant also must
conduct appropriate reviews and tests to
identify any material inadequacies in
systems and controls that could violate
the Commission’s segregation or secured
amount requirements. Any such
inadequacies are required to be reported
to the FCM’s DSRO and to the
Commission.
C. Futures Commission Merchant
Insolvencies and Failures of Risk
Management
Recent events demonstrate the need
for revisions to the Commission’s
customer protection regime. Since
October 2011, two FCMs have entered
into insolvency proceedings. On
October 31, 2011, MF Global, Inc.
(‘‘MFGI’’), which was dually-registered
as an FCM with the Commission and as
a securities broker-dealer (‘‘BD’’) with
the U.S. Securities and Exchange
Commission (‘‘SEC’’), was placed into a
liquidation proceeding under the
Securities Investor Protection Act by the
Securities Investor Protection
Corporation (‘‘SIPC’’). The trustee
appointed to oversee the liquidation of
MFGI has reported a potential $900
million shortfall of funds necessary to
repay the account balances due to
customers trading futures on designated
contract markets, and an approximately
$700 million shortfall in funds
immediately available to repay the
account balances of customers trading
on foreign futures markets.9 The
shortfall in customer segregated
accounts is attributable by the MFGI
Trustee to significant transfers of funds
out of the customer accounts that were
used by MFGI for various purposes
other than to meet obligations to or on
9 See Report of the Trustee’s Investigation and
Recommendations, In re MF Global Inc., No. 11–
2790 (MG) SIPA (Bankr. S.D.N.Y. Jun. 4, 2012).

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behalf of customers. The trustee also is
attempting to recover approximately
$640 million of customer funds that was
deposited by MFGI with its London,
U.K. affiliate, MFGUK, as margin funds
for trading on foreign markets. The
MFGI trustee and the Special
Administrators handling the liquidation
of MFGUK are disputing the legal status
of the funds and whether they are
customer funds under English law. The
outcome of this dispute will have a
significant impact on the amount of
funds that are returned to MFGI.
In addition, the Commission filed a
civil injunctive complaint in federal
district court on July 10, 2012, against
Peregrine Financial Group, Inc. (‘‘PFG’’),
a registered FCM and its Chief Executive
Officer (‘‘CEO’’) and sole owner, Russell
R. Wasendorf, Sr., alleging that PFG and
Wasendorf, Sr. committed fraud by
misappropriating customer funds,
violated customer fund segregation
laws, and made false statements
regarding the amount of funds in
customer segregated accounts in
financial statements filed with the
Commission. The complaint states that
in July 2012 during an NFA
examination PFG falsely represented
that it held in excess of $220 million of
customer funds when in fact it held
approximately $5.1 million.10
Recent incidents also have
demonstrated the value of establishing
robust risk management systems within
FCMs and enhanced early warning
systems to detect and address capital
issues. In particular, problems that arise
through an FCM’s non-futures-related
business can have a direct and
significant impact on the FCM’s
regulatory capital, raising questions as
to whether the FCM will be able to
maintain the minimum financial
requirements mandated by the Act and
Commission regulations.11
These recent incidents have
highlighted weaknesses in the customer
protection regime prescribed in the
Commission’s regulations and through
10 Complaint, U.S. Commodity Futures Trading
Commission v. Peregrine Financial Group, Inc., and
Russell R. Wasendorf, Sr., No. 12–cv–5383 (N.D. Ill.
July 10, 2012). A copy of the Commission’s
complaint has been posted to the Commission’s
Web site.
11 See, e.g., Edward Krudy, Jed Horowitz and John
McCrank, ‘‘Knight’s Future in Balance After
Trading Disaster,’’ Reuters (Aug. 3, 2012), available
at http://in.reuters.com/article/2012/08/03/
knightcapital-loss-idINL2E8J27QE20120803 (noting
that a software issue caused the firm to incur a $440
million trading loss, which represented much of the
firm’s capital); Chris Dieterich and Nathalie Tadena,
‘‘Penson Worldwide’s US Securities Accounts To
Be Acquired By Apex Clearing,’’ available at
http://online.wsj.com/article/BT-CO-20120531717791.html (discussing circumstances that led
Penson to sell its futures business).

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the self-regulatory system. In particular,
questions have arisen on the
requirements surrounding the holding
and investment of customer funds,
including the ability of FCMs to
withdraw funds from customer
segregated accounts and Part 30 secured
accounts. Additionally, the incidents
have underscored the need for
additional safeguards—such as robust
risk management systems, strengthened
early-warning systems surrounding
margin and capital requirements, and
enhanced public disclosures—to
promote the protection of customer
funds and to minimize the systemic risk
posed by certain actions of market
participants. Further questions have
arisen on the system of audits and
examinations of FCMs, and whether the
system functions adequately to monitor
FCMs’ activities, verify segregated fund
and secured amount balances, and
detect fraud. Consequently, the
Commission has taken steps to study
and address the issues raised by the
incidents, and industry participants
likewise have taken steps to address the
issues. Such steps are described in
greater detail in the next section.
D. Recent Commission Rulemakings and
Other Initiatives Relating to Customer
Protection
Since late 2011, the Commission has
promulgated rules directly impacting
the protection of customer funds. The
Commission also has studied the
current regulatory framework
surrounding customer protection,
particularly in light of the recent
incidents outlined above, in order to
identify potential enhancements to the
systems and Commission regulations
protecting customer funds. The
Commission’s efforts have been
informed, in part, by efforts undertaken
by industry participants. The proposed
rule amendments set forth in this
release have been informed by the
efforts detailed below.
In December 2011, the Commission
adopted final rule amendments revising
the types of investments that an FCM or
DCO can make with customer funds
under § 1.25, for the purpose of
affording greater protection for such
funds.12 Among other changes to §§ 1.25
and 30.7, the final rule amendments
removed from the list of permitted
investments: (1) corporate debt
obligations not guaranteed by the
United States; (2) foreign sovereign debt;
12 See, Investment of Customer Funds and Funds
Held in an Account for Foreign Futures and Foreign
Options Transactions, 76 FR 78776 (Dec. 19, 2011).

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and (3) in-house and affiliate
transactions.
In adopted the amendments to § 1.25,
the Commission was mindful that
customer segregated funds must be
invested by FCMs and DCOs in a
manner that minimizes their exposure
to credit, liquidity, and market risks
both to preserve their availability to
customers and DCOs, and to enable
investments to be quickly converted to
cash at a predictable value in order to
avoid systemic risk. The amendments
are consistent with the general
prudential standard contained in § 1.25,
which provides that all permitted
investments must be ‘‘consistent with
the objectives of preserving principal
and maintaining liquidity.’’
The Commission also approved final
regulations that require DCOs to collect
initial customer margin from FCMs on
a gross basis.13 Under the final
regulations, FCMs are no longer
permitted to offset one customer’s
margin requirement against another
customer’s margin requirements and
deposit only the net margin collateral
with the DCO. As a result of the rule
change, a greater portion of customer
initial margin will be posted by FCMs
to the DCOs.
The Commission also approved a new
margining regime for cleared swaps
positions.14 Under the traditional
futures margining model, DCOs hold an
FCM’s customer funds on a collective
basis and are permitted to use the
collective margin funds held for the
FCM’s customers to satisfy a margin
deficiency caused by a single customer.
The Commission approved an
alternative margin rule for cleared swap
transactions. Under the ‘‘LSOC rule’’
(legal segregation with operational
comingling), the DCOs that clear swaps
transactions have greater information
regarding the margin collateral of
individual Swaps Customers, and each
Swaps Customer’s collateral is protected
individually all the way to the
clearinghouse.
The Commission also included
customer protection enhancements in
the final rule for designated contract
markets. These provisions codify into
rules staff guidance on minimum
requirements for SROs regarding their
financial surveillance of FCMs.15 The
rules require that a DCM have
arrangements and resources for effective
13 See Commission Regulation 39.12(g)(8)(i) and
Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR 69334 (Nov.
8, 2011).
14 See 77 FR 6336 (Feb. 7, 2012).
15 See Core Principles and Other Requirements for
Designated Contract Markets, 77 FR 36612 (June 19,
2012).

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rule enforcement and trade and
financial surveillance programs,
including the authority to collect
information and examine books and
records of members and market
participants. The rules also establish
minimum financial standards for both
member FCMs and IBs and nonintermediated market participants. The
Commission expressly noted in the
preamble of the Adopting Release that
‘‘a DCM’s duty to set financial standards
for its FCM members involves setting
capital requirements, conducting
surveillance of the potential future
exposure of each FCM as compared to
its capital, and taking appropriate action
in light of the results of such
surveillance.’’ 16 Further, the rules
mandate that DCMs adopt rules for the
protection of customer funds, including
the segregation of customer and
proprietary funds, the custody of
customer funds, the investment
standards for customer funds,
intermediary default procedures and
related recordkeeping.
In addition to the rulemaking efforts
outlined above, the Commission has
sought additional information through a
series of roundtables and other
meetings. On February 29 and March 1,
2012, the Commission solicited
comments and held a public roundtable
to solicit input on customer protection
issues from a broad cross-section of the
futures industry, including market
participants, FCMs, DCOs, SROs,
securities regulators, foreign clearing
organizations, and academics.17 The
roundtable focused on issues relating to
the advisability and practicality of
modifying the segregation models for
customer funds; alternative models for
the custody of customer collateral;
enhancing FCM controls over the
disbursement of customer funds;
increasing transparency surrounding an
FCM’s holding and investment of
customer funds; and lessons learned
from recent commodity brokerage
bankruptcy proceedings.
The Commission also hosted a public
meeting of the Technology Advisory
Committee (‘‘TAC’’) on July 26, 2012.18
Panelists and TAC members discussed
potential technological solutions

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16 Id.

at 36646.
information on the public roundtable,
including video recordings and transcripts of the
discussions, have been posted to the Commission’s
Web site. See http://www.cftc.gov/PressRoom/
Events/opaevent_cftcstaff022912 (relating to Feb.
29, 2012); http://www.cftc.gov/PressRoom/Events/
opaevent_cftcstaff030112 (relating to Mar. 1, 2012).
18 Additional information, including documents
submitted by meeting participants, has been posted
to the Commission’s Web site. See http://
www.cftc.gov/PressRoom/Events/opaevent_tac
072612.
17 Further

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directed at enhancing the protection of
customers funds by identifying and
exploring technological issues and
possible solutions relating to the ability
of the Commission, SROs and customers
to verify the location and status of funds
held in customer segregated accounts.
Commission staff hosted an additional
roundtable on August 9, 2012, to
discuss SRO requirements for
examinations of FCMs and Commission
oversight of SRO examination programs.
The roundtable also focused on the role
of the independent public accountant in
the FCM examination process, and
proposals addressing various
alternatives to the current system for
segregating customer funds.
In developing the proposals set forth
in this release, the Commission also has
been informed by efforts undertaken by
industry participants. On February 29,
2012, the Futures Industry Association
(‘‘FIA’’) initiated steps to educate
customers on the extent of the
protections provided under the current
regulatory structure. FIA issued a list of
Frequently Asked Questions (‘‘FAQ’’)
prepared by members of the FIA Law
and Compliance Division addressing the
basics of segregation, collateral
management and investments, capital
requirements and other issues for FCMs
and joint FCM/BDs, and clearinghouse
guaranty funds.19 The FAQ is intended
to provide existing and potential
customers with a better understanding
of the risks of engaging in futures
trading and a clear explanation of the
extent of the protections provided to
customers and their funds under the Act
and Commission regulations.
FIA also issued a series of initial
recommendations for the protection of
customer funds.20 The
recommendations were prepared by the
Financial Management Committee,
whose members include representatives
of FIA member firms, DCOs and
depository institutions. The initial
recommendations address enhanced
disclosure on the protection of customer
funds, reporting on segregated funds
balances by FCMs, FCM internal
controls surrounding the holding and
disbursement of customer funds, and
revisions to Part 30 regulations to make
the protections comparable to those
19 The FIA’s release addressing FAQs on the
protection of customer funds is accessible on the
FIA’s Web site at http://www.futuresindustry.org/
downloads/PCF–FAQs.PDF.
20 The FIA’s initial recommendations are
accessible on the FIA’s Web site at http://
www.futuresindustry.org/downloads/
Initial_Recommendations_for_Customer
_Funds_Protection.pdf.

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provided for customers trading on
designated contract markets.
On July 13, 2012, the Commission
approved new FCM financial
requirements proposed by the National
Futures Association (‘‘NFA’’).21 The
NFA Financial Requirements Section 16
and its related Interpretive Notice
entitled NFA Financial Requirements
Section 16: FCM Financial Practices and
Excess Segregated Funds/Secured
Amount Disbursements (collectively
referred to as ‘‘the Segregated Funds
Provisions’’) were developed in
consultation with Commission staff.
NFA’s Segregated Funds Provisions
require each FCM to: (1) Maintain
written policies and procedures
governing the deposit of the FCM’s
proprietary funds (i.e., excess or
residual funds) in customer segregated
accounts and Part 30 secured accounts;
(2) maintain a targeted amount of excess
funds in segregate accounts and Part 30
secured accounts; (3) file on a daily
basis the FCM’s segregation and Part 30
secured amount computations with
NFA; (4) obtain the approval of senior
management prior to a withdrawal that
is not for the benefit of customers,
whenever the withdrawal equals 25
percent or more of the excess segregated
or Part 30 secured amount funds; (5) file
a notice with NFA of any withdrawal
that is not for the benefit of customers,
whenever the withdrawal equals 25
percent or more of the excess segregated
or Part 30 secured amount funds; (6) file
detailed information regarding the
depositories holding customer funds
and the investments made with
customer funds as of the 15th day (or
the next business day if the 15th is not
a business day) and the last business
day of each month; and (7) file
additional monthly net capital and
leverage information with NFA.
Significantly, NFA’s Segregated
Funds Provisions also require FCMs to
compute their Part 30 secured amount
requirement and compute their targeted
excess Part 30 secured funds using the
same Net Liquidating Equity Method
that is required by the Act and
Commission regulations for computing
the segregation requirements for
customers trading on U.S. contract
markets under section 4d of the Act.
FCMs are not permitted under the NFA
rules to use the Alternative Method to
compute the Part 30 secured amount
requirement. The failure of an FCM to
maintain its targeted amount of excess
Part 30 funds computed using the Net
21 For more information relating to the new FCM
financial requirements, see http://
www.nfa.futures.org/news/
newsNotice.asp?ArticleID=4072.

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Liquidating Equity Method may result
in NFA initiating a Membership
Responsibility Action (‘‘MRA’’) against
the firm.
In addition, in setting the target
amount of excess funds, the FCM’s
management must perform a due
diligence inquiry and consider various
factors relating, as applicable, to the
nature of the FCM’s business, including
the type and general creditworthiness of
the FCM’s customers, the trading
activity of the customers, the types and
volatility of the markets and products
traded by the FCM’s customers, and the
FCM’s own liquidity and capital needs.
The FCM’s Board of Directors (or similar
governing body), CEO or Chief Financial
Officer (‘‘CFO’’) must approve in writing
the FCM’s targeted residual amount, any
changes thereto, and any material
changes in the FCM’s written policies
and procedures.
The NFA Board of Directors also
approved on August 16, 2012,
amendments to NFA financial
requirements for FCMs that will require
each FCM to provide its DSRO with
view-only access via the Internet to
account information for each of the
FCM’s customer segregated funds
account(s) maintained and held at a
bank or trust company. The same
requirement would apply to the FCM’s
customer secured account(s) held for
customers trading on foreign futures
exchanges.
In addition, the NFA rule
amendments provide that if a bank or
trust company is unable to allow the
FCM to provide its DSRO with viewonly full access via the Internet, the
bank or trust company will not be
deemed an acceptable depository to
hold customer segregated and secured
accounts. NFA intends to expand its
oversight of FCMs under the amended
rules, once the amendments are
implemented, to receive daily reports
from all depositories for customer
segregated and secured accounts,
including FCMs that are clearing
members of DCOs. NFA plans to
develop a program to compare the
balances reported by the depositories
with the balances reported by the FCMs
in their daily segregation reports. An
immediate alert would be generated for
any material discrepancies.
E. Commission’s Proposal
The incidents outlined above,
coupled with the information generated
through the recent efforts undertaken by
the Commission and industry
participants, demonstrate the need for
new rules and amendments to existing
rules. In particular, an examination of
FCM business operations—including

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the non-futures business of FCMs—and
the currently regulatory framework
evince a need for enhanced customer
protections, risk management programs,
disclosure requirements, and auditing
and examination programs. The
amendments proposed herein address
these issues in several ways.
First, recognizing problems
surrounding the treatment of customer
segregated funds and foreign futures or
foreign options secured amounts, the
Commission is proposing to amend
several components of Parts 1, 22, and
30 of the Commission’s regulations. The
Commission believes that the proposed
amendments will provide greater
certainty to market participants that the
customer funds entrusted to FCMs will
be protected. Second, to address
shortcomings in the risk management of
FCMs, the Commission is proposing a
new § 1.11 that will establish robust risk
management programs. Third, the
Commission determined that the current
regulatory framework should be reoriented to implement a more riskbased, forward-looking perspective,
affording the Commission and SROs
with read-only access to accounts
holding customer funds and additional
information on depositories and the
customer assets held in such
depositories. The proposed amendments
to §§ 1.10, 1.12, 1.20, 1.26, and 1.32
address those and other issues. Fourth,
given the difficulties that can arise in an
FCM’s business, and the direct and
significant impact on the FCM’s
regulatory capital that can result from
such difficulties, the Commission is
proposing to amend § 1.17(a)(4) to
ensure that an FCM’s capital and
liquidity are sufficient to safeguard the
continuation of operations at the FCM.
Fifth, to effect the change in orientation
needed in FCM examinations programs,
as well as to assure quality control over
program contents, administration and
oversight, the Commission is proposing
to amend § 1.52, which, among other
things, addresses the formation of Joint
Audit Committees and the
implementation of Joint Audit
Programs. And sixth, recognizing the
need to increase the information
provided to customers concerning the
risks of futures trading and the FCMs
with which they may choose to conduct
business, the Commission is proposing
amendments to § 1.55 that will enhance
the disclosures provided by FCMs.
These amendments are discussed in
greater detail in the next Section.

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67871

II. Section by Section Analysis of
Proposed Commission Regulations and
Proposed Amendments to Existing
Commission Regulations
A. Proposed Amendments to § 1.10:
Financial Reports of Futures
Commission Merchants and Introducing
Brokers
Regulation 1.10 requires each FCM to
file with the Commission and with the
firm’s DSRO an unaudited financial
report each month. The financial report
must be prepared using Form 1–FR–
FCM. An FCM, however, that is duallyregistered as a BD, may file a Financial
and Operational Combined Uniform
Single Report under the Securities
Exchange Act of 1934 (‘‘FOCUS
Report’’) in lieu of the Form 1–FR–FCM.
Each FCM also is required to file an
annual report certified by an
independent public accountant with the
Commission and with its DSRO.
The unaudited monthly and certified
annual financial reports are required to
contain basic financial statements
including a statement of financial
condition, a statement of income (loss),
and a statement of changes in
ownership equity. The financial
statements also are required to include
additional schedules designed to
address specific regulatory objectives to
demonstrate that the FCM is in
compliance with minimum capital and
customer funds segregation
requirements. These additional
schedules include a statement of
changes in liabilities subordinated to
claims of general creditors, a statement
of the computation of the minimum
capital requirements (‘‘Capital
Computation Schedule’’), a statement of
segregation requirements and funds in
segregation for customers trading on
U.S. commodity exchanges
(‘‘Segregation Schedule’’) and a
statement of secured amounts and funds
held in separate accounts for foreign
futures and foreign options customers
(‘‘Secured Amount Schedule’’). In
addition, the certified annual report
must contain a reconciliation of material
differences between the Capital
Computation Schedule, the Segregation
Schedule, and the Secured Amount
Schedule contained in the certified
annual report and the unaudited
monthly report for the FCM’s year-end
month.
The Forms 1–FR–FCM and the
FOCUS Reports are necessary financial
reporting for Commission and DSRO
staff to assess the ongoing financial
condition of an FCM and provide
significant information regarding the
operations of the firm that may impact
the FCM’s ability to maintain

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compliance with Commission
requirements and the protection of
customer funds. The Form 1–FR–FCM
and FOCUS Reports are filed
electronically with the Commission and
are subject to automated edits by the
Commission’s financial statement
surveillance software. Alerts and edit
checks, which may indicate a need for
further analysis and follow-up by staff,
are generated by the financial
surveillance software and major issues
are immediately and automatically
forwarded to Commission staff for
review.
The Segregation Schedule and the
Secured Amount Schedule generally
indicate, respectively, the total amount
of funds held by the FCM in segregated
or secured accounts, the total amount of
funds that the FCM must hold in
segregated or secured accounts to meet
its regulatory obligations to futures
customers and foreign futures or foreign
options customers, and whether the firm
holds excess segregated or secured
funds in the segregated or secured
accounts as of the reporting date. The
Commission is proposing to amend
§ 1.10 to require each FCM to also
disclose in the Segregation Schedule
and in the Secured Amount Schedule 22
a target amount of ‘‘residual interest’’
(denoting the FCM’s proprietary funds)
that the FCM is required to maintain in
customer segregated accounts and
secured accounts based upon its written
policies and procedures for computing a
targeted amount required under the new
risk management provisions in § 1.11
discussed in Section II.B below.23 In
addition to the target amount of residual
interest, the FCM also will be required
to report on the Segregation Schedule
and the Secured Amount Schedule the
sum of outstanding margin deficits of
the relevant customers for each
computation, to ensure that the residual
interest is at all times in excess of such
sum, demonstrating compliance with
the newly proposed procedures in
§§ 1.22 and 1.23, which shall require
22 The Commission also proposes to revise the
title of the ‘‘Secured Amount Schedule’’ by adding
the term ‘‘30.7 Customer’’ to specify that the
secured amount will include both U.S.-domiciled
and foreign-domiciled customers consistent with
the proposed amendments to Part 30 of the
Commission Regulations discussed in Section II.R
below.
23 The NFA recently adopted a similar
amendment to its rules, mandating that its member
FCMs maintain written policies and procedures
identifying a target amount that the FCM will seek
to maintain as its residual interest in customer
segregated and secured accounts. See NFA Notice
I–12–14 (July 18, 2012), available at http://
www.nfa.futures.org/news/
newsNotice.asp?ArticleID=4072.

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residual interest to exceed the sum of
such margin deficits.
As more fully discussed in Section
II.B below, proposed § 1.11 will require
each FCM that carries customer funds to
determine a necessary level of excess
segregated and secured funds that the
firm should hold in segregated or
secured accounts to ensure against
becoming undersegregated or
undersecured as a result of the
withdrawal of proprietary funds from
segregated or secured accounts. Each
FCM is required under proposed § 1.11
to compute or determine the necessary
target of residual interest based upon
appropriate due diligence and
consideration of various factors relating
to the nature of the FCM’s business,24
including the type and general
creditworthiness of the customer base,
the amount of the undermargined
customer accounts on any given day,
and the volatility and liquidity of the
markets and products traded by
customers.
The disclosure of the targeted amount
of the FCM’s residual interest in
segregated or secured accounts will
allow the Commission and DSRO to
assess the size of the target relative to
both the total funds held in segregation
or secured accounts and to compare the
target to other FCMs. Such information
will assist the Commission and DSROs
in assessing the potential risk that a firm
may become undersegregated or
undersecured, and will enhance the
Commission’s and DSRO’s ability to
protect customer funds.
The Commission also is proposing to
revise Form 1–FR–FCM to adopt a new
‘‘Statement of Cleared Swap Customer
Segregation Requirements and Funds in
Cleared Swap Customer Accounts
Under Section 4d(f) of the Act’’
(‘‘Cleared Swaps Segregation
Schedule’’). The Commission is
proposing the Cleared Swaps
Segregation Schedule to implement
provisions in section 724(a) of the
Dodd-Frank Act.25 Section 724(a)
amended section 4d of the Act, and
requires an FCM to segregate from its
own assets any money, securities and
other property deposited by a Cleared
Swaps Customer to margin its cleared
24 The term ‘‘Cleared Swaps Customer Collateral’’
is defined in § 22.1 to mean all money, securities,
or other property received by a futures commission
merchant or by a derivatives clearing organization
from, for, or on behalf of a Cleared Swaps Customer
to margin a Cleared Swap or the settlement value
of a Cleared Swap, and includes any accruals on
such Cleared Swap transactions.
25 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
may be accessed at http://www.cftc.gov/
LawRegulation/OTCDERIVATIVES/index.htm.

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swaps positions. As part of the
implementation of section 724(a) of the
Dodd-Frank Act, the Commission
adopted § 22.2(g) which requires an
FCM to compute, as of the close of
business each business day, a
segregation computation demonstrating
compliance with its obligation to hold
sufficient funds in segregated accounts
in an amount sufficient to cover the
total Net Liquidating Equity of each of
the FCM’s Cleared Swaps Customers.26
The proposed Cleared Swaps
Segregation Schedule will be
comparable to the current Segregation
Schedule and will allow the
Commission and the FCM’s DSRO to
obtain information on the FCM’s
holding of Cleared Swaps Customer
Collateral to ensure that such funds are
held in accordance with the provisions
of Part 22 of the Commission’s
regulations and that the FCM is
reporting that it has sufficient funds in
segregated accounts to meet its
obligations to all of its Cleared Swaps
Customers computed under the Net
Liquidating Equity Method.
The Commission previously proposed
a Cleared Swaps Segregation Schedule
as part of its proposed regulations to
adopt capital requirements for swap
dealers and major swap participants.27
In light of the Commission’s decision to
revise the Cleared Swaps Segregation
Schedule from the version that was
published for comment as part of the
Commission’s proposed capital rules for
swap dealers and major swap
participants by requiring the FCM to
separately disclose its targeted residual
interest in Cleared Swaps Customer
Accounts and the sum of margin deficits
for such accounts, the Commission is
republishing the Cleared Swaps
Segregation Schedule as part of this
proposal to provide the public with an
opportunity to comment on the
proposal.28
The Commission also is proposing to
amend § 1.10(g)(2) to provide that the
Cleared Swaps Segregation Schedule is
a public document. Regulation 1.10
currently provides that the Commission
will treat the monthly Form 1–FR–FCM
26 See

77 FR 6336 (February 7, 2012).
Capital Requirements of Swap Dealers and
Major Swap Participants, 76 FR 27802 (May 12,
2011).
28 Regulation 1.10(h) provides that a duallyregistered FCM/BD may file a FOCUS Report in lieu
of the Form 1–FR–FCM provided that all
information that is required to be included in the
Form 1–FR–FCM is included in the FOCUS Report.
Currently, dual-registrant FCM/BDs include a
Segregation Schedule and a Secured Amount
Schedule in the FOCUS Report filings as
supplemental schedules. If the Commission were to
adopt a Cleared Swaps Segregation Schedule, dualregistrant FCM/BDs would have to include such
schedule in their Focus Report filings.
27 See

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
reports and monthly FOCUS Reports as
exempt from mandatory public
disclosure for purposes of the Freedom
of Information Act and the Government
in the Sunshine Act, except for certain
capital numbers and other financial
information including the Segregation
Schedules and the Secured Amount
Schedules contained in the financial
reports. The Commission is proposing to
amend § 1.10(g)(2) to provide that the
Cleared Swaps Segregation Schedule is
a public document in the same manner
as the Segregation Schedule and
Secured Amount Schedule, and is
available by requesting copies from the
Commission.
Making the Cleared Swaps
Segregation Schedule publicly available
will benefit customers and potential
customers by allowing them to review
an FCM’s compliance with its regulatory
obligations and will provide a certain
amount of detail as to how the FCM
holds customer funds, which customers
and potential customers will be able to
assess from a risk perspective and also
use to compare to other firms. This
information, coupled with additional
firm risk disclosures that the
Commission is proposing in § 1.55 and
discussed in detail in Section II.P
below, will provide customers with
greater transparency regarding the risks
of entrusting their funds and engaging
in transactions with particular FCMs.
Customers also will be able to view the
total amount of the targeted residual
interest each FCM holds and to assess
for themselves the adequacy of the
targeted residual interest and whether
the FCM holds funds in excess of the
targeted residual interest.
The Commission also is proposing to
amend several statements in the Form
1–FR–FCM. The Commission is
proposing to amend the Statement of
Financial Condition by adding a new
line item 1.D. Line 1 currently
separately details the amount of funds
in segregation or separate accounts for
futures customers and foreign futures or
foreign option customers. Proposed line
item 1.D. will set forth the amount of
funds held by the FCM in segregated
accounts for Cleared Swaps Customers.
This amendment is necessary due to the
adoption of the Part 22 regulations,
which require the segregation of Cleared
Swaps Customer Collateral and the
proposed adoption of the Cleared Swaps
Segregation Schedule as part of the
Form 1–FR–FCM.
The Commission also is proposing to
amend the Statement of Financial
Condition by adding a new line item
22.F., which requires the separate
disclosure of the FCM’s liability to
Cleared Swaps Customers. The

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Commission also is proposing to revise
current line item 27.J. to require the
FCM to disclose its obligation to retail
forex customers. Currently, an FCM’s
obligation to retail forex customers is
included with other miscellaneous
liabilities and reported under current
line item 27.J. ‘‘Other.’’ The separate
reporting of an FCM’s retail forex
obligation will provide greater
transparency on the Statement of
Financial Condition regarding the firm’s
obligations to its retail counterparties in
off-exchange foreign currency
transactions, and is appropriate given
the Commission’s direct jurisdiction
over such activities under section 2(c) of
the Act when conducted by an FCM.
The Commission also is proposing to
amend § 1.10(b)(1)(ii) to require that an
FCM submit its certified annual report
to the Commission and to its DSRO
within 60 days of its year-end date.
Currently, an FCM is required to submit
the annual certified financial statements
within 90 days of the firm’s year-end
date, except for FCMs that are duallyregistered as FCM/BDs, which are
require to submit the certified annual
report within 60 days of the year-end
date under both Commission and SEC
regulations. Therefore, the proposal will
only impact FCMs that are not duallyregistered as BDs.
The proposal will align the filing
deadlines for both FCMs and dual
registrant FCMs/BDs. The annual
certified financial report is a key
component of the Commission’s and
DSROs’ financial surveillance program,
as it represents that an independent
entity has conducted an audit following
U.S. generally accepted auditing
standards for the purpose of expressing
an opinion on the financial statements
of the FCM. Requiring standalone FCMs
to submit the certified financial
statements within 60 days of the firm’s
year-end date will allow Commission
and DSRO staff to review the financial
statements on a more timely basis to
identify and address accounting or
auditing issues that may impact the
financial condition of the FCM.
In addition, the Commission notes
that, pursuant to § 3.3(f)(2), the annual
report of an FCM’s CCO must be
furnished electronically to the
Commission simultaneously with the
submission of Form 1–FR–FCM, as
required under § 1.10(b)(2)(ii);
simultaneously with the FOCUS Report,
as required under § 1.10(h); or
simultaneously with the financial
condition report, as required under
section 4s(f) of the Act, as applicable.
Given the 60-day deadline proposed
herein, the Commission is proposing a

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conforming amendment to § 3.3(f)(2) to
reflect the proposed 60-day deadline.
The Commission is proposing to add
a new requirement in § 1.10(b)(5) to
require each FCM to file with the
Commission on a monthly basis its
balance sheet leverage ratio. FCMs
currently are required to file the same
leverage information with the NFA on a
monthly basis. The Commission does
not expect the imposition of this
regulation to have any significant
impact on the FCMs as the ratio is
calculated from existing reported
balances and already provided to NFA.
The leverage ratio will provide
information regarding the amount of
assets supported by the FCM’s capital
base. The Commission views leverage
information as an important element in
assessing the financial condition of an
FCM as a high degree of balance sheet
leverage may indicate that the firm does
not have the capital to support its
investment decisions, particularly if
such investments loose a significant
amount of their value in a short period
of time or require substantial margin
payments or other payments to support.
The Commission also is proposing to
amend § 1.10(c)(2)(i) to require that all
monthly unaudited Forms 1–FR–FCM
or FOCUS Reports be filed
electronically with the Commission.
The Commission also is proposing to
amend § 1.10(c)(2)(i) to require an FCM
to file its certified financial statement in
electronic format.
FCMs currently file the monthly
unaudited financial statements with the
Commission using the WinJammer
Online Filing System (‘‘WinJammer’’)
electronic filing system, and the
proposed amendments are simply
codifying current practices.29 Annual
certified financial reports currently are
required to be filed in paper form, and
are required to contain the manual
signature of the public accountant that
conducted the examination. Under the
Commission’s proposal, an FCM will
use the WinJammer system to file its
certified financial report as a ‘‘PDF’’
document. The electronic filing of
certified annual reports will ensure that
such documents are received in a timely
manner and will allow Commission staff
to initiate prompt reviews of the public
accountant’s report to identify any
accounting issues or material
inadequacies that might have been
identified during the examination. The
29 WinJammer is a web-based application
developed jointly by the Chicago Mercantile
Exchange (‘‘CME’’) and the NFA. FCMs currently
use WinJammer to transmit Forms 1–FR–FCM,
FOCUS Reports, and other financial information
and regulatory notices to the Commission and to the
SROs.

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timely review of the certified financial
statements will enhance customer
protections as deficiencies and other
accounting issues will be promptly
identified and reviewed.
The Commission also is proposing a
technical amendment to § 1.10(c)(1).
Regulation 1.10(c)(1) provides that any
report or information required to be
provided to the Commission by an IB or
FCM will be considered filed when
received by the Commission Regional
office with jurisdiction over the state in
which the FCM has its principal place
of business. To ensure that reports are
filed expeditiously with the correct
Commission Regional office, the
Commission’s proposed amendment to
§ 1.10(c)(1) cross-references § 140.02,
which sets forth the jurisdiction of each
of the Commission’s three Regional
offices.
The Commission requests comment
on all aspects the proposed amendments
to § 1.10. Specifically, the Commission
requests comments on the following
questions:
• Should other schedules in the Form
1–FR–FCM be amended to provide
additional information to the
Commission and the FCM’s SROs?
• The Commission is proposing to
require FCMs to submit to the
Commission and the firm’s DSRO a
monthly computation of the FCM’s
balance sheet leverage. The proposal is
consistent with the leverage
computation set forth in the rules of the
NFA. Are there other measures of
leverage that the Commission should
consider adopting? Are there other
financial statement ratios in addition to
leverage that the Commission should
consider requiring FCMs to submit to
the Commission and DSROs?
B. Proposed § 1.11: Risk Management
Program for Futures Commission
Merchants
Proposed § 1.11 requires each FCM
that carries customer accounts 30 to
establish a risk management program
designed to monitor and manage the
risks associated with the FCM’s
activities as an FCM. It further provides:
(1) That such risk management program
consist of written policies and
procedures; (2) that such policies and
procedures be approved by the
governing body of the FCM and be
furnished to the Commission; and (3)
that a risk management unit that is
30 Proposed § 1.11 contains an applicability
provision in paragraph (a) that makes clear that the
risk management program is only required of FCMs
that accept money, securities, or property to margin
or secure the trades or contracts of customers
transacting in futures, options on futures, and
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independent from the business unit be
established to administer the risk
management program.
Paragraph (b) of proposed § 1.11
establishes definitions for the terms
‘‘Customer,’’ ‘‘Customer Account,’’
‘‘Business Unit,’’ ‘‘Governing Body,’’
‘‘Segregated Funds,’’ and ‘‘Senior
Management.’’
‘‘Business Unit’’ is defined to clearly
delineate the separation of the risk
management unit required by the
proposed rule from the other personnel
of an FCM.
The term ‘‘Customer’’ is defined
broadly to include futures customers (as
defined in § 1.3) trading futures
contracts or options on futures contracts
listed on designated contract markets,
30.7 Customers (as proposed to be
defined in § 30.1) trading futures
contract or options on futures contracts
listed on foreign contract markets, and
Cleared Swaps Customers (as defined in
§ 22.1) engaging in cleared swap
transactions.
The term ‘‘Customer Funds’’ is
defined to mean funds deposited by
futures customers, 30.7 Customers, and
Cleared Swap Customers as margin or
funds accruing to such customers from
open futures or cleared swap
transactions. Existing Commission
regulations require FCMs to hold each
of these types of customer deposited
funds, as applicable, in separate
accounts and to segregate such
Customer Funds from the FCM’s own
funds and from each other type.
The term ‘‘Governing Body’’ is
defined as the sole proprietor, if the
FCM is a sole proprietorship; a general
partner, if the FCM is a partnership; the
board of directors, if the FCM is a
corporation; and the chief executive
officer, chief financial officer, the
manager, the managing member, or
those members vested with the
management authority if the FCM is a
limited liability company or limited
partnership. ‘‘Senior Management’’ is
defined to mean any officer or officers
specifically granted the authority and
responsibility to fulfill the requirements
of senior management by the Governing
Body. These definitions, as used in
proposed § 1.11, are designed to ensure
that there is accountability at the
highest levels for the FCM’s key internal
controls and processes designed to
protect the funds of the FCM’s
customers.
The term ‘‘Segregated Funds’’ is
defined to mean money, securities, or
other property held by a futures
commission merchant in separate
accounts pursuant to § 1.20 for futures
customers, pursuant to § 22.2 for cleared
swaps customers, and pursuant to § 30.7

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for foreign futures and options
customers. The definition makes clear
that the requirements of § 1.11 applies
to all customer funds that may be held
by an FCM.
Proposed § 1.11(c)(4) requires FCMs
to provide copies of the risk
management policies and procedures to
the Commission and the FCM’s DSRO in
order to allow the Commission and
DSROs to monitor the status of risk
management practices among FCMs.
Submission of such policies and
procedures to the Commission without
further comment or action by the
Commission or Commission staff should
not be construed as an endorsement of
the completeness or effectiveness of the
risk management policies and
procedures and no FCM should make a
representation to the contrary. The
Commission invites comments on the
submission of risk management policies
and procedures and, more generally, on
whether the provisions of § 1.11 have
achieved a sufficient level of detail for
the purposes of designing a
comprehensive risk management
program.
Proposed § 1.11(e) provides for a nonexclusive list of the elements that must
be a part of the risk management
program of an FCM. Such policies and
procedures should include: (1)
identifying risks (including risks posed
by affiliates, all lines of business of the
FCM, and all other trading activity of
the FCM) and setting of risk tolerance
limits; (2) providing periodic risk
exposure reports to senior management
and the governing body; (3) operational
risk controls; (4) capital controls; and (5)
establishing a risk management program
that takes into account risks associated
with the safekeeping and segregation of
customer funds.
In regard to customer funds, the
Commission notes that FCMs are
required by the Act and Commission
regulations to segregate and safeguard
funds deposited by customers for
trading futures and/or swap contracts.
Recent events have emphasized that it is
essential that FCMs maintain adequate
systems of internal controls, involving
the participation and review of the
firm’s senior management, in order to
properly safeguard customer funds.
Accordingly, proposed § 1.11(e)(3)(i)
requires that the risk management
policies and procedures of an FCM
related to the risks associated with
safekeeping and segregation of customer
funds must include: (1) The evaluation
and monitoring of depositories; 31 (2)
31 The evaluation process must include
documented criteria that any depository will be
assessed against in order to qualify to hold funds

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account opening procedures that ensure
the FCM obtains the acknowledgment
required under § 1.20 from the
depository and that the account is
properly titled as belonging to the
customers of the FCM; 32 (3) establishing
and maintaining an adequate targeted
amount of excess funds in customer
accounts reasonably designed to ensure
the FCM is at all times in compliance
with the segregation requirements for
customer funds under the Act and
Commission regulations, as discussed
further below; (4) controls ensuring that
withdrawal of cash, securities, or other
property from accounts holding
customer funds not for the benefit of
customers are in compliance with the
Act and Commission regulations; 33 (5)
procedures for assessing the
appropriateness of investing customer
funds in accordance with § 1.25; 34 (6)
the valuation, marketability, and
liquidity of customer funds and
permitted investments made with
customer funds; (7) the appropriate
separation of duties of personnel
responsible for compliance with the Act
and Commission regulations relating to
the protection and financial reporting of
customer funds; 35 (8) procedures for the
timely recording of transactions in the
firm’s books and records; and (9) annual
training of personnel responsible for
belonging to Customers. The criteria must address
a depository’s capitalization, creditworthiness,
operational reliability, access to liquidity. The
criteria must also address risks associated with
concentration of Customer funds in any depository
or group of depositories, the availability of deposit
insurance, and the regulation and supervision of
depositories. The evaluation criteria is intended to
ensure that the FCM adopts an evaluation process
which reviews potential depositories against
substantive criteria relevant to the safe custody of
Customer funds and that the FCM’s process for
evaluating and selecting depositories can be
reviewed by regulators and auditors. The FCM also
must maintain a documented process addressing
the ongoing monitoring of selected depositories,
including a thorough due diligence review of each
depository at least annually.
32 As required by § 1.20, such account opening
documentation is necessary to ensure that the
depositories are aware of their obligations regarding
the accounts and the statutory and regulatory
protections afforded the funds held in the accounts
due to their status as Segregated Funds.
33 The controls must include the conditions for
pre-approval and the notice to the Commission for
such withdrawals required by proposed § 1.23,
§ 22.17, or § 30.7, discussed below.
34 The FCM’s assessment must take into
consideration the market, credit, counterparty,
operational, and liquidity risks associated with the
investments.
35 The policies and procedures must provide for
the separation of duties among personnel that are
responsible for customer trading activities, and
approving and overseeing cash receipts and
disbursements (including investment and treasury
operations). The policies and procedures must
further require that any movement of funds to
affiliated companies or parties be approved and
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compliance with the Act and
Commission regulations relating to the
protection and financial reporting of
customer funds.
Regarding the proposed requirement
that FCMs establish and maintain an
adequate targeted amount of excess
funds in customer accounts, the
Commission notes that FCMs currently
deposit proprietary funds into both
customer segregated accounts and Part
30 secured accounts as a buffer to
minimize the possibility of the firm
being in violation of its segregated and
secured fund obligations at any time.
Under the proposal, senior management
of the FCM must perform appropriate
due diligence in setting the amount of
this buffer and must consider the nature
of the FCM’s business including the
type and general creditworthiness of its
customer base, the types of markets and
products traded by the firm’s customers,
the proprietary trading activities of the
FCM, the volatility and liquidity of the
markets and products traded by the
customers and the FCM, the FCM’s own
liquidity and capital needs, and
historical trends in customer segregation
and secured account funds balances,
customer debits and margin deficits.
The FCM also must reassess the
adequacy of the targeted residual
interest quarterly.
The Commission believes that each
FCM must set the amount of excess
segregated and secured funds required
utilizing a quantitative and qualitative
analysis that reasonably ensures
compliance at all times with segregated
and secured fund obligations. Such
analysis must take into account the
various factors that could affect
segregated and secured balances, and
must be sufficiently described in writing
to allow the DSRO of the FCM and
Commission to duplicate the
calculations and test the assumptions.
The analysis must provide a reasonable
level of assurance that the excess is at
an appropriate level for the FCM.36 A
failure to adopt or maintain appropriate
risk management policies and
procedures or to implement, monitor
and enforce controls required by § 1.11
may result in a referral to the
Commission’s Division of Enforcement
for appropriate action.
Finally, to ensure the effectiveness of
a risk management program, § 1.11(e)(4)
36 Separate

from requiring the establishment of a
target for residual interest, the Commission is
further requiring, as discussed in more detail under
Sections II.G, II.H, and II.I for §§ 1.20, 1.22, and
1.23, respectively, that residual interest at all times
exceed the sum of outstanding margin deficits to
provide a mechanism for ensuring compliance with
the prohibition of the funds of one customer being
used to margin or guarantee the positions of another
customer under the Act and existing regulations.

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requires that the risk management
program include a supervisory system
that is reasonably designed to ensure
that the risk management policies and
procedures are diligently followed.
Furthermore, § 1.11(f) requires an
annual review and testing of the
adequacy of each FCM’s risk
management program by internal audit
staff or a qualified external, third party
service.
The Commission requests comment
on all aspects of proposed § 1.11.
Specifically, the Commission requests
comment on the following:
• Should the Commission have
different risk management requirements
for FCMs based upon some measureable
criteria, such as size of the firm or type
of customers? How would the
Commission design such criteria to
distinguish between firms? Which
elements in proposed § 1.11 should
apply to smaller FCMs vs. larger FCMs?
What elements should apply to all
FCMs irrespective of the size of the
firm?
• Does the proposed risk management
program address the appropriate
minimum elements that should be
covered by an FCM risk management
program?
• Regulation 3.3 requires the CCO of
an FCM to provide an annual report to
the Commission that must review each
applicable requirement under the Act
and Commission regulations, and with
respect to each applicable requirement,
identify the policies and procedures that
are reasonably designed to ensure
compliance with the requirement, and
provide an assessment of the
effectiveness of the policies and
procedures.37 The annual report also
must include a certification by the CCO
that, to the best of his or her knowledge
and reasonable belief, and under
penalty of law, the information
contained in the annual report is
accurate and complete. The Commission
requests comment on whether the
standard for the CCO’s certification in
the annual report (i.e., based upon the
CCO’s knowledge and reasonable belief)
is adequate for a certification of the
FCM’s compliance with policies and
procedures for the safeguarding of
customer funds. Should § 1.11 contain a
separate CCO certification requirement
37 Such report is mandated by § 3.3 of the
Commission’s regulations; See Swap Dealer and
Major Swap Participant Recordkeeping, Reporting,
and Duties Rules; Futures Commission Merchant
and Introducing Broker Conflicts of Interest Rules;
and Chief Compliance Officer Rules for Swap
Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128, Apr. 3, 2012
(promulgating final rules concerning the CCOs of
FCMs, swap dealers, and major swap participants);
see also § 4d(d) of the Act, 7 U.S.C. 6d(d).

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that would impose a higher duty of
strict liability or some other higher
obligation on a CCO?
• Should the risk management
program require an FCM to conduct
quarterly or periodic audits to detect
any breach of the policies and
procedures that address the proper
segregation of customer funds?
• Should the Commission establish a
phased-in compliance provision for
§ 1.11? If so, how long of a phase-in
period should be provided? Should
there be different phase-in periods for
different provisions of the proposed
regulation?
C. Proposed Amendments to § 1.12:
Maintenance of Minimum Financial
Requirements by Futures Commission
Merchants and Introducing Brokers
The regulatory notices required under
§ 1.12 are intended to provide the
Commission and SROs with prompt
notice of potential adverse conditions at
FCMs or IBs that may indicate or lead
to a threat to the financial condition of
the firm or the protection of customer
funds held by the FCM. In adopting
§ 1.12 in 1978, the Commission stated
that the establishment of an early
warning system was necessary because
‘‘[a] fundamental purpose of the Act is
to protect the public from financially
irresponsible FCMs who handle
customer funds.’’ 38
Regulation 1.12 currently obligates
FCMs and IBs to provide notice to the
Commission and to the respective
DSROs if certain specified reportable
events occur. Reportable events include:
failing to maintain the minimum level
of required regulatory capital (§ 1.12
(a)); failing to maintain current books
and records (§ 1.12(c)); and failing to
comply with the requirements to
properly segregate customer funds
(§ 1.12(h)). The Commission is
proposing to amend § 1.12 to include
several additional reportable events and
to revise the process for submitting
reportable events to the Commission
and DSROs.
Regulation 1.12(a) requires an FCM or
IB that fails to maintain the minimum
level of adjusted net capital required by
§ 1.17 to provide immediate notice to
the Commission and to the entity’s
DSRO. The notice must include
additional information to adequately
reflect the FCM’s or IB’s current capital
condition as of any date that the entity
is undercapitalized.
The Commission is proposing to
amend § 1.12(a) to explicitly provide
that if the FCM or IB cannot compute or
document its actual capital at the time
38 43

FR 39956, 39967 (Sept. 8, 1978).

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it knows that it is undercapitalized, it
must still provide the written notice
required by § 1.12(a) immediately and
cannot delay filing the notice until it
has adequate information to compute its
actual level of adjusted net capital. A
purpose of the notice provision under
§ 1.12(a) is to provide the Commission
and the DSROs with immediate notice
of the undercapitalized condition of an
FCM or IB. If an FCM or IB were to
delay alerting the Commission that it
was undercapitalized due to the fact
that it could not accurately assess its
capital condition, it would frustrate the
intent of the notice provision. It is
imperative that an FCM or IB provide
immediate notice if the firm is
undercapitalized. Upon the filing of a
notice, Commission and SRO staff will
contact the FCM or IB to obtain greater
details of the financial condition of the
firm, including information regarding its
current financial condition or issues
associated with the firm’s inability to
accurately determine its current
financial condition.
Regulation 1.12(h) currently requires
an FCM that fails to hold sufficient
funds in segregated accounts to meet its
obligations to futures customers, or that
fails to hold sufficient funds in separate
accounts for foreign futures or foreign
options customers, to provide
immediate notice to the Commission
and to the FCM’s DSRO. The
Commission is proposing to amend
paragraph (h) to include an explicit
requirement that an FCM provide
immediate notice to the Commission
and to its DSRO if the FCM fails to hold
sufficient funds in segregated accounts
for Cleared Swaps Customers to meet its
obligation to such customers.
Commencing November 8, 2012, the
compliance date for certain Commission
Part 22 regulations, FCMs will be
required under § 22.2 to hold a
sufficient amount of funds in Cleared
Swaps Customer Accounts to meet the
Net Liquidating Equity of each Cleared
Swaps Customer.39 Immediate
notification of a failure to hold
sufficient funds in segregation for
Cleared Swaps Customers is essential
for the Commission and DSROs to
promptly assess the financial condition
of an FCM and to determine if there are
threats to the safety of the Cleared
Swaps Customers’ funds held by the
FCM. The proposed amendment to
§ 1.12(h) also harmonizes the notice
requirements whenever an FCM fails to
hold sufficient funds for futures
customers, 30.7 Customers, and Cleared
Swaps Customers.
39 77

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The Commission also is proposing to
amend § 1.12 by adding new paragraph
(i) to require an FCM to provide notice
whenever it discovers or is informed
that it has invested funds held for
customers in investments that are not
permitted investments under § 1.25, or
if the FCM holds permitted investments
in a manner that is not in compliance
with the provisions of § 1.25 (such as
the investment concentration limits).
The proposal will apply to funds held
for futures customers, 30.7 Customers,
and Cleared Swaps Customers.
The protection of customer funds is a
core element of the Commission’s
regulatory program. FCMs are entrusted
with a responsibility to use customer
funds only for the benefit of the
depositing customers.40 FCMs are
permitted, however, to invest customer
funds pursuant to the standards and
conditions set forth in § 1.25. Regulation
1.25 contains a list of permitted
investments and other criteria that are
intended to allow an FCM to receive the
benefit of investing customer funds
while also preserving the principal and
maintaining the liquidity of the
customer funds.
Requiring an FCM to provide prompt
notice of a § 1.25 violation will allow
Commission and DSRO staff to assess
whether customer funds are endangered
and to work with the FCM to ensure that
the impermissible investments are
appropriately liquidated and customer
funds remain intact. Commission and
DSRO staff also will benefit from
receiving notices of § 1.25 violations in
that the notices will provide
information regarding new investments
that FCMs may engage in that are not
permitted investments under § 1.25.
Such information will be helpful for the
Commission and DSRO in conducting
reviews of other FCMs and in providing
regulatory updates to the industry.41
The Commission also is proposing to
amend § 1.12 to provide a new
paragraph (j) that will require an FCM
to provide immediate notice to the
Commission and to the firm’s DSRO if
the FCM does not hold an amount of
funds in segregated accounts for futures
customers or for Cleared Swaps
Customers, or if the FCM does not hold
sufficient funds in separate accounts for
30.7 Customers, sufficient to meet the
firm’s targeted residual interest in one
or more of these accounts as computed
40 Regulation

1.20(a), 17 CFR 1.20(a).
Commission further notes that investing
customer funds in investments that are not
permitted investments under § 1.25, or holding
investments in a manner that is otherwise not
compliant with § 1.25 does not change the legal
status of the funds as customer funds in the event
of the bankruptcy of the FCM.
41 The

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
under proposed § 1.11, or if its residual
interest in one or more of these accounts
is less than the sum of outstanding
margin deficits for such accounts.
Proposed § 1.11 will require each FCM
that carries customer funds to calculate
an appropriate amount of excess funds
(i.e., proprietary funds) to hold in
segregated or secured accounts to
mitigate the FCM from being
undersegregated or undersecured due to
a withdrawal of proprietary funds from
a segregated or secured account. The
fact that an FCM is not holding a
sufficient amount of excess funds in
customer accounts to meet its targeted
residual interest may be indicative of
more severe financial or operational
issues at the firm. In addition, if an
FCM’s residual interest is less than the
sum of outstanding margin deficits in
one such account, it is possible that
funds of one customer in such account
are at risk of margining or guaranteeing
the open positions of another customer.
Accordingly, the Commission is
proposing to require an FCM to file
immediate notice of such an event to
allow Commission and DSRO staff to
contact the FCM to assess the condition
of the firm and the safety of customer
funds.
The Commission also is proposing
new paragraphs (k) and (l) for § 1.12.
Paragraphs (k) and (l) will require an
FCM to provide notice to the
Commission and to the firm’s DSRO in
the event of a material adverse impact
in the financial condition of the firm or
a material change in the firm’s
operations. Proposed paragraph (k) will
require an FCM to provide immediate
notice if the FCM, its parent, or a
material affiliate, experiences a material
adverse impact to its creditworthiness
or its ability to fund its obligations.
Indications of a material adverse impact
of an FCM’s creditworthiness may
include a bank or other financing entity
withdrawing credit facilities, a credit
rating downgrade, or the FCM being
placed on ‘‘credit watch’’ by a credit
rating agency. Proposed paragraph (l)
will require an FCM to provide
immediate notice of material changes in
the operations of the firm, including: A
change in senior management; the
establishment or termination of a
material line of business; a material
change in the FCM’s clearing
arrangements; or a material change in
the FCM’s credit arrangements.
Paragraph (l) is intended to provide the
Commission with notice of material
events, such as the departure of the
FCM’s CCO, CFO, or CEO.
As noted above, § 1.12 is intended to
provide the Commission and DSROs
with notice of potential issues that may

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impact the financial condition of an
FCM or the safety of customer funds.
The regulatory objective is for FCMs to
provide material information to the
Commission and DSROs as early as
possible so that the Commission and
DSROs can assess the information and
communicate with the FCMs prior to a
more serious issue developing that may
impair the financial condition of the
firms or the safety of customer funds.
Proposed paragraphs (k) and (l) will
provide the Commission and DSROs
with notice of major events that will
initiate a dialogue between the
Commission, DSROs, and FCMs which
will have the benefit of informing the
Commission and DSROs of material
events impacting FCMs. Such
information would be used by the
Commission and DSROs in setting the
scope of the review and monitoring of
the FCMs, including the determination
of the risk of the firms for purposes of
scheduling future examinations.
Without paragraphs (k) and (l), the
Commission and DSROs may not learn
of material events at FCMs until the
firms are subject to periodic
examinations.
The Commission is proposing to add
a new paragraph (m) to § 1.12 that will
require an FCM that receives a notice,
examination report, or any other
correspondence from the SEC or a SRO
to file a copy of such notice,
examination report, or correspondence
with the Commission. In order to
perform comprehensive oversight of an
FCM, the Commission and the DSROs
need to receive prompt notice of any
concern or adverse action taken by the
SEC or a securities SRO. The protection
of futures customers funds are not
immune from issues that arise from the
securities operations or business of a
dual registrant FCM/BD. Requiring an
FCM to provide prompt notice to the
Commission and the firm’s DSRO of any
notice, examination report, or
correspondence that the firm receives
from the SEC or a securities SRO will
allow the Commission and the DSRO to
identify potential threats to the safety of
customer funds.
The Commission is further proposing
to amend the process that an FCM uses
to file the notices required by § 1.12.
Currently, § 1.12 requires an FCM to
provide the Commission and DSROs
with telephonic and facsimile notice in
some situations, and to provide written
notice by mail in other situations. An
FCM also is permitted, but not required,
to file notices and written reports with
the Commission and with its DSRO
using an electronic filing system in
accordance with instructions issued by
or approved by the Commission.

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The Commission is proposing to
amend § 1.12(n) to require that all
notices and reports filed by an FCM
with the Commission or with the FCM’s
DSRO must be in writing and submitted
using an electronic filing system. Each
FCM currently uses WinJammer to file
regulatory notices with the Commission
and with the firm’s DSRO. The
WinJammer system provides for the
most effective mechanism for ensuring
that regulatory notices are promptly
received by the Commission and by the
DSROs.42 The regulation further
provides that if the FCM cannot file a
notice due to the electronic system
being inoperable or for any other reason,
it must contact the Commission
Regional office with jurisdiction over
the firm and make arrangements for the
filing of the regulatory notices by filing
the notice with the Commission via
electronic mail at a specially designated
email address established by the
Commission; [email protected]. The
Commission also is proposing to amend
§ 1.12(n) to require that each notice filed
by an FCM, IB, or SRO under § 1.12
must include a discussion of what
caused the reportable event, and what
steps have been, or are being taken, to
address the reportable event. The
reporting entity, however, may not
delay the reporting of a reportable event
if it does not possess complete
information on what caused the event,
or the steps that have been taken or are
being taken to address the event.
The amendments to §§ 1.12(b), (d), (e),
(f) and (g) are necessary and technical in
nature, and primarily revise internal
cross-references to the filing
requirements in § 1.12(n).
The Commission request comment on
all aspects of the proposed amendments
to § 1.12. Specifically, the Commission
requests comment on the following:
• Are there other reportable events
that the Commission should consider
adding to § 1.12 that would benefit the
Commission and the DSROs in the
monitoring of the financial and
operating conditions of FCMs?
• Should the Commission consider
removing any of the reportable events
listed in § 1.12? If so, why?
• Should any of the reportable events
be made public by the Commission,
SROs, or FCMs? If so, which reportable
events? What benefit would the public
receive from the disclosure of the
reportable events? What would be the
costs of disclosing the reportable events
to the FCMs? Are there any negative
42 The Commission’s proposed amendment to
require the electronic filing of reports applies to
both registered FCMs and applicants for registration
as FCMs. Applicants for FCM registration currently
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impacts of disclosing the reportable
events?
• Are the reporting standards in
proposed paragraphs (k) and (l)
adequately detailed and objective so
that an FCM can determine when there
is a reportable event? If not, what
standards should the Commission use to
define a reportable event under
paragraphs (k) and (l)?

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D. Proposed Amendments to § 1.15: Risk
Assessment Reporting Requirement for
Futures Commission Merchants
Regulation 1.15 requires FCMs to
submit certain risk assessment reports to
the Commission. The risk assessment
filings include FCM organizational
charts; financial, operational, risk
management policies, and systems
maintained by the FCM; and fiscal yearend consolidated and consolidating
financial information for the FCM and
its highest level material affiliate.
The Commission is proposing to
amend § 1.15(a)(4) to require each FCM
that is subject to § 1.15 to submit its risk
assessment information to the
Commission electronically in
accordance with instructions issued by
the Commission. The Commission
intends for FCMs to file the risk
assessment materials using the
WinJammer electronic filing system.
The Commission requests comments on
its proposed amendments to § 1.15.
E. Proposed Amendments to § 1.16:
Qualifications and Reports of
Accountants
Regulation 1.16 sets forth the
qualifications a public accountant must
possess in order to conduct audits of
Commission registrants. Currently, a
public accountant must be registered
and in good standing under the laws of
the place of the public accountant’s
principal office in order to conduct
examinations of FCMs.
The Commission is proposing to
amend § 1.16(b)(1) to require that the
public accountant be registered with the
Public Company Accounting Oversight
Board (‘‘PCAOB’’) in addition to being
in good standing with the relevant state
licensing authorities. In addition, the
public accountant must have undergone
an examination by the PCAOB and any
deficiencies noted during such
examination must have been remediated
to the satisfaction of the PCAOB.
Regulation § 1.16(b)(4) also will impose
an obligation on an FCM’s governing
body to ensure that a public accountant
is qualified to perform an audit of the
FCM by assessing the firm’s experience
in auditing FCMs, the firm’s experience
and knowledge of the Act and
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and experience of the firm’s auditing
staff.
The Commission also is proposing to
amend § 1.16(c)(2) to require a public
accountant to state in the audit opinion
whether the audit was conducted in
accordance with U.S. GAAS after full
consideration of the auditing standards
adopted by the PCAOB. Currently, all
audits of the certified financial
statements of FCMs must be performed
under U.S. GAAS. However, as the
Commission is now proposing that
certified public accountants must be
registered with the PCAOB, it is
necessary to also require that the
auditing standards promulgated by the
PCAOB be considered and adhered to
where applicable. PCAOB requires
auditors opining on a public company
financial statements to comply with all
applicable auditing standards, including
PCAOB standards; whereas U.S. GAAS
is required for the audits of non-public
companies.
In 2003, the PCAOB adopted existing
U.S. GAAS as interim standards, subject
to periodic revision as the PCAOB
deemed necessary. Since that time, the
PCAOB has issued its own auditing
standards in areas of the audit in which
differentiated audit procedures or
reporting requirements have been
considered necessary. These areas
largely pertain to audits of internal
control over financial reporting as well
as reports on those controls, audit
documentation and engagement quality
review. Generally speaking, the most
significant difference between U.S.
GAAS and PCAOB standards relates to
the auditor’s testing of internal controls
over financial reporting which are
meant to cover the auditor’s opinion on
the Sarbanes-Oxley Act Section 404
report on internal controls. From a
regulatory perspective, an auditor’s
focus on internal controls is critical to
helping to ensure that material errors in
financial or regulatory reporting are
identified on a timely basis, and the
PCAOB standards provide more focus
on the auditing standards in this regard.
It should also be noted that auditors of
BDs are now required to register with
the PCAOB and follow PCAOB
standards; thus, any dually-registered
FCM/BDs will already have to comply
with this requirement.
The proposed amendments to
§§ 1.16(b)(1) and (c)(2) are designed to
reasonably ensure the quality and
competence of public accountants that
engage in the audits of FCMs. FCMs are
sophisticated financial market
participants that are subject to extensive
regulation. In addition, the complexity
of FCM audits is increased substantially
when a firm is engaged in proprietary

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trading or dually-registered as an FCM/
BD. Public accountants must be
knowledgeable regarding the business
operations, regulatory obligations and
financial reporting requirements for
FCMs, and the governing body of the
FCM must ensure that the public
accountant has the knowledge,
experience, and resources to conduct
the audits. Also, requiring the public
accountant to be registered with PCAOB
will ensure that the public accountant is
subject to periodic reviews to assess its
compliance with industry standards.
While the Commission does not
expect the proposed PCAOB registration
requirement to have a material impact
on FCMs, it recognizes that not all FCMs
currently use CPAs that are registered
with the PCAOB or CPAs that have been
subject to an examination by the
PCAOB. Currently, 111 of the 116 FCMs
are examined by CPAs that are
registered with the PCAOB. Also, 12
CPAs that are registered with the
PCAOB have not yet been subject to a
PCAOB examination. These 12 CPAs
conduct examinations of 20 FCMs.
Therefore, currently 25 of the 116 FCMs
would not satisfy the proposed
requirement that only PCAOB-registered
CPAs that have been subject to at least
one PCAOB review may be engaged to
conduct an examination of the FCM’s
financial statements.43
The Commission is proposing a
technical amendment to § 1.16 to revise
the definition of the term ‘‘customer.’’
Regulation 1.16 details the standards
that a public accountant must meet in
conducting a financial examination of
an FCM. Currently, § 1.16(a)(4) defines
the term ‘‘customer’’ to include futures
customers, Cleared Swaps Customers,
and foreign futures or foreign options
customers. The Commission is
proposing to amend § 1.16(a)(4) to revise
the definition of customer to replace the
term ‘‘foreign futures or foreign options
customer’’ with the term ‘‘30.7
Customer’’ to make the provision
consistent with the amendments
contained in Part 30 of the
Commission’s regulations.
The Commission also is proposing to
amend paragraph (f)(1)(i)(C) of § 1.16 to
provide that any filing of a notice of the
extension of time to file the audited
financial reports must be submitted by
the FCM to the Commission using an
electronic filing system. The
Commission intends for FCMs to use the
WinJammer electronic filing system.
43 The Commission further notes, however, that 7
of the 20 FCMs are audited by a PCAOB-registered
CPA that also conducts audits of BDs or public
companies and, therefore, will be subject to PCAOB
examination at a future date.

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emcdonald on DSK67QTVN1PROD with PROPOSALS2

The Commission also is proposing to
remove the requirement from
§ 1.16(c)(1) that annual financial reports
contain the manual signature of the
public accountant. Under the proposed
amendments to § 1.10 discussed above,
FCMs will be filing annual financial
reports electronically, which will
preclude the use of manual signature.
The Commission requests comment
on all aspects of proposed § 1.16.
Specifically, the Commission request
comment on the following:
• A purpose of the requirement that
FCMs engage only CPAs that are
registered with the PCAOB and have
been reviewed by the PCAOB is to
enhance the quality of the audit
examination conducted by CPAs. Does
the PCAOB registration and
examination process enhance the
quality of FCM audit engagements?
• Are there viable alternatives that
the Commission should consider to
enhance the quality of CPA FCM
examinations in lieu of PCAOB
registration and examination?
• Should the Commission consider
allowing the non-PCAOB registered
CPAs or PCAOB-registered CPAs that
have not been subject to a PCAOB
review to contractually engage for a peer
review from a qualified CPA who is
aware of the reason for the peer review
as a short-term measure to allow the
non-compliant CPAs to continue to
conduct audits of FCMs?
• If the Commission adopts the
PCAOB registration and examination
requirement, how should the
Commission implement the effective or
compliance dates? What factors should
the Commission consider in setting an
effective date or compliance date for
this provision?
F. Proposed Amendments to § 1.17:
Minimum Financial Requirements for
Futures Commission Merchants and
Introducing Brokers
The Commission is proposing to
amend § 1.17 by adding a new provision
that will authorize the Commission to
require an FCM to transfer its customer
business and cease operating as an FCM
if the FCM cannot immediately certify
to the Commission, and demonstrate
with verifiable evidence, that the FCM
has sufficient access to liquidity to
continue operating as a going concern.
The Commission also is proposing to
amend § 1.17 to permit an FCM that is
not a dually-registered FCM/BD to
develop the framework proposed by the
SEC, as set forth below, to establish,
maintain and enforce written policies
and procedures for determining
creditworthiness, and upon a
determination that a particular type of

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security has minimal credit risk, to
apply lower deductions to such
securities in computing the FCM’s
adjusted net capital.
Section 4f(b) of the Act provides that
no person may be registered as an FCM
unless such person meets the minimum
financial requirements that the
Commission has established by
regulation to ensure that an FCM meets
its obligations at all times as an FCM to
its customer and to market participants,
including DCOs. The Commission’s
minimum capital requirements for
FCMs are set forth in § 1.17 and
generally require an FCM to maintain
adjusted net capital equal to or in excess
of the greater of: $1 million; 8 percent
of the risk maintenance margin required
on customer and non-customer futures
and options on futures positions carried
by the FCM; 44 the amount of adjusted
net capital required by the NFA; or, for
dual-registrants, the amount of net
capital required by the SEC. The term
‘‘adjusted net capital’’ is generally
defined as the FCM’s net, liquid assets
less all of the FCM’s liabilities (except
certain qualifying subordinated debt). In
computing its adjusted net capital, an
FCM is required to reduce the value of
proprietary futures and securities
positions included in its liquid assets by
certain prescribed amounts or
percentages of the market value
(otherwise known as ‘‘haircuts’’) to
discount for potential adverse market
movements in the securities.
Commission Regulation 1.17(a)(4)
currently provides that an FCM must
cease operating as an FCM and transfer
its customers positions to another FCM
if the FCM is not in compliance with the
minimum capital requirements, or is
unable to demonstrate its compliance
with the minimum capital requirements.
The FCM, however, can initiate
customer trades for liquidation purposes
only. Regulation 1.17(a)(4) further
provides that the Commission or the
FCM’s DSRO may grant the FCM up to
a maximum of 10 days to come back
into compliance with the minimum
capital requirements without having to
cease operating as an FCM or
transferring customer accounts.
The Commission is proposing to add
an additional clause to § 1.17(a)(4),
which will specify that the Commission
may request certification in writing from
an FCM that it has sufficient liquidity to
continue operating as a going concern,
and that if such certification is not
provided immediately or the FCM is not
able to demonstrate its access to
liquidity with verifiable evidence, the
44 The term ‘‘noncustomer’’ is generally defined
under § 1.17 as affiliates or management of an FCM.

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FCM must transfer all customer
accounts and immediately cease doing
business as an FCM. The proposed
liquidity provision is intended to cover
circumstances that require immediate
attention. The proposal is not intended
to provide a mechanism for the
Commission to require FCMs to
demonstrate that they are a going
concern for an extended period of time
into the future. Rather, the purpose of
the proposal is to provide the
Commission with a means of addressing
exigent circumstances by requiring an
FCM to produce a written analysis
showing the sources and uses of funds
over a short period of time not to exceed
one week.
The Commission believes this clause
provides additional protection to
customers in the event of an imminent
liquidity drain on a registrant, which
may not be immediately reflected in its
accounting or regulatory capital
business records. Market events or other
external indicators may come to the
attention of the Commission which
suggest an FCM is under severe
liquidity stress, which demonstrates
that although the firm is still able to
demonstrate compliance with required
regulatory capital, conditions are such
that it will not be able to meet liquidity
requirements out a period of time not to
exceed one week. This provision will
allow the Commission to essentially
require an FCM on demand to be able
to certify its access to liquidity
sufficient to continue operating as a
going concern for a period not to exceed
one week. The inability of the FCM to
satisfy this requirement will allow the
Commission to direct the FCM to
transfer customer accounts and cease
doing business as an FCM.
The Commission believes the ability
to certify, and if requested, demonstrate
with verifiable evidence, sufficient
liquidity to operate as a going concern
to meet immediate financial obligations,
is a minimum financial requirement
necessary to ensure an FCM will
continue to meet its obligations as a
registrant as set forth under § 4(f)(b) of
the Act. The certification required must
satisfy the same oath or affirmation
requirements as those required for the
submission of monthly financial reports
under § 1.10(d)(4), to ensure that it is
made by an appropriate individual and
that it is in writing under oath of the
individual that it is true and correct to
the best knowledge and belief of such
individual. If a registrant certifies to the
Commission its access to liquidity, but
is not able to demonstrate with
sufficient evidence such liquidity (for
example such evidence may include
confirmations by third parties of access

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to credit lines with available credit or of
unrestricted cash balances available to
meet projected short term cash
requirements), the Commission believes
it would be prudent to require the
registrant to transfer customer accounts.
Circumstances related to a liquidity
drain could also result in a breakdown
of management controls and result in an
erroneous or false certification, and in
such circumstances, the protection of
customers must be paramount. The
Commission requests comment on the
proposed additional clause to
§ 1.17(a)(4).
Regulation 1.17 further requires an
FCM to take a haircut against the value
of securities the FCM holds as
investments of customer funds under
§ 1.25. A primary purpose of these
haircuts is to provide a margin of safety
against losses that might be incurred by
the FCM as a result of market
fluctuations in the prices of, or lack of
liquidity in, the security positions.
For futures positions, an FCM that is
a member of the clearing organization
where the positions are cleared is
required to take a haircut equal to the
margin required by the clearing
organization on such futures
positions.45 For securities positions,
§ 1.17 incorporates by reference the
securities haircuts that a BD is required
to take in computing its net capital
under the SEC’s regulations.46 The
structure of the Commission’s net
capital rule referring to the SEC’s net
capital rule is a result of the
Commission’s determination to defer to
the SEC in areas of its expertise,
specifically with respect to market risk
and appropriate haircuts on securities
positions.47
The SEC capital rule currently applies
a general or ‘‘default’’ haircut of 15
percent of the market value of
commercial paper, convertible debt
instruments, and nonconvertible debt
instruments if the securities are readily
marketable, and 100 percent of the
market value if the securities are not
readily marketable. The SEC capital rule
also provides for a lower haircut for
commercial paper, convertible debt
instruments, and nonconvertible debt
instruments if the securities are rated in
higher rating categories by at least two
nationally recognized statistical rating
organizations (‘‘NRSROs’’). To receive
the benefit of a reduced haircut on
commercial paper, the commercial
paper must be rated in one of the three
45 See

§ 1.17(c)(5)(x)(A).
Regulations 1.17(c)(5)(v) and
1.32(b) both incorporate 17 CFR 240.15c3–
1(c)(2)(vi) by reference.
47 See 43 FR 15072 (Apr. 10, 1978) at 15077 and
43 FR 39956 (Sept. 8, 1978) at 39963.
46 Commission

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highest rating categories by at least two
NRSROs. To receive the benefit of a
reduced haircut on a nonconvertible
debt security or a convertible debt
security, the security must be rated in
one of the four highest rating categories
by at least two NRSROs.
The SEC has proposed rule
amendments to implement the DoddFrank Act requirement to remove
references to credit ratings in its
regulations and substitute a standard for
creditworthiness deemed appropriate,
including a proposed amendment to its
net capital rule for BDs at 17 CFR
240.15c3–1.48 Under the SEC proposal,
a BD may impose the default haircuts of
15 percent of the market value of readily
marketable commercial paper,
convertible debt, and nonconvertible
debt instruments or 100 percent of the
market value of nonmarketable
commercial paper, convertible debt, and
nonconvertible debt instruments. A BD,
however, may impose lower haircut
percentages for commercial paper,
convertible debt, and nonconvertible
debt instruments that are readily
marketable, if the BD determines that
the investments have only a minimal
amount of credit risk pursuant to its
written policies and procedures
designed to assess the credit and
liquidity risks applicable to a security.
Under the SEC proposal, the BD’s
written policies and procedures may
assess a security’s credit risk using the
following factors, to the extent
appropriate, instead of exclusively
relying on NRSROs ratings:
• Credit spreads (i.e., whether it is
possible to demonstrate that a position
in commercial paper, nonconvertible
debt, and preferred stock is subject to a
minimal amount of credit risk based on
the spread between the security’s yield
and the yield of Treasury or other
securities, or based on credit default
swap spreads that reference the
security);
• Securities-related research (i.e.,
whether providers of securities-related
research believe the issuer of the
security will be able to meet its financial
commitments, generally, or specifically,
with respect to securities held by the
broker-dealer);
• Internal or external credit risk
assessments (i.e., whether credit
assessments developed internally by the
broker-dealer or externally by a credit
rating agency, irrespective of its status
as an NRSRO, express a view as to the
credit risk associated with a particular
security);
• Default statistics (i.e., whether
providers of credit information relating
48 See

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to securities express a view that specific
securities have a probability of default
consistent with other securities with a
minimal amount of credit risk);
• Inclusion on an index (i.e., whether
a security, or issuer of the security, is
included as a component of a
recognized index of instruments that are
subject to a minimal amount of credit
risk);
• Priorities and enhancements (i.e.,
the extent to which a security is covered
by credit enhancements, such as
overcollateralization and reserve
accounts, or has priority under
applicable bankruptcy or creditors’
rights provisions);
• Price, yield and/or volume (i.e.,
whether the price and yield of a security
or a credit default swap that references
the security are consistent with other
securities that the broker-dealer has
determined are subject to a minimal
amount of credit risk and whether the
price resulted from active trading); and
• Asset class-specific factors (e.g., in
the case of structured finance products,
the quality of the underlying assets).
A BD that maintains written policies
and procedures and determines that the
credit risk of a security is minimal is
permitted under the SEC proposal to
apply the lesser haircut requirement
currently specified in the SEC capital
rule for commercial paper (i.e., between
zero and c of 1 percent), nonconvertible
debt (i.e., between 2 percent and 9
percent), and preferred stock (i.e., 10
percent).
For FCMs that are dually-registered as
BDs, any changes adopted by the SEC to
these securities haircuts will be
applicable under § 1.17(c)(5)(v) unless
the Commission specifically provides an
alternate treatment for FCMs.49
However, FCMs that are not dual
registrants would be required to take the
default haircuts of 15 percent for readily
marketable securities. The Commission
does not believe that it is appropriate to
exclude standalone FCMs from using an
internal process to assess the credit risk
of certain securities. Therefore, the
Commission’s proposed amendment to
§ 1.17(c)(v) will permit an FCM that is
not a BD to develop the framework
proposed by the SEC to establish,
maintain and enforce written policies
and procedures for determining
creditworthiness, and upon a
determination that a particular type of
security has minimal credit risk, to
apply lower deductions to such
49 See discussion adopting § 1.17(c)(5)(vi) for
options haircuts at 43 FR 39956 at 39964, with
respect to the applicability of provisions
incorporating by reference and referring to the rules
of the SEC for securities broker dealers also
registered as futures commission merchants.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
securities. An FCM will be required to
maintain its written policies and
procedures in accordance with the
general recordkeeping requirements of
§ 1.31, and the implementation of the
policies and procedures will be subject
to review by the FCM’s DSRO. An FCM
that elects to develop written policies
and procedures will be subject to review
by its DSRO.
Regulation 1.17 also requires an FCM
to reduce its capital (i.e., take a capital
charge) for customer, noncustomer, and
omnibus accounts that are
undermargined for more than a
specified period of time. Regulation
1.17(c)(5)(viii) requires an FCM to take
a capital charge if a customer account is
undermargined for three business days
after the margin call is issued. The
capital charge is equal to the amount of
funds necessary to restore the account to
the initial margin requirement.
Regulation 1.17(c)(5)(ix) requires an
FCM to take a capital charge for
noncustomer and omnibus accounts that
are undermargined for two business
days after the margin call is issued. The
capital requirement for undermargined
noncustomer and omnibus accounts is
the amount of funds necessary to restore
the account to the maintenance margin
level.
For purposes of these Commission
regulations, a margin call is presumed to
be issued by the FCM the day after an
account becomes undermargined. Thus,
if a customer’s account is
undermargined at the close of business
on Monday, the FCM will issue a
margin call on Tuesday, and the
regulation requires the FCM to take an
undermargined capital charge at the
close of business on Friday if the margin
call is not met. For noncustomer and
omnibus accounts that were
undermargined at the close of business
on Monday, the FCM would take a
capital charge as of the close of business
on Thursday.
The Commission is proposing to
amend §§ 1.17(c)(5)(viii) and (ix) to
require an FCM to take capital charges
for undermargined customer,
noncustomer, and omnibus account that
are undermargined for more than one
business day after a margin call is
issued. Therefore, an FCM will impose
a capital charge as of the close of
business on Wednesday for any
customer, noncustomer, or omnibus
account that did not fully satisfy a
margin call that is issued by the FCM on
Tuesday for an account that was
undermargined as of the close of
business on Monday.
The timely collection of margin is a
critical component of an FCM’s risk
management program and is intended to

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ensure that an FCM holds sufficient
funds deposited by account owners to
meet potential obligations to a DCO. As
guarantor of the financial performance
of the customer, noncustomer, and
omnibus accounts that it carries, the
FCM is financially responsible if the
owner of an account cannot meet its
margin obligations to the FCM and
ultimately to a DCO. The timeframe for
meeting margin calls currently provided
in §§ 1.17(c)(5)(viii) and (ix) may have
been appropriate when the capital rules
were adopted in the 1970s when the use
of checks and the mail system were
more prevalent for depositing margin
with an FCM. The Commission believes,
however, that in today’s markets, with
the increasing use of technology, 24hour-a-day trading, and the use of wire
transfers to meet margin obligations,
that the timeframe for taking a capital
charge should be reduced both to
incentivize FCMs to exercise prudent
risk management and to strengthen the
financial protection of FCMs, their
customers, and the clearing systems by
requiring the FCMs to reserve capital for
undermargined customer, noncustomer,
and omnibus accounts that fail to meet
a margin call on a timely basis.
The Commission also is proposing, as
discussed in Section II.I below, to
require an FCM to maintain a residual
interest in customer segregated accounts
in an amount sufficient to cover all
customer accounts that are
undermargined as of the close of
business on the previous trading day,
thereby ensuring that residual interest
in customer segregated accounts
exceeds the sum of outstanding margin
calls for customers, and that the funds
of one customer are not used to margin
or guarantee the positions of another
customer. The FCM may only maintain
as residual interest cash and assets that
qualify as permitted investments under
§ 1.25. Margin deficits will be calculated
as enough to restore the customer’s
account equity to the maintenance
margin requirement on the account.
The Commission also is proposing
technical amendments to certain
definitions in § 1.17 to reflect proposed
changes discussed in Section II.R below
concerning the § 30.7 secured amount
calculation. The § 1.17(b)(2) and (7)
definitions of the terms ‘‘customer’’ and
‘‘customer account’’ are being proposed
to be amended, the first to include ‘‘30.7
Customer’’ (which is a new definition
being proposed in § 30.1 to include
foreign domiciled persons) and the
second to remove surplus language due
to the revised definition of ‘‘customer.’’
The Commission requests comment
on the proposed amendments to § 1.17.

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Specifically, the Commission requests
comment on the following:
• Does the proposed amendment to
require an FCM to certify that it has
sufficient liquidity to operate as a going
concern provide a sufficient and
objective standard for FCMs to assess
whether they are in compliance with the
provision? Are there alternative
standards or approaches that the
Commission should consider to meet its
objective of ensuring that an FCM has
sufficient liquidity to meet its pending
short-term obligations so that customer
funds would not be put at risk in the
event of the insolvency of the FCM?
• Should the Commission consider
alternative timeframes for the
imposition of a capital charge for
undermargined accounts?
G. Proposed Amendments to § 1.20:
Futures Customer Funds To Be
Segregated and Separately Accounted
for
The Commission is proposing to
reorganize the structure of § 1.20 by
providing additional paragraph
subdivisions to the existing specific
requirements, applying headings to the
regulation to assist in the reading and
understanding of the regulation. The
Commission also is proposing to add
new provisions designed to enhance the
protection of customer funds.
Regulation 1.20 implements the
provisions of section 4d(a)(2) of the Act,
which provides, in relevant part, that an
FCM must: (1) Separately account for all
futures customer funds and segregate
such funds as belonging to its futures
customers; (2) not commingle futures
customer funds with the FCM’s
proprietary funds; (3) not use the funds
of one futures customer to margin or
extend credit to any person other than
to the futures customer that deposited
the funds; and (4) deposit futures
customer funds in any bank, trust
company or DCO.
Paragraph (a) of § 1.20 sets forth the
general principle under section 4d(a)(2)
of the Act by requiring an FCM to
separately account for all futures
customer funds and to segregate such
funds from the FCM’s proprietary funds
by depositing them under an account
name that clearly shows that the funds
are futures customer funds and
segregated as required by the Act.
Paragraph (g)(1) applies the same
general principle to futures customer
funds received by a DCO from its
members.
Paragraph (a) also requires each FCM
to perform appropriate due diligence on
all depositories in accordance with its
risk management policies and
procedures required under proposed

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§ 1.11 to ensure that the depositories
holding customer funds are financially
sound. The FCM must annually update
its due diligence.
Paragraph (a) of § 1.20 also provides
that an FCM must be in compliance
with its segregation obligations at all
times. It is not sufficient for an FCM to
be in compliance at the end of a
business day, but to fail to meet its
segregation obligations on an intra-day
basis. If an FCM was not in compliance
with the segregation requirements on an
intra-day basis that would necessarily
mean that the FCM was using the funds
of one customer to margin positions of
another customer or to cover losses of
another customer.
Paragraph (b) of § 1.20 lists the
permitted depositories for futures
customer funds as any bank, trust
company, derivatives clearing
organization, or another FCM. These
permitted depositories are listed in
existing § 1.20 and the Commission is
not proposing to amend the list.
Proposed paragraph (g)(2) lists the
permitted depositories for futures funds
received by a DCO as any bank or trust
company, and clarifies that the term
‘‘bank’’ includes a Federal Reserve
Bank. This proposed amendment
implements section 806(a) of the DoddFrank Act, which provides that a
Federal Reserve Bank may establish and
maintain a deposit account for a
‘‘financial market utility’’ (in the present
case, a DCO) that has been designated as
systemically important.
Paragraph (c) provides that an FCM
may hold futures customer funds in
depositories outside of the United States
only in accordance with the current
provisions of § 1.49. Paragraph (g)(3)
sets forth the same limitation for a DCO.
Regulation 1.49 currently permits an
FCM or DCO to hold futures customer
funds in certain foreign depositories
provided that the FCM or DCO holds
sufficient funds in the United States to
meet its U.S. dollar-denominated
obligations to futures customers.
Regulation 1.49 also requires specific
futures customer authorization for an
FCM or DCO to hold futures customer
funds in certain foreign jurisdictions.
The Commission is not proposing to
amend § 1.49 as part of this rulemaking.
Proposed § 1.20(e) prohibits an FCM
from commingling futures customer
funds with the FCM’s proprietary funds,
and prohibits the FCM from
commingling funds deposited by futures
customers with funds deposited by 30.7
Customers or Cleared Swaps Customers.
Regulation 1.20(e), however, does
permit an FCM to commingle the funds
of multiple futures customers in a single
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convenience. Similarly, proposed
§ 1.20(g)(5) prohibits a DCO from
commingling futures customer funds
with the DCO’s proprietary funds or
with any proprietary account of any of
its clearing members, and prohibits the
DCO from commingling funds held for
futures customers with funds deposited
by clearing members on behalf of their
Cleared Swaps Customers. DCOs would
be permitted to commingle the funds of
multiple futures customers in a single
account or accounts for operational
convenience.
Proposed § 1.20(f) restricts an FCM’s
use of customer funds. An FCM is
prohibited from using one futures
customer’s funds to margin or secure
another futures customer’s positions. An
FCM also is prohibited from using a
futures customer’s funds to extend
credit to any other person. The FCM
also may obligate futures customers’
funds to a DCO or another FCM solely
to purchase, margin, or guarantee
futures and options positions of futures
customers.
The Commission is proposing a new
paragraph (h) which states that all
futures customer funds deposited with a
bank or trust company must be available
for immediate withdrawal upon demand
by the FCM or DCO. Paragraph (h)
codifies a long-standing interpretation
of the Commission’s Division of Swap
Dealer and Intermediary Oversight and
predecessor divisions derived from an
administration determination by the
Commission’s predecessor, the
Commodity Exchange Authority of the
U.S. Department of Agriculture.50 The
requirement, as proposed, is a practical
necessity to the effective functioning of
FCMs and futures markets. Should a
depository have the ability to delay an
FCM from withdrawing customer funds,
the FCM may not be able to meet margin
obligations to DCOs, or requests by
futures customers for access to their
funds. In addition, an inability of an
FCM to have immediate access to the
futures customer funds that it holds may
adversely impact the transfer of futures
customers positions in the event of the
FCM’s insolvency.51
50 See Administrative Determination No. 29 of the
Commodity Exchange Administration dated Sept.
28, 1937 stating, ‘‘the deposit, by a futures
commission merchant, of customers’ funds * * *
under conditions whereby such funds would not be
subject to withdrawal upon demand would be
repugnant to the spirit and purpose of the
Commodity Exchange Act. All funds deposited in
a bank should in all cases by subject to withdrawal
on demand.’’
51 In the case of the bankruptcy of Lehman
Brothers, for example, immediate access to
customer funds allowed the commodity customer
accounts to be effectively transferred to Barclays
over the weekend of September 20–21, 2008,

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• The Commission is proposing a
new paragraph (i), which mirrors what
was recently adopted in Part 22 for
Cleared Swaps Customers, by providing
more detail implementing the Net
Liquidating Equity Method of
calculating segregation requirements. In
addition, because a customer may have
Net Liquidating Equity (i.e., a credit
balance) in his or her account, requiring
segregation of his or her funds, and still
be undermargined relative to open
positions, proposed paragraph (i)
requires an FCM to record in the
accounts of its futures customers the
amount of margin required for such
customers’ open positions, and to
calculate margin deficits for each such
customer. Moreover, the Commission is
proposing to require that an FCM
maintain residual interest in segregated
accounts in an amount that exceeds the
sum of all futures customers’ margin
deficits. A margin deficit occurs when
the value of the futures customer funds
for a futures customer’s account is less
than the total amount of collateral
required by DCOs for that account’s
contracts. Currently, the Commission
requires FCMs to hold sufficient funds
in segregated futures customer accounts
to ensure that those accounts do not
become undersegregated. Proposed new
paragraph (i) will affirmatively require
an FCM to maintain enough funds in the
futures customer accounts to cover all
margin deficits as well as to ensure that
the accounts are not undersegregated.
The Commission requests comments on
all aspects of proposed new § 1.20(i),
including the costs and benefits of this
proposed regulation. The Commission
specifically requests comment on the
following:
• Will this proposal serve to increase
the protections to customer funds in the
event of an FCM bankruptcy?
• To what extent would this proposal
increase costs to FCMs and/or futures
customers?
• To what extent would this proposal
benefit futures customers and/or FCMs?
• To what extent would this proposal
increase or mitigate market risk?
• To what extent would this proposal
lead to FCMs requiring customers to
provide margin for their trades before
placing them?
• To what extent is this likely to lead
to a re-allocation of costs from
customers with excess margin to
undermargined customers?
• For purposes of margin deficit
calculations, should the Commission
immediately following the commencement of the
liquidation of the firm. This transfer was authorized
in the hours immediately following the
commencement of Lehman’s liquidation, and was
implemented in the hours immediately thereafter.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
address issues surrounding the timing of
when an FCM must have sufficient
funds in the futures customer account to
cover all margin deficits? If so, how
should the Commission address such
issues?
In addition to the foregoing, the
Commission also is proposing to revise
requirements regarding the written
acknowledgment letter that an FCM or
DCO is required to obtain from a
depository holding futures customer
funds. Regulation 1.20 currently
requires an FCM or DCO to obtain a
written acknowledgment from each
depository, unless the depository is a
DCO that has rules approved by the
Commission providing for the
segregation of customer funds. The
written acknowledgment must state that
the depository was informed that the
futures customer funds deposited
belong to futures customers and are
being held in accordance with the
provisions of the Act and Commission
regulations.
The Commission previously proposed
amendments to the acknowledgment
letter regulations. On February 20, 2009,
the Commission published proposed
amendments to §§ 1.20, 1.26, and 30.7
for public comment (the ‘‘Original
Proposal’’).52 The Original Proposal set
out specific representations that would
have been required to be included in all
acknowledgment letters in order to
reaffirm and to clarify the obligations
that depositories incur when accepting
customer funds or secured amount
funds.53
In light of the comments on the
Original Proposal, the Commission
determined to re-propose the
amendments with several changes made
in response to comments (the ‘‘Revised
Proposal’’).54 As part of the Revised
Proposal, the Commission proposed the
required use of standard template
acknowledgment letters which were
included as Appendix A to each of
§ 1.20 and 1.26, and Appendix E to Part
30 of the Commission’s regulations
52 74

FR 7838 (February 20, 2009).
Commission notes that both the current
and proposed definition of ‘‘customer funds’’ in
Regulation 1.3(gg) do not include ‘‘secured amount
funds’’ as defined in Regulation 30.7 (i.e., funds
deposited by foreign futures or foreign options
customers). See 76 FR 33066, 33085 (June 7, 2011).
However, as used in this notice, unless otherwise
specified, the term ‘‘customer funds’’ is meant to
include secured amount funds. The regulations
adopted by this notice are also being amended to
use the term ‘‘customer’’ as newly proposed (i.e., in
this rulemaking the Commission is deleting
references to ‘‘commodity or option customers’’. As
necessary, the Commission distinguishes between
the two types of funds in this notice by referring
to ‘‘customer segregated funds’’ and ‘‘customer
secured amount funds.’’
54 75 FR 47738 (Aug. 9, 2010).

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(referred to herein as the ‘‘Template
Letters’’ or ‘‘Acknowledgment Letters’’).
The Commission received nine
comment letters on the Revised
Proposal.55 In general, the commenters
were supportive of the Commission’s
Revised Proposal and, in particular,
were very supportive of requiring the
use of Template Letters. It was noted by
certain commenters that use of a
standard template will simplify the
process of obtaining an
Acknowledgment Letter.56 In addition,
it was noted by commenters that
uniformity of Acknowledgment Letters
will provide consistency and legal
certainty across the commodities and
banking industries.57
The Commission is proposing revised
amendments to the Acknowledgment
Letters in this release to address several
issues that have arisen as a result of the
recent MF Global and Peregrine failures
and the adverse impact on customers
that had funds on deposit with these
FCMs. The additional amendments are
discussed below. The Commission also
has revised the Acknowledgment Letters
to address comments to the Revised
Proposal. These revisions are discussed
immediately below.
1. Obligation To Obtain New
Acknowledgment Letters
Under the Revised Proposal, an FCM
or DCO would be required to obtain a
new Acknowledgment Letter within 60
days of changes in the name of any
party to the Acknowledgment Letter or
changes to the account number(s) under
which customer funds are held. FIA
stated that it is unduly burdensome to
require the parties to execute a new
Acknowledgment Letter in the event of
a party changing its name within 60
days of the event.58 FIA recommended
instead including ‘‘binding effect’’
language in the Template Letters to
ensure parties remain subject to the
applicable provisions.59 If the
55 Letters were submitted by: Hunton & Williams
on behalf of the Working Group of Commercial
Energy Firms (‘‘Energy Working Group’’);
International Derivatives Clearinghouse LLC
(‘‘IDCH’’); Futures Industry Association (‘‘FIA’’);
Harris, N.A. (‘‘Harris’’); Katten Muchin Rosenman
LLP (‘‘Katten’’); CME Group Inc. (‘‘CME’’); The
Minneapolis Grain Exchange (‘‘MGEX’’); JPMorgan
Chase Bank, N.A. (‘‘JP Morgan’’); and The Federal
Reserve Bank of Chicago, Financial Markets Group
(‘‘FRB Chicago’’).
56 See MGEX CL–00007 at 1; FIA CL–00003 at 2;
Harris CL–00004 at 1.
57 See MGEX CL–00007 at 1; CME CL–00006 at
2; FRB Chicago CL–00010 at 1.
58 FIA CL–00003 at page 2.
59 FIA suggests, for example, the following
language: ‘‘The terms of this letter shall remain
binding upon the parties, their successors and
assigns, including for the avoidance of doubt,
regardless of the change in name of any party.’’ FIA
CL–00003 at page 2.

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Commission determines to adopt the
amendment requirement, FIA requested
that the time period be extended from
60 to 120 days because a change in
name often occurs in the context of a
merger or acquisition in which case the
relevant party will be in the process of
amending numerous agreements and
related documentation.
The Commission has determined to
add to the Template Letter the ‘‘binding
effect’’ language as proposed by FIA, as
this language will ensure the continued
applicability of the Acknowledgment
Letter in the event of a name change to
the parties. The Commission, however,
is proposing to require that FCMs and
DCOs file new Acknowledgment Letters
in the event of a name, address, or other
change as specified in the proposed rule
because the Commission believes it is
important to maintain current and
accurate Acknowledgment Letters to
provide clear legal status of the
customer account, which will better
protect customers in the event of a
dispute regarding the legal status of the
account. The Commission is proposing
a 120-day time period for an FCM to
obtain new Acknowledgment Letters.
Given the use of the Template Letter,
which is not open to negotiation, and
electronic filing, the Commission
believes that 120 days is a sufficient
period of time for FCMs and DCOs to
obtain and file the new
Acknowledgment Letters.
2. Technical Amendments to
Acknowledgment Letter for Omnibus
Accounts; Abbreviation of Account
Names
Regulation 1.20 provides that
customer funds, when deposited with a
depository, ‘‘shall be deposited under
an account name that clearly identifies
them as such and shows that they are
segregated as required by the Act and
[Part 1 of the CFTC Regulations].’’ FIA
noted that the account naming
convention used in the proposed forms
of Template Letters 60 may present
certain issues with respect to
Acknowledgment Letters obtained by
FCMs maintaining customer funds with
60 Proposed Appendix A to Regulation 1.20
provides that the Account will be entitled ‘‘[Name
of Futures Commission Merchant or Derivatives
Clearing Organization] CFTC Regulation 1.20
Customer Segregated Account.’’ 75 FR 47738, 47743
(Aug. 9, 2010); Proposed Appendix A to Regulation
1.26 provides that the Account will be entitled
‘‘[Name of Futures Commission Merchant or
Derivatives Clearing Organization] CFTC Regulation
1.26 Customer Segregated Money Market Mutual
Fund Account.’’ 75 FR 47738, 47744 (Aug. 9, 2010);
and Proposed Appendix E to part 30 provides that
the Account will be entitled ‘‘[Name of Futures
Commission Merchant] CFTC Regulation 30.7
Customer Secured Account.’’ 75 FR 47738, 47745
(Aug. 9, 2010).

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another FCM through a customer
omnibus account relationship.61 The
first issue is with respect to operational
limits on the number of characters
available for account names. Secondly,
naming conventions for such accounts
typically include the words ‘‘Customer
Omnibus Account’’ and the relevant
account number. FIA accordingly
requested the Commission to clarify that
the Template Letters may be modified to
permit the use of the words ‘‘CFTC
Regulated FCM Customer Omnibus
Account’’ to describe such accounts.
The Commission has modified the
proposed Template Letters to provide an
option to add the words ‘‘CFTC
Regulated FCM Customer Omnibus
Account’’ to describe such accounts
when applicable. In addition, the
Commission is proposing that if the
name of the account as set forth in the
Template Letter is too long for a
depository’s system to include all
characters, the depository may
abbreviate the name in order to
accommodate its system, provided that
(i) it remains clear that the account is a
CFTC regulated segregated/secured
account held for the benefit of
customers (e.g., ‘‘segregated’’ may be
shortened to ‘‘seg;’’ ‘‘customer’’ may be
shortened to ‘‘cust;’’ ‘‘account’’ to
‘‘acct;’’ etc.), and (ii) when completing
an Acknowledgment Letter, such letter
must include both the long and short
versions of the account name.

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3. Clarification Regarding Notice,
Authentication, and Instruction Protocol
for Commission Authorized
Withdrawals
Four of the commenters to the
Revised Proposal addressed the need for
the Commission to establish specific
standards with respect to the notice,
authentication and instruction protocol
regarding Commission instructions for
the immediate release of funds from a
Customer Account.62
The FRB Chicago pointed out that, as
the Acknowledgment Letters will have
been filed electronically with the
Commission, the Commission will know
all of the Depositories that have signed
such letters, their location, and basic
contact information. In light of this, the
FRB Chicago suggests that the
61 FIA

CL–00003 at 4 and 5.
the Revised Proposal, the Template Letter
provides that ‘‘the Funds in the Account(s) shall be
released immediately, * * * upon proper notice
and instruction from an appropriate officer or
employee * * * of the CFTC. [FCM/DCO] will not
hold [depository] responsible for acting pursuant to
any instruction from the CFTC upon which
[depository] has relied after having taken reasonable
measures to assure that such instruction was
provided to [depository] by a duly authorized
officer or employee of the CFTC.’’
62 In

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Commission could establish for each
depository a basic but unique
authentication identifier. The
Commission believes this suggestion has
merit, and it will consider
implementing this type of data
collection and identification as it works
to implement the operational aspects of
the electronic filing of Acknowledgment
Letters.
JP Morgan suggests that the
Acknowledgment Letter include a
notice provision with contact
information for the depository so that
the Commission has information on
how best to contact the depository. The
Commission agrees with this suggestion
and has revised the Template Letters to
indicate where depository contact
information may be inserted as optional
information. The Commission
recognizes that such information may be
subject to frequent change and,
therefore, at this time, the Commission
is not requiring that an amended
Acknowledgment Letter be filed in the
event there are changes to such contact
information.
Katten asserts that Depositories face
legal uncertainty with respect to their
release of customer funds in reliance on
instructions from the Commission.
Katten states that the Commission’s
reluctance to define ‘‘proper notice’’ or
‘‘reasonable measures’’ imposes on
Depositories the conflicting obligations
(i) to the Commission, to release
customer funds ‘‘immediately upon
proper notice,’’ and (ii) to its customer
FCM, to take ‘‘reasonable measures’’
first to assure that such notice was
‘‘duly authorized.’’
With respect to due authorization,
Katten requests that the Commission
reconsider its decision to permit an
instruction to transfer customer funds to
be made orally, with written
confirmation to follow. Katten believes
that the depository’s obligation to take
‘‘reasonable measures’’ may require it to
await written confirmation in any event.
In addition, Katten believes that the
proposed amendments to §§ 1.20, 1.26,
30.7 and 140.91 do not limit the identity
of the Commission officers and
employees that may issue a notice to a
depository or the process that must be
followed before such a notice is issued.
Katten submits that a depository would
have a reasonable basis to conclude that
an instruction to transfer customer
funds was duly authorized if the
depository could be assured that any
instruction to transfer customer funds
would be issued only by the Director of
the Division of Clearing and
Intermediary Oversight (or the Director’s

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designee).63 Katten recommends that
‘‘the Commission revise the proposed
rules to confirm that any such
instruction may be made only by the
Commission or by the director of DCIO
(or the director’s designee) acting with
the concurrence of the General Counsel
(or Deputy General Counsel).’’ 64 FIA
requests, at a minimum, that the
Commission define and limit the term
‘‘appropriate officer or employee’’ of the
Commission (for example, authorization
limited to Division Directors or other
senior designated personnel such as
Deputy Directors or Associate
Directors).65
With respect to a ‘‘duly authorized
officer or employee of the CFTC,’’ the
Commission has determined to provide
that any such instruction to transfer
customer funds may be made by the
Director of the Division of Clearing and
Risk (or the Director’s designee), or by
the Director of the Division of Swap
Dealer and Intermediary Oversight (or
the Director’s designee). Accordingly,
the Template Letter now specifies that
such instructions may only be given by
the Director of the Division of Clearing
and Risk (or any successor division), the
Director of the Division of Swap Dealer
and Intermediary Oversight (or any
successor division), or the designees of
such Directors under delegated
authority.66 With regard to the role of
the General Counsel, the General
Counsel will be consulted by the
Director of the Division of Clearing and
Risk (or any successor division), the
Director of the Division of Swap Dealer
and Intermediary Oversight (or any
successor division), or the designees of
such Directors prior to the exercise of
the delegated authority.
The Commission does not believe, as
asserted by Katten, that ‘‘reasonable
measures’’ may require the depository to
await written confirmation. For
example, due to the nature of the
63 In October 2011, the Commission reorganized
the Division of Clearing and Intermediary Oversight
into two divisions, the Division of Clearing and
Risk and the Division of Swap Dealer and
Intermediary Oversight. With respect to a transfer
of customer funds as contemplated in this
rulemaking, instructions would come from either
the Director of the Director of the Division of
Clearing and Risk or the Director of the Division of
Swap Dealer and Intermediary Oversight (or one of
the Director’s designees).
64 See Katten CL–00005 at FN 3.
65 FIA CL–00003 at page 3.
66 The Commission will publish on its Web site
the identity of the Director of the Division of
Clearing and Risk, the Director of the Division of
Swap Dealer and Intermediary Oversight, and the
individual(s) who are authorized to serve as their
designees. The Template Letters do not explicitly
refer to instructions provided by ‘‘the Commission’’
because in exigent circumstances, it is not likely
that action approved by a majority of
Commissioners will be feasible.

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exceptional circumstances that would
prompt a call from the Commission, it
is likely that the depository would
already be aware of certain problems
facing the FCM or DCO and would not
be surprised to receive a phone call
from a Division Director (or his or her
designee). In addition, while the
Commission believes it is desirable that
any such instruction to release customer
funds be in writing, or, if oral, to be
confirmed in writing, the Commission is
not limiting the manner of notice in the
Template Letter given the potential
exigencies of the situation and the need
for flexibility in communication. For
example, either the Commission or the
depository could be experiencing
unexpected technical problems in its
respective email servers or facsimile
machines. It is critical that the transfer
of customer funds from a Segregated
Account not be delayed as a result of
technical or other operational issues.
With respect to the release of
customer funds ‘‘immediately upon
proper notice,’’ Katten commented that
it appreciates the Commission’s
recognition of the potential practical
obstacles to immediate release (e.g.,
Fedwire is unavailable). However,
Katten remains concerned that, in the
absence of further guidance or
clarification, the use of the term
‘‘immediately’’ may subject a depository
to potential claims by either FCMs or
the Commission in the event that there
is a delay in the transfer of customer
funds, even if such delay is the result of
reasonable actions on the part of the
depository or events beyond the control
of the depository. In addition, FIA
commented that it would like the
Commission to confirm that its
authority to require the transfer of
customer funds would be expected to be
used sparingly (i.e., ‘‘only in
exceptional circumstances’’).
After considering these comments, the
Commission is proposing to retain the
use of the word ‘‘immediately’’ in the
Template Letter regarding instructions
to a depository for release of customer
funds. First, in response to FIA’s
comment, the Commission clarifies that
the use of its authority to require the
immediate release of customer funds
would be in exceptional circumstances.
As stated in the Revised Proposal, ‘‘[t]he
Commission would issue such an
instruction only when, in the judgment
of the Commission, it is necessary to do
so for the protection of customer funds.
For example, the prospective insolvency
of the FCM could prompt an instruction
from the Commission to release the

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customer funds.’’ 67 Next, the
Commission notes that anything less
than the term ‘‘immediate’’ could leave
the timing open to interpretation, which
could cause delays in the transfer of
funds and have a potential impact on
safety and soundness of customer funds
and positions. In this regard, the
Commission notes that customer funds
in the Segregated Account have always
been subject to withdrawal immediately
upon demand by the FCM.68
4. Limiting the ‘‘Merger’’ Clause in the
Acknowledgment Letter
CME believes that the use of an
integration clause (i.e., the statement
that the Acknowledgment Letter
‘‘constitutes the entire understanding of
the parties with respect to its subject
matter’’) in the Template Letters is
inappropriate and could have a number
of serious and unintended
consequences. For example, the parties
to the Acknowledgment Letter could be
prevented from relying upon and
enforcing terms of applicable account
(or similar) agreements that do not
conflict with the Acknowledgment
Letter. CME believes the term ‘‘subject
matter’’ is ambiguous and could be
interpreted very broadly thereby casting
doubt on the validity and interpretation
of existing agreements between the
parties. The CME suggests the following
more narrowly tailored language for the
integration clause in the Template
Letters: ‘‘This letter agreement
supersedes and replaces any prior
agreement between the parties in
connection with the Account(s),
including but not limited to any prior
Acknowledgment Letter, to the extent
that such prior agreement is
inconsistent with the terms hereof.’’
FIA agrees with the CME’s comment
that the scope of the ‘‘merger clause’’ in
the Template Letters should be
narrowed to make clear that these
clauses do not invalidate the terms of
other agreements that may have been
entered into by the parties and that do
67 75 FR 47738, 47740. The Revised Proposal also
noted that, as set forth in the Template Letter, in
the event the FCM becomes subject to a voluntary
or involuntary petition for relief under the U.S.
Bankruptcy Code, the depository will have no
obligation to release the customer funds except
upon instruction from the bankruptcy trustee or
pursuant to a court order. Id.
68 See Amended Financial and Segregation
Interpretation No. 10, 70 FR 24768 (May 11, 2005)
(‘‘Thus any impediments or restrictions on the
FCM’s ability to obtain immediate and unfettered
access to customer funds are not permitted. The
immediate and unfettered access requirements is
[sic] intended to prevent potential delay or
interruption in securing required margin payments
that, in times of significant market disruption,
could magnify the impact of such market disruption
and impair the liquidity of other FCMs and
clearinghouses.’’)

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not conflict with the Template Letters.
The FRB Chicago also believes that this
provision should be narrowed so that a
bank’s standard account opening
agreements, corporate resolutions and
other agreements incorporated by
reference should govern the remainder
of the account relationship, but not
matters specific to section 4d of the Act.
Should there be a conflict, the
Acknowledgment Letter should govern
matters specific to section 4d of the Act.
The Commission agrees with the
commenters that the scope of the
‘‘merger clause’’ language in the
Template Letter 69 should be narrowed.
Accordingly, the Commission is
replacing the clause with CME’s
suggested language above. In addition,
in order to incorporate the comment of
the FRB Chicago and to ensure that
future agreements between the parties
do not negate the Acknowledgment
Letter, the Commission is adding the
following sentence to the end of the new
language: ‘‘In the event of any conflict
between this letter agreement and any
other agreement between the parties in
connection with the Account(s), this
letter agreement shall govern with
respect to matters specific to section 4d
of the Act and the CFTC’s regulations,
as amended.’’
5. New Proposed Amendments to
Acknowledgment Letters
The Commission is also now
proposing under Appendix A to § 1.26
and Appendix F to § 30.7 an additional
acknowledgment letter template form
for money market mutual funds (to the
extent they are permissible investments
under § 1.25). The template form for
money market mutual funds is
substantially the same as the
Acknowledgment Letters. The
Commission requests comment on all
aspects of the template form.
In addition, the Commission is
proposing to add language to its
proposed Acknowledgment Letters
(under § 1.20, § 1.26 and § 30.7)
authorizing and requiring the depository
to grant—at all times—read-only
electronic access to such accounts to the
Commission and, in the case of an FCM,
to the FCM’s DSRO. Given recent
events, the Commission believes such
access is crucial to the protection of
customer funds. The Commission is also
proposing a substantive requirement for
69 The merger clause language in the Revised
Proposal’s Template Letter reads as follows: ‘‘This
letter agreement constitutes the entire
understanding of the parties with respect to its
subject matter and supersedes and replaces all prior
writings, including any applicable agreement
between the parties in connection with the
Account(s), with respect thereto.’’

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this access in §§ 1.20, 1.26 and 30.7 in
addition to the language in the
Acknowledgment Letters.
The proposal for read-only access is
not intended to require a depository to
have the ability to provide the
Commission or an FCM’s DSRO with
real-time information regarding an
FCM’s account balance. The
Commission understands that
depositories may not have the capability
to provide customers or any other party
with real-time account balances and
position information. The conditions of
the proposal would be satisfied if the
depository had the capability to provide
read-only access to account information
as of the close of the prior business day.
The Commission intends to continue
to explore possible uses of technology to
enhance its ability to protect customer
funds. Read-only access will allow
Commission staff to review an FCM’s
segregated account balances reported by
depositories and to compare those
balances to the FCM’s reported account
balances either as part of a review of the
firm, or in circumstances where the
Commission is concerned about the
financial condition of the firm. The
read-only access is an additional tool
that Commission staff may use as part
of its assessment of the financial
condition of an FCM and the safety of
customer funds. The Commission will
continue to review how direct access to
account balances and the use of
technology can provide greater
assurance as to the safety of customer
funds held by an FCM.
The Commission requests comment
on all aspects of the proposed
amendments to § 1.20. Specifically, the
Commission requests comment on the
following:
• The proposal requires each
depository to provide the Commission
and an FCM’s DSRO with direct, readonly access to the FCM’s accounts held
by the depository. What technology
issues are raised by the Commission’s
proposal? How can the Commission
adequately address such technology
issues?
• What account information can
depositories currently provide to the
Commission and to DSROs via the
internet on a read-only basis? Do all
depositories (e.g., banks, trust
companies, derivatives clearing
organizations, or other FCMs) have the
capability of using the Internet to
provide account access to the
Commission and DSROs? Are there
other options for depositories to provide
read-only access to FCM accounts other
than the internet?
• How should the Commission
implement this requirement? What

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timeframe would be appropriate to
make the requirement effective? Please
provide analysis with your comment.
H. Proposed Amendments to § 1.22: Use
of Futures Customer Funds
The Commission proposes to amend
§ 1.22 by clarifying that the prohibition
on the FCM’s use of one futures
customer’s funds to margin or secure the
positions of another futures customer, or
to extend credit to another person,
applies at all times.
Regulation 1.22 provides that an FCM
may not use the cash, securities or other
property deposited by one futures
customer to purchase, margin or settle
the trades, contracts, or other positions
of another futures customer, or to
extend credit to any other person.
Regulation 1.22 further provides that an
FCM may not use the funds deposited
by a futures customer to carry trades or
positions, unless the trades or positions
are traded through a designated contract
market.
The proposed amendment to clarify
that the prohibition on the FCM’s use of
one futures customer’s funds to margin
positions of another futures customer is
intended to remove any question as to
the permissibility of being
undersegregated at any point in time
during the day. Section 4d(a)(2) requires
an FCM to segregate futures customers’
funds from its own funds, and prohibits
an FCM from using the funds of one
customer to margin or extend credit to
any other futures customer or person.
The Commission believes that section
4d(a)(2) is intended to provide a
maximum level of protection to futures
customer funds, which would be
thwarted and inconsistent with the
reading of the Act if an FCM only
recognized this principle at the end of
the trading day. Further, the
Commission is proposing language
providing a clear mechanism to ensure
compliance with this prohibition, which
is to require an FCM to maintain
residual interest in segregated accounts
in an amount which exceeds the sum of
all margin deficits for futures customers.
The Commission also is proposing that
the sum of all margin deficits be
reported on the Segregation Schedule
(as discussed previously with respect to
proposed amendments to § 1.10) and
also required to be reported on the daily
segregation calculation (as discussed
further herein with respect to proposed
amendments to § 1.32), so that
compliance review of this mechanism
can be performed.

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I. Proposed Amendments to § 1.23:
Interest of Futures Commission
Merchant in Segregated Futures
Customer Funds; Additions and
Withdrawals
The Commission is proposing to
amend § 1.23 to require additional
safeguards with respect to an FCM
withdrawing futures customer funds
from segregated accounts that are part of
the FCM’s residual interest in such
accounts.
Regulation 1.23 provides that an FCM
may deposit unencumbered proprietary
funds, including securities that qualify
as permitted investments under § 1.25,
into segregated futures customer
accounts in order to ensure that the firm
always maintains sufficient funds in
such accounts to meet its total
obligations to futures customers. FCMs,
by virtue of practical necessity, must
keep proprietary funds in segregated
futures customer accounts in order to
act as a buffer between futures
customers whose funds are commingled
in such accounts. In the event that any
futures customer were to experience
losses such that the customer has
insufficient funds to meet the margin
requirements at clearing organizations
associated with its positions, or if all of
the funds deposited by the futures
customer were depleted and the account
had a debit balance, without proprietary
funds of the FCMs being held in such
accounts to absorb the debit balance as
it accrued, funds of other futures
customers would be used to guarantee
the undermargined amount or the debit.
For this reason, FCMs are permitted to
deposit their own funds into segregated
accounts and to maintain a residual
financial interest in such accounts.
Regulation 1.23 further provides that an
FCM’s books and records must always
reflect the firm’s residual interest in the
accounts of its futures customers.
In addition, an FCM is permitted to
withdraw funds from futures customer
accounts for the FCM’s proprietary use
to the extent of the FCM’s actual
residual interest in such accounts. The
withdrawal, however, may not result in
the FCM failing to hold sufficient funds
to meet its obligations to its futures
customers, or in the funds of one futures
customer margining or securing the
positions of another futures customer.
The Commission also is proposing that
the residual amount maintained by an
FCM be required to exceed the sum of
margin deficits for futures customers, as
discussed previously with respect to
§§ 1.20 and 1.22, to provide a clear
mechanism to ensure that the funds of
one futures customer are not used to
margin or guarantee the positions of

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another futures customer. Irrespective of
the procedures permitting withdrawals
of residual interest under the
amendments proposed, the proposed
amendments further make clear that no
withdrawals may be made of residual
interest to the extent of the sum of
margin deficits.
If an FCM does not have adequate
internal controls governing the
calculation and withdrawal of its
residual interest from futures customer
accounts, the FCM’s actions may
actually result in the withdrawal of
futures customer funds and not the
FCM’s residual interest. Such a
withdrawal would be a violation of
section 4d(a)(2) of the Act.
The Commission, therefore, is
proposing to amend § 1.23 to include
additional safeguards applicable to an
FCM’s withdrawal of funds from the
accounts of futures customers that are
part of the FCM’s residual interest in
such accounts. Under proposed
§ 1.23(a), an FCM will still have access
to its own funds deposited into futures
customer accounts to the extent of the
FCM’s residual interest therein, subject
to the restriction on withdrawal of
residual interest equal to the sum of
margin deficits. However, proposed
§ 1.23(b) will prohibit an FCM from
withdrawing any of its residual interest
or excess funds from futures customer
accounts (any withdrawal not made for
the benefit of futures customers would
be considered a withdrawal of the
FCM’s residual interest) on any given
business day unless the FCM had
completed the daily calculation of funds
in segregation pursuant to § 1.32 as of
the close of the previous business day,
and the calculation showed that the
FCM maintained excess segregated
funds in the futures customer accounts
as of the close of business on the
previous business day. Proposed
§ 1.23(b) further requires that the FCM
adjust the excess segregated funds
reported on the daily segregation
calculation to reflect other factors, such
as overnight and current day market
activity and the extent of current
customer undermargined or debit
balances, to develop a reasonable basis
to estimate the amount of excess funds
that remain on deposit since the close
of business on the previous day prior to
initiating a withdrawal.
The Commission also is proposing
several additional required layers of
authorization and documentation if the
withdrawal exceeds, individually or in
the aggregate with other such
withdrawals, 25 percent of the FCM’s
residual interest. Proposed § 1.23(c)
prohibits an FCM from withdrawing
more than 25 percent of its residual

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interest in futures customer accounts
unless the FCM’s CEO, CFO, or other
senior official that is listed as a
principal on the firm’s Form 7–R
registration statement and is
knowledgeable about the FCM’s
financial requirements (‘‘Financial
Principal’’) pre-approves the withdrawal
in writing.
Regulation 1.23(c) will further require
the FCM to immediately file a written
notice with the Commission and with
the firm’s DSRO of any withdrawal that
exceeds 25 percent of its residual
interest. The written notice must be
signed by the CEO, CFO, or Financial
Principal that pre-approved the
withdrawal, specifying the amount of
the withdrawal, its purpose, its
recipient(s), and contain an estimate of
the residual interest after the
withdrawal. The written notice also
must contain a representation from the
person that pre-approved the
withdrawal that to such person’s
knowledge and reasonable belief, the
FCM remains in compliance with its
segregation obligations. The proposal
further requires that the official in
making this representation specifically
consider any other factors that may
cause a material change in the FCM’s
residual interest since the close of
business on the previous business day,
including known unsecured futures
customer debits or deficits, current day
market activity, and any other
withdrawals. The written notice would
be required to be filed with the
Commission and with the FCM’s DSRO
electronically.
Proposed § 1.23(d) requires an FCM
that has withdrawn funds from
segregated futures customer accounts for
its own purposes, and such withdrawal
causes the firm to fall below its targeted
residual interest in such accounts, to
deposit proprietary funds into the
accounts to restore the residual interest
balance to the targeted amount. The
FCM must deposit the proprietary funds
into the segregated account prior to the
close of the next business day.
Alternatively, the FCM may revise its
targeted residual interest amount, if
appropriate, in accordance with its
written policies and procedures for
establishing, documenting, and
maintaining its target residual interest,
in accordance with the requirements of
proposed § 1.11. Should an FCM’s
residual interest, however, be exceeded
by the sum of the FCM’s futures
customers’ margin deficits, an amount
necessary to restore residual interest to
that sum must be deposited
immediately.
The Commission’s proposal is
consistent in most respects with NFA’s

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recent rule amendments that require
FCMs to maintain written policies and
procedures regarding the withdrawal of
proprietary funds from futures
customers’ segregated accounts
discussed in Section I.D above. The
proposal will continue to provide FCMs
with flexibility to access the residual
interest in segregated funds, but with
the responsibility to ensure that any
withdrawals of residual interest are, in
fact, the firm’s own funds. This
responsibility exists currently by virtue
of the language of section 4d(a)(2) of the
Act and § 1.23, however the processes
necessary to ensure that the
responsibility was carried out were not
specified by regulation.
By providing a prohibition on
withdrawals until the segregation
calculation is performed by the FCM
and submitted to the Commission and to
the DSRO, and further requiring written
approvals by the FCM’s senior officials
prior to any withdrawals in excess of 25
percent of the prior day’s residual
interest with notice to the Commission
and a DSRO, any withdrawal of funds
in excess of the residual interest will be
clear violations of proposed § 1.23, and
the responsibility for such violations
will be clear from written pre-approvals
made by the CEO, CFO or Financial
Principal, or the lack thereof.
J. Proposed Amendments to § 1.25:
Investment of Customer Funds
The Commission is proposing to
amend § 1.25(b)(3)(v) to provide that the
25-percent counterparty concentration
limit for reverse repurchase agreements
applies not only to a single
counterparty, but to all counterparties
under common control or ownership.
The Commission also is proposing to
delete paragraph (b)(6) of § 1.25 because
the information that an FCM is required
to record and maintain under paragraph
(b)(6) is currently required by § 1.27.
Further, the Commission is proposing to
amend § 1.25(d) to clarify the conditions
under which an FCM may deposit firmowned securities into segregation.
Regulation 1.25 sets forth the
financial investments that an FCM or
DCO may make with customer funds. As
one of the permitted investments, FCMs
and DCOs may use customer funds to
purchase securities from a counterparty
under an agreement for the resale of the
securities back to the counterparty
(‘‘reverse repurchase agreements’’).
Regulation 1.25 places conditions on
such repurchase or reverse repurchase
agreements, including limiting
permitted counterparties to certain
banks and government securities
brokers or dealers, and prohibiting an
FCM or DCO from entering into such

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agreements with affiliate. Regulation
1.25(b)(3)(v) also imposes a
counterparty concentration limit on
reverse repurchase agreements that
prohibits an FCM or DCO from
purchasing securities from a single
counterparty that exceeds 25 percent of
the total assets held in segregation by
the FCM or DCO.
Under the proposed amendment to
§ 1.25(b)(3)(v), an FCM or DCO must
aggregate the value of the securities
purchased from two or more different
counterparties under repurchase
agreements if the counterparties are
under common control or ownership.
The aggregate value of the securities
purchased under the repurchase
agreements from the counterparties
must not exceed 25 percent of the total
assets held in segregation by the FCM or
DCO. The Commission believes that
expanding the concentration limitation
to counterparties under common control
or ownership is consistent with the
original intention of the concentration
limitation, which was to minimize the
potential losses or disruptions due to
the default of a counterparty. If the
counterparties are under common
control or ownership, a default by one
counterparty may adversely impact all
of the counterparties.
The Commission also is proposing to
amend § 1.25 by deleting paragraph
(b)(6), which requires an FCM or DCO
to prepare a record, on a daily basis,
detailing the type of instruments in
which customer funds were invested,
the original costs of the investments,
and the current market value of the
investments. As noted above, the
information that an FCM is required to
record and maintain under paragraph
(b)(6) is currently required by § 1.27.
Finally, the Commission is proposing
to amend § 1.25(d)(7) to recognize that
a DCO designated as systemically
important (‘‘SIDCO’’) by the Financial
Stability Oversight Council may keep
securities transferred to the SIDCO
under a repurchase or reverse
repurchase agreement in a safekeeping
account with a Federal Reserve Bank, as
authorized by section 806 of the DoddFrank Act.
K. Proposed Amendments to § 1.26:
Deposit of Obligations Purchased With
Futures Customer Funds
As discussed above, the Commission
has previously proposed to amend
§ 1.26 along with § 1.20 to require a
template form of Acknowledgment
Letter—in addition to other substantive
requirements and obtaining and filing
such Acknowledgment Letters—with
respect to the deposit of instruments
purchased with customer funds,

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including money market mutual funds.
As discussed earlier with respect to
§ 1.20, the Commission received and
analyzed comments on those proposals.
As noted above, the Commission is
herein proposing changes to the
template Acknowledgment Letter set
forth in Appendix A to § 1.26 for money
market mutual funds, which incorporate
revisions based on the Commission’s
analysis of prior comments, and is
proposing new additions to such
template. The Commission is also
proposing new substantive requirements
applicable to obtaining and filing such
written Acknowledgment Letters. A new
substantive requirement under § 1.26, as
proposed to be amended and included
in the template form, is a requirement
that depositories provide the
Commission and, and in the case of an
FCM, the FCM’s DSRO—at all times—
with read-only electronic access to all
FCM and DCO accounts holding
customer funds.
L. Proposed Amendments to § 1.29:
Increment or Interest Resulting From
Investment of Customer Funds
The Commission is proposing to
amend § 1.29 to explicitly provide that
an FCM bears sole responsibility for any
losses resulting from the investment of
customer funds in financial instruments
permitted under § 1.25.
Regulation 1.29 provides that an FCM
is not prohibited from keeping as its
own any interest or other gain resulting
from the investment of customer funds
in financial instruments permitted
under § 1.25. Regulation 1.25 also
provides that an FCM must manage the
permitted investments consistent with
the objectives of preserving principal
and maintaining liquidity.
The proposed amendment clarifies
that an FCM is solely responsible for
any losses that result from the
investment of customer funds in the
financial instruments listed under
§ 1.25. An FCM may not charge or
otherwise allocate any such losses to the
accounts of the FCM’s customers. To
allocate losses on the investment of
customer funds would result in the use
of customer funds in a manner that is
not consistent with section 4d(a)(2) and
§ 1.20, which provides that customer
fund can only be used for the benefit of
futures customers and limits
withdrawals from futures customer
accounts, other than for the purpose of
engaging in trading, to certain
commissions, brokerage, interest, taxes,
storage or other fees or charges lawfully
accruing in connection with futures
trading.
The Commission requests comment
on the proposed amendment to

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explicitly provide that losses resulting
from the investment of customer funds
may not be allocated by an FCM to
customers. The Commission also
requests comment on how any losses
associated with bank deposits should be
addressed. The Commodity Exchange
Authority issued an Administrative
Determination (‘‘AD’’) in 1971 that
provides that an FCM may not be liable
for losses resulting from the deposit of
customer funds with a bank that
subsequently closes or is unable to
repay the FCM’s deposit.70 The AD
provides that an FCM would not be
liable if it had used due care in selecting
the bank, had not otherwise breached its
fiduciary responsibilities toward the
customers, and had fully complied with
the requirements of the Act and the
Commission regulations relating to the
handling of customers’ funds. The
Commission requests comment on
whether the regulations should be
revised to impose an obligation on an
FCM to repay customer funds in the
event of a default by a bank holding
customer funds. Should there be a
distinction drawn between U.S.domiciled and regulated banks and nonU.S.-domiciled banks?
M. Proposed Amendments to § 1.30:
Loans by Futures Commission
Merchants: Treatment of Proceeds
The Commission is proposing to
amend § 1.30 to provide that an FCM
may not loan funds to finance a
customer’s trading account on an
unsecured basis, or accept as collateral
for the loan the customer’s trading
account.
Regulation 1.30 provides that
Commission regulations do not prevent
an FCM from lending its own funds to
a customer that has pledged securities
and property, or from repledging or
selling the customer’s securities or
property pursuant to specific written
agreement of the customer. This
provision generally allows customers to
deposit non-cash collateral as initial and
variation margin. Absent the provisions
in § 1.30, an FCM may be required to
liquidate the non-cash collateral if the
customer was subject to an initial or
variation margin call.
The Commission is proposing to
amend § 1.30 to prohibit an FCM from
loaning funds to finance a customer’s
trading account on an unsecured basis,
or from accepting a customer’s trading
account as collateral for the loan. The
Commission believes that extending
unsecured loans to customers is not a
70 Liability of Futures Commission Merchants and
Clearing Associations, Administrative
Determination No. 230 (Nov. 23, 1971).

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common occurrence as the current
capital requirements in § 1.17 would
require the FCM to take a 100 percent
capital charge on the unsecured
receivables from the customers
associated with such loans. Commission
staff has, however, had to provide its
views on whether a customer trading
account may be used to collateralize a
loan from the FCM.
A trading account does not qualify as
readily marketable securities that are
generally required to collateralize a loan
for the FCM to avoid the 100 percent
unsecured receivable capital charge.71
Rules of the CME also prohibit an FCM
from providing unsecured financing to a
customer for margin purposes.72 The
Commission is proposing to explicitly
prohibit unsecured lending by FCMs to
customers in the proposed amendments
in § 1.30. Should customers have
liquidity needs sufficient to require
unsecured lending, the Commission
believes it to be prudent to require that
such unsecured lending be done by a
party other than the FCM carrying the
customer account. This newly proposed
prohibition comports with the
Commission’s existing regulatory
requirement contained in § 1.56 that
provides that no FCM may represent
that it will not call for or attempt to
collect initial and maintenance margin
as established by the rules of the
applicable board of trade.
N. Proposed Amendments to § 1.32:
Segregated Account: Daily Computation
and Record
The Commission is proposing to
amend § 1.32 to require additional
safeguards with respect to futures
customer funds on deposit in segregated
accounts, and to require FCMs to
provide twice each month a detailed
listing to the Commission of
depositories holding customer funds.
Regulation 1.32 requires an FCM to
prepare a daily record as of the close of
business each day detailing the amount
of funds the firm holds in segregated
accounts for futures customers trading
on designated contract markets, the
amount of the firm’s total obligation to
such customers computed under the Net
Liquidating Equity Method, and the
amount of the FCM’s residual interest in
the futures customer segregated
accounts. In addition, the daily record
must detail the sum of the futures
71 Regulation

1.17(c)(3).
Rule 930.G.—Loans to Account Holders—
provides that clearing members may not make loans
to account holders to satisfy their performance bond
requirements unless such loans are secured by
readily marketable collateral that is otherwise
unencumbered and which can be readily converted
into cash.
72 CME

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customers’ margin deficits, to ensure
that residual interest equals or exceeds
such sum. In performing the calculation,
an FCM is permitted to offset any
futures customer’s debit balance by the
market value (less haircuts) of any
readily marketable securities deposited
by the particular customer with the
debit balance as margin for the account.
The amount of the securities haircuts
are as set forth in SEC Rule 15c3–
1(c)(vi).
FCMs are required to perform the
segregation calculation prior to noon on
the next business day, and to retain a
record of the calculation in accordance
with § 1.31. Both the CME and NFA
require their respective member FCMs
to file the segregation calculations with
the CME and NFA, as appropriate, each
business day. FCMs, however, are only
required to file a segregation calculation
with the Commission at month end as
part of the Form 1–FR–FCM (or FOCUS
Reports for dual-registrant FCM/BDs).
Regulation 1.12, as discussed in Section
II.C above, requires the FCM to provide
immediate notice to the Commission
and to the firm’s DSRO if the FCM is
undersegregated at any time.
The Commission is proposing to
amend § 1.32 to require each FCM to file
its segregation calculation with the
Commission and with its DSRO each
business day. The Commission also is
proposing to amend § 1.32 to require
FCMs to use the Segregation Schedule
contained in the Form 1–FR–FCM (or
FOCUS Report for dual-registrant FCM/
BDs) to document its daily segregation
calculation.
As noted above, the CME and NFA
require their respective member FCMs
to file their segregation calculations
with them on a daily basis. The CME
and NFA also require the FCMs to
document their segregation calculation
using the Segregation Schedule
contained in the Form 1–FR–FCM.
Therefore, the additional requirement of
filing a Segregation Schedule with the
Commission is not a material change to
the regulation.73
The Commission believes that the
filing of a Segregation Schedule by each
FCM each day will significantly
enhance its ability to monitor and
protect customer funds. Commission
staff will be able to determine almost
immediately upon receipt of the
Segregation Schedule whether a firm is
undersegregated and immediately take
steps to determine if the firm is
experiencing financial difficulty or if
73 In fact, since FCMs file the Segregation
Schedules with the CME and NFA via WinJammer,
the Commission already has access to the filings,
and the amendment will not require an FCM to
change any of its operating procedures.

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customer funds are at risk.74
Commission staff also can coordinate
the review of the daily segregation
computations with the additional bank
and other depository information that it
will have access to under proposed
§ 1.23.
In addition, the use of the Segregation
Schedule provides a uniform way for
each FCM to present its information to
the Commission, in a format that both
the Commission and FCMs are familiar
with that will reduce significantly the
possibility of a miscommunication
regarding the information that is
reported. The standardized Segregation
Schedule will also facilitate the
Commission’s ability to compare one
FCM to another, and to perform
additional trend and other analysis to
identify potential issues with the
holding of customer funds. The filing of
daily segregation records also will allow
staff to monitor significant movements
in the balances of segregated funds on
a day-to-day basis.
Proposed § 1.32(d) provides that the
Segregation Statement must be filed
with the Commission and with the
FCM’s DSRO electronically using a form
of user authentication assigned in
accordance with procedures established
or approved by the Commission. The
Commission is not proposing to change
the timeframe for the preparation of the
Segregation Statements. The Segregation
Statement must be filed by noon (based
upon the location of the FCM) the next
business day.
The Commission also is proposing to
amend § 1.32(b) to provide that in
determining the haircuts for commercial
paper, convertible debt instruments, and
nonconvertible debt instruments
deposited by customers as margin, the
FCM may develop written policies and
procedures to assess the credit risk of
the securities as proposed by the SEC
and discussed more fully in Section II.F
above. If the FCM’s assessment of the
credit risk is that it is minimal, the FCM
may apply haircut percentages that are
lower than the 15 percent default
percentage under SEC Rule 15c3–
1(c)(2)(vi).
The Commission is further proposing
to amend § 1.32 by requiring each FCM
to file detailed information regarding
depositories and the substance of the
investment of customer funds under
§ 1.25. Proposed paragraphs (f) and (j) of
§ 1.32 will require each FCM to submit
74 Each Form 1–FR–FCM and FOCUS Report is
received by the Commission via WinJammer. The
financial forms are automatically electronically
reviewed within several minutes of being received
by the Commission and if a firm is undersegregated
an alert is immediately issued to Commission staff
members via an email notice.

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to the Commission and to the firm’s
DSRO a listing of every bank, trust
company, DCO, other FCM, or other
depository or custodian holding
customer funds.
The listing must specify separately for
each depository the total amount of cash
and § 1.25 permitted investments held
by the depository for the benefit of the
FCM’s customers. Specifically, each
FCM must list the total amount of cash,
United States government securities,
United States agency obligations,
municipal securities, certificates of
deposit, money market mutual funds,
commercial paper, and corporate notes
held by each depository, computed at
current market values. The listing also
must specify: (1) If any of the
depositories are affiliated with the FCM;
(2) if any of the securities are held
pursuant to an agreement to resell the
securities to a counterparty (reverse
repurchase agreement) and if so, how
much; and (3) the depositories holding
customer-owned securities and the total
amount of customer-owned securities
held by each of the depositories. The
FCM is also required to disclose if any
of the depositories are affiliated with the
FCM.
Each FCM is required to submit the
listing of the detailed investments to the
Commission and to the firm’s DSRO
twice each month. The filings must be
made as of the 15th day of each month
(or the next business day, if the 15th day
of the month is not a business day) and
the last business day of the month. The
filings are due to the Commission and
to the firm’s DSRO by 11:59 p.m. on the
next business day.
Proposed paragraph (k) of § 1.32 will
require each FCM to retain the
Segregation Statement prepared each
business day and the detailed
investment information, together with
all supporting documentation, in
accordance with § 1.31.
The Commission’s proposal is similar
to existing SRO practices and rules. The
CME and NFA recently adopted rules
requiring member FCMs to submit
detailed information on how they invest
customer funds and the depositories
holding customer funds. The
information required to be filed by
FCMs with the CME and NFA is
consistent with the information that
FCMs are required to file with the
Commission and DSROs under the
proposed amendments to § 1.32, with
the exception that the current CME rule
does not require member FCMs to
submit information regarding the
holding of customer-owned securities.
The proposed timeframes for both
preparing and filing both the
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investment information are consistent
between the SRO rules and proposed
§ 1.32.
The Commission also notes that NFA
will be publishing information on its
Web site regarding how each FCM
invests and holds customer funds.
Commission staff is consulting with
NFA and is assessing whether NFA
should be the primary method for the
public to obtain information on how
FCMs hold and invest customer funds.
The twice monthly filing of
information on the investment of
customer funds will provide the
Commission and SROs with more
timely detailed information regarding
how FCMs are holding and investing
customer funds, which will allow the
Commission and SROs to more closely
monitor customer funds to assess their
safety. In this regard, the reporting of
the use of depositories that are affiliated
with the FCM will alert staff to review
such relationships more closely to
ensure that transactions are done in an
appropriate arms-length manner and not
to the benefit of the affiliated
depository. Staff also can compare
reported the reported investment
balances with information maintained
directly by the depositories using the
on-line access that the depositories will
be required to provide to Commission
staff under § 1.20 discussed above.
The Commission request comment on
all aspects of the proposed amendments
to § 1.32. Specifically, the Commission
requests comments on the following:
• Should the Commission amend the
regulations to require each FCM to
disclose information regarding its
investments of customer funds? If so,
what information should be disclosed?
What investment information would be
of the most benefit to market
participants in assessing whether to
entrust funds to a particular FCM? How
would the investment information be
used by market participants?
• How frequently should investment
information be disclosed? What format
should be used to disclose the
information? How should the
information be disclosed? Should the
information be posted on the FCM’s
internet web site?
• Should NFA act as the primary
source for the disclosure of how FCMs
hold and invest customer funds?
O. Proposed Amendments to § 1.52:
Self-Regulatory Organization Adoption
and Surveillance of Minimum Financial
Requirements
SROs are required by the Act and
Commission regulations to monitor their
member FCMs for compliance with the
Commission’s and SROs’ minimum

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financial and related reporting
requirements. Specifically, DCM Core
Principle 11 provides, in relevant part,
that a board of trade shall establish and
enforce rules providing for the financial
integrity of any member FCM and the
protection of customer funds.75 In
addition, section 17 of the Act requires
NFA to establish minimum capital,
segregation, and other financial
requirements applicable to its member
FCMs, and to audit and to enforce
compliance with such requirements.76
The Commission also has established
in § 1.52 minimum elements that each
SRO financial surveillance program
must contain to satisfy the statutory
objectives of Core Principle 11 and
section 17 of the Act. In this regard,
§ 1.52 requires, in part, each SRO to
adopt and to submit for Commission
approval rules prescribing minimum
financial and related reporting
requirements for member FCMs. The
rules of the SRO also must be the same
as, or more stringent than, the
Commission’s requirements for financial
statement reporting under § 1.10 and
minimum net capital under § 1.17.
In addition, the Commission adopted
final amendments to § 1.52 on May 10,
2012, to codify previously issued CFTC
staff guidance regarding the minimum
elements of an SRO financial
surveillance program.77 The final
amendments require an SRO to: (1)
Maintain staff of an adequate size,
training, experience, and independence
to effectively implement a supervisory
program; (2) maintain a program that
provides for the ongoing surveillance of
FCMs through review of financial
statements and regulatory notices; (3)
identify firms that pose a high degree of
potential risk, including risk to
customer funds; (4) conduct routine,
periodic onsite examinations of FCMs;
and (5) adequately document all aspects
of the operation of the supervisory
program, including the conduct of riskbased scope setting and the risk-based
surveillance of high-risk member
registrants, and the imposition of
remedial and punitive actions for
material violations.
In order to effectively and efficiently
allocate SRO resources over FCMs that
are members of more than one SRO,
§ 1.52(c) currently permits two or more
SROs to enter into an agreement to
establish a joint audit plan for purpose
of assigning to one of the SROs (the
DSRO) of the joint audit plan the
function of monitoring and examining
member FCMs for compliance with
75 7

U.S.C. 7(d)(11).
U.S.C. 21(p).
77 77 FR 36611 (June 19, 2012).
76 7

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certain regulatory and financial
reporting obligations. The audit plan
must be submitted to the Commission
for approval. The Commission may
approve a joint audit plan, or part of
such a plan, after notice and comment
if the Commission determines that the
plan: (1) Is necessary or appropriate to
serve the public interest; (2) is for the
protection and in the interest of
customers; (3) reduces multiple
monitoring and auditing for compliance
with the minimum financial
requirements; (4) reduces multiple
reporting of financial information; (5)
fosters cooperation and coordination;
and (6) does not hinder the
development of a registered futures
association. Currently all active SROs
are members of a joint audit plan that
was approved by the Commission on
March 18, 2009.78
The Commission is proposing
additional amendments to § 1.52 in light
of recent events that highlight a need for
strengthening the minimum
requirements that SROs must abide by
in conducting financial surveillance to
minimize the chances that FCMs that
engage in unlawful activities that result,
or could result, in the loss of customer
funds or the inability of the firms to
meet their financial obligations to
market participants, including DCOs, go
undetected. The proposed amendments
to § 1.52 revise the current supervisory
program required to be established and
implemented by SROs pursuant to
existing § 1.52(b) with respect to their
FCM members. In addition, for SROs
that choose to delegate their duties to
oversee and examine FCMs that are
members of two or more SROs to a
DSRO pursuant to a plan established
under existing § 1.52(c) in lieu of each
conducting its own oversight and
examinations of such common FCM
members, proposed § 1.52 provides that
the plan adopt certain requirements to
assure the quality of the DSRO oversight
and examinations conducted under the
plan, both as to the substance of the
oversight and examination program and
the application of such program.
Proposed § 1.52(b) requires each SRO
to adopt rules requiring its member
FCMs to establish a risk management
program that is at least as stringent as
78 The original signatories of the joint audit plan
approved on March 18, 2009 are as follows: Board
of Trade of the City of Chicago, Inc.; Board of Trade
of Kansas City; CBOE Futures Exchange, LLC;
Chicago Climate Futures Exchange, LLC; Chicago
Mercantile Exchange Inc.; Commodity Exchange,
Inc; ELX Futures, L.P.; HedgeStreet, Inc.; ICE
Futures U.S., Inc.; INET Futures Exchange, L.L.C.;
Minneapolis Grain Exchange; NASDAQ OMX
Futures Exchange; National Futures Association;
New York Mercantile Exchange, Inc.; NYSE Liffe
US, L.L.C.; OneChicago, L.L.C.

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the risk management program required
in proposed § 1.11. Proposed § 1.11 is
discussed in Section II.B above, and
requires an FCM to establish a risk
management program designed to
monitor and manage risks associated
with the activities of the FCM.
Proposed § 1.52 does not make
significant changes to the existing SRO
supervisory programs with respect to
the oversight and examination of retail
foreign exchange dealer and IB member
registrants. However, with respect to the
oversight and examination of FCMs,
proposed § 1.52 requires an SRO to
adopt significant new requirements in
its supervisory program. The
supervisory program for FCMs will now
explicitly require, among other things,
controls testing as well as substantive
testing, and the examination process for
each FCM must be driven by the risk
profile of each such FCM. In addition,
the supervisory program must conform
to U.S. GAAS after giving full
consideration to those auditing
standards as prescribed by the PCAOB.
The supervisory program also must
contain written standards addressing
numerous aspects of the examination
process over FCMs as provided in
proposed § 1.52(c)(2)(iii), including the
examination of the risk assessment
process, the examination of the
planning process, and the quality
control procedures to ensure that the
examinations maintain the level of
quality expected by the SRO.
The Commission believes that an
examination of an FCM must include a
review and assessment of the firm’s
internal controls in order to identify
where there may be potential
weaknesses and to properly gauge the
risks associated with such weaknesses
including their potential impact on the
financial condition of the firm and the
protection of customer funds.
The SRO also must engage an
‘‘examinations expert’’ under
§ 1.52(c)(2) to review its supervisory
program and the application of the
supervisory program at least once every
two years. The term ‘‘examinations
expert’’ is proposed to be defined under
§ 1.52(a) as a nationally recognized
accounting and auditing firm with
substantial expertise in audits of FCMs,
risk assessment and internal control
reviews, and is someone acceptable to
the Commission. The Commission is
proposing to delegate to the Director of
the Division of Swap Dealer and
Intermediary Oversight the
responsibility of assessing whether a
particular entity is qualified and
approved as an examinations expert to
review the SRO’s supervisory program

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The review will require the
examinations expert to assess the
sufficiency of the SRO’s risk-based
approach and the internal controls
testing and also whether the supervisory
program is being appropriately applied
by the SRO in its examinations of its
member FCMs. In addition, the review
will require that the examinations
expert provide an opinion as to whether
the supervisory program is reasonably
likely to identify a material deficiency
in internal controls of the FCM or in any
of the other items that are the subject of
an examination conducted in
accordance with the supervisory
program. Furthermore, the review will
require that the examinations expert
also provide recommendations on new
or best practices prescribed by industry
sources that should be incorporated in
the supervisory program. The SRO must
receive a written report from the
examinations expert describing, among
other things, the items mentioned in
this paragraph.
Upon receipt of the written report, the
SRO must provide such written report
to the Commission. The SRO must
update the supervisory program and
coordinate with the Commission to
resolve any issues raised by the written
report and any Commission questions
and comments before the updated
supervisory program becomes the
standard for the SRO’s examinations of
its registered FCM members. Proposed
§ 1.52(c)(2)(vi) also requires each SRO to
submit an initial supervisory program
within 120 days of the effective date of
the regulation, or a longer period of time
that Director of the Division of Swap
Dealer and Intermediary Oversight
(acting pursuant to authority delegated
by the Commission) may approve. The
initial supervisory program must
contain an affirmation from the
examinations expert regarding the
evaluation of the supervisory program,
including the sufficiency of the riskbased approach and the internal
controls testing. The examinations
expert also must opine as to whether the
supervisory program is reasonably likely
to identify a material weakness in
internal controls over financial or
regulatory reporting.
Consistent with the current
regulation, and in order to avoid
duplicative examinations and oversight
of FCMs, retail foreign exchange dealers,
or IBs, proposed § 1.52(d)(1) provides
that when two or more SROs have a
common member registrant, such SROs
may voluntarily agree to establish a plan
to delegate to a single DSRO the
function of overseeing and examining
such common member registrant
otherwise required from each such SRO.

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Proposed amendments to § 1.52(d)(1)
would further provide that while an
SRO may delegate the functions of
examining a member FCM for
compliance with the minimum financial
and reporting and risk management
requirements, the delegating SRO
retains responsibility for its member
FCM’s compliance with such
requirements.
If SROs choose to take advantage of
the efficiency provided by a joint audit
plan with respect to their oversight and
examinations over common member
FCMs, then the plan must satisfy the
requirements of proposed § 1.52(d)(2),
which will assure the quality of the
SROs, both as to the substance of the
oversight and examination program and
the application of such program.
Proposed § 1.52(d)(2) requires in such a
plan that the SROs form a Joint Audit
Committee and adopt a Joint Audit
Program pursuant to which FCMs are
overseen and examined by a DSRO.
The Joint Audit Committee members
will be subject to a number of duties
according to proposed § 1.52(d)(2). The
most important of these is that the Joint
Audit Committee members establish
and maintain a Joint Audit Program that
the DSROs must apply in their oversight
and examinations of FCMs.
The requirements for the
establishment and maintenance of the
Joint Audit Program are identical in
many ways to the establishment and
maintenance of the standalone
supervisory program with respect to
FCMs described in proposed §§ 1.52(b)
and (c). For example, the Joint Audit
Program and the standalone supervisory
program both require controls testing as
well as substantive testing, and the
examination process for each FCM must
be driven by the risk profile of each
such FCM. Both programs are required
to be reviewed by an examinations
expert every two years. Both must have
standards addressing the items listed in
proposed § 1.52(c)(2)(iii), including the
examination risk assessment,
examination planning, and quality
control to ensure that the examinations
maintain the level of quality expected.
The rationale for this approach is
because one of the goals of proposed
§ 1.52(d)(2) is to ensure that the SRO
and examinations of FCMs is at least up
to the same heightened standard,
regardless of whether the oversight and
examinations are conducted by the SRO
itself or by a DSRO designated by the
Joint Audit Committee.
The proposed revisions to § 1.52(d)
would not nullify the existing joint
audit plan approved by the Commission
on March 18, 2009. Furthermore, the
Commission believes that the new

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minimum requirements for a Joint Audit
Program under proposed § 1.52(d)(2)
will not require revisions to the current
joint audit plan. In this regard, the joint
audit plan approved by the Commission
includes a provision in paragraph 3 that
provides that the minimum practices
and procedures followed by each DSRO
in the conduct of examinations of FCMs
shall be established to conform with the
requirements of § 1.52, Commission staff
interpretations, and any other
Commission requirements hereinafter in
effect relating to audits and financial
reviews. The Commission believes that
this provision would require the DSROs
of the current joint audit plan to revise
their Audit Program to meet the new
requirements of proposed 1.52, but not
require a new joint audit plan to be
submitted to the Commission.79
The members of the current joint
audit plan would be required to
establish, operate and maintain a Joint
Audit Program under proposed
§ 1.52(d)(2)(i). The members of the
current joint audit plan also would be
required to submit to the Commission
for its review and comment a Joint
Audit Program within 120 days (or such
other time as the Commission may
approve) of the effective date of the
amendments to § 1.52 under proposed
§ 1.52(d)(2)(ii)(H). The Joint Audit
Program must be accompanied by a
written report from an examinations
expert affirming that the examinations
expert has evaluated the Joint Audit
Program and the examinations expert’s
opinion as to whether the Joint Audit
Program is reasonably likely to identify
a material deficiency in internal
controls over financial and regulatory
reporting, and other items that are
subject of an examination conducted in
accordance with the Joint Audit
Program.
The Commission is proposing to
delegate the responsibility for granting
an extension of time to submit an initial
Joint Audit Program to the Director of
the Division of Swap Dealer and
Intermediary Oversight. In this
connection, the Commission anticipates
that the Division of Swap Dealer and
Intermediary Oversight will be
performing ongoing consultation with
SROs regarding the examination
programs and, therefore, would be in
position to assess the adequacy of, and
necessity for, any request for an
79 The Commission’s view is only that the current
agreement does not have to be revised as a result
of the proposed amendments. The SRO members of
the current joint audit plan, however, are not
precluded from making any amendments or
otherwise revising the joint audit program
consistent with the terms included in the agreement
for making such revisions.

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extension of the filing deadline. It is
anticipated that the Director of the
Division of Swap Dealer and
Intermediary Oversight will grant
requests for reasonable extensions of
time for the submission of the Joint
Audit Program.
The Commission requests comments
on all aspects of proposed § 1.52. The
Commission also requests comments on
the following:
• The Commission is proposing to
require that the SRO and/or JAC
program be subject to an evaluation by
an examinations expert at least once
every two years. The examinations
expert is defined as a nationally
recognized accounting and auditing
firm. Is the proposed definition of the
examinations expert sufficiently clear or
detailed to identify which entities may
qualify as an examinations expert? If
not, how can the Commission make the
definition more objective? Should the
Commission consider entities other than
accounting and auditing firms (such as
consulting firms) to act as examinations
experts?
• Is the requirement for the
examinations expert to conduct an
evaluation of the SRO or JAC program
at least once every two years an
appropriate timeframe? Should the
Commission consider a shorter interval
between evaluations? If so, why?
Alternatively, should the Commission
consider a longer interval between
evaluations? If so, why? What criteria
should the Commission consider in
setting the interval? Should the
Commission allow SRO or JAC
programs that have minimal issues
raised by the examinations expert be
subject to a longer evaluation interval
than programs that have more issues
identified by the examinations expert? If
so, how would the Commission
implement such a program?
• Does the requirement for an
examinations expert add sufficient
value to the SRO or JAC program to
justify the costs of such evaluations?
Please provide detail in your response
to assist the Commission in assessing
the costs of such evaluations.
• Are there alternatives to the
examinations expert’s evaluation to
assess the adequacy of the SRO and JAC
program that the Commission should
consider? Please provide detail in your
response.
• The Commission is proposing that
an SRO submit an initial supervisory
program and that the members of a Joint
Audit Committee submit an initial Joint
Audit Program within 120 days of the
effective date of the regulation. The
initial supervisory program and the
initial Joint Audit Program must include

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a written report containing an
affirmation from an examinations expert
regarding the evaluation of the
supervisory program or the Joint Audit
Program, including the sufficiency of
the risk-based approach and the internal
controls testing. The examinations
expert also must opine as to whether the
supervisory program or the Joint Audit
Program is reasonably likely to identify
a material weakness in internal controls
over financial or regulatory reporting. Is
the proposed 120-day period a sufficient
period of time for an SRO or JAC to
obtain such report from an examinations
expert and to submit its respective
supervisory program or Joint Audit
Program? If not, what is a sufficient
period of time?

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P. Proposed Amendments to § 1.55:
Public Disclosures by Futures
Commission Merchants
The Commission is proposing to
amend § 1.55 to enhance the disclosures
provided to customers and potential
customers regarding the extent to which
customer funds are protected when
deposited with an FCM as margin or to
guarantee performance for trading
commodity interests. The Commission
also is proposing to require each FCM
to disclose certain firm specific
information regarding the FCM’s
financial condition and operations to
allow customers and potential
customers to assess the risks of engaging
the firm to conduct futures trading and
the risks of entrusting their funds to the
FCM.
Regulation 1.55(a) currently requires
an FCM, or an IB in the case of an
introduced account, to provide each
customer with a risk disclosure
statement prior to opening the
customer’s account (‘‘Risk Disclosure
Statement’).80 Regulation 1.55(b)
provides a standard form Risk
Disclosure Statement that each FCM or
IB is required to provide to each
prospective customer. The current Risk
Disclosure Statement is primarily
intended to provide a customer with
disclosure of the market risks of
engaging in futures trading and
addresses, among other things, risks
associated with leverage, market
movements, and the inability to exit the
market due to limit moves. The FCM or
IB also is required to receive a signed
acknowledgment from the customer
stating that the customer received and
understood the Risk Disclosure
Statement.
80 FCMs and IBs are not required to provide
disclosure documents to institutional customers,
defined as eligible contract participants under
section 1a of the Act. See § 1.55(f).

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The Commission is proposing to
amend § 1.55 to require FCMs to
provide additional disclosures to
prospective customers. Specifically, the
Commission is proposing to add new
provisions to paragraph (b) that will
require the Risk Disclosure Statement to
contain a statement that: (1) Customer
funds are not protected by insurance in
the event of the bankruptcy or
insolvency of the FCM, or if customer
funds are misappropriated in the event
of fraud; (2) customer funds are not
protected by SIPC, even if the FCM is a
BD registered with the SEC; and (3)
customer funds are not insured by a
DCO in the event of the bankruptcy or
insolvency of the FCM holding the
customer funds. The proposed
amendments also will require an FCM
to disclose that each customer’s funds
are not held in an individual segregated
account by an FCM, but rather are
commingled in one or more accounts,
and that FCMs may invest funds
deposited by customers in investments
listed in § 1.25. The proposed
amendments also will require that each
FCM disclose that funds deposited by
customers may be deposited with
affiliated entities of the FCM, including
affiliated banks and brokers.
The Commission also is proposing to
revise the Risk Disclosure Statement
required by § 1.55(b) to include a new
disclosure that informs a potential
customer that each futures commission
merchant is required by Commission
regulations to make certain firm specific
disclosures and financial information
publicly available on the futures
commission merchant’s Web site to
assist the customer with his or her
assessment and selection of a futures
commission merchant. The firm specific
disclosures are detailed in proposed
paragraph (k) of § 1.55 and are discussed
below. The Risk Disclosure Statement
also must include the futures
commission merchant’s Web site
address where the additional firm
specific and financial information may
be obtained by the customer.
The Commission is proposing the
additional disclosures in response to the
recent failures of MF Global and
Peregrine. The Commission is
concerned that the current Risk
Disclosure Statement does not provide
customers with adequate or complete
information regarding the risks of
engaging in trading through an FCM.
Current disclosures in the Risk
Disclosure Statement focus on the
market risks of engaging in futures
trading. However, the Commission
understands that many of MF Global’s
former customers did not have adequate
and meaningful information regarding

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the risks that their funds were exposed
to beyond general market risks.
Specifically, the Commission
understands that some customers
believed that their funds were covered
by insurance or other protection. Some
customers also believed that DCOs
guaranteed customer funds in the event
of a bankruptcy of an FCM.
The proposed additional disclosures
in the Risk Disclosure Statement are
intended to provide customers with a
greater understanding of the risks of
entrusting their funds with an FCM.
This includes disclosures regarding the
meaning and operation of the term
‘‘segregation’’ under the Act and
Commission regulations. In addition,
the Commission believes that customers
will benefit from an awareness that
FCMs may use affiliated entities to hold
customer funds.
The Commission also is proposing
that the Risk Disclosure Statement
include a new provision that informs
potential customers to the fact that
additional firm specific disclosures and
financial information about a particular
FCM may be obtained from information
maintained on each FCM’s respective
Web site. The content of the additional
firm specific and financial disclosures
are discussed below.
The Commission also is proposing to
amend § 1.55, by adding new
paragraphs (i) through (n) which will
require an FCM to provide to each
customer an additional disclosure
document that will set forth firm
specific information and address firmspecific risk factors to allow customers
to have more information regarding the
FCM and the risks associated with
entrusting their funds to the FCM, or
otherwise conducting business with or
through the FCM (‘‘Firm Specific
Disclosure Document’’). The additional
risk information provided also will
enable customers to make more
meaningful judgments regarding the
appropriateness of selecting an FCM by
providing tools and information for the
meaningful comparisons of business
models and risks across FCMs. Such
additional information will greatly
enhance the due diligence that a
customer can conduct both prior to
opening an account and on an ongoing
basis, as the proposal will require that
the FCM update the risk disclosure
information on a periodic basis. The
Commission believes that the proposed
Firm Specific Disclosure Document,
coupled with the existing Risk
Disclosure Statement, will provide
customers with a more complete
perspective regarding the risks of
participating in the futures markets.

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Under the proposal, in addition to
providing general firm contact
information, the Firm Specific
Disclosure Document will contain the
names, business contacts, and
backgrounds for the FCM’s senior
management and members of the FCM’s
board of directors. The Firm Specific
Disclosure Document also will include
firm risk disclosures including: (1) A
discussion of the significant types of
business activities and product lines
that the FCM engages in; (2) a
discussion of the FCM’s significant lines
of business and the approximate amount
of assets and capital devoted to each
line of business; (3) a discussion of the
material risks of the firm including the
FCM’s creditworthiness, leverage,
capital and liquidity condition, and an
explanation of how such risks may be
material to customers that deposit funds
for futures trading with the firm; and (4)
a discussion of any material
administrative, civil, criminal, or
enforcement actions pending or any
enforcement actions taken in the last
three years.
The proposed Firm Specific
Disclosure Document also will require
each FCM to disclose firm specific
information regarding its operations in
the futures marketplace. An FCM will
be required to disclose the name of the
firm’s DSRO, and to provide an
overview of customer funds segregation
protections and limitations, and how it
manages its collateral management and
investments. Each FCM also will be
required to disclose the clearinghouses
and carrying brokers that its uses to
conduct its business, as well as its
policies and procedures concerning the
choice of depositories, custodians and
counterparties.
The proposed Firm Specific
Disclosure Document also will require
the FCM to disclose certain financial
and risk management information
including the firm’s total equity,
regulatory capital, and net worth as of
the most recent month end when the
disclosure document is prepared. The
FCM also is required to disclose
information regarding: (1) The amount
of the FCM’s proprietary margin
requirements as a percentage of the total
segregated and secured funds that the
FCM holds; (2) the number of customers
that comprise 50 percent of the firm’s
total customer segregated and secured
amount requirements; (3) the aggregate
notional value, by asset class, of all nonhedged, principal over-the-counter
transactions into which the FCM has
entered; (4) the amount, generic source
and purpose of any unsecured lines of
credit (or similar short-term funding)
the FCM has obtained but not yet drawn

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upon; (5) the aggregate amount of
financing the FCM provides for
customer transactions involving illiquid
financial products for which it is
difficult to obtain timely and accurate
prices; (6) the percentage of customer
receivables that the FCM had to writeoff as uncollectable during the prior
year compared to the current segregated
and secured amount balances; and (7) a
summary of the FCM’s current risk
practices, controls and procedures.
An FCM is obligated to update the
Firm Specific Disclosure Document as
necessary to keep the information
accurate, but at least on an annual basis.
An FCM also is required to make the
Firm Specific Disclosure Document
available to its customers and the
general public on its Web site. An FCM
may, however, use an alternative
electronic means to make the Firm
Specific Disclosure Document available
to its customers provided that the
electronic version is presented in a
format that is readily communicated to
its customers. The Proposal further
provides that an FCM shall provide a
paper copy of the Firm Specific
Disclosure Document to a customer
upon the customer’s request.
The Commission also is proposing to
amend § 1.55 to require each FCM to
disclose on its Web site to the general
public financial information that is
publicly available under existing
Commission regulations. Specifically,
proposed paragraph (o) of § 1.55 will
require each FCM to make available on
its Web site the daily Segregation
Schedule; the daily Secured Amount
Schedule; and the daily Cleared Swaps
Segregation Schedule. Each FCM will be
required to maintain 12 months of the
above segregation and secured
schedules available on its Web site.
Proposed paragraph (o) also requires
each FCM to disclose on its Web site a
summary schedule of the firm’s adjusted
net capital, net capital, and excess net
capital for the 12 most recent monthend dates. Each FCM also will be
required to disclose on its Web site the
following statements and schedules
from the most current year end annual
report that is certified by an
independent public accountant in
accordance with § 1.16: the Statement of
Financial Condition; the Segregation
Schedule; Secured Amount Schedule;
the Cleared Swaps Segregation
Schedule; and all footnotes related to
the above statement and schedules.
The information that the proposal
requires each FCM to disclose on its
Web site is information that is currently
publicly available under Commission
regulations, or proposed by this
rulemaking in the case of the Cleared

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Swaps Segregation Schedule, to be
public information. Regulation 1.10(g)
currently provides that the Segregation
Schedules and Secured Amount
Schedules contained in the monthly
unaudited Forms 1–FR–FCM are public
information. Regulation 1.10(g) further
provides that the amounts of an FCM’s
adjusted net capital, minimum net
capital requirement, and excess net
capital as reported in the firm’s
unaudited monthly Form 1–FR–FCM
are public information. Lastly, § 1.10(g)
provides that the Statement of Financial
Condition, Segregation Schedule,
Secured Amount Schedule, and related
footnote disclosures contained in an
FCM’s audited annual financial report
are public documents.
The Commission also is proposing in
paragraph (o) of § 1.55 to require each
FCM to include a statement on its Web
site that is available to the public that
additional information, including
information on how the FCM invests
customer funds, may be obtained from
the NFA. The FCM also is required to
include a link on its Web site to the
NFA web page which shows financial
information for the FCM. Lastly,
proposed paragraph (o) requires each
FCM to include a statement regarding
the Commission’s reporting of select
FCM financial information and a link to
the Commission’s Web site.
The Commission is proposing
paragraph (o) as it believes that
customers will make more informed
choices regarding which FCMs to use to
carry their account and to entrust their
funds to if they have the opportunity to
have access to FCM financial
information. Requiring FCMs to make
the information available to the public
on their respective Web sites will allow
customers and potential customers with
a convenient method of obtaining and
reviewing the information to assist with
their selection process. Customers will
have the ability to compare and contrast
financial data from all FCMs to assist
with the decision making process of
determining which firms meet their
criteria for holding their funds.
The Commission requests comment
on all aspects of proposed amendments
to § 1.55. Specifically, the Commission
requests comment on the following:
• Do the existing and proposed
disclosures required to be included in
the Risk Disclosure Statement and Firm
Specific Disclosure Document
adequately convey to retail and/or
institutional investors the market and
firm specific risks of engaging in futures
trading and the risks of using an FCM
to execute trades on customers’ behalf
and to hold customers’ funds? If not,
how should the Risk Disclosure

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Statement and Firm Specific Disclosure
Document be amended?
• Are there other disclosures that the
Commission should require to be
included in Risk Disclosure Statement?
If so, what are the additional disclosures
and how would such disclosures benefit
customers?
• Are there other disclosures that the
Commission should require to be
included in a Firm Specific Disclosure
Document? If so, what are the additional
disclosures and how would such
disclosures benefit customers?
• Are the proposed additional firmspecific disclosures too broad? If so,
how should the Commission refine the
disclosures to be more specific, yet
provide the type of information that the
Commission would like customers to
receive?
• The Commission is proposing to
require an FCM to disclose in the Firm
Specific Disclosure Document the
number of customers that comprise 50
percent of the FCM’s customer fund
balances for futures customers, Cleared
Swaps Customers, and 30.7 Customers.
Should the Commission consider
additional or different percentages? If
so, what should the percentages be and
why?
• The Commission requests comment
on how the new or revised Risk
Disclosure Statement and Disclosure
Documents should be provided to
existing customers. Should FCMs be
required to obtain new signature
acknowledgments from existing
customers for a revised Risk Disclosure
Statement? How should existing
customers be informed of the new Firm
Specific Disclosure Statement? How can
the Commission be assured that all
existing customers have been informed
of the new disclosure documents, and
the availability of the FCM financial
data?
• If FCMs are required to provide
existing customers with new Risk
Disclosure Statements, how should
Commission address the
implementation of the requirement?
What would be an adequate period of
time for FCMs to obtain new
acknowledgment from existing
customers?
Q. Proposed Amendments to Part 22
The Commission recently adopted
final regulations in Part 22
implementing the provisions of the
Dodd Frank Act that provide for the
protection of Cleared Swaps Customer
contracts and collateral.81 Although
substantive differences in the
segregation regimes between futures and
81 77

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cleared swaps at the clearing level exist
under the final Part 22 regulations as
adopted, requirements with respect to
collateral which is not posted to
clearinghouses and maintained by FCMs
for Cleared Swaps Customers replicate
or incorporate by reference the same
regulatory requirements applicable to
the segregation of futures customer
funds under section 4d(a)(2) of the Act
(for example, holding funds separate
and apart from proprietary funds,
limitations on the FCM’s use of
customer funds, titling of depository
accounts, Acknowledgment Letter from
depository requirements, and
limitations on investment of swap
customers’ funds are currently
contained in Part 22 regulations).
The determination that appropriate
enhancements are necessary with
respect to the regulatory requirements
discussed above for segregated futures
customer funds under section 4d(a)(2) of
the Act is equally applicable to Cleared
Swaps Customer Collateral. The written
policies and procedures requirements
proposed in § 1.11 would be applicable
to Cleared Swaps Customer Collateral,
the new withdrawal limitations
requirements proposed in § 1.23 are
proposed to be replicated in a new
§ 22.17, and the changes to the daily
segregation calculations and filing of
such calculations, as well as
requirements for detailed depository
and investment information, are
proposed to apply to Cleared Swaps
Customer funds through proposed
amendments to § 22.2(g). In addition,
changes discussed above regarding
§ 1.17 with respect to securities haircuts
are also proposed with respect to
§ 22.2(f), which similarly incorporates
by reference the applicable SEC
securities haircuts. Finally, the
proposed § 1.20(i) requirement that an
FCM maintain residual interest in
segregated accounts in an amount that
exceeds the sum of all futures
customers’ margin deficits is also
proposed with respect to Cleared
Swaps. As stated above, this
requirement provides a clear
mechanism for demonstrating FCM
compliance with the prohibition under
the Act and existing Commission
regulations on using the collateral of
one Cleared Swaps Customer to support
the obligations of another Cleared
Swaps Customer.
R. Amendments to § 1.3: Definitions;
and § 30.7: Treatment of Foreign
Futures or Foreign Options Secured
Amount
Part 30 of the Commission’s
regulations were adopted in 1987 and
govern trading on foreign futures

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markets.82 Regulation 30.7 requires an
FCM to set aside in separate accounts
for the benefit of its foreign futures or
foreign options customers an amount of
funds defined as the ‘‘foreign futures or
foreign options secured amount.’’ The
term ‘‘foreign futures or foreign options
secured amount’’ is defined in § 1.3(rr)
as the amount of funds necessary to
margin the foreign futures or foreign
options positions held by the FCM for
its foreign futures or foreign options
customers, plus or minus any gains or
losses on such open positions. The
calculation of the foreign futures or
foreign options secured amount is
referred to as the ‘‘Alternative Method.’’
Foreign futures or foreign options
customers receive substantially less
protection for their account deposits
under the Alternative Method than
futures customers receive for their
account deposits under section 4d(a)(2)
of the Act and Commission regulations.
Section 4d(a)(2) of the Act and
Commission regulations require an FCM
to segregate in separate accounts
sufficient funds to satisfy the full
account equities of all of its futures
customers trading on designated
contract markets (i.e., the Net
Liquidating Equity Method). The
regulatory objective of the Net
Liquidating Equity Method is to ensure
that an FCM has sufficient funds in
segregated accounts to cover the full
account equities of all of its futures
customers. This would allow the FCM
to transfer the futures customers’
positions and margin collateral in the
event of the insolvency of the FCM to
another firm that was financial sound. If
the FCM does not maintain sufficient
funds in segregation to cover the full
account equities, the futures customers
may not be able to be transferred to
another FCM, or the futures customers
may be required to deposit margin funds
with the transferee FCM to adequately
margin the positions.
In contrast, the Alternative Method
only obligates an FCM to set aside an
amount of funds in separate accounts
sufficient to cover the margin required
on open foreign futures and foreign
options positions, plus or minus any
unrealized gains or losses on such
positions. Any funds deposited by
foreign futures or foreign options
customers in excess of the required
amount to be set aside in separate
accounts under the Alternative Method
may be held by the FCM in operating
cash accounts and may be used by the
FCM as if it were its own capital.
Therefore, an FCM is not required to set
aside in separate accounts a sufficient
82 52

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amount funds to repay the full account
balances of each of its foreign futures or
foreign options customers, and, in the
event of an FCM insolvency, the foreign
futures or foreign options customers
may not recover 100 percent of the
value of their accounts or be able to
transfer their positions to another FCM.
The Commission is proposing to
amend the Part 30 regulations to
eliminate the Alternative Method and to
require FCMs to use the Net Liquidating
Equity Method to compute the amount
of funds they must set aside in separate
accounts for the benefit of its foreign
futures or foreign options customers.
The amount of funds held for foreign
futures and foreign options customers
has grown dramatically in the last 10
years. FCMs held approximately $36.4
billion for foreign futures or foreign
options customers as of June 30, 2012,
compared to a total of $7.9 billion held
as of March 31, 2002 (an approximate
470 percent increase).83 In addition, the
amount of funds held by FCMs for
foreign futures or foreign options
customers has increased relative to the
amount of segregated funds held by
FCMs during the last 10 years. Funds
held for foreign futures or foreign
options customers represented
approximately 13 percent of the total
customer funds held by FCMs as of
March 31, 2002, and represented
approximately 21 percent of total
customer funds as of June 30, 2012.84
Accordingly, the Commission is
proposing to amend § 1.3(rr) to define
the term ‘‘foreign futures or foreign
options secured amount’’ to mean the
amount of funds an FCM needs to
satisfy the full account balances of each
30.7 Customer at all times (i.e., the Net
Liquidating Equity Method).
The term ‘‘30.7 Customer’’ is
proposed to be defined in § 30.1 to mean
both U.S.-domiciled customers and
foreign-domiciled customers trading
foreign futures or foreign options. As
originally adopted, FCMs were only
required to hold funds for U.S.domiciled customers. The Net
Liquidating Equity Method will require
the FCM to set aside a sufficient amount
of funds in secured accounts to repay
the total account balances of all of its
30.7 Customers, which will align the
requirement with the segregation
requirements for both futures customers
and Cleared Swaps Customers. The
proposed amendments will significantly
enhance the protection afforded to
83 The total amount of customer funds held by
FCMs is available on the Commission’s Web site at
http://www.cftc.gov/MarketReports/
FinancialDataforFCMs/index.htm.
84 Id.

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funds deposited by customers trading
on foreign markets.
The Commission also is proposing to
substantively revise the regulations
governing an FCM’s holding of funds
deposited by a customer for trading on
foreign futures markets. The proposed
amendments to the foreign futures or
foreign options secured amount
requirement establish many of the
regulatory requirements that currently
exist, or are proposed to be adopted
under this rulemaking, with regard to
segregated funds deposited by
customers trading on a designated
contract market under Part 1 and
deposited by Cleared Swaps Customers
under Part 22 of the Commission’s
Regulations.
Regulation 30.7(a) requires an FCM to
set aside in separate accounts sufficient
funds to meet its current obligations to
foreign futures or foreign option
customers denominated as the ‘‘foreign
futures or foreign options secured
amount.’’ The term ‘‘foreign futures or
foreign options customer’’ is defined in
§ 30.1 to mean any person located in the
United States, its territories, or
possessions. The term ‘‘foreign futures
or foreign options secured amount’’ is
defined at § 1.3(rr) and means an
amount of money, securities, or other
property sufficient to margin, guarantee,
or secure open foreign futures contracts
plus any unrealized gains or losses on
such contracts, and any money
securities or property representing
premiums paid or received, and any
other funds necessary to guarantee or
secure, open foreign option transactions
(i.e., the Alternative Method of
computing the secured amount
requirement). Thus, an FCM is not
required to set aside in separate
accounts all funds deposited by or
otherwise belonging to foreign futures or
foreign option customers. Funds
deposited by foreign futures or foreign
options customers that exceed the
foreign futures or foreign options
secured amount may be commingled
with the FCM’s proprietary funds and
used by the FCM as part of its business
capital.
In addition, § 30.7(b) requires only
that an FCM set aside the required
margin funds for foreign futures
customers that are located within the
United States, its territories, or
possessions. Regulation 30.7 permits the
FCM to include foreign futures
customers that are located outside of the
United States, but the FCM is not
obligated to include such foreigndomiciled customers.
Furthermore, Commission staff
previously issued guidance to FCMs
stating that an FCM could carry

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positions other than foreign futures and
foreign option positions in foreign
futures or foreign options customers’
accounts. Thus, FCMs could commingle
and carry customers’ non-foreign futures
positions, such as foreign currency
positions and over-the-counter
positions, in such customers’ foreign
futures or foreign options account.
The intent of the following
amendments is to align the regulatory
approach and customer protections by
raising the requirements for foreign
futures or foreign options secured
amount to make it consistent with the
FCM’s segregation requirements for
customers trading on designated
contract market or engaging in cleared
swap transactions.
As stated above, the Commission is
proposing to require FCMs to compute
the foreign futures or foreign options
secured amount using the Net
Liquidating Equity Method by amending
the definition in § 1.3(rr) of the term
‘‘foreign futures or foreign options
secured amount’’ to match structurally
the definition in § 1.3(gg) of the term
‘‘customer funds,’’ which encompasses
the Net Liquidating Equity Method of
computing the amount of funds an FCM
is required to maintain in customer
segregated accounts. Specifically, the
proposed definition of the term ‘‘foreign
futures or foreign options secured
amount’’ would be amended to mean all
money, securities and property received
by an FCM for, or on behalf of, ‘‘30.7
Customers’’ to margin, guarantee, or
secure foreign futures contracts and
foreign option transactions, and all
funds accruing to ‘‘30.7 Customers’’ as
a result of such foreign futures and
foreign options transactions. The term
‘‘30.7 Customer’’ is proposed to be
defined in § 30.1 to mean any person,
whether domiciled within or outside of
the United States, that engages in
foreign futures or foreign options
transactions through the FCM.
Requiring an FCM to set aside in
separate accounts the funds deposited
by both domestic and foreign-domiciled
customers provides comparable
customer protections to customers
notwithstanding their place of domicile.
In addition, requiring the FCM to hold
U.S.-domiciled and foreign-domiciled
customer funds in separate accounts
under § 30.7 ensures that such
customers receive equal protections in
the event of the bankruptcy of the firm.
Part 190 of the Commission’s
regulations and the U.S. Bankruptcy
Code 85 provide that in the event of a
commodity broker bankruptcy
liquidation, customers in the account
85 See

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
class entitled to a preference to the
amounts in set-aside accounts for
customers trading on foreign boards of
trade include both U.S.-domiciled and
foreign-domiciled customers.86 The
Commission is proposing to require
funds to be set aside equally for U.S.domiciled and foreign-domiciled
customers trading on foreign boards of
trade in the computation under § 30.7
by establishing a new definition of 30.7
Customers that includes existing foreign
futures or foreign options customers
(which are U.S.-domiciled persons
trading foreign futures or foreign
options) as well as any foreigndomiciled persons trading foreign
futures or foreign options through the
registered FCM. The secured amount
definition, as proposed to be amended
in § 1.3(rr), will reference ‘‘30.7
Customers’’ instead of ‘‘foreign futures
or foreign options customers,’’ to ensure
FCMs are required to set aside funds
equal to the net liquidating equity of all
such persons. Combined with the
proposed amendment to require net
liquidating equity, this should result in
at all times an amount required to be set
aside for all persons equal to the amount
owed to such persons that would share
in the account class for foreign futures
in a commodity broker liquidation. The
Commission is also proposing
amendments in § 1.10 and § 1.17 to
reference ‘‘30.7 Customers’’ instead of
foreign futures or foreign options
customers in the title of the schedules
prepared by an FCM.
In addition, the Commission is
proposing to add language to § 30.7(a) to
provide an equivalent offset to that
available in the futures customer
segregation calculation under § 1.32(b)
for deficits in accounts secured by
securities, subject to language updating
the reference to applying securities
haircuts in calculating the offset as
discussed in Section II.F above. The
result of these amendments as discussed
should be accord between the
methodologies applied in the 4d
segregation calculation and the § 30.7
calculation.
Consistent with proposed changes in
§ 1.20(i) and Part 22, the Commission
also is proposing to add language to
§ 30.7(a) to provide that an FCM must
hold residual interest in accounts set
aside for the benefit of 30.7 Customers
86 Id. By definition, ‘‘foreign future’’ under
section 761 of the Bankruptcy Code is not limited
to transactions entered on foreign boards of trade
on behalf of U.S. domiciled persons, and
‘‘customer’’ is not limited to U.S. domiciled
persons. The result is that by the application of
these definitions a preferential account class at a
commodity broker for customers trading foreign
futures would not be limited to U.S. domiciled
customers.

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equal to the sum of all margin deficits
for such accounts, to provide an
equivalent clear mechanism for
ensuring that the funds of one 30.7
Customer are not margining or
guaranteeing the positions of another
30.7 Customer. Although this
prohibition is not specified in the Act as
it is with respect for futures customers
and Cleared Swaps Customers, the
Commission is proposing to the extent
possible to replicate wherever practical
and advisable customer protection
provisions for futures customers and
Cleared Swaps Customers to 30.7
Customers. As a result, most of the
amendments proposed earlier in various
provisions for these customers also are
being proposed in § 30.7.
The Commission requests comment
on the proposed amendments to
§ 30.7(a).
Proposed paragraph (b) of § 30.7 sets
forth the permitted depositories for
holding 30.7 Customer funds. The
proposal does not alter the list of
depositories that are currently permitted
under § 30.7 to hold 30.7 Customers’
funds: (1) A bank or trust company
located in the United States; (2) a bank
or trust company located outside of the
United States that maintains in excess of
$ 1 billion of regulatory capital; (3) an
FCM registered with the Commission;
(4) a DCO; (5) the clearing organization
of a foreign board of trade; (6) a member
of a foreign board of trade; and (7) the
depositories used by the clearing
organization of a foreign board of trade
or a member of a foreign board of trade.
Proposed § 30.7(c) would limit the
amount of 30.7 Customers’ funds that an
FCM could hold in non-U.S.
jurisdictions. Under the proposal, an
FCM must hold 30.7 Customer funds in
the United States, except to the extent
that the funds held outside of the
United States are necessary to margin,
guarantee, or secure (including any
prefunding obligations) the foreign
futures or foreign options positions of
an FCM’s 30.7 Customers. The
Commission also is proposing to allow
an FCM to deposit additional 30.7
Customer Funds equal to 10 percent of
the total amount of funds required to be
held by non-U.S. brokers or foreign
clearing organizations for 30.7
Customers as a cushion to the required
margin requirements, so that the FCM
has a certain degree of flexibility in
managing its daily cash movements and
to ensure that the foreign futures or
foreign options positions are not
undermargined at foreign brokers or
clearing organizations. The Commission
recognizes that due to differences in
time zones, trading hours, banking
holidays, as well needs for cash

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67897

transfers to foreign jurisdictions to settle
and to be credited to accounts, a
customer may not be able to
immediately transfer funds to its FCM,
and an FCM may not be able to
immediately transfer funds to a foreign
broker or foreign clearing organization
to meet a margin call. The proposed
cushion is intended to provide an FCM
with sufficient flexibility to meet its
customers’ trading obligations on
foreign markets, while also requiring as
much of the total 30.7 Customer funds
to be held within the United States in
order to minimize the impact of the
repatriation risk in the event of an FCM
insolvency.
The Commission previously proposed
changes to the form of the
Acknowledgment Letter required from
depositories holding funds set aside as
the foreign futures or foreign options
secured amount.87 The Commission
here re-proposes in a revised paragraph
(d) to § 30.7 the requirements for
obtaining and submitting
Acknowledgment Letters for § 30.7
accounts, which proposed changes
include further revised template forms
of Acknowledgment Letter included as
Appendices E and F. The proposed
template forms, in addition to
incorporating earlier proposed changes
previously summarized with respect to
the § 1.20 Acknowledgment Letters,
have been further revised to include a
depository’s agreement to provide readonly account access to Commission or
DSRO staff, in order for Commission or
DSRO staff to directly verify balances as
necessary. The Commission is also
proposing subparagraphs (3), (4) and (5)
of § 30.7(d), which substantively require
24 hour a day direct read-only
electronic access to the depository
account by the Commission and the
DSRO, require the depository to file the
written Acknowledgment Letter directly
with the Commission and the FCM’s
DSRO, and require the depository to
provide confirmations to the
Commission and the FCM’s DSRO
directly upon request. The Commission
requests comment on the revised
requirements for Acknowledgment
Letters for § 30.7 accounts as proposed
in paragraph (d) and the new template
forms of the Acknowledgment Letters
proposed in Appendices E and F.
As part of its participation in the
public roundtable discussed in the
Background section above, FIA
recommended that the Commission
eliminate the ability of FCMs to
commingle funds from unregulated
87 See Acknowledgment Letters for Customer
Funds and Secured Amount Funds, 75 FR 47738
(Aug. 9, 2010).

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transactions with funds for foreign
futures and options trading in Part 30
set aside accounts, except by
Commission order, as is the case under
4d(a)(2) of the Act for segregated funds.
The Commission agrees with this
recommendation. The comments cited
in the release adopting Part 30 with
respect to back office operational
difficulties of establishing multiple
‘‘customer’’ origins were persuasive at
the time Part 30 was adopted.88 With
the technological changes of intervening
decades, however, these concerns
should no longer dictate the advisability
of commingling the funds of regulated
foreign futures and foreign options
transactions with unregulated
transactions. Therefore, the Commission
is proposing to amend § 30.7 by
adopting new paragraph (e), which will
extend the prohibition against
commingling to any funds of account
holders of an FCM unrelated to trading
foreign futures or foreign options,
except as the Commission shall by order
permit, under terms and conditions as
specified. Should there be a need to
permit commingling of funds, the
Commission will continue to have the
ability to permit such commingling
under the formalities of processes
associated with a Commission order.
The Commission requests comment on
this proposed amendment to § 30.7(e).
The Commission has proposed to
adopt a new paragraph (f) and a new
paragraph (k) in § 30.7, to extend
regulatory provisions from §§ 1.20, 1.21,
1.22 and 1.24, that previously were
applicable only to 4d segregated funds,
to funds set aside as the foreign futures
or foreign options secured amount
under § 30.7. The Commission requests
comment on replicating these regulatory
requirements applicable to segregated
funds to funds set aside as the foreign
futures or foreign options secured
amount. These proposed requirements
would make clear that FCMs would not
be permitted to use funds set aside as
the foreign futures or foreign options
secured amount other than for the
benefit of 30.7 Customers, and that
funds set aside as the foreign futures or
foreign options secured amount should
not be invested in any obligations of
clearing organizations or boards of
trade, and that further, no funds placed
at foreign brokers should be included as
funds set aside as the foreign futures or
foreign options secured amount unless
those funds are on deposit to margin the
foreign futures or foreign options
trading of 30.7 Customers. In addition to
extending these existing Commission
regulations to § 30.7 in proposed
88 See

52 FR 28980 at 28985–28986.

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paragraphs (f) and (k), the Commission
is also proposing a new requirement
prohibiting a FCM from imposing any
liens or allowing any liens to be
imposed on funds set aside as the
foreign futures or foreign options
secured amount. The Commission has
previously adopted a lien prohibition
with respect to the segregation of
Cleared Swaps Customer collateral at
§ 22.2(d)(2) and therefore proposes to
extend this lien prohibition to funds set
aside as the foreign futures or foreign
options secured amount in § 30.7. The
Commission requests comment on the
proposed amendments providing
limitations on use and permitted
withdrawals as contained in §§ 30.7(f)
and (k).
As discussed in Section II.I above, the
Commission has proposed new
limitations on withdrawals of segregated
funds in § 1.23. The proposed
amendments provide for an FCM’s
residual interest in segregated funds,
and permits withdrawals from
segregated funds for the proprietary use
of the FCM to the extent of such
residual interest, subject to the
requirement that the withdrawal must
not occur prior to the completion of the
daily segregation computation for the
prior day, and should the withdrawal
(individually or aggregated with other
withdrawals) exceed 25 percent of the
prior day residual interest, the
withdrawal must be subject to specific
approvals by senior management and
appropriately documented, and further
subject to a complete prohibition on
withdrawals of residual interest to the
extent of margin deficits. The
Commission has proposed paragraph (g)
of § 30.7 to apply the same restrictions
on withdrawals of an FCM’s residual
interest in funds set aside as the foreign
futures or foreign options secured
amount. The Commission requests
comment on proposed paragraph (g) of
§ 30.7.
Regulation 30.7(g) was recently
adopted by the Commission to provide
that the investment of § 30.7 funds be
subject to the investment limitations
contained in § 1.25.89 The Commission
is proposing to now move this permitted
investment requirement to a new
paragraph § 30.7(h), and further to adopt
a new paragraph § 30.7(i), which makes
clear that FCMs are solely responsible
for any losses resulting from the
permitted investment of funds set aside
as the foreign futures or foreign options
secured amount. The new paragraph
§ 30.7(i) is intended to apply the same
standard as is being proposed in the
amendment to § 1.29 for segregated
89 76

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funds discussed above. The Commission
is also requesting comment on whether
the investment of 30.7 property should
be restricted in cases of jurisdictions
where client asset protection of such
property cannot be assured? If so, what
assurances should be required? For
example, in cases of jurisdictions where
client asset protections can be waived,
should the Commission require that the
Commission or a DSRO be practicably
able to audit for evidence of such
waiver? What are the relevant costs and
benefits of adopting any of these
alternatives?
The Commission also is proposing in
an amended paragraph (j) to § 30.7 to
clarify the circumstances under which
an FCM may make secured loans to 30.7
Customers and to adopt the same
restriction on unsecured lending to 30.7
Customers as has been proposed with
respect to futures customers and 4d
segregated funds in the proposed
amendment to § 1.30 discussed above.
The Commission requests comment on
applying this restriction in relation to
30.7 Customers.
Finally, the Commission is proposing
an amended paragraph (l) to § 30.7 to
require the daily computation of the
foreign futures or foreign options
secured amount and the filing of such
daily computation with the Commission
and DSROs, as well as to require the
FCM to provide investment detail of the
foreign futures or foreign options
secured amount as of the middle and
end of the month. The proposed
amendments to paragraph (l) of § 30.7
are intended to be consistent with the
requirements for the daily segregation
calculation for segregated customer
funds and the provision of the
segregation investment detail which are
proposed in § 1.32. The Commission
requests comment on the proposed
changes requiring the filing of the daily
secured amount computation and the
investment detail as proposed in
§ 30.7(l).
III. Consideration of Costs and Benefits
The misuse or mishandling of
customer funds at specific FCMs like
MF Global or Peregrine not only
imposes a burden on those customers
whose funds have been misused, but
also creates a burden to the public by
eroding the trust of the American public
in all market intermediaries. This loss of
trust could deter market participants
from the benefits of using regulated,
transparent markets and clearing. The
overarching purpose of this rule is to
provide regulators the means by which
to detect and deter the misuse or
mishandling of customer funds by FCMs
in order to produce the benefits that

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accrue by virtue of avoiding similar
defaults in the future and to prevent the
costs, including lost customer funds,
decreased market liquidity that follows
from a crisis in confidence, and the
potential for the failure of one FCM to
cause instability in other clearing
members.90
The Commission’s proposal builds on
recent efforts by the Commission and
industry to better protect customer
funds. As discussed above in section
I.D., in December 2011 the Commission
amended § 1.25 of its regulations to
eliminate certain options for the
permissible investments of customer
funds.91 Two months later, the
Commission approved a margin rule for
cleared swap transactions referred to as
‘‘LSOC’’ (legal separation with
operational commingling) in which each
swaps customer’s collateral is protected
individually all the way to the
clearinghouse.92 The Commission also
convened a roundtable in late February
2012 to discuss what amendments
should be made to Commission
regulations in order to provide
additional protection to customer funds.
Further, in June 2012, the Commission
finalized rules for DCMs and included
amendments to § 1.52 which codify staff
guidance on minimum requirements for
SROs regarding their financial
surveillance of FCMs.93 With the recent
default of another FCM, Peregrine, the
Commission held two additional
roundtables to discuss, among other
things, technological approaches to
mitigating the risk of fraud, and possible
amendments to the Commission’s rules
regarding protection of customer
funds.94
90 The failure of one clearing member could lead
to instability in other clearing members if the losses
due to the first member’s failure are large enough
to exhaust the guarantee fund and require
additional capital infusion from other clearing
members.
91 In the final rule amending § 1.25, the
Commission stated, ‘‘the Commission is narrowing
the scope of investment choices in order to
eliminate the potential use of portfolios of
instruments that may pose an unacceptable level of
risk to customer funds.’’ See ‘‘Investment of
Customer Funds and Funds Held in an Account for
Foreign Futures and Foreign Options Transactions,’’
76 FR 78776, December 19, 2011.
92 77 FR 6336 (Feb. 7, 2012) (Protection of Cleared
Swaps Customer Contracts and Collateral;
Conforming Amendments to the Commodity Broker
Bankruptcy Provisions).
93 77 FR 36612 (June 19, 2012) (Core Principles
and Other Requirements for Designated Contract
Markets).
94 Public Meeting of the Technology Advisory
Committee, July 26, 2012. See http://www.cftc.gov/
PressRoom/Events/opaevent_tac072612. Public
Roundtable to Discuss Additional Customer
Protections, August 9, 2012. See http://
www.cftc.gov/PressRoom/Events/
opaevent_cftcstaff080912.

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In this rulemaking, the Commission is
proposing amendments to improve the
protection of customer funds. The
content of the Commission’s proposal
can be categorized in seven parts: (1)
Requiring FCMs to implement extensive
risk management programs including
written policies and procedures related
to various aspects of their handling of
customer funds; (2) increasing reporting
requirements for FCMs related to
segregated customer funds, including
daily reports to the Commission and
DSRO; (3) requiring FCMs to establish
target amounts of residual interest to be
maintained in segregated accounts as
well as creating restrictions and
increased oversight for FCM
withdrawals out of such residual
interest in customer segregated
accounts, specifically including clear
sign off and accountability from senior
management for such withdrawals; (4)
strengthening requirements for the
acknowledgment letters that FCMs and
DCOs must obtain from their
depositories; (5) eliminating the
Alternative Method for calculating 30.7
Customer funds segregation
requirements and requiring FCMs to
include foreign investors’ funds in
segregated accounts; (6) strengthening
the regulatory requirements applicable
to SRO and DSRO oversight of FCMs,
including regulating oversight provided
under the function of a Joint Audit
Committee that would establish
standards for, and oversee the execution
of, FCM audits; and (7) requiring FCMs
to provide additional disclosures to
investors.
Statutory Mandate To Consider the
Costs and Benefits of the Commission’s
Action: Commodity Exchange Act
Section 15(a)
Section 15(a) of the Act requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the Act
or issuing certain orders. Section 15(a)
further specifies that the costs and
benefits shall be evaluated in light of the
following five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission considers the costs and
benefits resulting from its discretionary
determinations with respect to the
section 15(a) considerations.
There are four considerations relevant
to this proposal. These are: (1)
Protection of market participants and
the public; (2) efficiency,

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competitiveness and financial integrity
of futures markets; (3) sound risk
management practices; and (4) other
public interest considerations. The
Commission proposes that the
amendments would not have any effect
on price discovery.
In the discussion that follows, the
Commission provides an overview of
the proposed rules in light of the three
relevant 15(a) cost-benefit
considerations previously identified,
and then considers the costs and
benefits of each section individually in
light of the same 15(a) public interest
considerations. The Commission
concludes with additional requests for
public comment on all aspects of its
preliminary consideration of the costs
and benefits of the rule proposals.
Overview of the Costs and Benefits of
the Proposed Rules and Amendments in
Light of the 15(a) Considerations
Protection of Market Participants and
the Public
As stated above, the Commission is
proposing amendments to improve
protection of customer funds. Each of
the seven parts of the proposal 95 would
increase levels of protection for
customer funds. Requiring FCMs to
implement risk management programs
that include documented policies and
procedures regarding various aspects of
handling customer funds would help
protect customer funds by promoting
robust internal risk controls and
reducing the likelihood of errors or
fraud that could jeopardize customer
funds. In addition, by requiring each
FCM to document certain policies and
procedures, the proposed rules would
enable the Commission, DSROs, and
95 The seven parts of the proposal are: (1)
Requiring FCMs to implement risk management
programs including extensive written policies and
procedures related to various aspects of their
handling of customer funds; (2) increasing reporting
requirements for FCMs related to segregated
customer funds, including daily reports to the
Commission and DSROs; (3) requiring FCMs to
establish target amounts of residual interest to be
maintained in segregated accounts as well as
creating restrictions and increased oversight for
FCM withdrawals out of such residual interest in
customer segregated accounts, including clear sign
off and accountability from senior management for
such withdrawals; (4) strengthening requirements
for the acknowledgment letters that FCMs and
DCOs must obtain from their depositories; (5)
eliminating the Alternative Method for calculating
30.7 Customer funds segregation requirements and
requiring FCMs to include foreign-domiciled
customers’ funds in segregated accounts; (6)
strengthening the regulatory requirements
applicable to SRO and DSRO oversight of FCMs,
including regulating oversight provided under the
function of a Joint Audit Committee (Joint Audit
Program) that would establish standards for, and
oversee the execution of, FCM audits; and (7)
requiring FCMs to provide additional disclosures to
investors.

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other auditors to evaluate each FCM’s
compliance with their own policies and
procedures. Moreover, the proposed
requirement that FCMs establish a
program for quarterly audits by
independent or external people that is
designed to identify any breach of the
policies and procedures would help to
ensure regular, independent validation
that the procedures are followed
diligently. Audits of this sort provide
more thorough review of internal
procedures than the Commission or
DSROs would be able to perform
regularly with existing resources, which
would provide helpful scrutiny of each
FCM’s procedures on a regular basis.
This, together with the proposed
requirement that FCMs establish a
program of governing supervision that is
designed to ensure the policies required
in § 1.11 are followed, will tend to
promote compliance with the FCM’s
own policies and procedures. And by
promoting such compliance, the
requirements would reduce the risk of
operational errors, lax risk management,
and fraud, and thus the risk of
consequent loss of customer funds.
Increasing reporting requirements for
FCMs related to segregated customer
funds would help the Commission and
DSRO identify FCMs that should be
monitored more closely in order to
safeguard customer funds. Moreover, by
making some additional reported
information public, the proposed rules
would facilitate additional market
discipline that further promotes
protection of customer funds.
Creating restrictions and increased
oversight for FCM withdrawals out of its
residual interest in customer segregated
accounts, and requiring sign off from
senior management for large
withdrawals would protect customers
by helping to ensure that such
withdrawals do not cause segregated
account balances to drop below their
segregation requirements. Moreover, it
would promote effective oversight of
customer segregated accounts by senior
management by increasing their
accountability for withdrawals that
affect the balance of such accounts.
The acknowledgments and
commitments depositories would be
required to make through proposed
§§ 1.20, 1.26, and 30.7 would provide
additional protection for customer funds
by, among other things, requiring
depositories that accept customer funds
to acknowledge that customer funds
cannot be used to secure the FCM’s
obligations to the depository. Such an
acknowledgment would provide
additional protection of customer funds
in the event of an FCM’s default. In
addition, depositories would agree in

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the acknowledgment letter to give the
Commission and DSROs read-only
electronic access to an FCM’s segregated
accounts, which would benefit
customers by enabling the Commission
and DSROs to monitor the accounts for
discrepancies between the FCM’s
reports and the balances on deposit at
various depositories. This would
provide an additional mechanism by
which customers would be protected
against a shortfall in customer funds
due to operational errors or fraud.
Requiring FCMs to include foreigndomiciled investors’ funds in segregated
accounts ensures that all customers
placing funds on deposit for use in
trading foreign futures and foreign
options will benefit from the same
protections provided by the Act and
Commission regulations. As discussed
below, the Commission understands
that most, if not all FCMs currently
extend the same protections to U.S.domiciled and to foreign-domiciled
customers. However, incorporating
foreign-domiciled customers within the
protections provided to 30.7 Customers
places regulatory weight behind the
protections and ensures that FCMs are
not permitted to cut corners with
respect to protecting foreign-domiciled
customers’ funds during a time of
financial strain. Similarly, eliminating
the Alternative Method provides
additional protection to customer funds
by ensuring that FCMs are not allowed
to reduce their segregation requirements
for 30.7 Accounts during a time
financial strain. As discussed below,
this change would provide protection to
both U.S-domiciled and foreigndomiciled customers with funds in 30.7
Accounts.
The proposed provisions in § 1.52
include additional requirements for
both the supervisory program for SROs
as well as for the formation of a Joint
Audit Committee to oversee the
implementation and operation of a Joint
Audit Program that directs audits of
FCMs by DSROs. By requiring both the
SRO supervisory programs and the Joint
Audit Program to comply with U.S.
generally accepted audit standards, to
develop written policies and
procedures, to require controls testing as
well as substantive testing, and to have
an examinations expert review the
programs at least once every two years,
the proposed amendments would help
to ensure that audits of FCMs by SROs
or DSROs are thorough, effective, and
continue to incorporate emerging best
practices for such audits. As a
consequence, the proposed amendments
would help to ensure that audits are as
effective as possible at identifying
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controls, and verifying the integrity of
FCMs’ financial reports, each of which
tend to provide protection for FCMs’
customers, counterparties, and
investors.
In addition the proposed § 1.55 would
require disclosure of firm-specific risks
to customers. This additional
information would assist them with due
diligence when selecting an FCM and
would help to ensure that they are
aware of any changes at the FCM that
could prompt them to reconsider their
decision to deposit funds with the FCM.
In doing so, the proposed rules would
promote market discipline that incents
FCMs to manage their risks carefully
and would assist customers in
understanding how their funds are held
and what risks may be relevant to the
safety of their funds.
Efficiency, Competitiveness and
Financial Integrity of Futures Markets
The proposed amendments would
increase the efficiency and financial
integrity of the futures markets by
ensuring that FCMs have strong risk
management controls that are subject to
multiple and enhanced external checks,
by enhancing reporting requirements,
facilitating increased oversight by the
Commission and DSROs, by allowing
FCMs flexibility in the development of
newly required policies and procedures
wherever the Commission has
determined that such flexibility is
appropriate, and by requiring FCMs to
implement training regarding the
handling of customer funds. In addition,
the proposed rules include some
requirements that many industry
participants have requested as necessary
for the adequate protection of customers
and also highlighted as best practices
already adopted within the industry.
Requiring such standards to be adopted
by all FCMs will promote the
competitiveness of futures markets by
ensuring a level playing field at a
minimum level necessary for the
protection of customers, and not
allowing any FCMs to, at the expense of
customers, maintain an unfair
competitive advantage to their
counterparts who utilize best practices
and may have such protections already
in place. There are also provisions in
the proposal that permit FCMs that are
not broker-dealers to implement certain
securities net capital haircuts that have
been proposed to apply to jointly
registered FCM/BDs by the SEC, which
similarly enhances competition by
keeping a level playing field between
sole FCMs and jointly registered FCM/
BDs with respect to such requirements.
More specifically, the proposed
amendments to §§ 1.10, 1.11, 1.12, 1.32,

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
22.2, and 30.7 would increase reporting
requirements for FCMs related to
segregated customer funds, including
daily, bi-monthly, and additional eventtriggered reports to the Commission and
DSROs. The expanded range and
frequency of information that the
Commission and DSRO would receive
under the proposed regulations would
enhance their ability to monitor each
FCM’s segregated accounts, which
would promote the integrity of futures
markets by helping to ensure proper
handling of customer funds at FCMs.
In addition, the proposed changes
would facilitate increased oversight by
the Commission and DSROs by
including additional notification
requirements, obligating FCMs to alert
the Commission when certain events
occur that could indicate an FCM’s
financial strength is deteriorating or that
important operational errors have
occurred. Such notifications would
enable the Commission and DSROs to
increase monitoring of such FCMs to
ensure that customer funds are handled
properly in such circumstances. The
proposed rules would also require FCMs
and DCOs to obtain an acknowledgment
letter from depositories that would give
the Commission and DSROs electronic
access to view customer accounts at
each depository. That would enable
both the Commission and DSROs to
verify the presence of customer funds
which would provide a safeguard
against fraud and would promote the
integrity of markets for futures, cleared
options, and cleared swaps.
The proposed rules would also
require FCMs to establish policies and
procedures regarding several aspects of
how they handle customer funds. The
rules would give FCMs the flexibility,
where appropriate, to develop policies
and procedures tailored to the unique
composition of their customer base,
size, and other operational
disincentives. This flexible approach
protects FCMs from additional
regulatory compliance costs that could
otherwise result from rules requiring
every FCM to operate in exactly the
same way without sacrificing the
additional accountability that results
from written policies and procedures
that the Commission or DSRO can
review and use as the basis for FCM
audits.
The proposed requirement that FCMs
would provide annual training to all
finance, treasury, operations, regulatory,
compliance, settlement and other
relevant employees regarding the
segregation requirements for segregated
funds, for notices under § 1.12,
procedures for reporting noncompliance, and the consequences of

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failing to comply with requirements for
segregated funds, would enhance the
integrity of the futures markets by
promoting a culture of compliance by
the FCM’s personnel. The training
would help to ensure that FCM
employees understand the relevant
policies and procedures, that they are
empowered and incented to abide by
them, and that they know how to report
non-compliance to appropriate
authorities.
Last, the proposing form of the rule
would allow FCMs that are not dual
registrants (i.e., are not both FCMs and
BDs) to follow the same procedures as
dual registrants when determining what
regulatory capital haircut applies to
certain types of securities in which the
FCM invests its own capital or customer
funds. This proposed change is needed
as the SEC has proposed a change for
broker-dealers which would permit joint
registrants to possibly apply a lower
regulatory haircut for certain securities,
but which would not be applicable to
sole FCMs without the proposal.
Therefore, the proposal would ensure
that sole FCMs are not competitively
disadvantaged and are able to continue
applying the same regulatory capital
haircuts for such securities as joint
registrants.
Sound Risk Management
The amendments proposed here, if
adopted, would promote sound risk
management by facilitating market
discipline, enhancing internal controls,
enabling the Commission and DSROs to
monitor FCMs for compliance with
those controls, by minimizing the risk
that an FCM’s financial strain could
interfere with customers’ ability to
manage their positions, by requiring
FCMs to notify the Commission in
additional circumstances that could
indicate emerging financial strain, and
by requiring senior management to be
involved in the process of setting targets
for residual interest.
The proposed reporting requirements
would enhance market discipline by
providing additional information to
investors regarding the location of their
funds, and the size of residual interest
buffer that an FCM targets and
maintains in its segregated accounts.
This additional information would be
valuable to customers selecting an FCM
and monitoring the location of their
funds deposited with the FCM which
would promote market discipline. For
example, if an FCM were to establish a
low target for residual interest, or
maintain a very low residual interest,
market participants would likely
recognize this as a practice that could
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deposit at the FCM, and would likely
either apply pressure to the FCM to
raise their target, or take their business
to a different FCM that maintains a
larger residual interest in customer fund
accounts. This market discipline would
incent FCMs to maintain a level of
residual interest that is adequate to
ensure that a shortfall does not develop
in the customer segregated accounts.
The proposed rules would also
enhance FCM internal controls by
requiring them to establish a risk
management program that includes
policies and procedures related to
various aspects of how segregated
customer funds are handled. For
example, FCMs would be required to
establish procedures for continual
monitoring of depositories where
segregated customer funds are held, and
would have to establish a process for
evaluating the marketability, liquidity,
and accuracy of pricing for § 1.25
compliant investments.
In addition, documented policies and
procedures would benefit the FCM
customers and the public by providing
the Commission and DSROs greater
ability to monitor and enforce
procedures that FCMs perform to ensure
that the protection of customer funds is
achieved, with the effect that the
Commission would have a greater
ability to address and protect against
operational errors and fraud that put
customer funds at risk of loss.
Further, through the proposed
amendments to § 1.17(a)(4), FCMs will
need to manage their access to liquidity
so as to be able to certify to the
Commission, at its request, that they
have sufficient access to liquidity to
continue operating as a going concern.
This proposal will provide the
Commission with the flexibility to deal
with emerging liquidity drains at FCMs
which may endanger customers,
potentially prior to instances of
regulatory capital non-compliance,
allowing customer positions and funds
to be transferred intact and quickly to
another FCM. This change would
promote sound risk management
practices by helping to ensure that
customers maintain control of their
positions without interruption.
The proposed additions to
notification requirements established in
§ 1.12 would enhance the Commission’s
ability to identify situations that could
lead to financial strain for the FCM,
which makes it possible for the
Commission to monitor further
developments with that FCM more
carefully and to begin planning earlier
for the possibility that the FCM’s
customer positions may need to be
transferred to other FCMs, in the event

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that the FCM currently holding those
positions defaults. Advance notice helps
to ensure customers’ positions are
protected by enabling the Commission
to work closely with DCOs and DSROs
to identify other FCMs that have
requisite capital to meet regulatory
requirements if they were to take on
additional customer positions, thus
facilitating smooth transition of those
positions in the event that it is
necessary.
Last, residual interest is an important
aspect of protection for customer funds
because it enables the FCM to ensure
that it can meet all customer obligations
at any time without using another
customer’s funds to do so. In general,
the larger the residual interest, the more
secure customer funds are in this
respect. By requiring that senior
management set the target for residual
interest, and that they conduct adequate
due diligence in order to inform that
decision, the proposed rule promotes
both informed decision making about
this important form of protection, and
accountability among senior
management for this decision, both of
which are consistent with sound risk
management practices.
Other Public Interest Considerations
As discussed above, the recent
failures of MF Global and Peregrine,
FCMs to which customers have
entrusted their funds, sparked a crisis of
confidence regarding the security of
those funds. This crisis in confidence
could deter market participants from
using regulated, transparent markets
and clearing which would create
additional costs for market participants
and losses in efficiency and safety that
could create additional burdens for the
public. The Commission anticipates that
this rule will not only address the
current crisis of confidence, but that it
will produce benefits for the public by
virtue of avoiding similar defaults in the
future.
These proposed amendments are not,
however, without costs. The most
significant costs created by the proposed
amendments are those that increase the
amount of capital that FCMs would be
required to contribute to segregated
accounts as part of establishing a target
for their residual interest, incent them to
hold additional capital, prevent them
from holding excess segregated funds
overseas, and that are created
operationally by the formation of a risk
management unit and adoption of new
policies and procedures.
Multiple proposed changes would
incent or require FCMs to increase the
amount of residual interest that they
maintain in segregated accounts

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including: (1) Requiring FCMs to
establish a target for residual interest
that reflects proper due diligence on the
part of senior management; (2)
disclosing the FCMs’ targeted residual
interest publicly; and (3) requiring them
to report to the Commission and their
DSRO any time their residual interest
drops below that target. In addition by
restricting FCMs’ ability to withdraw
residual interest from segregated
accounts and obligating FCMs to report
to the Commission and their respective
DSRO each time the residual interest
drops below the target, the proposed
regulations would incent FCMs to hold
additional capital, which is also likely
to be a significant cost.
When FCMs hold excess customer
funds overseas, such funds will likely
be held at depositories that are
themselves subject to foreign insolvency
regimes, which may provide protections
for customer funds that are less effective
than those applicable under U.S. law.
By prohibiting FCMs from holding
excess customer funds overseas, the
proposed regulations could reduce the
returns that FCMs may obtain on
invested customer funds.
And last, the proposed requirements
related to operational procedures are
likely to create significant costs,
particularly related to creating and
documenting policies and procedures,
as well as complying with ongoing
training, due diligence, and audit
requirements. However, in several cases
the implementation costs of proposed
changes would be minimal. For
example, some proposed requirements
would obligate FCMs to provide the
Commission and DSROs more regular
access to information that FCMs and
their depositories are already required
to maintain, or in some cases are already
reporting to their DSROs. The
Commission also anticipates that some
of the changes proposed codify best
practices for risk management that many
FCMs and DCOs may already follow. In
such cases, the costs of compliance
would be mitigated by the compliance
programs or best practices that the firm
already has in place. Moreover, in other
cases the proposed changes codify
practices that are already required by
SROs, and therefore would impose no
additional costs.
The initial and ongoing costs of the
proposed rules for FCMs would vary
significantly depending on the size of
each FCM, the policies and procedures
that they already have in place, and the
frequency with which they experience
certain events that would create
additional costs under the proposed
rules. The Commission estimates that

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the initial operational cost 96 of
implementing the proposed rules would
be between $193,000 and $1,850,000 per
FCM.97 And the initial cost to the SROs
and DSROs would be between $41,100
and $63,500 per SRO or DSRO. The
Commission estimates that the ongoing
operational cost to FCMs would be
between $287,000 and $2,300,000 per
FCM per year.98 As described below in
§ 1.52, the Commission does not have
adequate information to determine the
ongoing cost of the proposed
requirements for SROs and DSROs.
In the sections that follow, the
Commission considers the costs and
benefits of the proposed changes,
section by section, in light of the
relevant 15(a) public interest, costbenefit considerations.
96 The Commission is not able to quantify the
costs that would result from increased residual
interest held in customer segregated accounts, from
increased capital held by the FCM, or from lost
investment opportunities due to restrictions on the
amount of funds that may be held overseas. The
Commission does not have sufficient data to
estimate the amount of additional residual interest
FCMs are likely to need as a consequence of
proposed, the amount of additional capital they
may hold for operational purposes, the cost of
capital for FCMs, or the opportunity costs FCMs
may experience because of restrictions on the
amount of customer funds they can hold overseas,
each of which would be necessary in order to
estimate such costs.
97 The lower bound assumes an FCM requires the
minimum estimated number of personnel hours to
be compliant with these new rules and that, when
possible, they already have policies, procedures,
and systems in place that would satisfy the
proposed requirements. The upper bound assumes
an FCM requires the maximum amount of
personnel hours and do not have pre-existing
policies, procedures, and systems in place that
would satisfy the proposed requirements. The
greatest amount of variation within in the range
would depend on the number of new depositories
an FCM must establish relationships with due to
current depositories that would not be willing to
sign the required acknowledgment letter. The lower
bound assumes that an FCM does not need to
establish any new relationships with depositories.
The Commission estimates that the largest FCMs
may have as many as 30 depositories, and as a
conservative estimate, the Commission assumes for
the upper bound that an FCM would have to
establish new relationships with 15 depositories.
98 As above, the lower bound assumes that an
FCM requires the minimum estimated number of
personnel hours to be compliant and that for eventtriggered costs, the FCM bears the minimum
number of possible events. The upper bound
assumes an FCM requires the maximum number of
personnel hours to be compliant. It also assumes an
FCM has to notify the Commission pursuant to the
proposed amendments in § 1.12 five times per year,
and that an FCM withdraws funds from residual
interest for proprietary use 50 times per year. The
estimate does not include additional costs that
would result if FCMs increase the amount of
residual interest or capital that they hold in
response to the proposed rules, or certain
operational costs that the Commission does not
have sufficient information to estimate.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
Consideration of Costs and Benefits
Related to Proposed Changes in Each
Section
§ 1.3(rr)—Definition of ‘‘Foreign Futures
or Foreign Options Secured Amount’’
Proposed Changes
As described above in II.R, the
proposed amendments to § 1.3(rr) would
replace the term ‘‘foreign futures or
foreign options customers’’ with the
term ‘‘30.7 Customers.’’ The former only
includes U.S.-domiciled customers,
whereas the term ‘‘30.7 Customers’’
includes both U.S.-domiciled and
foreign-domiciled customers who place
funds in the care of an FCM for trading
on foreign boards of trade. This change
expands the range of funds that the FCM
must include as part of the foreign
options or foreign futures secured
amount.
In addition, the definition of ‘‘foreign
futures or foreign options secured
amount’’ currently means ‘‘all money,
securities and property held by or held
for or on behalf of a futures commission
merchant from, for, or on behalf of
foreign futures or foreign options
customers as defined in § 30.1.’’ The
proposed definition would change the
meaning of ‘‘foreign futures or foreign
options secured amount’’ so that it is
equal to the amount of funds an FCM
needs in order to satisfy the full account
balances of each of its customers at all
times. This definitional change supports
the shift in § 30.7 from the ‘‘Alternative
Method’’ to the ‘‘Net Liquidating Equity
Method’’ of calculating the foreign
futures or foreign options secured
amount.
Benefits and Costs
These definitional changes would
determine what funds are considered
part of the ‘‘foreign futures or foreign
options secured amount.’’ However, the
costs and benefits of these changes are
attributable to the substantive
requirements related to the definitions
and, therefore, are discussed in the cost
and benefit considerations related to
§ 30.7.

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§ 1.10—Financial Reports of Futures
Commission Merchants and Introducing
Brokers
Proposed Changes
As described above in II.A, the
proposed amendments would make four
changes. First, they would amend the 1–
FR–FCM to create a new schedule called
the ‘‘Cleared Swap Segregation
Schedule’’ that would be included in
the FCM’s monthly report, together with
the Segregation Schedule and Secured
Amount Schedule. Second, it would

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make the Cleared Swap Segregation
Schedule a public document.99 Third,
the proposed amendments would
require each of the Schedules to include
the FCM’s target for residual interest in
the accounts relevant to that Schedule,
as well as a calculation of any surplus
or deficit in residual interest with
respect to that target. And fourth, the
proposed rule would require each FCM
to submit to the Commission a monthly
statement reporting the FCM’s leverage.
Benefits
The proposal to include target
residual interest and monthly
calculation of the deviation from that
target on the monthly Schedules
provides important benefits with respect
to the safety of customer funds. The data
in the reports is public information.
Public disclosure incentivizes FCMs to
set a reasonable target for residual
interest. Under proposed regulations,
FCMs would have to notify the
Commission and their respective DSRO
each time they drop below their targeted
residual interest, which gives them an
incentive to set a low target, even if they
intend to keep more residual interest in
their accounts. However, by disclosing
an FCM’s targeted residual interest to
the public, the proposed rule would
enable customers and potential
customers of an FCM to incorporate the
size of the FCM’s targeted residual
interest, and the corresponding amount
of protection to customers’ funds
provided by that level of residual
interest, into their selection of an FCM.
Holding all other considerations
constant, FCMs that have higher targets
relative to their segregation
requirements would presumably be
more attractive to customers than FCMs
that target smaller levels of residual
interest relative to their segregation
requirements because of the additional
protection of customer funds it
provides. This additional information
permits customers to weigh this
consideration along with considerations
of price in selecting an FCM. Last, by
requiring FCMs to report their leverage
monthly, the proposed amendments
would assist the Commission in
monitoring each FCM’s overall risk
profile, which would help the
Commission to identify FCMs that
should be monitored more closely for
further developments that could weaken
their financial position.
Costs
As stated above, all else equal, by
requiring FCMs to include their residual
99 The Segregation Schedule and Secured
Amount Schedule are already public documents.

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interest target in the monthly report,
and by making the contents of those
reports public, the proposed rule would
incent FCMs to set a higher target for
their residual interest in customer
segregated funds. However, maintaining
a larger targeted residual interest would
create some costs for FCMs. Proprietary
funds deposited into customer
segregated accounts by an FCM are only
allowed to be invested in § 1.25
investments and, therefore, are not
available for other investments. In
addition, placing additional capital in
the customer segregated accounts
reduces the amount of capital that an
FCM has to meet operational needs,
which would likely prompt the firm to
raise or retain additional capital.
Estimating the lost revenue that would
result from the investment opportunities
an FCM misses is not possible because
the Commission is not able to estimate
either the amount of increased residual
interest that an FCM would, on average,
maintain as the result of this proposed
change, or the differential in return on
investment between FCM funds placed
into customer segregated accounts
versus proprietary funds not held in
such accounts. Similarly the
Commission does not have adequate
information to determine the average
cost of capital for FCMs or the amount
of additional capital that they would
likely raise or retain as a consequence
of this proposed change. The proposed
requirement regarding monthly leverage
statements will require FCMs to
produce an additional report each
month. The Commission anticipates that
each FCM will incur a one-time cost in
order to modify their systems to create
the report, and then ongoing costs will
be negligible because the report is likely
to be automated. The Commission
estimates that the one-time setup costs
are likely to be between $2,800 and
$5,700.100
Requests for Comment 101
Question 1: The Commission requests
comment regarding the costs and
100 This assumes 40–80 hours of time from both
a programmer and 20–40 hours from an
intermediate accountant. The average compensation
for a programmer is $53.64/hour [$82,518 per year/
(2000 hours per year)*1.3 = $53.64/hour];
$53.64*40= $2,145.47 and $53.64*80= $4,290.94.
The average compensation for an intermediate
accountant is $34.11/hour [$52,484.00 per year/
(2000 hours per year)*1.3 is $34.11per hour];
$34.11*20= $682.29 and $34.11*40= $1,364.58. All
figures are taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.
101 The Commission has numbered its questions
throughout the Cost Benefit Considerations section.
When responding to specific questions, please
reference the number of the question. In addition,

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benefits of these proposed rules,
including making residual interest
targets public information. Please
explain and, if possible, quantify the
relevant costs and benefits.
Question 2: In addition, the
Commission requests comment
regarding the costs and benefits that
would result from providing each FCM’s
daily calculation of residual interest
public. Would the disclosure of an
FCM’s daily calculations of residual
interest pose a risk to such FCM, the
markets, to customers, or the public? If
so, please explain. Or, conversely,
would a lack of disclosure exacerbate
risks to FCM customers or the public?
If so, please explain.
Question 3: Market participants have
suggested that additional information
from FCMs’ daily, bi-monthly, and
monthly reports should be disclosed to
the public. What alternatives should the
Commission consider in this respect?
What would be the costs and benefits of
that alternative?
Question 4: In addition, the
Commission requests information or
data that would assist the Commission
in quantifying the cost to FCMs of
placing additional proprietary funds
into the customer segregated account
and the benefit to customers of having
such additional funds in the segregated
accounts.
§ 1.11 Risk Management Program for
Futures Commission Merchants

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Proposed Changes
As discussed in II.B above, proposed
§ 1.11 would require an FCM that
carries accounts for customers to
establish a risk management unit that is
independent from the business unit and
reports directly to senior management.
In addition, it would require each FCM
to establish and document a risk
management program, approved by the
governing body of the FCM, that, at a
minimum: (a) Identifies risks and
establishes risk tolerance limits related
to various risks that are approved by
senior management; (b) includes
policies and procedures for detecting
breaches of risk tolerance limits, and for
reporting them to senior management;
(c) provides risk exposure reports
quarterly and whenever a material
change in the risk exposure of the FCM
is identified; (d) includes annual review
and testing of the risk management
program; and (e) meets specific
commenters should provide analysis and empirical
data to support their views on the costs and benefits
associated with the proposed rule, and should
provide information to the Commission that would
enable it to replicate and verify any quantitative
estimates.

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requirements related to segregation risk,
operational risk, and capital risk.
Regarding segregation risk, the
proposed rule would require that each
FCM must establish written policies and
procedures that require, at a minimum:
(1) Documented criteria for selecting
depositories that would hold segregated
funds; (2) a program to monitor
depositories on an ongoing basis; (3) an
account opening process that ensures
the depository acknowledges that funds
in the account are customers’ funds
before any deposits are made to the
account, and that also ensures accounts
are titled appropriately; (4) a process for
determining a residual interest target for
the FCM that involves due diligence
from senior management; (5) a process
for the withdrawal of an FCM’s residual
interest when such a withdrawal is not
made for the benefit of the FCM’s
customers; (6) a process for determining
the appropriateness of investing funds
in § 1.25 compliant investments; (7)
procedures to assure that securities and
other non-cash collateral held as
segregated funds are properly valued
and readily marketable and highly
liquid; (8) procedures that help to
ensure appropriate separation of duties
between those who account for funds
and are responsible for statutory and
regulatory compliance vs. those who act
in other capacities with the company
(e.g., those who are responsible for
treasury functions); (9) a process for the
timely recording of all transactions; and
(10) a program for annual training of
FCM employees regarding the
requirements for handling customer
funds.
The proposed rule would require
automated financial risk management
controls that address operational risk,
and written procedures reasonably
designed to ensure that an FCM has
sufficient capital to be in compliance
with the Act and regulations and to
meet its liquidity needs for the
foreseeable future.
Benefits
Establishing a risk management unit
with adequate authority; qualified
personnel; and financial, operational
and other resources to carry out the Risk
Management Program would enhance
protection of customer funds by
mitigating the risk that the effectiveness
of the Program is compromised by a lack
of resources. Moreover, separation of the
Risk Management Unit from the
Business Unit mitigates the risk that
conflicts of interest could interfere with
the effectiveness of the risk management
unit in avoiding situations that may lead
to a loss of customer funds.

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Furthermore, by requiring that the
risk management unit report directly to
senior management, § 1.11(d) would
help ensure that the risk management
unit’s operations and concerns receive
prompt attention from personnel who
are able to address any problems that
arise, and also minimizes the risk that
conflicts of interest could cause a
breakdown in communications that
undermines the effectiveness of the risk
management unit or the Risk
Management Program. Each of these
elements, by promoting the risk
management unit’s effectiveness, would
help to ensure that the unit will identify
and address emerging risks before such
risks threaten the health of the FCM or
the security of segregated customer
funds.
The Commission believes the
establishment of the proposed risk
management program would provide
several benefits to FCMs, customers,
and the public, in particular with
respect to the protection of customer
funds.
a. The proposed requirement for
FCMs to establish, as part of their risk
management program, specific risk
tolerance limits, would provide
additional protection to FCMs by
helping to ensure that they have a
system in place to identify emergent
risks to the business. By requiring an
underlying methodology for establishing
the limits, the proposed rule would
promote reasoned decision making
regarding the limits as they are set and
updated. Quarterly review of the risk
limits by senior management and
annual review by the Governing Body
would help to ensure that limits are
current as the market, business, and
customer base evolve, and also provide
accountability for periodic evaluation of
such risks at the most senior levels of
the organization, which helps to ensure
that senior leaders are proactively
discussing and addressing the full range
of risks that are facing the business. As
a consequence, these measures would
help ensure that an FCM is taking
whatever steps are necessary in order to
reduce and mitigate the effects of
emerging risks. Moreover, customer
funds held at the FCM may face
elevated risk of loss due to misuse or
operational errors during times of
financial strain at the FCM. By
protecting the health of the FCM, the
proposed requirements mitigate the risk
that financial strain at the FCM would
lead to a loss of customer funds that it
holds.
b. By requiring policies and
procedures for detecting breaches of the
risk tolerance limits and notifying
appropriate personnel, the proposed

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rule would promote objectivity when
monitoring of each risk that the policies
address, thus mitigating the risk that
poor individual judgment could cause
important emerging risks to go
unnoticed, or could prevent proper
personnel from being notified, leading
to a loss of customer funds.
c. The contents of the proposed Risk
Exposure Reports would help to ensure
that attention is regularly given to an
evaluation of each risk that is covered
in the FCM’s Risk Management Program
and that senior management and the
Governing Body of the FCM are made
aware of the findings. They will also
help to ensure that the Risk
Management Program is continuously
updated to reflect changing risks that
face the business by requiring
recommendations to be included in
such reports, which promotes the
effectiveness of the Program in
protecting customer funds. Moreover,
status updates on any incomplete
implementation of previous
recommendations from such reports
provide accountability at the most
senior levels of the FCM regarding
implementation of initiatives to improve
the Program.
d. Similar to above, review and testing
of the risk management program on an
annual basis as well as whenever there
is a material change in the business,
would help to ensure that the Risk
Management Program continues to
evolve as the risks facing the business
evolve, thus promoting the effectiveness
of the program, which in turn, would
help protect the FCM. By requiring an
analysis of adherence to the program the
proposed requirement would promote
compliance with it. And requiring the
review and testing to be conducted by
staff that are independent of the
Business Unit or by an external third
party promotes objectivity and rigor in
the findings that would result, and
requiring senior management and the
Governing Body of the FCM to review
the findings promptly helps to ensure
that any breaches of compliance or other
findings of the review are addressed
promptly and effectively. As above,
each of these elements promotes
protection for the FCM, which in turn,
reduces the likelihood that risk to the
FCM could cause elevated risk of
operational errors that could result in a
loss of customer funds.
e. Regarding segregation risk, the
requirements set forth in proposed
§ 1.11 would benefit customers and the
financial integrity of markets by
requiring FCMs to implement rigorous
internal controls designed to detect and
mitigate the risk that operational errors
or fraud could lead to a loss of customer

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funds. More specifically, and as
discussed above, proposed § 1.11
requires FCMs to establish written
policies and procedures that address 12
components of segregation risk. The
Commission addresses each of those
components below.
1. Proposed § 1.11(e)(3)(i)(A) would
establish a minimum set of factors that
the FCM would have to incorporate into
its due diligence standards and
depositories would have to meet those
standards in order to be eligible to be
selected by the FCM to hold customer
segregated funds. As a consequence,
customers would have greater clarity
about what factors were considered as
their FCM selected individual
depositories, leading to market
discipline that encourages the
protection of customer funds.
Documenting the process would
enable regulators to review and audit for
rigor of the process and adherence to it.
Such documentation would help
regulators identify risk creating
operational patterns or errors that could
increase risk to customer funds before
those risks are realized. In addition,
documenting such criteria helps to
ensure that the depository is evaluated
against substantive criteria that are
relevant to the safety of customer funds
held by the depository as a precondition
for placing customer funds there. The
proposed requirement, by specifying
certain criteria that must be included in
the FCM’s policies and procedures,
would also promote market discipline
by giving customers clarity about what
factors, at a minimum, are considered as
part of the FCM’s program for evaluating
potential depositories.
Together, these benefits help to
ensure that the FCM and depository
have developed and adhere to
procedures that minimize risk to
customer funds, which reduces the risk
that an FCM would experience a
shortfall in their customer segregated
funds account.
2. Regulation 1.11(e)(3)(i)(B) would
require each FCM to establish a program
to monitor depositories on an ongoing
basis. This would mitigate the risk of
loss of customer funds resulting from
depository default or malfeasance
because FCMs would be better able to
discern emerging problems at the
depository in time to move such funds
to another depository before the
customer segregated funds are affected.
In addition, as above, documenting such
a program would enable the
Commission and DSRO to evaluate the
FCM’s diligence in monitoring its
depositories by auditing the FCM’s
compliance with its own procedures in
this respect, which would again lead to

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more effective protection of customer
funds.
3. The proposal makes it clear that
before an FCM is permitted to deposit
any customer segregated funds at a
depository, the depository must agree
that, if instructed to do so by the
Director of DSIO or the Director of DCR,
it will make such transfers without
delay. Requiring the acknowledgment
letter to be signed before any funds are
deposited removes uncertainty about
whether the depository has been put on
notice that it is required to move funds
without delay when directed by the
Director of DSIO or the Director of DCR.
In the event of a default by an FCM, the
Commission and relevant DCOs would
immediately move customer funds in
order to move open positions to a
different FCM.
4. The proposal requires senior
management to conduct due diligence to
understand various factors that could
impact the amount of residual interest
that would be prudent to maintain in
the segregated funds account, and then
reach a determination about a targeted
amount. The benefit of such a
requirement is that it would protect
customer funds by creating
accountability for senior management.
Requiring such due diligence helps
ensure that senior management is
attentive to the causes of segregated
funds account underfunding. The
requirement allows both flexibility and
accountability in that it allows FCMs to
account for relevant factors that vary
across firms when determining an
appropriate target, rather than requiring
all FCMs to maintain a common target
for residual interest. However, by
requiring them to establish such a target
and to conduct due diligence in doing
so, it allows the Commission and
DSROs to audit the FCMs to ensure that
they reached their target through a
reasoned decision-making process, and
ensures that the respective boards
approve and are responsible for the
target.
Maintaining a target enhances market
discipline by creating public
accountability for an FCM. It
communicates to customers that the
FCM intends to maintain a certain
residual interest in the account, and
gives customers an opportunity to
consider, when selecting an FCM, the
additional security that varied levels of
residual interest may provide for their
funds.
5. A process for the withdrawal of
residual interest that is not for the
benefit of customers would help to
ensure good communication and that
senior managers are appropriately
involved in the decision to remove

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residual interest from segregated
customer accounts. Good
communication, deliberate decisionmaking, and proper involvement of
senior managers would promote
accountability when an FCM is
removing residual interest. These
benefits are particularly important at
times when FCMs experience financial
stress because good communication,
deliberate decision-making, and proper
involvement of senior management in
decisions related to residual interest
may be more likely to fail at such times,
creating risk to segregated customer
funds. By requiring FCMs to establish
and follow procedures for withdrawals
of residual interest, the rule would help
to ensure that such failures do not
occur.
An additional, related benefit is that
by ensuring proper communication with
and approval from relevant senior
managers before such withdrawals
occur, the proposed changes would
enhance accountability among those
managers for decisions that could create
risk for segregated customer funds.
6. FCMs have a range of potential
investments that are compliant with
§ 1.25. By requiring FCMs to establish a
process for deciding how to invest those
funds, the requirement would provide
the Commission and DSRO with a
standard by which such investment
decisions could be judged, which would
help prevent the FCM from investing
primarily in the least credit-worthy
§ 1.25 investments. FCMs have an
incentive to invest customer funds in
§ 1.25 compliant investments that offer
the highest rate of return possible, but
it is possible that the § 1.25 investments
offering the highest rates of return are
also less credit-worthy or less liquid
than other § 1.25 investments. Requiring
FCMs to set up, document and follow a
process for assessing the
appropriateness of investing segregated
funds in § 1.25 investments ensures that
FCMs take steps not only to determine
whether an investment complies with
§ 1.25 as required by current regulation,
but that the investment is also evaluated
with respect to any risk it may pose to
the FCM’s primary responsibilities of
preserving principal and maintaining
liquidity when handling customer
funds. In other words, this provision
would help to prevent the possibility of
a ‘‘race to the bottom’’ for FCMs
investing in § 1.25 compliant assets.
7. If the FCM is not able to get
accurate pricing for § 1.25 assets, it is
difficult to know whether or not
sufficient funds are in the segregated
account. A shortage (and thus, in the
event of insolvency, a loss of customer
funds) could occur simply because the

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FCM can’t accurately estimate the value
of the assets that are there, or it could
also make it easier for the FCM to
intentionally skew their reports
regarding funds in the customer
segregated accounts by making favorable
assumptions about the value of assets
that are difficult to price. Requiring the
FCM to establish a program for assessing
the ease of pricing for § 1.25 assets helps
reduce these risks and gives the
Commission and DSRO an opportunity
to understand the FCM’s procedures
and to enforce the FCM’s compliance
with them. This, in turn, promotes
reasoned and disciplined decisionmaking with respect to the FCM’s
investment of customer funds in § 1.25
investments. Establishing procedures to
evaluate the liquidity of § 1.25
instruments will help FCMs minimize
the risk of such problems.
8. Appropriate internal controls are
critical to the prevention of fraud. The
Commission understands that FCMs
typically require that certain duties are
performed by separate people or
separate groups of people in order to
ensure that a proper system of checks
and verification remains in place.102 In
particular, FCMs generally ensure that
the individuals responsible for reporting
and associated calculations are separate
from the individuals responsible for
operational transfers of funds. In the
absence of such internal controls, one
person or group of people with access
to both movement and reporting of
funds could transfer funds and then, for
a time, hide those transfers from senior
management, auditors, and the public.
The proposed rule would help protect
customer funds by establishing a
regulatory requirement that all FCMs
develop procedures to ensure that the
individuals responsible for calculating
and reporting segregation account
requirements and segregation account
funds do not share duties with those
who are responsible for transferring or
investing segregated funds. This should
result in controls to prevent fraudulent
fund transfers.
9. The Commission regulations
already require timely recording of
transactions in § 1.35(b), but this
proposed addition would require that
FCMs develop written policies and
procedures ensure that they have a
consistent process to achieve that
outcome. Again, requiring FCMs to
document their procedures helps
protect customer funds by enabling the
Commission and DSROs to audit for
compliance, detecting and preventing
102 See ‘‘Initial Recommendations for Customer
Funds Protection’’ by the FIA Futures Markets
Financial Integrity Task Force.

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operational issues that could pose risk
to customer funds before those risks
result in an actual loss to customer
funds.
10. Proper training of employees
would help to ensure that employees
understand the written procedures
regarding segregated funds. The
proposed training requirement provides
flexibility for an FCM to determine
whether it should develop the required
training in house, or to pay a vendor to
develop a training program. Training
regarding the requirements of the Act
and Commission regulations regarding
handling customer funds will help to
ensure that employees understand how
the procedures and requirements related
to customer funds apply to various
situations they face in their work for the
FCM. Training regarding the second and
third points mentioned above will help
to ensure that the Commission and
DSRO are notified promptly whenever
any of the circumstances covered in
§ 1.12 occur, or whenever there is a
breach of the FCM’s own policies and
procedures, even if the circumstances in
§ 1.12 have not occurred. Moreover, by
requiring broad participation in training
focused on these points, the proposed
requirement would protect customer
funds by encouraging a culture of
accountability and transparency through
self-disclosure. Training regarding the
consequences of failing to comply will
help to ensure that employees
understand the seriousness with which
the Commission regards violation of
these standards, thereby providing an
incentive to diligently adhere to them.
In addition, requiring FCMs to provide
the training annually helps ensure that
the critical content of this training is not
lost due to the passing of time, or
employee turnover.
In addition, by requiring automated
financial risk management controls, the
proposed Risk Management Program
would reduce operational risk that
could result from ‘‘fat finger’’ errors
when submitting trades, or from
technological ‘‘glitches’’ using
automated trading. Several events have
demonstrated that such operational
risks are difficult to predict, tend to
emerge so quickly that non-automated
forms of risk management may not be
able to contain them, and can threaten
an FCM’s continued viability.
Automated controls would help to
reduce these operational risks, thereby
providing additional protection to FCMs
and mitigating the risk of loss to
customer funds.
Last, by requiring an FCM to develop
and implement written policies that
ensure it has sufficient capital and
liquidity not only to comply with the

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Act and Commission regulations but
also to meet its foreseeable needs, the
proposed rule would promote reasoned
decision making regarding capital
retention and allocation decisions
because such decisions would have to
be made according to the established
policies and procedures, weighing the
factors and inputs included therein.
Moreover, written procedures could be
used by the Commission and relevant
SROs as the basis for audits to check for
compliance with such procedures,
which would help the Commission and
relevant SRO identify operational
problems that could lead to loss of
customer funds.
In many cases the proposed rules
provide flexibility to FCMs by requiring
that they develop and document their
own policies and procedures rather than
prescribing specific procedures for
them. In so doing, the proposal gives
FCMs an opportunity to tailor policies
and procedures that accommodate their
specific needs and operational patterns,
which may vary from one FCM to
another based on differences in their
size, involvement in specific markets,
and the characteristics of their investor
base. This approach is likely to be less
costly for FCMs when compared to the
alternative of a more prescriptive
approach because it is less likely to
require changes to operational patterns
if existing procedures are adequate to
provide the same protections to
customer funds. In addition, the
flexibility of this approach benefits
market participants and customers alike
because it is the FCM that is in the best
position to define the precise form of
internal controls that will best protect
customer funds from operational errors
and fraud.
In addition, as suggested above,
requiring FCMs to document their
policies and procedures regarding their
Risk Management Program would
enable the Commission and DSRO to
audit for operational problems that
could put customer funds at risk before
those risks turn into actual losses. This
would strengthen the critical first line of
defense against operational errors and
fraud.
Costs
The risk management unit, required
by the proposed rule, would create
certain personnel costs. The
Commission estimates that such a unit
would require between one and ten fulltime staff depending on the size and
complexity of the FCM. Therefore, the
Commission estimates that the annual

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cost for the risk management unit would
be between $171,000 and $1,934,000.103
There are costs associated with the
Risk Management Program proposed in
§ 1.11.
a. Each FCM would likely have to
review its operations, business model,
market conditions, customer base, and a
number of other factors in order to
identify the risks that it should be
monitoring. In addition, each FCM
would have to develop and document
methodologies for establishing risk
tolerance limits for each risk that they
choose to monitor. Last, for each FCM,
the risks and proposed limits for those
risks would have to be reviewed and
approved quarterly by its senior
management and annually by the board.
The Commission estimates that the
initial cost for identifying relevant risks
and developing and documenting
methodologies for establishing
thresholds would be between $28,800
and $68,400.104 The ongoing cost for
reviewing the risks and limits and
approving them would be between
$27,900 and $99,700 per year.105

b. Developing these policies and
procedures for detecting breaches of the
risk tolerance limits and notifying
appropriate personnel would create an
initial cost, but little ongoing cost since
most of the monitoring costs are
included in other elements (quarterly
reports, annual audits, etc.). The
Commission estimates that the initial
cost to develop these policies and
procedures is between $3,400 and
$6,800.106
c. Many of the activities necessary for
completing the quarterly review of risk
thresholds will overlap with the
activities necessary for completing the
Risk Exposure Reports. However, some
additional time will be required to
compile the Report and to incorporate
information that is distinct from that
which is required for the quarterly
review of risk thresholds. In addition,
the FCM’s board and senior
management are obligated to review the
report. Therefore, the Commission
estimates that each Risk Exposure
Report will cost between $8,800 and
$13,300 per year.107

103 This assumes 2,000–10,000 hours per year
from compliance attorneys (i.e., 1–5 full time
compliance attorneys) and 0–10,000 hours per year
from a senior risk management specialist (i.e., 0–5
full time senior risk management specialists). The
average compensation for a compliance attorney is
$85.35/hour [$131,303 per year/(2000 hours per
year)*1.3 is $85.35 per hour]; $85.35*2000 =
$170,693.90 and $85.35*10,000 = $853,469.50. The
average compensation for a senior risk management
specialist is $83.13/hour [$166,251.00 per year/
(2000 hours per year)*1.3 is $83.13 per hour];
$83.13*0 = $0 and $83.13*10,000 = $1,080,631.50.
104 For initial costs, this estimates initial costs of
50–250 hours from compliance attorneys, 10–100
hours from risk management personnel, 36 hours
(total) of time from the board, and 10–20 hours each
from the CEO, CFO, COO, and CCO. The average
compensation for a compliance attorney is $85.35/
hour [$131,303 per year/(2000 hours per year)*1.3
is $85.35 per hour]; $85.35*50 = $4,267.35 and
$85.35*250 = $21,336.77. The average
compensation for a risk management specialist is
$65.33/hour [$100,500 per year/(2000 hours per
year)*1.3 is $65.33 per hour]; $65.33*10 = $653.25
and $65.33*100 = $6,532.50. The average
compensation for a member of a firm’s board of
directors is estimated by the Commission to be
$200.00/hour [$100,000 per year/(500 hours per
year) is $200 per hour]; $200.00*36 = $7,200.00.
The average compensation for a chief executive
officer is estimated by the Commission to be
$650.00/hour [$1,000,000 per year/(2000 hours per
year)*1.3 is $650.00 per hour]; $650.00*10 =
$6,500.00 and $650.00*20 = $13,000. The average
compensation for both a chief financial officer and
a chief operations officer is estimated by the
Commission to be $455.00/hour [$700,000 per year/
(2000 hours per year)*1.3 is $455.00 per hour];
$455.00*10 = $4,550.00 and $455.00*20 =
$9,100.00. The average compensation for a chief
compliance officer is $110.97/hour [ $170,727 per
year/(2000 hours per year)*1.3 = $110.97/hour];
$110.97*10 = $3,329.18 and $110.97*20 =
$11,097.26.
105 For ongoing costs, this estimates annual costs
of 20–200 hours from compliance attorneys, 50–300
hours from risk management personnel, 48 hours
(total) of time from the board, and 8–32 hours each

from CEO, CFO, COO, and CCO. Using the same
compensation figures listed above, this is $85.35
*20 = $1,706.94 and $85.35*200 = $17,069.39 for
a compliance attorney; $65.33*50 = $3266.25 and
$65.33*300 = $19,597.50 for a risk management
specialist; $200.00*48 = $9,600.00 for the board;
$650.00*8 = $5,200.00 and $650.00*32 =
$20,800.00 for the CEO; $455.00*8 = $3,640.00 and
$455.00*32 = $14,560.00 for both the CFO and
COO; and $110.97*8 = $887.78 and $110.97*32 =
$3,551.12 for the CCO. The compensations of an
average CEO and CFO are estimates by the
Commission; the compensation of the board of
directors is based on the average compensation of
the boards of several large FCMs. All other figures
are taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.
106 This estimates 40–80 hours of time from a
compliance attorney. The average compensation for
a compliance attorney is $85.35/hour [$131,303 per
year/(2000 hours per year)*1.3 is $85.35 per hour];
$85.35*40 = $3,413.88 and $85.35*80 = $6,827.76.
These figures are taken from the 2011 SIFMA
Report on Management and Professional Earnings
in the Securities Industry.
107 This estimates 20–50 hours of compliance
attorney time, 20–50 hours from risk management
personnel, 12 hours of board time, and 2 hours from
each of the CEO, CFO, COO, and CCO. The average
compensation for a compliance attorney is $85.35/
hour [$131,303 per year/(2000 hours per year)*1.3
is $85.35 per hour]; $85.35*20 = $1,706.94 and
$85.35*50 = $4,267.35. The average compensation
for a risk management specialist is $65.33/hour
[$100,500 per year/(2000 hours per year)*1.3 is
$65.33 per hour]; $65.33*20 = $1,306.50 and
$65.33*50 = $3,266.25. The average compensation
for a member of a firm’s board of directors is
estimated by the Commission to be $200.00/hour
[$100,000 per year/(500 hours per year) is $200 per
hour]; $200.00*12 = $2,400.00. The average
compensation for a chief executive officer is
estimated by the Commission to be $650.00/hour
[$1,000,000 per year/(2000 hours per year)*1.3 is
$650.00 per hour]; $650.00*2 = $1,300.00. The
average compensation for both a chief financial
officer and a chief operations officer is estimated by

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d. The Commission estimates that
review and testing of the Risk
Management Program will cost between
$6,000 and $24,300.108 An FCM must
conduct such a review and testing
annually as well as any time it
experiences a material change in the
business that is reasonably likely to alter
the risk profile of the FCM. The
Commission does not have adequate
information to estimate how frequently
such a change in the business will
occur, so it has assumed one review and
testing per year.
e. Regarding the policies and
procedures that are required to address
segregation risk, proposed § 1.11 would
create three sets of costs: (1) costs
related to developing and documenting
all required policies and procedures; (2)
initial implementation costs; and (3)
ongoing costs.109
1. The Commission estimates that
developing and documenting requisite
policies and procedures would require
one or more compliance attorneys to be
heavily involved interpreting and
explaining the Act and Commission
requirements to other affected
employees, guiding other subject matter
experts in the development of compliant
operations, and drafting the required
documentation. Risk management
the Commission to be $455.00/hour [$700,000 per
year/(2000 hours per year)*1.3 is $455.00 per hour];
$455.00*2 = $910.00. The average compensation for
a chief compliance officer is $110.97/hour [
$170,727 per year/(2000 hours per year)*1.3 =
$110.97/hour]; $110.97*2 = $221.95. The
compensations of an average CEO and CFO are
estimates by the Commission; the compensation of
the board of directors is based on the average
compensation of the boards of several large FCMs.
All other figures are taken from the 2011 SIFMA
Report on Management and Professional Earnings
in the Securities Industry.
108 This assumes four weeks’ worth of time from
one to four intermediate compliance specialists.
The average compensation of an intermediate
compliance specialist is $37.90/hour [$58,303.00
per year/(2000 hours per year)*1.3 is $37.90];
$37.90*40 hours/week*1 = $6,063.51 and
$37.90*40 hours/week*4 = $24,254.05. These
figures are taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.
109 Developing, documenting, and implementing
the requisite policies and procedures would require
personnel hours from compliance attorneys, senior
management, and limited involvement from others
such as risk management, HR, and IT. Those costs
are would vary, perhaps significantly, depending on
the extent to which each FCM already has
compliant procedures in place and the extent to
which such procedures may already be
documented. However, the Commission has
endeavored to estimate broad ranges of costs that
would likely result from efforts to develop and
document the requirements of § 1.11, to implement
compliant procedures, and then to sustain such
procedures on an ongoing basis. And while the
benefits are enumerated separately because their
substantive benefits, in several cases, vary from one
requirement to the next, the substantive costs are,
in many cases, overlapping, and therefore the
Commission has addressed them collectively.

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personnel would also likely be involved
in developing procedures to review
banks and § 1.25 investments as well as
to support the due diligence that senior
management will have to conduct in
order to establish a target residual
interest for the FCM. The CFO and other
senior personnel reporting to the CFO
would likely be involved with selecting
a target for the firm’s residual interest
and developing procedures for making
withdrawals of residual interest for
proprietary use. The CEO and board
would be involved in reviewing and
approving the policies and procedures
required under § 1.11. The Commission
estimates that the likely cost for
developing and documenting the
policies and procedures that would be
required under the proposed § 1.11
would be between $54,800 and
$131,000.110
2. The policies and procedures must
not only be documented, they must be
implemented, which will create some
one-time costs that will depend
significantly on the extent to which an
FCM already practices some of the
110 This estimate assumes 400–1000 hours of time
from one or more compliance attorneys re: all
aspects of the requirements (interpreting,
summarizing, guiding compliance discussions,
drafting, etc.), 80–160 hours from a firm’s chief
compliance officer re: All aspects of the program,
10–100 hours from risk management personnel re:
bank selection, monitoring, process to assess § 1.25
investment decisions, and due diligence to support
targeted residual amount decision, 4–20 hours from
a firm’s chief financial officer re: selection of target
for residual funds and process for withdrawal of
segregated account funds not for the benefit of FCM
customers, 2–4 hours from a firm’s CEO, and 40–
50 hours from board collectively re: discussion and
approval of written policies and procedures. The
average compensation for a compliance attorney is
$85.35/hour [$131,303 per year/(2000 hours per
year)*1.3 is $85.35 per hour]; $85.35*400 =
$34,140.00 and $85.35*1000 = $85,350.00. The
average compensation for a chief compliance officer
is $110.97/hour [ $170,727 per year/(2000 hours per
year)*1.3 = $110.97/hour]; $110.97*60 = $6,658.35
and $110.97*100 = $11,097.26. The average
compensation for a risk management specialist is
$65.33/hour [$100,500 per year/(2000 hours per
year)*1.3 is $65.33 per hour]; $65.33*10 = $653.25
and $65.33*100 = $6,532.50. The average
compensation for a chief financial officer is
estimated by the Commission to be $455.00/hour
[$700,000 per year/(2000 hours per year)*1.3 is
$455.00 per hour]; $455.00*4 = $1,820.00 and
$455.00*20 = $9,100.00. The average compensation
for a chief executive officer is estimated by the
Commission to be $650.00/hour [$1,000,000 per
year/(2000 hours per year)*1.3 is $650.00 per hour];
$650.00*2 = $1,300.00 and $650.00*4 = $2,600.00.
The average compensation for a member of a firm’s
board of directors is estimated by the Commission
to be $200.00/hour [$100,000 per year/(500 hours
per year) is $200 per hour]; $200.00*40 = $8,00.00
and $200.00*50 = $10,000.00. The compensations
of an average CEO and CFO are estimates by the
Commission; the compensation of the board of
directors is based on the average compensation of
the boards of several large FCMs. All other figures
are taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.

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operational procedures that the
Commission is requiring here. While the
Commission expects that some FCMs
are likely to have certain policies and
procedures in place already that comply
with § 1.11, the Commission does not
have adequate information to determine
to what extent this is true. Therefore, for
the purposes of estimation we have
estimated the one-time costs for an
entity that does not yet have any of the
required policies and procedures in
place. The Commission anticipates that
in such a circumstance, implementing
new policies and procedures would
require risk management personnel to
conduct initial due diligence on
depositories and existing as well as
prospective § 1.25 investments. Human
Resource (‘‘HR’’) personnel would have
to revise job descriptions to comply
with policies to separate critical
functions related to handling of
customer funds, and would also have to
develop new annual training.111 One or
more compliance attorneys would be
involved ensuring that accounts are
titled appropriately, securing requisite
acknowledgment letters from
depositories, setting up quarterly audits
of policies and procedures, and
providing general oversight of the
implementation process. IT personnel
will likely be required to automate
certain aspects of the information
collection that is necessary, and the
CCO would likely be involved on
virtually a full-time basis for some
period of time as well, overseeing the
implementation of critical new policies
and procedures. The Commission
estimates the cost for such an
implementation would range between
$90,800 and $275,300.112
111 However, they are likely to outsource some
pieces of the implementation (e.g. annual training
would likely be developed by vendors to meet the
needs of multiple market participants) which will
mitigate associated costs. If a firm chooses to use
training created by a vendor, that would likely
reduce the HR one-time costs significantly.
112 This estimate assumes 100–200 hours of risk
management personnel time (from employees of
varying levels of pay) conducting initial due
diligence on depositories and evaluating § 1.25
investments, 800–1000 hours of human resources
personnel time (400–500 at a junior level and 400–
500 at a senior level) revising job descriptions to
accommodate separation of roles and developing
annual training, 20–400 hours of time from one or
more compliance attorneys for retitling accounts,
securing requisite acknowledgements from
depositories, setting up quarterly audits, and
general oversight of implementation of new policies
and procedures, 4–12 weeks of the time of a firm’s
Chief Compliance Officer, or 160–480 hours, and
160–800 hours of the time of IT personnel (140–700
at a junior to intermediate level and 20–100 at a
senior level) as the firm will likely seek to automate
some types of information collection and other
steps necessary to support requirements. The
average compensation for a senior risk management
specialist is $108.06/hour [$166,251 per year/(2000

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3. The costs necessary to sustain the
policies and procedures required under
§ 1.11 are difficult to estimate because
they would depend on variables such as
the size of the firm, the program of
governing supervision that they
develop, and the degree of automation
they achieve in their various ongoing
processes (monitoring depositories,
evaluating § 1.25 investments,
reevaluating residual funds target, etc.),
and the degree to which their operations
are already compliant with the policies
and procedures they would develop
pursuant to the proposed § 1.11.
However, as a lower bound, the ongoing
costs would include expenses related to
the time for: (1) The CCO to review
quarterly audits and conduct due
diligence that is necessary before
providing certification of compliance
with the Act, regulations and its policies
and procedures with respect to
segregated funds in the annual report;
(2) risk management personnel to
evaluate § 1.25 investments for liquidity
and marketability and to monitor
depository institutions where customer
segregated funds are held; (3) the CFO
and other senior management to review
and determine the continued
appropriateness of the FCM’s target for
residual interest; and (4) HR personnel
to organize and deliver annual training.
The Commission estimates that the
lower bound for these costs is
approximately $20,000 and that costs
may be higher, depending on the
variables mentioned above.113
hours per year)*1.3 is $108.06 per hour];
$108.06*100 = $10,806.00 and $108.06*500 =
$54,030.00. The average compensation for a risk
management specialist is $65.33/hour [$100,500 per
year/(2000 hours per year)*1.3 is $65.33 per hour];
$65.33*100 = $6,532.50 and $65.33*500 =
$32,665.00. The average compensation for a junior
human resources representative is $40.95/hour
[$62,989 per year/(2000 hours per year)*1.3 is
$40.95 per hour]; $40.95*800 = $32,760.00 and
$40.95*1000 = $40,950.00. The average
compensation for a senior human resources
representative is $71.45/hour [$109,921 per year/
(2000 hours per year)*1.3 is $71.45 per hour];
$71.45*100 = $7,144.87 and $71.45*500 =
$35,724.33. The average compensation for a
compliance attorney is $85.35/hour [$131,303 per
year/(2000 hours per year)*1.3 is $85.35 per hour];
$85.35*20 = $1,706.94 and $85.35*400 =
$34,138.78. The average compensation for a chief
compliance officer is $110.97/hour [ $170,727 per
year/(2000 hours per year)*1.3 = $110.97/hour];
$110.97*160 = $17,755.61 and $110.97*480 =
$53,266.82. The average compensation for a
programmer is $53.64/hour [$82,518 per year/(2000
hours per year)*1.3 = $53.64/hour]; $53.64*140 =
$7,509.14 and $53.64*700 = $37,545.69. The
average compensation for a senior programmer is
$74.56/hour [$114,714 per year/(2000 hours per
year)*1.3 = $74.56/hour]; $74.56*20 = $1,491.28
and $74.56*100 = $7,456.41. All figures are taken
from the 2011 SIFMA Report on Management and
Professional Earnings in the Securities Industry.
113 This estimate assumes 20+ hours per year
from the CCO for due diligence and certification of

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In addition, FCMs would have to
implement automated financial risk
management controls that are
reasonably designed to prevent entering
of erroneous trades. The Commission
anticipates that some, but not all, FCMs
already have such systems in place. For
those FCMs that do not yet have such
systems in place, the Commission
proposes that it would cost an FCM
between $10,300 and $89,400 to
implement such a system.114
§ 1.12 Maintenance of Minimum
Financial Requirements by Futures
Commission Merchants and Introducing
Brokers
Proposed Changes
As described in the section by section
discussion at II.C, the proposed changes
to § 1.12 would alter the notice
requirement so that it is no longer
acceptable to give ‘‘telephonic notice to
compliance on annual report and reviewing
quarterly audits, 40+ hours each per year from
junior and senior risk management personnel
evaluating § 1.25 investments for liquidity and
marketability and monitoring depository
institutions where customer segregated funds are
held, 6+ hours per year from the CFO and other
senior management for reviewing the target for the
firm’s residual interest, and 20+ hours each per year
from junior and senior HR—organizing and
delivering annual training, as well as at least a day’s
training for 20 employees, or 160 hours from an
average financial employee, such as a general
intermediate trader. The average compensation for
a chief compliance officer is $110.97/hour
[$170,727 per year/(2000 hours per year)*1.3 =
$110.97/hour]; $110.97*20 = $2,219.45. The average
compensation for a senior risk management
specialist is $108.06/hour [$166,251 per year/(2000
hours per year)*1.3 is $108.06 per hour];
$108.06*40 = $4,322.53. The average compensation
for a risk management specialist is $65.33/hour
[$100,500 per year/(2000 hours per year)*1.3 is
$65.33 per hour]; $65.33*40 = $2,613.00. The
average compensation for a chief financial officer is
estimated by the Commission to be $455.00 per/
hour [$700,000 per year/(2000 hours per year)*1.3
is $455.00 per hour]; $455.00*6 = $2,730. The
average compensation for a junior human resources
representative is $40.94/hour [$62,989.00 per year/
(2000 hours per year) = $40.94/hour]; $40.94*20 =
$818.86. The average compensation for a senior
human resources representative is $71.45/hour
[$109,921.00 per year/(2000 hours per year) =
$71.45/hour]; $71.45*20 = $1,428.97. The average
compensation for a general intermediate trader is
$36.48/hour [$56,130.00 per year/(2000 hours per
year)*1.3 is $36.48 per hour]; $36.48*160 =
$5,837.52. The compensations of an average CFO is
an estimate by the Commission. All other figures
are taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.
114 This estimates 150–1500 hours of mid-level IT
programming time and 30–120 hours of senior level
IT personnel time. The average compensation for a
programmer is $53.64/hour [$82,518 per year/(2000
hours per year)*1.3 = $53.64/hour]; $53.64*150 =
$8,045.51 and $53.64*1500 = $80,455.05. The
average compensation for a senior programmer is
$74.56/hour [$114,714 per year/(2000 hours per
year)*1.3 = $74.56/hour]; $74.56*30 = $2,236.92
and $74.56*120 = $8,947.69. All figures are taken
from the 2011 SIFMA Report on Management and
Professional Earnings in the Securities Industry.

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67909

be confirmed, in writing, by facsimile.’’
Instead, all notices would be made in
writing and submitted through an
electronic medium acceptable to the
Commission (currently, WinJammer).
In addition, as described above in II.C,
the proposed changes would require
that if an FCM has a shortfall in net
capital but is not sure of their financial
condition, the FCM should not delay
notifying the Commission about the
shortfall in net capital. The FCM must
communicate each piece of information
(knowledge of the shortfall and
knowledge of the financial condition of
the FCM) to the Commission as soon as
it is known.
The proposed requirements in
paragraphs (i), (j), (k) and (l) of § 1.12
identify additional circumstances in
which the FCM must provide immediate
written notice to the Commission,
relevant SRO and to the SEC if the FCM
is also a broker-dealer. Those
circumstances are: (1) If an FCM
discovers that any of the funds in
segregated accounts are invested in
investments not permitted under § 1.25;
(2) if an FCM does not have sufficient
funds in any of their segregated
accounts to meet their targeted residual
interest; (3) if the FCM experiences a
material adverse impact to its
creditworthiness or ability to fund its
obligations; (4) whenever the FCM has
a material change in operations
including changes to senior
management, lines of business, clearing
arrangements, or credit arrangements
that could have a negative impact on the
FCM’s liquidity; and (5) if the FCM
receives a notice, examination report, or
any other correspondence from a DSRO,
the SEC, or a securities industry selfregulatory organization, the FCM must
notify the Commission, and provide a
copy of the communication as well as a
copy of their response to the
Commission.
Last, proposed changes in paragraph
(n) of § 1.12 would require that every
notice or report filed with the
Commission pursuant to § 1.12 would
include a discussion of how the
reporting event originated and what
steps have been, or are being taken, to
address the event.
Benefits
The proposed changes requiring that
notice to the Commission be given in
written form via specified forms of
electronic communication not only
adapt the rule to account for modern
forms of communication, but also
reduce the possibility of notification
being delayed in reaching appropriate
Commission staff. The proposed
requirement would ensure that such

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notices are submitted to WinJammer,
which forwards notices to appropriate
personnel within the Commission via
email within a matter of minutes, if not
seconds.
With respect to the proposed change
in § 1.12(a)(2), if an FCM knows that it
does not have adequate capital to meet
the requirements of § 1.17 or other
capital requirements, and is also not
able to calculate or determine its
financial condition, it is likely that the
FCM is in a period of extraordinary
stress. In these circumstances, time is of
the essence for the solvency of the FCM
and to the protection of its customers
and counterparties. Therefore, it is
important that the Commission, DSRO,
and SEC (if the FCM is also a brokerdealer) be notified immediately so that
they can begin assessing the FCM’s
condition, and if necessary, making
preparations to allow the transfer of the
customers’ positions to another FCM in
the event that the FCM currently
holding those positions has insufficient
regulatory capital. These preparations
help to ensure that the customers’ funds
are protected in the event of the FCM’s
default, and that the positions of its
customers are transferred expeditiously
to another FCM where those customers
may continue to hold and control those
positions without interruption to the
customer’s positions.
The situations enumerated in
proposed §§ 1.12(i) and (j) are more
specific indicators of potential or
existing problems in the customer
segregated funds accounts. Notifying the
Commission in such circumstances will
enable it to monitor steps the FCM is
taking to address a shortfall in targeted
residual interest, or to direct the FCM as
it takes steps to address improperly
invested segregated funds. In either
case, the Commission will be able to be
much more closely involved in
rectifying the situation and ensuring the
continued protection of customer
segregated funds.
The situations enumerated in
proposed §§ 1.12(k) through (l) are
circumstances indicating that the FCM
is undergoing changes that could
indicate or lead to financial strain.
Alerting the Commission and relevant
SRO in such circumstances will enable
both to protect customer funds by
monitoring the FCM more closely in
order to ensure that any developing
problems are identified quickly and
addressed proactively by the FCM with
the oversight of the Commission and
relevant SRO.
The proposed amendment requiring
that the FCM notify the Commission
whenever it receives a notice or results
of an examination from the DSRO, SEC,

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or securities-industry self-regulatory
body, would ensure that the
Commission is aware of any significant
developments affecting the FCM that
have been observed or communicated
by other regulatory bodies. Such
communications could prompt the
Commission to heighten its monitoring
of specific FCMs, or create an
opportunity for the Commission to work
collaboratively and proactively with
other regulators to address any concerns
about how developments in the FCM’s
business could affect customer funds.
The proposed requirement that
notifications to the Commission
pursuant to § 1.12 include a discussion
of what caused the reporting event and
what has been, or is being done about
the event would provide additional
information to Commission staff that
help them quickly gauge the potential
severity of related problems that have
been or are developing at the reporting
FCM, IB, or SRO. It would also help
Commission staff discern how
effectively the reporting entity is
responding to such problems, which
could assist the staff in determining
whether the situation is likely to be
corrected quickly or to continue
deteriorating.
Costs
As discussed above, the proposed rule
requires that FCMs provide immediate
notice to the Commission and its DSRO
in five additional circumstances. These
additional requirements create some
minimal reporting costs when such
circumstances arise. The Commission
estimates that the total cost of
completing and sending the requisite
form is approximately $9,700 and
$19,400 per form.115
Ongoing monitoring for any of the five
additional circumstances that require
reporting to the Commission, relevant
SRO, and to the SEC if the FCM is a
115 This estimates 8–16 hours of time from both
the CCO and the CFO, 10–20 from the General
Counsel, 20–40 from a compliance attorney, and
10–20 from a senior accountant. The average
compensation for a chief compliance officer is
$110.97/hour [ $170,727 per year/(2000 hours per
year)*1.3 = $110.97/hour]; $110.97*2 = $221.95 and
$110.97*4 = $443.89. The average compensation for
a chief financial officer is estimated by the
Commission to be $455.00/hour [$700,000 per year/
(2000 hours per year)*1.3 is $455.00 per hour];
$455.00*2 = $910.00 and $455.00*4 = $1,820.00.
The average compensation for a general counsel is
estimated by the Commission to be $260.00/hour
[$400,000 per year/(2000 hours per year)*1.3 is
$260.00 per hour]; $260.00*10 = $2,600.00 and
$260.00*20 = $5,200.00. The average compensation
for a senior accountant is $44.18/hour [$67,971 per
year/(2000 hours per year)*1.3 = $44.18/hour];
$44.18*10 = $441.81 and $44.18*20 = $883.62.
These figures are taken from the 2011 SIFMA
Report on Management and Professional Earnings
in the Securities Industry.

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broker-dealer will also create some
costs. In its consideration of the
proposed rule, the Commission assumes
that FCMs will automate the process for
monitoring residual interest for any
shortfall against the firm’s target.
Furthermore, the Commission
anticipates that FCMs will build on the
systems that they already have in place
to calculate residual interest once per
day at the close of business. The
incremental cost of modifying such
systems to monitor residual interest
compared to the target value on an
ongoing basis is likely to be between
$1,800 and $6,300.116 Identifying
instances where their FCM has
experienced a material adverse impact
to its creditworthiness or ability to fund
its obligations, as would be required by
proposed § 1.12(k), would likely require
deliberation among senior leaders at the
FCM. Such deliberations, however,
would likely be prompted by
observations that such leaders make in
the ordinary course of business, and
therefore would not require proactive
monitoring. The Commission estimates
that deliberations among senior leaders
to determine whether there is evidence
suggesting a material decrease in the
FCM’s creditworthiness has occurred
would cost at least $6,600 per year.117
Material changes to the FCM’s
leadership or business would create
some incremental costs. Some of the
material changes envisioned, such as
changes in senior leadership, are
discrete events that do not require
monitoring in order to identify. On the
other hand, events that constitute a
material change in operations, credit
arrangements, or ‘‘any change that could
adversely impact the firm’s liquidity
116 This estimates 20–90 hours of personnel time
from a programmer and 10–20 hours of personnel
time from a senior programmer. The average
compensation for a programmer is $53.64/hour
[$82,518 per year/(2000 hours per year)*1.3 =
$53.64/hour]; $53.64*20 = $1,072.73 and $53.64*90
= $4,827.30. The average compensation for a senior
programmer is $74.56/hour [$114,714 per year/
(2000 hours per year)*1.3; $74.56*10 = $745.64 and
$74.56*20 = $1,491.28. All figures are taken from
the 2011 SIFMA Report on Management and
Professional Earnings in the Securities Industry.
117 This estimates at least 8 hours per year from
the CFO, the CCO, and the General Counsel. The
average compensation for a chief compliance officer
is $110.97/hour [ $170,727 per year/(2000 hours per
year)*1.3 = $110.97/hour]; $110.97*8 = $887.78.
The average compensation for a chief financial
officer is estimated by the Commission to be
$455.00/hour [$700,000 per year/(2000 hours per
year)*1.3 is $455.00 per hour]; $455.00*8 = $3,640.
The average compensation for a general counsel is
estimated by the Commission to be $260.00/hour
$400,000.00 per year/(2000 hours per year)*1.3 is
$260.00 per hour]; $260.00*8 = $2,100.00. The
figure for the CCO is taken from the 2011 SIFMA
Report on Management and Professional Earnings
in the Securities Industry; other compensations are
estimates by the Commission.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
resources,’’ 118 would only be reliably
recognized as a material change by
someone with a broad knowledge of the
firm’s operations and finances, so the
Commission assumes that senior
management would fulfill these
requirements. However, identifying and
addressing material changes to the
business is a function that senior
management already plays, and
therefore monitoring for such changes
would not create any incremental costs.
The proposed rule would make it
necessary for senior management, in
addition to identifying changes to the
business, to make a decision about
whether or not those changes are
material and therefore should be
reported. The Commission proposes that
the additional time senior management
spends making determinations about the
materiality of changes to the business,
as defined by the proposed rule, would
require approximately twenty hours of
time from both the CCO and CFO.
Therefore, the Commission estimates
that the monitoring costs would be
$11,300 and $22,600.119
The proposed requirement that
notices or reports filed with the
Commission pursuant to § 1.12 include
a discussion of how the reporting event
originated and what has been, or is
being done to address the reporting
event, will increase the cost of such
reports. The Commission anticipates
that this requirement would prompt the
CFO, General Counsel, and CCO of a
reporting entity to invest additional
time in developing and reviewing the
report. The Commission anticipates that
the incremental cost associated with the
additional time spent by the CFO,
General Counsel, and CCO would be
between $3,300 and $6,600 per
report.120

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118 § 1.12(l).
119 This estimates 20–40 hours of time each from
the CCO and CFO. The average compensation for
a chief compliance officer is $110.97/hour
[$170,727 per year/(2000 hours per year)*1.3 =
$110.97/hour]; $110.97*20 = $2,219.45 and
$110.97*40 = $4,438.90. The average compensation
for a chief financial officer is estimated by the
Commission to be $455.00/hour [$700,000 per year/
(2000 hours per year)*1.3 is $455.00 per hour];
$455.00*20 = $9,100.00 and $455.00*40 =
$18,200.00. The compensations of an average CFO
is an estimate by the Commission. The figure for a
CCO is taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.
120 This estimates that the CFO, General Counsel,
and CCO will each spend an additional 4–8 hours
developing and reviewing the report. The average
compensation for a chief financial officer is
estimated by the Commission to be $455.00/hour
[$700,000 per year/(2000 hours per year)*1.3 is
$455.00 per hour]; $455.00*4 = $1,780.00 and
$455.00*8 = $3,640.00. The average compensation
for a general counsel is estimated by the
Commission to be $260.00/hour [$400,000.00 per
year/(2000 hours per year)*1.3 is $260.00 per hour];

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Additional proposed changes would
introduce only minimal, if any,
additional costs. For example, all FCMs
already use WinJammer to submit
certain reports to DSROs and to the
Commission, so there would not be any
additional cost involved with
§ 1.12(n)(3) requirement that such
notices to be submitted through that
platform rather than via fax.121 Nor is
there any cost associated with this
proposed change to § 1.12(a)(1). The
FCM is still required to disclose its
financial condition to the Commission,
DSRO and SEC (if applicable) as soon as
it can be ascertained. The proposed
change does not alter the information
that the FCM must gather, calculate, or
report. It merely requires that each of
the two pieces of information relevant to
the requirements in § 1.12(a)(1–2) are
submitted as soon as they are known.
Request for Comment
Question 5: The Commission requests
additional information regarding the
costs of these additional notification
requirements. Specifically, how much
time will information technology and
compliance personnel have to invest in
order to modify systems to calculate
residual interest on a continual basis?
How much time would be necessary to
monitor for material changes in the
business and what level of personnel
would have to participate in that in
order to draw reliable conclusions about
whether or not a material event had
occurred?
§ 1.16 Qualifications and Reports of
Accountants
Proposed Changes
As discussed above in II.E, the
proposed changes would require that in
order for an accountant to be qualified
to conduct an audit of an FCM, that
accountant would have to be registered
with the Public Company Accounting
Oversight Board (‘‘PCAOB’’),122 have
$260.00*4 = $1,040.00 and $260.00*8 = $2,100.00.
The average compensation for a chief compliance
officer is $110.97/hour [ $170,727 per year/(2000
hours per year)*1.3 = $110.97/hour]; $110.97*4 =
$443.88 and $110.97*8 = $887.78. The figure for the
CCO is taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry; other compensations are
estimates by the Commission.
121 See NFA Interpretive Notice 9028—NFA
Financial Requirements: The Electronic Filing of
Financial Reports. Available at: http://
prodwebvip.futures.org/nfamanual/
NFAManual.aspx?RuleID=9028&Section=9. See
also CME Advisory Notice: Enhanced Customer
Protections & Rule Amendments, June 27, 2012.
Available at: http://www.cmegroup.com/toolsinformation/lookups/advisories/clearing/AIB1208.html.
122 ‘‘PCAOB is a nonprofit corporation established
by Congress to oversee the audits of public

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undergone at least one examination by
the PCAOB, and have addressed any
deficiencies noted by the PCAOB within
three years of the report noting such a
deficiency.
Second, the amendments would
require that the governing body of the
FCM ensure that the accountant engaged
for an audit is duly qualified, and
specifies certain qualifications that must
be considered when evaluating an
accountant for such purpose.
Last, the Commission is proposing to
require a public accountant to state in
the audit opinion whether the audit was
conducted in accordance with U.S.
generally accepted auditing standards
after full consideration of the auditing
standards adopted by the PCAOB.
Benefits
By requiring accountants to be
registered with PCAOB and to have
undergone at least one examination by
the same, the proposed rule would help
to ensure that the accountant is
qualified to audit publicly traded
companies, which are often more
complex than those that are privately
held. As a consequence, the proposed
requirement would promote selection of
accounting firms that are more
sophisticated and experienced than
would necessarily be the case in the
absence of the proposed amendment,
which would help to ensure that the
accountant is large enough to maintain
independence in its examination and
has adequate experience to deal with
the unique aspects of an FCM’s business
model, operational processes, and
financial records.
Requiring the FCM’s board to evaluate
and approve accountants conducting
audits for the FCM would tend to
enhance protection of customer funds
by increasing accountability among the
board for any errors resulting from an
accountant’s lack of relevant experience.
Consequently, the requirement would
incent the board to choose auditors
carefully, or to provide diligent
oversight as senior management makes
such selections. This would promote
selection of highly qualified
accountants, which would help to
ensure that audits are as effective as
possible in identifying problems with
operational controls, potential
indications of fraud, or other warning
signs that could enable senior
companies in order to protect the interests of
investors and further the public interest in the
preparation of informative, accurate and
independent audit reports. The PCAOB also
oversees the audits of broker-dealers, including
compliance reports filed pursuant to federal
securities laws, to promote investor protection.’’
See http://pcaobus.org/Pages/default.aspx.

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management and the Commission or
DSRO to protect customer funds more
effectively.
Costs
The Commission anticipates that
auditors that are registered with the
PCAOB and that have undergone at least
one examination by the PCAOB are
likely to charge more for audits, than
those that do not have those
qualifications. However, the
Commission does not have adequate
information to estimate the difference in
costs.
Request for Comment
Question 6: The Commission requests
comment regarding the cost of audits for
an FCM. Specifically, what is the range
of costs and average cost of an audit
conducted by auditors with the
credentials required in the proposed
rule? What is the range of costs and the
average cost of an audit conducted by
auditors without such qualifications?
§ 1.17 Minimum Financial
Requirements for Futures Commission
Merchants And Introducing Brokers 123

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Proposed Changes
As described in the section by section
discussion at II.F, the Commission is
proposing to amend § 1.17 by adding a
new provision that will authorize the
Commission to require an FCM to cease
operating as an FCM and transfer its
customer accounts if the FCM is not
able to certify and demonstrate
sufficient access to liquidity to continue
operating as a going concern.
In addition, FCMs that are dual
registrants (FCM and BD) are allowed to
use the Securities and Exchange
Commission’s broker-dealer
approach 124 to evaluating the credit risk
123 CEA 4(d)(2), referenced in § 1.17, states, ‘‘It
shall be unlawful for any person, including but not
limited to any clearing agency of a contract market
or derivatives transaction execution facility and any
depository, that has received any money, securities,
or property for deposit in a separate account as
provided in paragraph (2) of this section, to hold,
dispose of, or use any such money, securities, or
property as belonging to the depositing futures
commission merchant or any person other than the
customers of such futures commission merchant.’’
124 As stated above in II.F above, under the SEC
proposal, a BD may impose the default haircuts of
15 percent of the market value of readily marketable
commercial paper, convertible debt, and
nonconvertible debt instruments or 100 percent of
the market value of nonmarketable commercial
paper, convertible debt, and nonconvertible debt
instruments. A BD, however, may impose lower
haircut percentages for commercial paper,
convertible debt, and nonconvertible debt
instruments that are readily marketable, if the BD
determines that the investments have only a
minimal amount of credit risk pursuant to its
written policies and procedures designed to assess
the credit and liquidity risks applicable to a
security. A BD that maintains written policies and

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of securities that the FCM invests in and
assigning smaller haircuts 125 to those
that are deemed to be a low credit risk,
should the SEC adopt as final its
proposed rule to eliminate references to
credit ratings. The proposed change to
§ 17(c)(5)(v) would allow FCMs that are
not dual registrants to use the same
approach. Reducing the haircut assigned
to low credit risk securities that the
FCM invests in (which would
potentially include some investments
compliant with the requirements of
§ 1.25), reduces the capital charge that
the FCM must take for investing in those
securities.
Last, the proposed amendments
would change the period of time that an
FCM can wait for margin payments from
a customer before taking a capital charge
from three days to one day.
Benefits
As discussed in II.F, an FCM’s ability
to meet capital requirements and
segregation requirements is not
necessarily a sufficient indicator of the
FCM’s continued viability as a going
concern. If an FCM does not have access
to liquidity to meet identifiable,
imminent financial obligations, the FCM
will likely default, regardless of the
amount of capital that is recognized on
its balance sheet. In such circumstances,
transferring customer positions to
another FCM before the current FCM
enters into bankruptcy provides
additional protection to customer funds.
Once the FCM enters into bankruptcy,
the transfer of customer positions may
be slowed by the trustee’s involvement,
which could interrupt customers’ ability
to actively manage those positions. In
addition, if the FCM enters into
bankruptcy before transferring
customers’ positions, customer
segregated funds may be subject to
trustee fees. Transferring the positions
before the FCM enters into bankruptcy,
therefore, provides additional protection
to customers by preserving their ability
to continuously manage their accounts
and by protecting their funds from being
subject to trustee fees.
procedures and determines that the credit risk of a
security is minimal is permitted under the SEC
proposal to apply the lesser haircut requirement
currently specified in the SEC capital rule for
commercial paper (i.e., between zero and 1⁄2 of 1
percent), nonconvertible debt (i.e., between 2
percent and 9 percent), and preferred stock (i.e., 10
percent).
125 As stated above in II.F, in computing its
adjusted net capital, an FCM is required to reduce
the value of proprietary futures and securities
positions included in its liquid assets by certain
prescribed amounts or percentages of the market
value (otherwise known as ‘‘haircuts’’) to discount
for potential adverse market movements in the
securities.

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By allowing FCMs that are not dual
registrants to follow the same rules as
those that are dual registrants, the
change would harmonize the regulation
of FCMs with respect to minimal
financial requirements. This would
place FCMs that are not dual registrants
on a level playing field with those that
are dual registrants, which contributes
to the competitiveness of the financial
markets.
In § 1.17(c)(5)(viii), the Commission
proposes to reduce the period of time an
FCM can wait to receive margin call
payments from customers before taking
a capital charge, which will incent
FCMs to exercise increased diligence
when seeking such payments, and
therefore will likely prompt customers
to provide such payments more quickly.
As a consequence, the risk that a debit
balance could develop in a customer’s
account due to tardy margin call
payments would be reduced, and the
amount of residual interest that the FCM
would need to maintain in the
segregated accounts in order to protect
against the possibility that such debit
balances could cause them to have less
that is required in their segregated
accounts would also be reduced. This
provides benefits for the FCM by
reducing the amount of capital that it
must contribute to the customer
segregated accounts, and for customers,
by promoting more rapid margin call
payments from other customers to
support their own positions.
Costs
With respect to costs, the proposed
amendment § 1.17(a)(4), allowing the
Commission to require an FCM to
transfer its customer positions if the
FCM is not able to immediately certify
that its liquidity is adequate to continue
as a going concern, would give the
Commission the authority to force the
FCM to transfer its customer positions
to another FCM in such circumstances.
This could create additional costs for
the FCM in two different ways. First, it
is possible that while the FCM may not
be able to immediately certify that it has
sufficient liquidity to continue as a
going concern but may nevertheless
obtain sufficient liquidity before its
impending obligations become due. If
the FCM is forced to transfer its
positions before it obtains the liquidity
necessary to demonstrate that it may
continue as a going concern, the FCM
will have lost its FCM business. Second,
if the FCM is working on obtaining
sufficient liquidity to continue as a
going concern, it may be able to obtain
such liquidity under more favorable
terms if it has time to consider multiple
offers. However, if the FCM has a

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
shortened timeline to consider offers
before being forced to transfer its
customer positions to another FCM, it
may be forced to accept an offer that is
less attractive than what otherwise
would have been the case.
Regarding the proposed amendment
to § 1.17(c)(5)(v) changing the
haircutting procedures for FCMs,
lowering the amount of capital that the
FCM must hold reduces the buffer it has
to absorb any losses that result from its
own investments. However, the
Commission proposes that even in the
absence of the amendment proposed
here dual registrants will be able to use
the SEC’s haircutting procedure.
Therefore, only FCMs that are not dual
registrants would be impacted by the
proposed change to § 1.17. Moreover,
the Commission proposes that FCMs
that are not dual registrants do not
typically invest in securities that would
be subject to reduced haircuts under the
SEC’s proposed rules, and therefore the
change would not have a significant
impact on the capital requirements for
such FCMs.
Reducing the period of time FCMs can
wait for customers’ margin call
payments before taking a capital charge
may increase the capital charge that
FCMs take due to tardy margin call
payments. As a consequence, proposed
§ 1.17(c)(5)(viii) would likely force
FCMs to hold more capital, or to more
diligently collect margin from customers
on a prompt basis. The Commission
does not have adequate information to
estimate the amount of additional
capital that FCMs would likely be
required to hold, or the cost of that
capital, and therefore is not able to
quantify this cost at this time.

average cost of capital for an FCM. In
addition, please provide data and
calculations that would enable the
Commission to replicate and validate
the estimates you provide.

Request for Comment
Question 7: The Commission requests
comment regarding whether FCMs that
are not dual registrants typically invest
in securities that would be subject to
reduced haircutting procedures under
the SEC’s proposed rules. If an FCM
would be subject to reduced haircutting,
please quantify the effect that such
investments are likely to have on the
capital requirements for such FCM.
Question 8: In addition, the
Commission requests information that
would assist it in quantifying the costs
and benefits associated with reducing
the number of days an FCM can wait for
margin call payments before taking a
capital charge. Specifically, how much
margin is typically owed by those
customers?
Question 9: The Commission also
requests comment regarding the amount
of additional capital that FCMs would
likely be required to hold and the

Proposed § 1.20(d)(2) would require
that FCMs and DCOs use the template
in Appendix A when obtaining written
acknowledgments from their
depositories holding futures customer
funds. Through this change would
require depositories accepting customer
funds to: (1) Recognize that the funds
are customer segregated funds subject to
the Act and CFTC regulations; (2) agree
not to use the funds to secure any
obligation of the FCM to the depository;
(3) agree to allow the CFTC and the
FCM’s SRO to examine accounts at any
reasonable time; (4) agree to provide
CFTC and SRO user login to have readonly access to segregated accounts 24
hours a day; (5) and agree to release
funds in segregated accounts when
instructed to do so by an appropriate
officer of FCM, the Director of DSIO, or
the Director of DCR.
These acknowledgments and
commitments would result in important

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§ 1.20 Futures Customer Funds To Be
Segregated and Separately Accounted
for
Proposed Changes
As described in the section by section
discussion at II.G, the proposed
amendments to § 1.20 reorganize the
section, but also alter the substance of
the section’s requirements in certain
places.
Proposed § 1.20 includes a new
Appendix A which is a template for the
acknowledgment letter that FCMs and
DCOs must obtain from their
depositories. The proposed changes
would require FCMs and DCOs to use
the letter in Appendix A to provide the
acknowledgment that they must obtain,
and to clarify that the acknowledgment
letter must be obtained before
depositing any funds with a depository.
The proposed amendments to § 1.20
also requires FCMs and DCOs file the
acknowledgment letter with the
Commission promptly, and to update
the acknowledgment letter whenever
there are changes to the business name,
address, or account numbers referenced
in the letter. Last, proposed § 1.20
requires that customer funds deposited
at a bank or trust company must be
available for immediate withdrawal
upon demand by the FCM or DCO,
which effectively prevents them from
placing funds into time-deposit
accounts with depositories.
Benefits

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benefits. First, by acknowledging that
the funds are subject to the Act and
CFTC regulations, the depository would
become accountable for complying with
relevant statutory and regulatory
requirements related to its handling of
those funds. Second, the depository
would acknowledge that the FCM is not
permitted to use customer funds as
belonging to any person other than the
customer which deposited them, which
would also prohibit an FCM from using
customer funds to secure its own
obligations. By requiring the FCM or
DCO to obtain a statement from
depositories holding customer funds
acknowledging these limitations on use,
the proposed rule would ensure that
each depository is aware that the
customers’ funds cannot be used to
secure the FCM’s obligations to the
depository. Third, the letter constitutes
written permission by the depository to
allow CFTC or DSRO officials to
examine the FCM’s customer accounts
at any reasonable time, and to view the
those accounts online at any time. As a
consequence, the letter would enable
both the Commission and the DSRO to
monitor actual balances at the
depository more easily and regularly.
This would increase the probability that
any discrepancy between balances
reported by the FCM on its daily
customer segregation account reports,
and balances actually held by the
depository would be identified quickly
by the Commission or the DSRO.
Moreover, with standing authorization
from the depository to examine
customer segregated accounts, both the
Commission and DSRO would be better
able to move quickly to verify that there
is a problem.
The commitment to distribute funds
when directed to do so by the Director
of DSIO, the Director of DCR, or
appropriate officials of the DSRO
facilitates the immediate movement of
customer funds, and avoids delay in the
release such funds which expedites to
the transfer the customers’ positions or
to return the customers’ funds without
delay.
The acknowledgment letter also
provides some assurances to the
depository, namely, that it is not liable
to the FCM for following instructions to
distribute funds from customer
segregated accounts at the direction of
the Director of DSIO or the Director of
DCR and that the depository is not
responsible for the FCM’s compliance
with the Act or Commission regulations
beyond what is expressly stated in this
letter. The letter places depositories
holding customer funds on notice that
they must release customer funds
without delay when directed to do so by

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the Director of DSIO or the Director of
DCR. The assurance that the FCM will
not hold the depository liable for
following instructions from the Director
of DSIO or of DCR should reduce this
potential cause for delay in time-critical
situations. Moreover, under the
proposed amendments, depositories
must sign the acknowledgment letter in
Appendix A in order to receive funds
from an FCM or DCO. If some
depositories were not willing to sign the
letter, it would reduce the number of
available depositories for FCMs and
DCOs and may force them to move some
existing depository accounts.
The benefit of requiring FCMs and
DCOs to obtain an acknowledgment
letter from their depository prior to or
contemporaneously with transferring
any customer funds to that depository is
that it ensures that all the protections
provided for by the depository’s consent
to the terms of the letter are in place for
the full time during which a depository
holds customer segregated funds. In
other words, it prevents the possibility
of a gap in the protections created by the
requirements of this section.
By requiring FCMs and DCOs to
submit the acknowledgment letters,
signed by their depositories, to both the
Commission and the relevant SRO, the
proposed rules should make it easier for
the Commission or relevant SRO to act
quickly, when necessary, being
confident that the correct legal
permissions are in place. Additionally,
requiring the letters to be retained for
five years past the time when customer
segregated funds are no longer held by
each depository would ensure that
proper documentation of all relevant
acknowledgments and commitments is
in the possession of each party that
relies upon the existence of those
commitments in order to effectuate the
protections created by this section.
Last, § 1.12(h) requires that funds
deposited by an FCM be available for
immediate withdrawal. If an FCM
places customer funds in time-deposit
accounts the depository has the
contractual right to require a period of
notice from the FCM before distributing
funds at the FCM’s request. Under the
proposed regulation, a period of notice
would not be acceptable given the
obligation that the FCM has to return
customer funds to customers upon
request. Moreover, placing funds in a
time-deposit account could prevent the
DCO, Commission, or Trustee from
being able to effect the immediate
movement of customer funds if required
to do so in the event of a default by the
FCM. Requiring that funds be available
for immediate withdrawal at the request

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of the FCM ensures prompt access to
customer funds by all concerned.
Prohibiting FCMs from placing
customer funds in time-deposit
accounts would codify a long-standing
staff interpretation that prohibits FCM’s
from placing customer funds in such
accounts.126 The interpretation and
proposed amendment prohibit such
deposits because time-deposit accounts,
by law, must retain the right to a certain
number of days advance notice before
allowing a customer to withdrawal
funds. This delay could prevent an FCM
from returning all customer funds in a
prompt manner if those customers all
demanded their funds and could
prevent the DCO from porting open
positions to another FCM in the event
that the FCM currently holding those
funds defaulted. The benefits of
codifying the current staff interpretation
are that it will provide additional clarity
about the legal force of the requirement,
and will put the requirement in a
location where relevant market
participants are much more likely to see
it, which reduces the likelihood that
FCMs would violate this prohibition
unknowingly.
Costs
FCMs and DCOs are likely to bear
some initial and ongoing costs as a
result of the proposed amendment
requiring them to use the template in
Appendix A to obtain the
acknowledgment letter from their
depositories. Regarding initial costs, the
letter includes new requirements that
existing depositories want to discuss
with the FCM or DCO’s staff. In
addition, some existing depositories
may not be willing to sign the new
letter, which would force the FCM or
DCO to move any customer funds held
by that depository to a different
depository, creating certain due
diligence and operational costs. The
Commission estimates that the cost of
obtaining a new acknowledgment letter
from each existing depository is
between $1,300 and $4,200.127 Based on
126 See Administrative Determination No. 29 of
the Commodity Exchange Administration dated
Sept. 28, 1937 stating, ‘‘the deposit, by a futures
commission merchant, of customers’ funds * * *
under conditions whereby such funds would not be
subject to withdrawal upon demand would be
repugnant to the spirit and purpose of the
Commodity Exchange Act. All funds deposited in
a bank should in all cases by subject to withdrawal
on demand.’’
127 This estimate assumes 10–40 hours of time
from a compliance attorney and 10–20 hours from
an office services supervisor. The average
compensation for a compliance attorney is $85.35/
hour [$131,303 per year/(2000 hours per year)*1.3
is $85.35 per hour]; $85.35*10 = $853.47 and
$85.35*40 = $3,413.88. The average compensation
for an office services supervisor is $40.15/hour

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conversations with industry
participants, the Commission estimates
that FCMs and DCOs would have
approximately 1–30 depositories each,
from which they must obtain a new
acknowledgment letter. Therefore, the
Commission estimates that the cost of
obtaining new acknowledgment letters
from existing depositories is between
$2,700 and $82,000 per FCM or DCO.128
In addition, based on conversations
with industry participants, the
Commission estimates that identifying
new potential depositories, conducting
necessary due diligence, formalizing
necessary agreements, opening
accounts, and transferring funds to a
new depository is likely to take between
three to six months and is likely to
require support from compliance
attorneys, as well as operations, risk
management, and administrative
personnel. The Commission estimates
that the cost of moving accounts from an
existing depository that is not willing to
sign the letter is between $50,000 and
$102,000.129
Ongoing costs include those created
by the additional requirements the FCM
or DCO will have to explain to new
depositories when obtaining the
required letter. There may be additional
operational costs involved with
monitoring depositories for any change
that would necessitate updating the
letter. The per-entity cost of obtaining
the letter from new depositories is likely
to be the same as it would for obtaining
the letter from existing depositories (i.e.,
[$61,776.00 per year/(2000 hours per year)*1.3 is
$40.15 per hour]; $40.15*10 = $401.54 and
$40.15*20 = $803.09. These figures are taken from
the 2011 SIFMA Report on Management and
Professional Earnings in the Securities Industry.
128 Total figures are taken from previous
calculation. ($1,255.01+$4,216.97)/2 = $2,735.99;
$2,735.99*1 = $2,735.99 and $2,735.99*30 =
$82,079.69.
129 This estimate assumes one compliance
attorney working full-time for 3–6 months, 50–200
hours from an office services supervisor, 80–160
hours of time from a risk management specialist,
and 40–60 hours from an intermediate accountant.
The average compensation for a compliance
attorney is $85.35/hour [$131,303 per year/(2000
hours per year)*1.3 is $85.35 per hour]; $85.35*40
hours/week*4 weeks/month*3 months = $40,966.54
and $85.35*40 hours/week*4 weeks/month*6
months = $81,933.07. The average compensation for
an office services supervisor is $40.15/hour
[$61,776.00 per year/(2000 hours per year)*1.3 is
$40.15 per hour]; $40.15*50 = $2,007.72 and
$40.15*200 = $8,030.88. The average compensation
for a risk management specialist is $65.33/hour
[$100,500 per year/(2000 hours per year)*1.3 is
$65.33 per hour]; $65.33*80 = $5,226.00 and
$268.84*160 = $10,452.00. The average
compensation for an intermediate accountant is
$34.11/hour [$52,484.00 per year/(2000 hours per
year)*1.3 is $34.11 per hour]; $34.11*40 =
$1,364.58 and $34.11*60 = $2,046.88. These figures
are taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.

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$1,300 and $4,200). The Commission
estimates that the ongoing cost
associated with monitoring for changes
that would require the
acknowledgement letter to be updated is
between $1,100 and $2,800 per year.130
The proposed requirement, embedded
in the acknowledgment letter, that
depositories provide to the Commission
and DSRO online, read-only access to
accounts where customer segregated
funds are held, would create certain
costs for depositories that would likely
be passed onto FCMs. The NFA Board
of Directors recently approved rule
amendments that will require FCMs to
provide their respective DSROs with online view-only access to customer
segregated/secured amount bank
account information. NFA has
submitted the rule amendments to the
Commission for approval.131 Therefore,
the pending NFA rule and the
Commission’s proposed requirement
would require banks and trust
companies to provide the Commission
and the DSROs with the same read-only
access to account information. The
Commission estimates that the cost of
this additional access is between $270
and $540 per account.132
For all other depositories, the
Commission believes that providing
access read-only access to balances and
transactions in cash accounts is possible
with existing technology and therefore,
for depositories that already provide
such access to their customers, the cost
of providing that access to the
Commission and DSRO is likely to be
relatively low. Based on conversations
with industry participants, the
Commission estimates that on average
an FCM or DCO is likely to have
approximately 5–30 accounts. The
Commission estimates that the initial
set-up cost of providing access to each
account at depositories that already
provide online access to their customers
130 This assumes 20–50 hours per year from an
office manager for monitoring costs. The average
compensation for an office manager is $55.82/hour
[$85,875 per year/(2000 hours per year)*1.3 =
$55.82/hour]; $55.82*20 = $1,116.38 and $55.82*50
= $2,790.94. This figure is taken from the 2011
SIFMA Report on Management and Professional
Earnings in the Securities Industry.
131 A copy of the NFA rule submission is
available on the NFA Web site,
www.nfa.futures.org.
132 This assumes 4–8 hours per account from a
senior database administrator. The average
compensation for a senior database administrator is
$$68.09/hour [$104,755 per year/(2000 hours per
year)*1.3 = $68.09/hour]; $68.09*4 hour = $272.36
and $68.09/hour *8 hours = $554.73. This figure is
taken from the 2011 SIFMA Report on Management
and Professional Earnings in the Securities
Industry.

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is approximately $270 and $550 per
account.133
On the other hand, for depositories
that do not currently provide such
access to their customers, setting up the
capability to provide it to the
Commission and DSRO will require that
the depository implement additional
technology. The Commission does not
have adequate data to estimate the cost
for establishing such a system.
The Commission proposes that the
requirement embedded in the
acknowledgment letter that depositories
consent to release customer funds
whenever requested to do so by the
Director of DCR or Director of DSIO will
not create any additional costs for
FCMs, depositories, or market
participants.
The Commission does not anticipate
any costs associated with proposed
§ 1.20(h) prohibiting an FCM from
placing customer funds in time-deposit
accounts since it is codifying a current
staff interpretation and FCMs already
abide by this standard.
The remaining requirements in
proposed § 1.20 are virtually identical to
those in the existing rule, but are
reorganized in order to improve
readability. The changes that are merely
the result of reorganizing identical
requirements do not result in any costs
for market participants.
Request for Comment
Question 10: The Commission
requests data from which to estimate the
initial and ongoing costs for a
depository to establish the capability to
provide read-only access to account
balances and transaction history.
Question 11: The Commission
requests comment from the public
regarding the initial and ongoing cost of
services provided by vendors that have
the ability to provide regular
confirmation of balances at depositories
on both a scheduled and unscheduled
basis. Also, would such services be
applicable to custodial accounts, and
accounts held at non-bank depositories
(e.g. other FCMs or Money Market
Mutual Funds)?
Question 12: The Commission
requests comment regarding whether
depositories currently have systems that
provide their customers with
continuous read-only access to accounts
133 This assumes 4–8 hours per account from a
senior database administrator. The average
compensation for a senior database administrator is
$$68.09/hour [ $104,755 per year/(2000 hours per
year)*1.3 = $68.09/hour]; $68.09*4 hour = $272.36
and $68.09/hour *8 hours = $554.73. This figure is
taken from the 2011 SIFMA Report on Management
and Professional Earnings in the Securities
Industry.

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where securities are held that provide:
(1) Real time or end of day balances for
each segregated account; and (2)
descriptions of the types of assets
contained in each account with balances
associated with each type of asset. How
do the capabilities of systems that
provide continuous read-only access to
customers vary across different types of
depositories, foreign or domestic (i.e.
banks, FCMs, DCOs, or Money Market
Mutual Funds)?
Question 13: If depositories do not
currently have the ability to provide
continuous read-only access to accounts
holding customer funds that display
transactions and balances for those
accounts, what costs would be required
in order to create such a system?
Question 14: The Commission
assumes that the costs and benefits
enumerated above capture the range of
costs and benefits that would be
experienced by each type of depository.
The Commission requests comment and
quantification regarding any additional
costs or benefits that would be
experienced by certain types of
depositories such FCMs, bank and trust
companies, depositories of an
international affiliate.
§ 1.22 Use of Customer Funds
Restricted
Proposed Changes
As described in the section by section
discussion at II.H, the Commission
recently approved amendments to the
definition of the term ‘‘commodity and/
or options customer.’’ 134 In order to
retain the meaning of the term
‘‘commodity and/or options customer’’
as it was originally defined, the
Commission is replacing the term with
‘‘futures customer.’’ As above, the new
term has the same meaning as the
original definition of the term that it is
replacing, and therefore there are no
costs or benefits associated with this
change.
In addition, the proposed
amendments to 1.22 clarify that the
prohibition against use of a futures
customer’s funds to extend credit to, or
to purchase, margin, or settle the
contracts of another person applies at all
times. Last, the proposed amendments
would clarify that in order to comply
with the prohibition against using one
customer’s funds to ‘‘purchase, margin,
or settle the trades, contracts, or
commodity options of, or to secure or
extend the credit’’ 135 of any other
134 The final rulemaking is available on the
Commission’s Web site, www.cftc.gov.
135 See proposed § 1.22. N.B., the current form of
§ 1.22 also includes a prohibition against using one

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

person, the FCM would be required to
ensure that its residual interest in
futures customer funds exceeds the sum
of all its futures customer margin
deficits.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Benefits
The benefit of the proposal is that it
protects customer funds by requiring
continual customer segregation
balancing thereby avoiding the potential
that an FCM could employ end-of-day
balancing to obscure a shortfall the FCM
experienced in the middle of the day.
Under current regulations it is not
permitted for an FCM to use one
customer’s funds to purchase, margin,
secure or settle positions for another
customer. However, the current
regulations do not specify how FCMs
must comply with this requirement. The
proposed rule would specify that FCMs
must maintain residual interest in
customer segregated accounts that is
larger than the sum of all customer
margin deficits, which would ensure
that the FCM is not using one
customer’s funds to purchase, margin,
secure, or settle positions for another
customer. Furthermore, when combined
with the reporting requirements in
§§ 1.10, 1.32, 22.2, and 30.7, which
require the FCM to report both the sum
of their customer margin deficits as well
as their residual interest in customer
segregated accounts, the proposed
approach would provide the
Commission and the public with
sufficient information to verify that
FCMs are not using one customer’s
funds to purchase, margin, secure or
settle positions for another customer.
Costs
If the sum of an FCM’s customer
margin deficits is greater than the
residual interest an FCM typically
maintains in their customer accounts,
then the FCM would have to increase
the amount of residual interest it
maintains in customer segregated
accounts, which would reduce the range
of investment options the FCM has for
those additional funds and may prompt
the FCM to maintain additional capital
to meet operational needs. On the other
hand, if an FCM typically maintains
residual interest in customer segregated
accounts that is greater than the sum of
their customer margin deficits, then the
proposed rule would not create any
additional costs. In the past, the
Commission has not required FCMs to
report the sum of their customers’
customer’s funds to ‘‘to purchase, margin, or settle
the trades, contracts, or commodity options of, or
to secure or extend the credit of, any person other
than such customer or commodity option
customer.’’

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margin deficits. Therefore, the
Commission does not have adequate
information to determine whether FCMs
typically hold residual interest that is
greater than the sum of their customers’
margin deficits and cannot estimate the
cost of the proposed rule.
Request for Comment
Question 15: The Commission
requests comment regarding whether
FCMs typically maintain residual
interest in their customer segregated
accounts that is greater than the sum of
their customer margin deficits, and data
from which the Commission may
quantify the average difference between
the amount of residual interest an FCM
maintains in customer segregated
accounts and the sum of customer
margin deficit.
Question 16: How much additional
residual interest would FCMs hold in
their customer segregated accounts in
order to comply with the proposed
regulation? What is the opportunity cost
to FCMs associated with increasing the
amount of capital FCMs place in
residual interest, and data that would
allow the Commission to replicate and
verify the calculated estimates provided.
Question 17: The Commission request
information regarding the additional
amount of capital that FCMs would
likely maintain in their customer
segregated accounts, if any, to comply
with the proposed regulation. What is
the average cost of capital for an FCM?
Please provide data and calculations
that would allow the Commission to
replicate and verify the cost of capital
that you estimate?
§ 1.23 Interest of Futures Commission
Merchants in Segregated Funds;
Additions and Withdrawals
Proposed Changes
As described in the section by section
discussion at II.I, the proposed text
changes the term ‘‘customer funds’’ to
‘‘futures customer funds.’’ This is a
conforming change in order to retain the
same meaning once the term
‘‘customer’’ is redefined in § 1.3.136 The
Commission anticipates that there are
no costs or benefits associated with this
change.
The proposed § 1.23 also places new
restrictions regarding an FCM’s
withdrawal of residual interest funds for
proprietary use. Under the proposed
§ 1.23, an FCM cannot withdraw funds
for proprietary use unless they have
136 The Commission recently approved final
amendments to § 1.3 that revised the definition of
the term ‘‘customer’’ to include commodity
customers, options customers, and swap customers.
A copy of the Federal Register release is available
on the Commission’s Web site, www.cftc.gov.

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prepared the daily segregation
calculation from the previous business
day and must adjust for any activity or
events that may have decreased residual
interest since close of business the
previous day. In addition, an FCM is
only permitted to withdrawal more than
25% of its residual interest for
proprietary use within one day if it: (1)
Obtains a signature from the CEO, CFO
or other senior official as described in
§ 1.23(c)(1) confirming approval to make
such a withdrawal; and (2) sends
written notice to the CFTC and DSRO
indicating that the requisite approvals
from the CEO, CFO or other senior
official has been obtained, providing
reasons for the withdrawal, listing the
names and amounts of funds provided
to each recipient, and providing an
affirmation from the signatory
indicating that he or she has knowledge
and reasonable belief that the FCM is
still in compliance with segregation
requirements after the withdrawal.
In addition, if the FCM drops below
its target threshold for residual interest
because of a withdrawal of residual
interest for proprietary use, the next day
it must either replenish residual interest
enough to surpass its target, or if senior
leadership believes the original target is
excessive, the FCM may revise its target
in accordance with its policies and
procedures established in proposed
§ 1.11.
Benefits
The proposed restrictions on
withdrawals of residual interest provide
an additional layer of protection for
customer funds contained in segregated
accounts. An FCM may withdraw
residual interest as long as it always
maintains sufficient FCM funds in the
account to cover any shortfall that exists
in all of its customers’ segregated
accounts. However, as a practical
matter, the segregation requirements
fluctuate constantly with market
movements, and customer surpluses or
deficits also fluctuate depending on the
speed with which customers meet
margin calls. As a consequence, an FCM
is not expected to have a precise, realtime knowledge of the amount of
residual interest it has in a segregated
account. The Commission recognizes
that any precise, real-time, single
calculation would almost immediately
become obsolete as the value of
customers’ accounts and their
obligations to the FCM continue to
fluctuate. Moreover, a sufficient amount
of residual interest to cover deficiencies
in customers’ accounts at one point in
time may be inadequate to cover such
deficiencies an hour later, or even a few
minutes later. Therefore, it is important

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
for an FCM to maintain sufficient
residual interest to cover both current
deficiencies in customer accounts as
well as any additional deficiencies that
could develop over a relatively short
period of time. Restrictions on
withdrawals of residual interest help to
ensure that the FCM does not withdraw
too much residual interest, either
knowingly or unknowingly, and
jeopardize customer funds in the
segregated account.
Prohibiting any withdrawal of
residual interest until the customer
segregation account calculations are
complete for the previous day and
requiring the FCM take into account any
subsequent developments in the market
or the account that could impact the
amount of residual interest before
withdrawing funds protects customer
funds by reducing the likelihood that
lack of current information could cause
the FCM to make a withdrawal from
customer funds that is large enough to
cause the account to fall below its
segregated funds requirement.
In addition, the proposed amendment
would require several steps in order for
an FCM to remove more than 25% of
their residual interest in a single day.
Large, single-day withdrawals of the
FCM’s residual interest in the customer
segregated account could be an
indication of current or impending
capital or liquidity strains at the FCM.
The additional steps ensure that senior
management is knowledgeable of and
accountable for such withdrawals, that
no shortfall in the customer segregated
accounts is created by the withdrawals
and that the CFTC and DSRO are both
alerted and can monitor the FCM and its
segregated accounts closely over
subsequent days and weeks. Additional
monitoring, in turn, would help to
ensure that the integrity and sufficiency
of the FCM’s customer segregated
accounts are carefully protected. In
addition, notifying the CFTC and DSRO
gives both an opportunity to ask
questions about the FCM’s reasonable
reliance on its estimations of the
adequacy of its funds necessary to meet
segregation requirements. Such
questions may give the Commission and
DSRO comfort that the transaction does
not indicate any strain on the FCMs
financial position, or conversely, may
raise additional questions and alert the
CFTC and DSRO to the need for
heightened monitoring of the FCM or
further investigation of its activities.
Also, while the proposed regulations
would reduce the risk that customer
funds could be missing in the event of
an FCM’s bankruptcy, the proposed rule
would establish a second layer of
protection by ensuring that the

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Commission has records regarding the
name and address of parties receiving
funds from the distribution of residual
interest.
In addition, requiring an FCM to
replenish its residual funds the
following day any time a withdrawal
causes it to drop below the FCM’s target
amount helps to ensure that residual
interest is not used by the firm to
address liquidity needs in other parts of
the firm unless those needs are very
short-term in nature (i.e., less than 24
hours).
Costs
These procedural requirements will
create some costs for FCMs. Restricting
an FCMs ability to withdraw residual
interest until daily calculations have
been completed may prevent the FCM
from withdrawing funds quickly in
order to meet certain operational needs,
or to take advantage of specific
investment opportunities. This
restriction may also force the FCM to
hold additional capital in order to
reduce the potential that it would need
funds from its residual interest in order
to meet any operational needs. The
Commission does not have adequate
information to estimate the amount of
additional capital that an FCM might be
likely to hold, or the cost of capital for
those funds. Moreover, calculating the
opportunity cost for an FCM’s potential
missed opportunities is not possible
since, by definition, they depend on the
alternative opportunities available to the
FCM and the Commission does not have
adequate information to determine what
those opportunities might be.
In addition, abiding by the procedures
for withdrawals of residual interest for
proprietary use, whether the
withdrawals are less than or greater than
25% of the FCM’s residual interest,
would create operational costs as these
percentages must be calculated and
requisite permissions will require time
to obtain. The additional cost created by
procedures that are required for
additional withdrawals below 25% of
the FCM’s residual interest will depend
significantly on the procedures the FCM
develops, and the extent to which the
FCM has already implemented similar
procedures. The Commission does not
have adequate information to estimate
these incremental costs. If an FCM
withdraws more than 25% in a given
day they have to get certain signatures
and have to send a notification to the
Commission. It is also likely that the
Commission would follow up with
questions about the withdrawal. The
Commission proposes that obtaining the
necessary signatures, reviewing the
notification sent to the Commission, and

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67917

conducting any follow-up conversations
would require time from an attorney
and office staff personnel. Therefore, the
Commission estimates that the
additional cost to an FCM for complying
with procedures to withdraw 25% or
more of their residual interest in a single
day is likely to be between $850 and
$1,100 each time an FCM needs to make
such withdrawals.137
Request for Comment
Question 18: The Commission invites
comment regarding the amount of
additional capital that FCMs would
likely hold because of restrictions on
their ability to withdraw residual
interest and the cost of capital for those
funds.
Question 19: In addition, the
Commission requests comment
regarding the extent to which FCMs
already have procedures in place that
would satisfy the requirements in
§§ 1.11 and 1.23 regarding withdrawals
of residual interest. For an FCM that do
not have such procedures in place
already, please quantify the additional
cost that the FCM will bear as a
consequence of complying with any
policies and procedures it may develop
and implement in order to satisfy the
requirements of §§ 1.11 and 1.23 with
respect to withdrawals of residual
interest.
§ 1.25

Investment of Customer Funds

Proposed Changes
As described in the section by section
discussion at II.J, § 1.25 permits FCMs
and DCOs to use customer funds to
purchase securities from a counterparty
under an agreement for the resale of the
securities back to the counterparty. This
type of transaction is often referred to as
a ‘‘repo,’’ and in effect, is a
collateralized loan by the FCM to its
counterparty. Currently, § 1.25(b)(3)(v)
establishes a counterparty concentration
limit, prohibiting FCMs and DCOs from
using more than 25% of the total funds
in the customer segregated account to
conduct reverse repos with a single
counterparty. The proposed amendment
would expand the definition of a
counterparty to include additional
entities under common ownership or
control. The proposed amendment
137 This assumes 6–8 hours of a compliance
attorney’s time and 6–8 hours of an office manager’s
time. The average compensation for a compliance
attorney is $85.35/hour [$131,303 per year/(2000
hours per year)*1.3 is $85.35 per hour]; $85.35*6
= $512.08 and $85.35*8 = $682.78. The average
compensation for an office manager is $55.82/hour
[$85,875 per year/(2000 hours per year)*1.3 =
$55.82/hour]; $55.82*6 = $334.91 and $55.82*8 =
$446.55. These figures are taken from the 2011
SIFMA Report on Management and Professional
Earnings in the Securities Industry.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

incorporates the Commission’s
interpretation of the existing rule, and
therefore does not alter its meaning.
Therefore, the Commission does not
anticipate that the proposed amendment
will create any costs or benefits.
The additional proposed changes to
§ 1.25 are conforming amendments
proposed in order to harmonize this
section with other amendments
proposed in this release, and therefore
do not create any additional costs or
benefits.
§ 1.26 Deposit of Instruments
Purchased With Customer Funds

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Proposed Changes
As described in the section by section
discussion at II.K, proposed § 1.26
would change the term ‘‘commodity or
option customers’’ to ‘‘futures
customers.’’ This is a conforming
change in order to retain the same
meaning once the term ‘‘customer’’ is
redefined in § 1.3.
In addition, the other changes
proposed for § 1.26(a–b) require that
FCMs and DCOs obtain a written
acknowledgment letter from
depositories in accordance with the
requirements established in § 1.20. This
change introduces significant additional
specificity regarding the timing and
content of the letter that FCMs and
DCOs must obtain from their
depositories. The specifics of those
requirements, as well as the costs and
benefits of them, are detailed in the
discussion of costs and benefits for
§ 1.20, discussed in the cost benefit
considerations section related to § 1.20.
If, however, an FCM or DCO invests
funds with a money market mutual fund
and those funds are held directly by the
money market mutual fund or its
affiliate, then the FCM or DCO must use
the acknowledgment letter proposed in
Appendix A of § 1.26 rather than the
acknowledgment letters in the
appendices of § 1.20. The content of the
letter in § 1.26 is identical to those in
§ 1.20 except that it includes three
additional provisions related
specifically to funds held by the money
market mutual fund or its affiliate
(‘‘MMMF’’). Specifically, it requires
that: (1) the value of the fund must be
computed and made available to the
FCM or DCO by 9:00 a.m. of the
following business day; (2) that the fund
must be legally obligated to redeem
shares and make payments to its
customers (i.e. the FCM or DCO) by the
following business day; and (3) the
money market mutual fund does not
have any agreements in place that
would prevent the FCM or DCO from
pledging or transferring fund shares.

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Benefits
The benefits are largely the same as
for the acknowledgment letters required
in § 1.20, described above in the cost
benefit section related to § 1.20.
However, requiring FCMs and DCOs to
have Money Market Mutual Funds
(‘‘MMMFs’’) sign a different
acknowledgment letter if customer
funds are held directly with the money
market mutual fund or its affiliate has
some benefits.
First, requiring the MMMF to
compute the value of the fund and make
that available to the FCM or DCO by
9:00 a.m. the following business day
ensures that FCMs will have the
information they need in order to
produce their daily segregation
calculations by 12:00 p.m. the following
business day (i.e., three hours later),
which is an existing requirement for
FCMs.138 This is important not only
because it enables the FCM to comply
with the requirement to produce
segregation calculations by 12:00 p.m.
the following day, but because under
the proposed rule, FCMs would not be
allowed to withdraw residual interest
until the daily segregation calculations
are completed. Second, by requiring the
fund to redeem shares and make
payments to their customers by the
following business day, the proposed
requirement prohibits MMMFs from
entering into any agreement with an
FCM or DCO that gives the MMMF a
contractual right to delay payment, thus
preventing similar risks to what would
occur if FCMs were allowed to place
funds in time-deposit accounts. Last, by
prohibiting the MMMF from imposing
restrictions that would prevent the FCM
or DCO from pledging or transferring
fund shares, the letter would ensure that
FCMs are able to use their shares as
collateral at the DCO and that those
shares could be transferred from one
FCM to another in the event of the first
FCM’s default.
Costs
As discussed above in the cost benefit
considerations section related to § 1.20
the NFA already requires electronic
read-only access to customer accounts,
so the Commission does not anticipate
that providing the same access to the
Commission will create additional costs.
In addition, if an FCM or DCO
currently has an account with a money
market mutual fund that, either directly
or through an affiliate, holds its own
funds, and that fund is either not
compliant with the additional
provisions of the letter in Appendix A
138 See

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§ 1.26 or is unwilling to sign the
proposed acknowledgment letter, the
FCM or DCO would bear some costs
related to identifying a compliant
money market mutual fund, conducting
due diligence, and moving its accounts
to that fund. This would force the FCM
or DCO to identify a new MMMF that
is qualified to accept its customer funds,
creating the same costs that are
described above in the cost benefit
considerations section related to § 1.20.
Request for Comment
Question 20: The Commission
requests comment regarding the
likelihood that money market mutual
funds holding segregated funds from
FCMs or DCOs are not compliant with
the additional terms contained in the
proposed acknowledgment letter. In
addition, what costs would an FCM or
DCO bear when identifying a compliant
money market mutual fund and
transferring their customer funds to that
money market?
Question 21: In addition, the
Commission requests comment
regarding whether the requirements
contained in the acknowledgment letter,
discussed in § 1.20, would impact
money market mutual funds differently
from any other depositories.
§ 1.29 Gains and Losses Resulting
From Investment of Customer Funds
Proposed Changes
As described in the section by section
discussion at II.L, under the
Commission’s existing regulations,
§ 1.29(a) states that FCMs or DCOs
investing customer funds in § 1.25
investments are entitled to the return on
those investments. Proposed § 1.29(b)
provides that FCMs or DCOs investing
customer segregated funds in
instruments described in § 1.25 also
bear sole responsibility for the losses
that result from those investments.
Benefits and Costs of the Proposed
Changes
This change was recommended by
FIA, which stated its belief that the FCM
or DCO’s responsibility for losses in
§ 1.25 investments ‘‘is clear and is
implicit in the Act and the
Commission’s rules.’’ 139 The
Commission believes that market
participants already recognize this and
act accordingly. Therefore the
Commission does not believe that
139 FIA, ‘‘Initial Recommendations for Customer
Funds Protection.’’ Available at: http://www.futures
industry.org/downloads/Initial_Recommendations
_for_Customer_Funds_Protection.pdf.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
proposed § 1.29(b) would create any
additional costs.
§ 1.30 Loans by Futures Commission
Merchants; Treatment of Proceeds

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Proposed Changes
As described in the section by section
discussion at II.M, § 1.30 permits the
FCM to lend its own funds to a
customer on securities and property
pledged by the customer, effectively
performing a collateral transformation
service. The proposed amendment to
§ 1.30 clarifies that, while an FCM may
provide secured loans to a customer, it
may not make loans to a customer on an
unsecured basis or use a customer’s
futures or options positions as security
for a loan from the FCM to that
customer.
Benefits
The proposed prohibition against
FCMs providing unsecured loans to
customers reduces counterparty risk
borne by the FCM position because it
prevents the FCM from accumulating
exposures to customers that have not
margined their positions. In addition,
the proposed rule would prohibit an
FCM from using a customer’s positions
to secure loans made to customers,
which would also reduce the FCM’s
counterparty risk. If an FCM used a
customer’s positions to secure a loan to
that customer, the FCM would be using
the same collateral to secure two
different liabilities: the liability
associated with the open position; and
the liability associated with the
unsecured loan. By prohibiting FCMs
from using a customer’s positions to
secure a loan to that customer, the
proposed rule would prevent the
additional exposure that would
otherwise result from using the same
collateral to secure two different
liabilities, which again, reduces the
FCM’s counterparty risk.
In addition, to the extent that the
proposed change would force customers
to obtain such loans from another
lender, it diversifies the counterparty
risk across multiple entities. That
benefits the FCM that would otherwise
bear more concentrated customer risk,
and likely would be good for the
markets more generally because of the
additional protection that it provides to
any clearinghouse of which the FCM is
a member.
Costs
Regarding costs associated with the
proposed restriction—customers that
need or prefer to use borrowed funds to
meet their initial and maintenance
margin requirements for certain
positions would be forced to obtain

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loans necessary to fund their futures or
options positions from another lender.
That would increase the customer’s
operational costs since they would have
to transfer funds from one institution to
another and would have to administer
both accounts. In addition, it is likely
that lenders will conduct more due
diligence than would be the case if the
FCM were to loan the requisite funds,
which will create additional costs
related to such a loan, both for the
customer and for the party lending the
funds.

of depositories report listing of all the
depositories and custodians where
customers segregated funds are held,
including the amount of customer funds
held by each entity and a break-down of
the different categories of § 1.25
investments held by each entity; and (3)
require that the detailed list of
depositories be submitted to the
Commission electronically by 11:59
p.m. the following business day and that
both Segregation Statements and
Detailed list of depositories be retained
by the FCM in accordance with § 1.31.

Request for Comment

Benefits
Requiring FCMs to submit their daily
calculations to the Commission and
DSRO, together with the proposed
amendments to §§ 1.20 and 1.26 giving
the Commission and DSRO electronic
access to view the balances of all
depository accounts where customer
segregated funds are held, will enable
the Commission and DSRO to better
protect customer funds by more closely
monitoring for any discrepancies
between the assets in segregated
accounts reported by the FCM and their
depositories. The ability of the
Commission and DSRO to check for
discrepancies more regularly, without
notice, is likely to provide an additional
disincentive to fraud. Moreover, it will
enable both the Commission and DSROs
to monitor for any trends that would
indicate operational or financial
problems are developing at the FCM,
which would give the Commission an
opportunity to enhance its supervision
and to intervene, if necessary, to protect
customer segregated funds.
The detailed list of depositories
would provide additional information to
the Commission and DSRO beyond
what would be available to both by
virtue of the electronic read-only access
that has been proposed in §§ 1.20, 1.26,
and 30.7. First, the detailed list of
depositories will provide additional
account detail including the types of
securities and investments that
constitute each account’s assets rather
than existing reports that only include
the total value securities. Second, the
reports will account for any pending
transactions that would not necessarily
be apparent when viewing a depository
account online. Third, FCMs will, in
these reports, provide to the
Commission and DSRO a reconciled
balance, which would not be available
to the Commission or DSRO simply by
viewing an FCM’s depository accounts
online. Each of these additional forms of
information would enable the
Commission and DSRO to provide better
oversight and create additional
accountability for the FCM.

Question 22: The Commission
requests comment regarding how often
FCMs currently make loans to
customers on either a secured or
unsecured basis, and what the processes
and terms typify such loans (including
details regarding the process for
evaluating credit risk, size of such loans,
payment terms, collateral, and any other
details that commenters believe the
Commission should consider).
Question 23: In addition, the
Commission requests information
regarding the additional operational
costs that customers would bear if they
have to obtain a loan from an entity
other than the FCM holding their funds
in a customer segregated account. If
possible, please quantify the additional
costs.
§ 1.32 Reporting of Segregated
Account Computation and Details
Regarding the Holding of Customer
Funds
Proposed Changes
As described in the section by section
discussion at II.N, The proposed
changes would allow an FCM that is not
a dual registrant to follow the same
procedures as dual registrants (FCM/
BDs) when assessing a haircut to
securities purchased with customer
funds if the FCM determines that those
securities have minimal credit risk. This
is the same change as is proposed in
§ 1.17 except that in § 1.17 the proposed
change refers to securities purchased by
an FCM with its own capital, whereas
the proposed change here would apply
to securities purchased with customer
funds. The change proposed here would
create the same costs and benefits as
described above in the cost benefit
considerations section related to § 1.17.
In addition, the proposed changes
would: (1) Require FCMs to report daily
Segregation Statements to the
Commission and their DSRO
electronically by noon the following
business day; (2) require that twice per
month, each FCM submit a detailed list

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Costs
FCMs are already calculating
segregated funds information daily and
reporting the results to the NFA via
WinJammer by noon the following day.
Similarly, the detailed list of
depositories that would be required to
be submitted twice per month is already
required by NFA to be produced and
submitted to NFA via WinJammer.140
Requiring FCMs to submit these reports
to the Commission via the same
platform should not create any
additional costs.
§ 1.52 Self-Regulatory Organization
Adoption and Surveillance of Minimum
Financial Requirements

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Proposed Changes
As described in the section by section
discussion at II.O, the proposed
amendments to 1.52 would revise the
supervisory program that SROs are
required to create and adopt. In
addition, for SROs that choose to
delegate the function to examine FCMs
that are members of two or more SROs
to a DSRO, the amended rules would
require a plan that establishes a Joint
Audit Committee which, in turn, must
propose, approve, and oversee the
implementation of a Joint Audit
Program. The amended rules specify a
number of additional requirements for
the SRO supervisory program as well as
for the Joint Audit Program.
Benefits
Regarding SROs’ supervisory
programs, the proposed amendments
would provide significant additional
protection to FCMs’ counterparties,
investors, and customers by ensuring
that SRO audits of member FCMs are
thorough and effective. The proposed
amendments would help to ensure
thorough audits by requiring that an
SRO’s audit program be designed to
address ‘‘all areas of risk to which
futures commission merchants can
reasonably be foreseen to be subject,’’
that the scope and focus of such audits
would be determined by the risk profile
that the SRO develops for each FCM,
and that the audit itself include both
controls testing as well as substantive
testing. The last requirement, in
particular, would help to ensure that
audits give adequate attention to testing
and review of internal controls, which
are critical to help ensure that each FCM
is not only compliant with capital and
segregation requirements at the time of
the audit, but that they continue to
operate in such a manner after the audit
140 See Segregated Investment Detail Report at:
http://www.nfa.futures.org/NFA-compliance/NFAfutures-commission-merchants/fcm-reporting.pdf.

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is completed by preventing fraud or
operational errors that could jeopardize
the FCM and its customers.141
By requiring that the supervisory
program for the SRO must be compliant
with U.S. Generally Accepted Auditing
Standards and standards prescribed by
the Public Company Accounting
Oversight Board, the proposed rules
would ensure that the SROs’
supervisory programs draw from
established best practices, and that they
address the full range of issues that
would impact the effectiveness of the
SRO’s audits of FCMs. This benefit is
enhanced by the proposed list of
specific issues that each SRO must
address in the standards they develop
for their supervisory program. And by
promoting audits that are thorough, the
proposed rules would, again, promote
protection of the FCM’s counterparties,
investors, and customers.
By requiring that an examinations
expert evaluate the SRO’s supervisory
program at least once every two years,
and that the results of such
examinations include a discussion and
recommendation of any new or best
practices, the proposed rules would
ensure that the supervisory program and
SRO audits continue to build on best
practices, for audits, which further
promotes thorough and effective audits
of FCMs.
The proposed rules for the Joint Audit
Program would require the Joint Audit
Program to: (1) Establish standards
covering all the same issues; (2) require
controls testing as well as substantive
testing; (3) address all areas of risk to
which the registered FCM can
reasonably be foreseen to be subject; (4)
conform to U.S. generally accepted
auditing standards and as well as those
prescribed by the Public Company
Accounting Oversight Board; and (5)
have an examinations expert evaluate
the Joint Audit Program at least once
every two years. Therefore, the
proposed rules would produce identical
benefits related to audits conducted by
a DSRO.
In addition, by requiring that the
DSRO audits include examination of an
FCM’s compliance with rules and
regulations governing minimum net
capital, obligations to segregate
customer funds, financial reporting
requirements, etc., the proposed rule
141 While many auditors and market participants
have noted the importance of controls testing, the
Commission understands that currently, many
audits tend to emphasize substantive testing and
give lesser attention to controls testing. See Public
Roundtable to Discuss Additional Customer
Protections, August 9, 2012. A recording of the
roundtable is available at: http://www.cftc.gov/
PressRoom/Events/opaevent_cftcstaff080912. See
[customer protection roundtable from 8/9].

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would ensure that these critical
elements of the FCM’s operations and
finances are reviewed during each audit.
Each of these elements safeguard
customers. Additionally, by requiring
the Joint Audit Committee to develop
procedures to identify high risk firms
and perform enhanced monitoring of
such firms, the proposed rules would
help to ensure that any risk to customer
funds that begins to materialize (e.g. the
FCM’s residual interest begins to drop)
is identified and corrected quickly, thus
reducing the risk of a loss of customer
funds.
In addition, commenters at the
Commission’s August 9th roundtable on
customer protection noted that when
audits take several months to complete,
the findings are less relevant when they
are delivered to the business than they
would have been if they were
communicated more promptly.142
Therefore, by requiring that the Joint
Audit Program maintain adequate levels
of staff with adequate training and
experience, the proposed requirements
would facilitate timely completion of
audits, which is likely to enhance the
protection of customer funds by
promoting more prompt identification
and correction of weaknesses identified
in such audits. Moreover, if auditors are
not independent of the FCM they are
auditing, their findings may be
compromised by conflicts of interest. By
requiring standards related to
independence together with annual
ethics training, the proposed rule would
help to ensure that the results of any
audit conducted by the DSRO are not
compromised by the influence of any
conflict of interests. Each of these, in
turn, facilitate thorough, effective, and
timely audits, which help protect the
FCM’s customers, counterparties, and
investors by ensuring that the FCM’s
financial reports are accurate, and that
internal controls are reviewed and
tested.
Costs
SROs are already required to establish
and operate supervisory programs for
auditing FCMs. The proposed
amendments require further detail and
documentation with regard to specific
elements of such supervisory programs.
The Commission estimates that the cost
for developing these policies and
procedures would be between $20,700
and $31,000 per SRO.143
142 See Public Roundtable to Discuss Additional
Customer Protections, August 9, 2012. A recording
of the roundtable is available at: http://www.cftc.
gov/PressRoom/Events/opaevent_cftcstaff080912
See [roundtable on Aug 9th].
143 This estimate assumes 160–240 hours of time
from both a compliance attorney and a senior

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The Joint Audit Committee would
have to develop policies and procedures
concerning the application of the Joint
Audit Program in the examination of
FCMs. The standards would have to, at
minimum, conform to the U.S. GAAS
and would also have to address the
items in § 1.52(c)(2)(iii). The
development of such policies and
procedures is likely to require input
from one attorney and one senior
accountant at each SRO, and therefore
the Commission estimates that such
involvement will cost each SRO
between $2,400 and $6,000.144 In
addition, the work required to further
develop Joint Audit Program is likely to
be supported by full time staff at the
DSRO. The Commission estimates that
such support will cost the DSRO
between $18,000 and $26,400.145 In
addition the Joint Audit Program would
be required to have an examinations
expert review the policies and
procedures they develop.
Ongoing costs to the SRO and Joint
Audit Program would include fees
charged by the examinations expert for
a review every other year, the
incremental cost of more extensive
controls testing when auditing each
FCM, and the incremental cost resulting
from standards that the SRO develops to
comply with the list of standards that
accountant. The average compensation for a
compliance attorney is $85.35/hour [$131,303 per
year/(2000 hours per year)*1.3 is $85.35 per hour];
$85.35 *160 = $13,655.51 and $85.35 *240 =
$20,483.27. The average compensation for a senior
accountant is $44.18/hour [$67,971.00 per year/
(2000 hours per year)*1.3 is $44.18 per hour];
$44.18*160 = $7,068.98 and $44.18*240 =
$10,603.48. These figures are taken from the 2011
SIFMA Report on Management and Professional
Earnings in the Securities Industry.
144 This estimate assumes 20–50 hours of time
from both a compliance attorney and an
intermediate accountant. The average compensation
for a compliance attorney is $85.35/hour [$131,303
per year/(2000 hours per year)*1.3 is $85.35 per
hour]; $85.35*20 = $1,706.94 and $85.35*50 =
$4,267.35. The average compensation for an
intermediate accountant is $34.11/hour [$52,484.00
per year/(2000 hours per year)*1.3 is $34.11 per
hour]; $34.11*20 = $682.29 and $34.11*50 =
$1,705.73. These figures are taken from the 2011
SIFMA Report on Management and Professional
Earnings in the Securities Industry.
145 This estimate assumes 320–400 hours from an
office services supervisor and 40–80 hours from
both a compliance attorney and a senior accountant.
The average compensation for an office services
supervisor is $40.15/hour [$61,776.00 per year/
(2000 hours per year)*1.3 is $40.15 per hour];
$40.15*320 = $12,849.41 and $40.15*400 =
$16,061.76. The average compensation for a
compliance attorney is $85.35/hour [$131,303 per
year/(2000 hours per year)*1.3 is $85.35 per hour];
$85.35*40 = $3,413.88 and $85.35*80 = $6,827.76.
The average compensation for a senior accountant
is $44.18/hour [$67,971.00 per year/(2000 hours per
year)*1.3 is $44.18 per hour]; $44.18*40 =
$1,767.25 and $44.18*80 = $3,534.49. These figures
are taken from the 2011 SIFMA Report on
Management and Professional Earnings in the
Securities Industry.

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must be addressed in the supervisory
program.146 The Commission does not
have adequate information to estimate
the ongoing costs for biennial reviews
by an examinations expert, or the
incremental costs of additional controls
testing or ongoing compliance with
standards that the FCMs develop
pursuant to § 1.52(c)(2)(iii).
Request for Comment
Question 24: The Commission
requests comment regarding the costs
associated with increased controls
testing. To what extent do SROs
currently conduct controls testing when
auditing FCMs? What additional testing
would likely be involved in order to
comply with the proposed regulations?
Question 25: In addition, the
Commission requests comment
regarding the costs for an expert
examiner to conduct a review such as
the one contemplated in the proposed
rules.
Question 26: Also, regarding costs
associated with the Joint Audit
Committee and Joint Audit Program,
which costs are likely to be borne by the
SROs and which are likely to be borne
by the DSROs?
§ 1.55 Public Disclosures by Futures
Commission Merchants
Proposed Changes
As described in the section by section
discussion at II.P, the proposed rules
would add new provisions to the
disclosure document that FCMs are
required to provide to prospective
customers, detailed in § 1.55(b). The
new provisions would require the
disclosure document to contain a
statement that: (1) Customer funds are
not protected by insurance in the event
of the bankruptcy or insolvency of the
FCM, or if customer funds are
misappropriated in the event of fraud;
(2) customer funds are not protected by
SIPC, even if the FCM is a BD registered
with the SEC; (3) customer funds are not
insured by a DCO in the event of the
bankruptcy or insolvency of the FCM
holding the customer funds; (4) each
customer’s funds are not held in an
individual segregated account by an
FCM, but rather are commingled in one
or more accounts; (5) FCMs may invest
funds deposited by customers in
investments listed in § 1.25; and (6)
funds deposited by customers may be
deposited with affiliated entities of the
FCM, including affiliated banks and
brokers.
In addition, the proposed rule would
require each FCM to provide a Firm
Specific Disclosure Document that
146 See

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would address firm specific information
regarding its business, operations, risk
profile, and affiliates that would be
material to a customer’s decision to
entrust funds to and do business with
the FCM.
As stated above, the Firm Specific
Disclosure Document would be made
available on the FCM’s Web site and
would provide material information
about: (1) General firm contact
information; (2) the names, business
contacts, and backgrounds for the FCM’s
senior management and members of the
FCM’s board of directors; (3) a
discussion of the significant types of
business activities and product lines
that the FCM engages in and the
approximate percentage of the FCM’s
assets and capital devoted to each line
of business; (4) the FCM’s business on
behalf of its customers, including types
of accounts, markets traded,
international businesses, and
clearinghouses and carrying brokers
used, and the futures commission
merchant’s policies and procedures
concerning the choice of bank
depositories, custodians, and other
counterparties; (5) a discussion of the
material risks of entrusting funds to the
FCM and an explanation of how such
risks may be material to its
customers; 147 (6) the name and Web site
address of the FCM’s DSRO and the
location of annual audited financial
statements; (7) a discussion of any
material administrative, civil, criminal,
or enforcement actions pending or any
enforcement actions taken in the last
three years (8) a basic overview of
customer fund segregation, FCM
collateral management and investments,
and of FCMs and joint FCM/BDs; (9)
information regarding how customers
may file complaints about the FCM with
the Commission or appropriate DSRO;
(10) certain financial data from the most
recent month-end when the disclosure
document is prepared; and (11) a
summary of the FCMs current risk
practices, controls and procedures.
FCMs would be required to update
the Firm Specific Disclosure Document
at least annually.
As described in the section by section
discussion at II.P, FCMs would also be
147 The material risks addressed must include,
without limitation, ‘‘the nature of investments made
by the futures commission merchant (including
credit quality, weighted average maturity, and
weighted average coupon); the futures commission
merchant’s creditworthiness, leverage, capital,
liquidity, principal liabilities, balance sheet
leverage and other lines of business; risks to the
futures commission merchant created by its
affiliates and their activities, including investment
of customer funds in an affiliated entity; and any
significant liabilities, contingent or otherwise, and
material commitments.’’

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required to disclose on their Web sites
their daily Segregation Schedule, daily
Secured Amount Schedule, and daily
Cleared Swaps Segregation Schedule.
Each FCM would be required to
maintain 12 months of the segregation
and secured schedules on its Web site.
Each FCM would also be required to
disclose on its Web site as well as
summary schedules of its adjusted net
capital, net capital, and excess net
capital for the 12 most recent monthend dates as well as the Statement of
Financial Condition, Segregation
Schedule, Secured Amount Schedule,
Cleared Swaps Segregation Schedule,
and all footnotes related to the above
statements and schedules from its most
current year end annual report that is
certified by an independent public
accountant.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Benefits
As explained above in the section by
section discussion at II.P, current
regulations require FCMs to provide a
risk disclosure to potential customers
before accepting customer funds. That
risk disclosure statement is primarily
intended to provide a customer with
disclosure of the market risks of
engaging in futures trading. The
proposed additions to that disclosure
would help to ensure that customers are
aware of certain non-firm-specific risks
that have been relevant in recent FCM
bankruptcies and that could be relevant
in the event of future FCM bankruptcies
or insolvencies.
The Firm Specific Disclosure
Document that would be required by the
proposed rules would address firmspecific risk, which would give
potential customers additional
information that they could use when
conducting due diligence and selecting
an FCM. By requiring that the disclosure
address several specific topics, the
proposed rule would ensure that certain
topics that are relevant are addressed,
even if potential customers might not
otherwise think to ask about them when
selecting or conducting due diligence on
potential FCMs.
Specifically, by requiring the
disclosure to provide information about
the business activities and product lines
the FCM engages in, and the percentage
of the FCM’s assets and capital that are
used in each type of activity, the
proposed rules would assist customers
in acquiring information that may assist
them in determining the extent to which
the FCM’s business is focused on
providing the types of services that the
customer needs, and the extent to which
other business interests could impact
either the focus or stability of the FCM.

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By requiring that FCMs provide the
policies and procedures by which it
selects depositories, the proposed rules
would assist potential and existing
customers in evaluating the sufficiency
of due diligence conducted by the FCM
when selecting such depositories. This
additional measure of transparency
would incent FCMs to be rigorous in
conducting such due diligence because
potential or existing customers that are
not satisfied with the FCM’s policies
and procedures in this respect could
take their business elsewhere.
Requiring FCMs to discuss their
business on behalf of customers, the
proposed rules would ensure that
customers and potential customers are
able to make a more thorough
assessment of risks that the FCM or
customer funds held by the FCM might
bear due to the markets or businesses in
which the FCM is active, the
clearinghouses and carrying brokers it
uses, or the depositories that hold funds
on behalf of the FCM. Such an
assessment could impact customers’
decisions as they select the FCM(s) with
which they will conduct business.
Moreover, additional transparency
would promote market discipline,
which would provide additional
incentive for FCMs to manage such risks
diligently.
By requiring FCMs to disclose
material risks together with an
explanation of how such risks may be
material to its customers, the proposed
rules would ensure that the FCM is
responsible to identify and
communicate such risks, which helps to
ensure that potential and existing
customers would be aware of those risks
when placing or keeping funds on
deposit with the FCM. In the absence of
such a requirement, potential or existing
customers may not know the FCM’s
business as well as the FCM does, and
therefore may not ask about certain risks
that are material to customers, may not
have access to adequate information to
determine the magnitude of such risks,
or may not understand how certain risks
could impact the FCM’s customers.148
The proposed amendment would make
the FCM responsible both to identify
148 In the Public Roundtable to Discuss
Additional Customer Protections on August 9, 2012,
participants suggested that FCMs may not provide
all customers and potential customers with
equivalent access to firm-specific data. See http://
www.cftc.gov/PressRoom/Events/
opaevent_cftcstaff080912.
As a result, larger customers may be able to
conduct more thorough due diligence when
selecting an FCM. The proposed requirements
would help ensure that all customers have access
to FCM-specific data that is helpful when
evaluating the risks that would be relevant to
customer funds entrusted to an FCM.

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and provide information regarding all
material risks and to provide
explanations that would help educate
customers about how such risks could
affect them.
Requiring FCMs to provide
information regarding how they may file
a complaint about the FCM with the
Commission or the firm’s DSRO would
help to ensure that if customers perceive
problems at an FCM, those concerns are
communicated to the proper regulatory
bodies, giving the Commission and
DSRO an opportunity to investigate
further, if appropriate. As a
consequence, the required information
would promote more effective oversight
by the Commission and DSRO.
By requiring that FCMs provide an
overview of customer fund segregation
and FCM collateral management and
investment, the proposed rules would
promote the protection of customer
funds by enhancing market discipline
through customer education. The
proposed rules would help customers
understand how statutory and
regulatory requirements are designed to
provide protections for their funds, and
what steps FCMs must take in order to
comply with such regulations. Educated
customers, in turn, provide an
additional layer of accountability for the
FCM in complying with such
requirements. Moreover, customers will
be better able to understand public
disclosures regarding disciplinary
actions against FCMs, updates regarding
material risks to customer funds,
financial disclosures made by the FCM,
and to make informed decisions in
response.
In particular, the disclosures
proposed in § 1.55(k)(10) could assist
customers in evaluating fellow customer
risk that they would bear at each FCM
with which they consider doing
business. By requiring FCMs to disclose
specific financial data as of the most
recent month-end when the disclosure
document is produced, the proposed
requirements would further ensure that
all customers have access to data that
would be helpful when considering
potential risks associated with
entrusting funds to the FCM.
Requiring FCMs to disclose the dollar
value of their proprietary trading margin
requirements as a percentage of margin
required for futures customers, Cleared
Swap Customers, and 30.7 Customers
would help customers understand the
magnitude of risk created by the FCM’s
proprietary positions relative to the
magnitude of risk created by customers’
positions. This information could
prompt customers to ask additional
questions about the relationship
between the risks created by the firm’s

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
proprietary trading and trading on
behalf of customers. It could also
prompt questions about how the firm’s
operations related to proprietary trading
may impact their operations related to
customer accounts.
By requiring FCMs to disclose the
number of customers that constitute
50% of the FCMs total funds held for
futures customers, Cleared Swaps
Customers, and 30.7 Customers,
customers would have additional
insight into the potential exposure that
the FCM could have due to a default by
one of its largest customers.
The aggregate notional value of nonhedged, principal over-the-counter
transactions into which the FCM has
entered, when calculated and reported
for each class of swaps, would give
customers some sense of the potential
exposure the FCM has due to potential
changes in the value of its proprietary
portfolio.
The aggregate amount of financing
FCMs provide for customer transactions
involving illiquid financial products
would give customers additional insight
into the potential challenges FCMs
would face if a fellow customer
defaulted and the FCM had to liquidate
such products in order to mitigate the
losses caused by the customer’s default.
Requiring FCMs to disclose the
amount, source, and purpose of any
unsecured and uncommitted short term
funding the FCM has access to would
help potential and existing customers
gain insight into the FCM’s capacity to
meet unexpected liquidity needs that
might occur due to a fellow customer’s
default.
Requiring FCMs to disclose the
percentage of customer debts the FCM
experienced during the past 12-month
period, as compared to the balance of
funds held for futures customers,
Cleared Swaps Customers, and 30.7
Customers would give customers a
sense for how effective the firm’s risk
management program is, as well as a
sense for the quality of the customer
pool that the FCM has accepted.
Requiring FCMs to provide a
summary of their current risk
management practices, controls and
procedures would give customers
insight into the procedures that FCMs
use to manage the risks associated with
fellow customers, which would be
valuable to customers when evaluating
potential fellow customer risk at various
FCMs.
By requiring each FCM to adopt
policies and procedures reasonably
designed to ensure that its advertising
and solicitation activities are not
misleading to its FCM customers, the
proposed rules would strengthen

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accountability for communication
related to an FCM’s sales and
solicitation activities. Moreover, the
Commission and DSROs would be better
equipped to monitor FCMs’ internal
controls related to sales and solicitation,
and compliance with those controls, if
FCMs have established policies and
procedures. In this way, the proposed
rules would promote consistently
reliable communication associated with
each FCM’s sales and solicitation
efforts.
By requiring FCMs to update the
disclosure proposed in rule 1.55(i)
annually as well as any time there is a
‘‘material change to its business
operation, financial condition and other
factors material to the customer’s
decision to entrust the customer’s funds
and otherwise do business with the
futures commission merchant,’’ and
requiring the FCM to provide each
updated disclosure to its customers, the
rule would make FCMs responsible to
communicate with customers whenever
such events occur. This requirement
would help to ensure that the FCM’s
financial condition, business operations,
or other important factors do not change
in material ways without customers
being aware of such changes, and would
likely prompt some customers to
conduct additional due diligence in
such situations in order to determine
whether their funds are at risk, which
would provide additional accountability
for FCMs.
By requiring FCMs to provide their
daily Segregation Schedules, daily
Secured Amount Schedules, and daily
Cleared Swaps Segregation Schedules,
as well as additional month end and
annual financial data, the proposed
rules would facilitate transparency. All
of the information that firms would be
required to post on their Web site is
information that would be public based
on the requirements of this rule even if
it were not posted on each FCM’s Web
site. However, if the schedules
mentioned above were not posted on
each FCM’s Web site, market
participants would have to submit a
request to the Commission in order to
access that information. Requiring each
FCM to post the above schedules and
data on its Web site would help to
ensure that market participants are
aware that it is available, and would
also improve the speed and efficiency of
obtaining it.
Similarly, by requiring FCMs to
provide a link to the Web site of the
NFA’s Basic System facilitate
transparency by promoting awareness of
the additional information that is public
regarding each FCM’s investment of
customer funds and by minimizing

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search costs for obtaining that
information.
Costs
FCMs would have to create the Firm
Specific Disclosure Document which
would likely require time from
compliance, legal, accounting, and
administrative personnel. The
Commission estimates that the cost for
producing the content of the initial
disclosure would be between $6,000
and $22,200.149 In addition, each FCM
would have to update the disclosure
annually as well as any time there is a
material change to the business that
could affect the customer’s willingness
to do business with the FCM. Producing
the content of each update is likely to
be less costly than the initial disclosure,
since some parts of the disclosure will
likely remain the same from one version
to the next. The Commission estimates
that such updates would cost between
$6,000 and $12,000.150
Posting the Firm Specific Disclosure
Document and the schedules and data
that would be required by § 1.55(o)
would require firms to update their Web
site on a daily, monthly, and annual
basis with the information that would
be required under § 1.55(o). The
Commission estimates that these
149 This assumes 40–200 hours from a compliance
attorney, 10–50 hours from a senior accountant, 40–
60 hours from an office services supervisor, and 5
hours from the CCO. The average compensation for
a compliance attorney is $85.35/hour [$131,303 per
year/(2000 hours per year)*1.3 is $85.35 per hour];
$85.35 *40 = $3,143.88 and $$85.35 *200 =
$17,069.39. The average compensation for a senior
accountant is $44.18/hour [$67,971.00 per year/
(2000 hours per year)*1.3 is $44.18 per hour];
$44.18*10 = $441.81 and $44.18*50 = $2,209.06.
The average compensation for an office services
supervisor is $40.15/hour [$61,776.00 per year/
(2000 hours per year)*1.3 is $40.15 per hour];
$40.15*40 = $1,606.18 and $40.15*60 = $2,409.26.
The average compensation for a chief compliance
officer is $110.97/hour [ $170,727 per year/(2000
hours per year)*1.3 = $110.97/hour]; $110.97*5 =
$554.86. These figures are taken from the 2011
SIFMA Report on Management and Professional
Earnings in the Securities Industry.
150 This estimate assumes 40–80 hours from a
compliance attorney, 20–40 hours from an
intermediate accountant, and 30–60 hours from an
office services supervisor. The average
compensation for a compliance attorney is $85.35/
hour [$131,303 per year/(2000 hours per year)*1.3
is $85.35 per hour]; $85.35*40 = $3,413.88 and
$85.35*80 = $6,827.768. The average compensation
for an intermediate accountant is $34.11/hour
[$52,484.00 per year/(2000 hours per year)*1.3 is
$34.11 per hour]; $34.11*40 = $1364.58 and
$34.11*80 = $2729.17. The average compensation
for an office services supervisor is $40.15/hour
[$61,776.00 per year/(2000 hours per year)*1.3 is
$40.15 per hour]; $40.15*20 = $803.09 and $40.15
*60 = $2,409.26. These figures are taken from the
2011 SIFMA Report on Management and
Professional Earnings in the Securities Industry.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

updates would cost between $2,300 and
$7,000 per year.151
Request for Comment
Question 27: What modifications to
the requirements of § 1.55(k)(10) should
the Commission consider in order to
ensure that the data provided from
FCMs’ most recent month-end is
valuable to customers evaluating
potential fellow customer risk?
• In particular, Is there additional
information FCMs could provide related
to the value of the FCM’s proprietary
margin requirements and customers’
margin requirements that would assist
current and potential customers when
conducting due diligence on an FCM?
• Is there additional information
FCMs could provide that would give
customers a more complete picture of its
ability to meet unexpected liquidity
needs that could occur due to the
default of one of its customers?
Question 28: Would the data from an
FCM’s most recent month-end be more
valuable to customers if it were coupled
together with similar data or the same
data from other points in time? If so,
what points in time should the
Commission consider?
§ 22.2 Futures Commission Merchants:
Treatment of Cleared Swaps and
Associated Cleared Swap Customer
Collateral

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Proposed Changes
As described in the section by section
discussion at II.Q, the proposed
amendments to § 22.2 would
incorporate changes with respect to
protection of funds for customers
trading cleared swaps that are identical
to the changes proposed for protection
of futures customer funds. Those
changes include: (1) Incorporating the
same change to haircutting procedures
as was proposed above in § 1.17 and
§ 1.32 but for swaps; (2) requiring the
FCM to send daily Segregation
Calculations for cleared swaps to the
Commission and DSRO; and (3)
requiring that segregated investment
detail report that FCMs produce twice
per month, listing assets on deposit at
each depository, to be sent to CFTC and
DSRO electronically by 11:59 p.m. the
following business day. Records of both
reports would be required to be
maintained in accordance with § 1.31.
In addition, the proposed rule would
specify that FCMs must maintain
residual interest in customer segregated
151 This

assumes 10–30 minutes of time per day
from a programmer. The average compensation for
a programmer is $53.64/hour [$82,518 per year/
(2000 hours per year)*1.3 = $53.64/hour];
$53.64*43 = $2,145.47 and $53.64*130 is $6,972.77.

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accounts that is larger than the sum of
all customer margin deficits. This
proposed requirement is substantially
identical to the proposed requirement in
§§ 1.22 and 30.7.
Benefits
As discussed above with reference to
§ 1.32, requiring FCMs to submit their
daily segregation reports to the
Commission and DSRO will enhance
protection of customer funds by giving
both of them additional information
that, together with permission to view
depository accounts online at any time,
would enable both the Commission and
DSRO to monitor those accounts more
closely for any discrepancies that may
result from operational errors or fraud.
Moreover, requiring FCMs to submit
their detailed list of depositories to the
Commission and DSRO twice per month
would give both organizations
additional information that could help
them perform spot checks to ensure that
the FCM is valuing and haircutting
securities correctly and, more generally,
to verify that the value of each account
that is computed by the FCM is
accurate.
As described in the discussion of cost
and benefit considerations related to
§ 1.22, by requiring that FCMs maintain
residual interest in their cleared swap
customer segregated accounts, the
proposed rule would ensure that the
FCM is not using one customer’s funds
to purchase, margin, secure, or settle
positions for another customer and
when combined with the reporting
requirements in § 22.2 would provide
the Commission and the public with
sufficient information to verify that
FCMs are not using one customer’s
funds to purchase, margin, secure or
settle positions for another customer.
Costs
With respect to costs, as described
above, changes to the reporting
requirements codify requirements that
are already established by the DSROs.
Therefore, the additional requirements
will not introduce new costs for market
participants. On the other hand,
reducing the haircut increases the
likelihood that adverse developments
affecting the FCM’s § 1.25 investments
could cause financial strain for the
FCM, or could cause losses that the
FCM would not be able to cover, either
of which could increase risk to customer
funds. However, as described above in
the cost benefit considerations section
related to § 1.17, the Commission
proposes that FCMs that are dual
registrants will be able to use the SEC’s
haircutting procedures, and that FCMs
that are not dual registrants do not

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typically invest in securities that would
be subject to reduced haircuts under the
SEC’s proposed rules.
By requiring FCMs to maintain
residual interest in the cleared swap
customer segregated accounts that is
greater than the sum of their customers’
margin deficits, the proposed rule
would create costs and benefits that are
substantially identical to those
described in the cost and benefit
considerations related to § 1.22. As
discussed in that section, the
Commission does not have information
to determine whether FCMs typically
maintain residual interest in their
cleared swap customer segregated
accounts that is greater than or less than
the sum of their customers’ margin
deficits, and requests information
sufficient to make such a determination,
and to quantify the associated costs, if
any.
Request for Comment
Question 29: The Commission
requests comment regarding whether
FCMs typically maintain residual
interest in their customer segregated
accounts that is greater than the sum of
their customer margin deficits, and data
from which the Commission may
quantify the average difference between
the amount of residual interest an FCM
maintains in customer segregated
accounts and the sum of customer
margin deficit.
Question 30: How much additional
residual interest would FCMs hold in
their customer segregated accounts in
order to comply with the proposed
regulation? What is the opportunity cost
to FCMs associated with increasing the
amount of capital FCMs place in
residual interest, and data that would
allow the Commission to replicate and
verify the calculated estimates provided.
Question 31: The Commission request
information regarding the additional
amount of capital that FCMs would
likely maintain in their customer
segregated accounts, if any, to comply
with the proposed regulation. What is
the average cost of capital for an FCM?
Please provide data and calculations
that would allow the Commission to
replicate and verify the cost of capital
that you estimate?
§ 22.17 Policies and Procedures
Governing Disbursements of Cleared
Swaps Customer Collateral From
Cleared Swap Customer Accounts
Proposed Changes
As described in the section by section
discussion at in II.Q, proposed § 22.17
would impose restrictions on an FCM’s
withdrawal of its residual interest, and

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
requires that if a withdrawal of residual
interest for proprietary use causes the
FCM to fall below its targeted residual
interest that the funds be replenished
the following business day or the
residual interest target be lowered in
accordance with its policies and
procedures established under § 1.11.
Benefits and Costs of the Proposed
Changes
The costs and benefits are similar to
those created by §§ 1.23 and 1.11 but
apply to customer funds in Cleared
Swaps Customer Accounts rather than
customer segregated accounts, and
therefore are in addition to those
specified in §§ 1.23 and 1.11.
§ 30.1

Definitions

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Proposed Changes
Proposed § 30.1 establishes
definitions for ‘‘30.7 Customer,’’ ‘‘30.7
Account,’’ and ‘‘30.7 Customer Funds.’’
The first is defined as any foreign
futures or foreign option customer,
together with any foreign-domiciled
person who trades in foreign futures or
foreign options trough an FCM. ‘‘30.7
Account’’ and ‘‘30.7 Customer Funds’’
are then defined accordingly. These
definitions would replace the terms
‘‘foreign futures or foreign options
customer,’’ ‘‘foreign futures or foreign
options customer account,’’ and
‘‘foreign futures or foreign options
customer funds,’’ respectively. The
existing term ‘‘foreign futures or foreign
options customer’’ only includes U.S.domiciled customers that deposit funds
with an FCM for use in trading foreign
futures or foreign options. The proposed
definitions, on the other hand, would
include both U.S. and foreign customers
that deposit funds with an FCM for use
in trading foreign futures or foreign
options.
Benefits and Costs of the Proposed
Changes
These definitions play a ‘gatekeeping’
function with respect to other rules by
determining what customers are
included as ‘‘30.7 Customers.’’
However, the costs and benefits of these
changes are attributable to the
substantive requirements related to the
definitions, and therefore are discussed
in the cost benefit considerations related
to § 30.7.
§ 30.7 Treatment of Foreign Futures or
Foreign Options Secured Amount
Proposed Changes
As described in the section by section
discussion at II.R, the proposed
amendments would: (1) Incorporate the
funds of foreign-domiciled investors

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deposited with an FCM for investment
in foreign futures and foreign options
within the protections provided in 30.7;
(2) eliminate the Alternative Method
and require the Net Equity Liquidation
Method for calculating 30.7 customer
segregation requirements; (3) add
specificity to the written
acknowledgments that FCMs and DCOs
must obtain from their depositories by
providing required templates; 152 (4) add
restrictions on withdrawing from
residual interest; 153 (5) require that 30.7
Customer Funds deposited in a bank
must be available for immediate
withdrawal at the request of the FCM;
(6) clarify that the FCM is responsible
for any losses related to investing 30.7
Customer Funds in investments that
comply with § 1.25; (7) add a
prohibition against making unsecured
loans to customers or using the funds in
the customer’s trading account as
security for the loan; (8) require daily
segregation reports and detailed list of
depositories be submitted to the
Commission and DSRO, and that
targeted residual interest be included in
both of those reports; (9) allow FCMs
that are not dual registrants to use the
broker-dealer (‘‘BD’’) procedure for
assigning a smaller haircut to
instruments with low default risk; (10)
establish a limit on the amount of funds
in a 30.7 Account that can be held
outside the United States; 154 and (11)
require FCMs to maintain residual
interest in 30.7 Accounts that is larger
than the sum of all 30.7 Customer
152 The additional specificity incorporates the
same requirements for acknowledgment and
agreement that are contained in the templates in the
appendices of §§ 1.20 and 1.26.
153 The same requirements as are proposed for
futures customers’ funds and cleared swaps
customers’ funds, including a requirement for the
FCM to abide by its policies and procedures
required in § 1.11.
154 As a result of the proposed changes, the rules
in § 30.7 for the protection of 30.7 Customer Funds
would be substantially the same as the rules for the
protection of segregated customer funds under 4(d)
and §§ 1.11–1.32, and the rules for the protection
of cleared swaps customer funds in § 22. However,
there are a few proposed changes to § 30.7 that are
dissimilar to current or proposed regulations
protecting futures customer funds and cleared swap
customer funds. They are: (1) the definition of the
minimum amount that must be deposited in a 30.7
Account for each 30.7 Customer is different than in
the corresponding requirements in 1.20 and 22.2.
The difference is due to the fact that 30.7
Customers’ funds may be deposited overseas under
a different regulatory regime and the proposed rule
would require an FCM to comply with the highest
requirement that is relevant to those funds, whether
it is the U.S. or the foreign regime; (2) the list of
acceptable depositories for 30.7 Funds includes
banks or trusts outside of the U.S. with more than
$1 billion in regulatory capital, and various other
participants of foreign boards of trade and their
depositories; and (3) 30.7 limits the amount of
funds from a 30.7 Account that can be held outside
the U.S.

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margin deficits. This proposed
requirement is substantially identical to
the proposed requirement in §§ 1.22 and
22.2.
A. Compared to Customer Protections
Under §§ 1.20–1.32 and § 22
The result of the proposed changes is
that the regulatory requirements
established in § 30.7 for the protection
of 30.7 Customer Funds would be
substantially the same as those
established for segregated customer
funds under 4(d) and §§ 1.11–1.32, and
for cleared swaps customer funds in
§ 22. However, the 30.7 regime would
have distinct requirements with respect
to: (1) the definition of the minimum
amount that must be deposited in a 30.7
Account for each 30.7 Customer is
different than in the corresponding
requirements in §§ 1.12 and 22.2.155 The
difference is due to the fact that 30.7
Customers’ funds may be deposited
overseas under a different regulatory
regime. The rule requires that FCMs
abide by the highest requirement that is
relevant to those funds, whether it is the
United States or the foreign regime; (2)
the list of acceptable depositories for
30.7 Funds includes banks or trusts
outside of the United States with more
than $1 billion in regulatory capital, and
various other participants of foreign
boards of trade and their depositories;
and (3) 30.7 limits the amount of funds
from a 30.7 Account that can be held
outside the United States. Of these three
differences, the third is the only one
created by the proposed rule, and
therefore is the only one incorporated in
the cost benefit considerations
discussion.
Benefits and Costs of the Proposed
Changes
The proposed changes would
establish regulations for the protection
of customer funds deposited for trading
in foreign futures and options that, with
limited exceptions, is substantively
identical to the protections that exist for
futures customer funds and cleared
swaps customer funds. Therefore, many
of the costs and benefits of the changes
that are proposed are identical to those
described above in the cost benefit
considerations related to §§ 1.11–1.32
and § 22.
1. Incorporating funds of foreigndomiciled investors deposited with an
FCM for investment in foreign futures
and foreign options within the
protections provided in 30.7
155 See

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

Benefits
Currently, when an FCM receives
funds from foreign customers for use in
trading foreign futures and foreign
options, the FCM may choose, but is not
required, to keep foreign customer funds
in a segregated account. If the funds are
not kept in a segregated account, they
are not subject to the same level of
oversight and protection as other
customer funds. For example, those
funds are not incorporated in the daily
or bi-monthly calculations that are
submitted to the Commission and
DSRO, and the FCM is permitted to use
the assets of one foreign customer to
cover the obligations of another foreign
customer, may allow a net deficiency to
exist in the funds of foreign customers
held for use in foreign futures or foreign
options, and is allowed to commingle
such funds with the FCM’s proprietary
funds and use them as part of its
business capital.
The benefit or requiring customer
funds to be kept in segregated accounts
is that those funds would receive the
same protections as funds deposited by
U.S.-domiciled investors. This enhances
the safety of funds deposited by both
U.S. and foreign investors by ensuring
that the FCM maintains sufficient funds
in segregated accounts to satisfy its
obligations regarding all customer funds
that have been deposited at the FCM.
The proposed change would extend
equivalent oversight and protection to
the money, securities and property
received by an FCM for or on behalf of
a foreign-domiciled customer for foreign
futures or foreign options trading.
Specifically, FCMs would be required to
hold the funds of foreign-domiciled
customers in 30.7 secured accounts, to
include such funds in daily and bimonthly calculations of 30.7
requirements and funds set aside for
30.7 customers, and to abide by other
policies and procedures regarding
handling of customer funds. This is a
benefit because FCMs would be
required to hold sufficient funds in 30.7
accounts at all times to cover the
obligations they have to their foreigndomiciled customers as well as their
U.S.-domiciled customers. Various
regulations designed to ensure that this
requirement is met at all times would
also apply, including the § 30.7(g)
restrictions on an FCM’s withdrawal of
its residual interest which is
commingled with customer 30.7 funds,
and policies and procedures developed
by the FCM pursuant to § 1.11 that are
designed to ensure safe handling of such
funds.
Application of the additional
protections designed for customer funds

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will help to ensure that in the event an
FCM has insufficient regulatory capital,
all 30.7 Customer Funds are available to
be ported to another FCM. This benefit
is relevant both to foreign-domiciled
customers and to U.S.-domiciled
customers holding money at an FCM
where foreign-domiciled customers also
hold funds because, as described above,
in the event of a bankruptcy both groups
of customers are entitled to equivalent
protections regardless of whether their
funds were held apart in separate
accounts. Consequently, under the
current rules, if an FCM keeps foreigndomiciled customer funds out of 30.7
accounts and then defaults, there may
not be sufficient funds to cover the
obligations of the FCM to all of their
U.S.-domiciled as well as foreigndomiciled customers. If this occurs, all
customers would receive a pro-rata
share of the funds that were kept in 30.7
accounts, regardless of which
customers’ funds were kept in the 30.7
account. U.S.-domiciled customers
would possibly suffer a pro rata loss of
their funds in the event of the FCM’s
bankruptcy because an FCM may not
have included foreign-domiciled
customer funds in 30.7 accounts. The
proposed rule would prevent this
situation from occurring, thus providing
increased protection not only to the
foreign-domiciled customers that
deposited funds, but to the U.S.domiciled customers as well.
According to FIA, ‘‘FCMs have
generally adopted policies and
procedures designed to provide
protections to all customers trading on
foreign boards of trade that are
comparable to the protections afforded
customers trading on U.S. futures
markets.’’ 156 If true, the proposed
change would not create substantial
costs or benefits in periods of normal
activity for the FCM. However, under
current regulations, FCMs still have the
ability to diverge from the
aforementioned practices they have
generally adopted, and can pull foreigndomiciled customer funds out of 30.7
accounts and use those funds as if they
were their own. It is precisely in a time
of stress for an FCM that these
protections for customer funds are most
needed to prevent the FCM from
commingling such funds with its own
capital and using it to meet the general
obligations of the firm. It is not possible
to quantify the value of the additional
protection that would be provided to
non-U.S.-based customers on the basis
of the proposed change. To do so would
require data sufficient to estimate the
156 FIA

‘‘Initial Recommendations for Customer
Funds Protection,’’ p. 10.

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probability and expected magnitude of
losses due to lesser protections for funds
deposited by foreign-domiciled
customers, and the Commission does
not have such data. The Commission,
however, requests public comment
regarding these benefits, and
specifically requests any data
commenters can provide that would
assist the Commission in quantifying
such benefits.
Costs
With respect to costs the Commission
understands that in practice, FCMs have
generally adopted practices that provide
equivalent protections to funds
deposited by customers domiciled in
the U.S. and those who are not.
Therefore, during normal operations the
proposed requirement would not create
any additional costs. However, the
proposed amendment will prevent an
FCM from using foreign-domiciled
customer funds for trading foreign
futures and foreign options as its own
capital, thus reducing the FCM’s
liquidity which increases risk to the
FCM in times of stress. As a
consequence, the FCM will have an
incentive to keep more capital in order
to protect itself since it will no longer
be able to use such funds to meet or
secure its own obligations. The
Commission does not have adequate
data to quantify the cost of FCMs’
decreased liquidity or the cost of the
additional capital they may hold as a
result. Doing so would require estimates
of probabilities regarding the likelihood
of an FCM’s liquidity crisis, likelihood
they hold foreign-domiciled customer
funds for use in foreign futures and
foreign options trading, the amount of
such funds, the duration of the liquidity
crisis, and a number of other factors that
the Commission does not have adequate
information to estimate.
Request for Comment
Question 32: The Commission
requests comment from the public
regarding the extent to which FCMs
currently provide equivalent protections
to U.S.-domiciled and foreign-domiciled
customers for trading foreign futures
and foreign options, as well as the
probability and expected size of losses
that foreign-domiciled customers may
face due to lesser regulatory protection.
In addition, the Commission requests
comment about any additional impact
this change may have on U.S. domiciled
investors, foreign investors, or the
public.157
157 Questions posed to the public have been
numbered for commenters’ convenience. The
Commission requests that commenters identify the

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2. Eliminate the Alternative Method
and require the Net Equity Liquidation
Method for calculating 30.7 Customer
segregation requirements
Benefits
Under the current regulations FCMs
are allowed to use the Alternative
Method, which only requires the
maintenance of sufficient funds in the
foreign futures or foreign options
account to satisfy the margin required
on open positions plus or minus any
unrealized gains or losses on such
positions, and any funds representing
option premiums or funds necessary to
margin or guarantee such options.
By removing the Alternative Method,
which the Commission understands is
not in use, and requiring the Net
Liquidating Equity Method, the
proposed rules benefit customers by
reducing the risk that a shortfall in
customer funds could exist where an
FCM operates in compliance with
Commission regulations. More
specifically, by requiring the FCM to
segregate in separate accounts sufficient
funds to satisfy the full account equities
of all of its customers trading foreign
futures or foreign options, the FCM
would have sufficient funds in
segregated accounts to meet all of their
obligations to all such customers at any
time, including in the event the FCM
defaults. Further, in the event of default,
the proposed regulations would
facilitate the transfer of assets to another
FCM by assuring the receiving FCM that
there are sufficient funds to cover the
liabilities that it may be assuming.

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Costs
With respect to costs, as described
above, the Commission understands that
in practice, all FCMs are currently using
the Net Liquidating Equity Method.
However, FCMs currently have the
option to switch to the Alternative
Method, which they would have an
incentive to do if the FCM needed
additional liquidity. The proposal
would prohibit an FCM switching to the
Alternative Method, thereby preventing
an FCM from using some portion of
customer funds as if it were its own
operational capital. In doing so, the
proposed rule would reduce the FCM’s
options for obtaining liquidity.
The Commission does not have
adequate data to quantify the cost of this
change. Doing so would require
estimates of probabilities regarding the
likelihood of an FCM’s liquidity crisis,
likelihood they hold foreign-domiciled
number of the question they are addressing when
responding to specific questions posed by the
Commission.

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customer funds for use in foreign
futures and foreign options trading, the
amount of such funds, the amount that
are typically required to margin open
positions for 30.7 Customers, and a
number of other factors that the
Commission does not have adequate
information to estimate. However, as
above, the Commission notes that it
does not believe that FCMs should
consider any customer funds a source of
liquidity.
3. Specific requirements contained in
the written acknowledgments that FCMs
and DCOs must obtain from their
depositories
The costs and benefits resulting from
this change are similar to those
discussed the cost benefit
considerations sections related to
§§ 1.20 and 1.26, but affect 30.7
Customer funds rather than futures
customer funds, and therefore are in
addition to the costs and benefits
discussed in the cost benefit
considerations sections related to § 1.20
and § 1.26.
4. Restrictions on withdrawing from
residual interest, including a
requirement for the FCM to abide by its
policies and procedures required in
§ 1.11
The costs and benefits resulting from
this change are similar to those
discussed the cost benefit sections
related to §§ 1.23 and 1.11, but affect
30.7 Customer funds rather than futures
customer funds, and therefore are in
addition to the costs and benefits
discussed in cost benefit considerations
sections related to §§ 1.23 and 1.11.
5. Require that 30.7 Customer Funds
deposited in a bank must be available
for immediate withdrawal at the request
of the FCM
The costs and benefits resulting from
this change are similar to those
discussed cost benefit considerations
sections related to §§ 1.20, but affect
30.7 Customer Funds rather than futures
customer funds, and therefore are in
addition to the costs and benefits
discussed in the cost benefit
considerations section related to § 1.20.
6. Clarification that the FCM is
responsible for any losses related to
investing 30.7 Customer Funds in
investments that comply with § 1.25
The costs and benefits resulting from
this change are similar to those
discussed in the cost benefit
considerations section related to § 1.29,
but affect 30.7 Customer Funds rather
than futures customer funds, and
therefore are in addition to the costs and
benefits discussed in the cost benefit
considerations sections related to
§§ 1.20 and 1.29.

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7. Prohibition against making
unsecured loans to customers and
against using the funds in the
customer’s trading account as security
for the loan
The costs and benefits resulting from
this change are similar to those
discussed the cost benefit
considerations section related to § 1.30,
but affect 30.7 Customer funds rather
than futures customer funds, and
therefore are in addition to the costs and
benefits discussed in that section.
8. Require daily segregation reports
and segregated investment detail reports
be submitted to the Commission and
DSRO, and that targeted residual
interest be included in those reports
The costs and benefits resulting from
this change are similar to those
discussed the cost benefit
considerations sections related to § 1.32,
but affect 30.7 Customer funds rather
than futures customer funds, and
therefore are in addition to the costs and
benefits discussed in that section.
9. Allow FCMs that are not dual
registrants to abide by the BD procedure
for assigning a smaller haircut to
investments purchased with customer
funds that have low default risk
The costs and benefits resulting from
this change are similar to those
discussed in the cost benefit sections
related to §§ 1.32 and 22.2, but affect
30.7 Customer funds rather than futures
customer funds, and therefore are in
addition to the costs and benefits
discussed in those sections.
Question
Question 33: However, the
Commission requests comment
regarding the extent to which 30.7
Customer funds held outside the United
States may be invested in instruments
that are subject to reduced haircuts
under the proposed SEC rules, and the
effect that will have on the capital
requirements of U.S. domiciled FCMs.
10. Proposed § 30.7(c) limits the
amount of funds from a 30.7 Account
that can be held outside the U.S.
Funds held overseas are subject to
different regulatory and bankruptcy
regimes that may not offer comparable
protections for customer funds, creating
additional repatriation risks to those
funds. For example, if an FCM carrying
30.7 funds, some of which were held in
depositories outside the U.S., were to
default, it is possible that the Trustee
would not be able to recover sufficient
funds to repay all the FCM’s obligations
to 30.7 Customers. As noted above, this
is especially true if the funds are
deposited with an overseas affiliate of
the FCM, as the likelihood of coincident
bankruptcies of affiliated financial firms

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is exceedingly high. In such an event,
the funds held at the affiliate would be
distributed in accordance with the
insolvency rules of the foreign
jurisdiction. In such a case each 30.7
Customer would likely receive a prorata share of the funds that the Trustee
is able recover, when the Trustee is able
to recover them. The proposed limit on
amount of funds that can be held
outside the U.S. would ensure that as
much of the customers’ funds as
possible remain subject to the U.S.
regulatory and bankruptcy regimes,
eliminating repatriation risk to those
funds. By eliminating this risk for a
larger percentage of the 30.7 funds, the
proposed rule promotes higher recovery
rates for 30.7 account funds if the FCM
defaults, which helps ensure that 30.7
Customers receive the largest pro rata
distribution possible.
Regarding costs, the proposed change
effectively prohibits FCMs from
increasing the amount of 30.7 Customer
Funds they hold overseas. This
restriction may reduce the return that
FCMs may be able to achieve through
their investment of customer funds.
11. As described in the discussion of
cost and benefit considerations related
to § 1.22, by requiring that FCMs
maintain residual interest in segregated
accounts, the proposed rule would
ensure that the FCM is not using one
customer’s funds to purchase, margin,
secure, or settle positions for another
customer and when combined with the
reporting requirements in § 30.7 would
provide the Commission and the public
with sufficient information to verify that
FCMs are not using one customer’s
funds to purchase, margin, secure or
settle positions for another customer.
Regarding costs, by requiring FCMs to
maintain residual interest in their 30.7
Accounts that is greater than the sum of
their 30.7 Customers’ margin deficits,
the proposed rule would create costs
and benefits that are substantially
identical to those described in the cost
and benefit considerations related to
§ 1.22. As discussed in that section, the
Commission does not have information
to determine whether FCMs typically
maintain residual interest in their 30.7
Accounts that is greater than or less
than the sum of their 30.7 Customers’
margin deficits, and requests
information sufficient to make such a
determination, and to quantify the
associated costs, if any.
Additional Requests for Comment
Related to the Commission’s Proposed
Consideration of Costs and Benefits
Question 34: The Commission
requests comment on all aspects of its
proposed consideration of the costs and

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benefits of the rulemaking. More
specifically, the Commission requests
dollar estimates of the costs and the
value of the benefits of the proposed
rules described herein, including
supporting data. In addition, the
Commission requests comment on
whether there are additional costs or
benefits related to the proposed rules
that the Commission should consider, as
well as whether there are alternative
approaches that would be more effective
in light of the purpose of the proposal.
Commenters should provide analysis
and empirical data to support their
views on the costs and benefits
associated with the proposed rule.
Question 35: The Commission
requests comment regarding the
different ways in which the proposed
rules will impact FCMs that are
different sizes and that are operating
with different business models. In
particular, are there any specific
proposed requirements that would be
particularly costly for either small or
large FCMs to follow? Are there any
specific proposed requirements that
would be especially costly for FCMs
with a particular business model to
follow? If so, please explain and where
possible please quantify specific costs.
Question 36: The Commission
requests comment regarding the effects
of the proposed amendments on the
composition of the FCM industry
including bank subsidiaries versus
stand-alone FCMs, large versus small,
retail customer oriented versus
wholesale, possible consolidation, etc.
Please explain and provide supporting
data.
Question 37: The Commission also
requests comment regarding the
potential impact of the proposed
regulations on specific groups of
customers. Will the proposed rules
make it more difficult for certain groups
of customers to obtain FCM services?

entities for purposes of the RFA, and,
thus, the requirements of the RFA do
not apply to FCMs.160 The
Commission’s determination was based,
in part, upon the obligation of FCMs to
meet the minimum financial
requirements established by the
Commission to enhance the protection
of customers’ segregated funds and
protect the financial condition of FCMs
generally.161 The Commission also has
previously determined that DCOs are
not small entities for the purpose of the
RFA.162 Accordingly, the Chairman, on
behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that
the proposed regulations will not have
a significant economic impact on a
substantial number of small entities.
The Commission invites comments on
the impact of this proposed regulation
on small entities.

B. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’) provides that a federal agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid control
number issued by the Office of
Management and Budget (‘‘OMB’’). This
proposed rulemaking contains several
collections of information that have not
been approved previously by OMB. The
collections contained in this rulemaking
are proposed to be mandatory.
To avoid double accounting for the
PRA burden hours of collections that
already have been assigned control
numbers by OMB, or for burden hours
contained in pending collections of
information—in particular existing
collection 3038–0024 and proposed
revisions thereto, and existing
collections 3038–0052 and 3038–0091—
this PRA analysis contains only burden
estimates for collections of information
that have not previously been submitted
to OMB. The Commission seeks
IV. Administrative Compliance
comment on those collections of
information contained in this
A. Regulatory Flexibility Act
rulemaking that would increase the
The Regulatory Flexibility Act
burden hours contained in each of the
(‘‘RFA’’) 158 requires Federal agencies, in related currently valid or proposed
promulgating regulations, to consider
collections.
the impact of those regulations on small
In particular, the Commission will
entities. The Commission has
submit to OMB information collection
previously established certain
requests (‘‘ICR’’) that address the new
definitions of ‘‘small entities’’ to be used collection burdens that would result
by the Commission in evaluating the
from the finalization of these proposed
impact of its rules on small entities in
rules on or before the publication of the
accordance with the RFA.159 The
proposed rules, as required by 44 U.S.C.
proposed regulations would affect FCMs 3506(c)(2)(B) and 5 CFR 1320.11. All
and DCOs. The Commission previously
interested parties may submit comments
has determined that FCMs are not small
160 Id.
158 5

U.S.C. 601 et seq.
159 47 FR 18618 (Apr. 30, 1982).

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at 18619.

161 Id.
162 See

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on this analysis and the associated ICR
to the Commission and to OMB, as
provided below.
The Commission will protect
proprietary information according to the
Freedom of Information Act (‘‘FOIA’’)
and 17 CFR part 145, ‘‘Commission
Records and Information.’’ In addition,
section 8(a)(1) of the Act strictly
prohibits the Commission, unless
specifically authorized by the Act, from
making public ‘‘data and information
that would separately disclose the
business transactions or market
positions of any person and trade
secrets or names of customers.’’ The
Commission is also required to protect
certain information contained in a
government system of records according
to the Privacy Act of 1974.
1. Collections of Information
The proposed amendments would
require FCMs to adopt new policies and
procedures, keep records related to such
policies and procedures and submit
reports of such policies and procedures,
including certain management
approvals, to the Commission. In
addition, the proposals alter existing
FCM reporting requirements in process
and substance, including changes to
certain schedules and proposed
schedules to the Form 1–FR–FCM (the
Segregation Schedule and Secured
Amount Schedule); changes to the
process for filing such schedules and
additional frequency for such filings;
and requiring detailed information
supporting such schedules to also be
reported to the Commission and the
FCM’s designated self-regulatory
organization.
Further FCMs and depositories
accepting customer funds will be
required to obtain acknowledgment
letters in specified formats and file them
directly with the Commission and the
FCM’s designated self-regulatory
organization. Records will have to be
kept of approvals of certain withdrawals
made of an FCM’s residual interest in
customer funds and further reported to
the Commission. Additional notices will
also be required to be filed with the
Commission under the proposed
amendments. The examination process
of SROs and DSROs is proposed to be
amended with new recordkeeping and
reporting requirements being imposed,
as well as a required report to be
obtained from an examinations expert
and filed with the Commission. Lastly,
disclosures made by FCMs to customers
will be enhanced and records of such
disclosures will have to be maintained
and reported to the Commission.
As noted, some of these proposed
amendments will result in the alteration

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of existing regulations covered by
existing collections which have already
been assigned OMB control numbers.
Others will result in additional or new
collection burdens, which will be
incorporated into the most relevant
existing collection maintained by the
Commission and previously approved
by or submitted for approval to OMB.
a. Proposed Revision to Collection
3038–0024
Collection 3038–0024 is currently in
force, with its control number having
been provided by OMB. In addition, the
collection was proposed to be revised in
May 2011, with the approval of and
issuance of a control number by OMB
presently pending. Certain collections
contained in this rulemaking would
result in further revisions to the
collection, as discussed herein.
First, the Segregation Schedules and
the Secured Amount Schedule, required
to be filed under § 1.10, have been
proposed to be changed to reflect the
FCM’s target for residual amounts and
the sum of margin deficits. The
proposed amendments will also
increase the frequency of filing these
schedules to daily under §§ 1.32 and
30.7. However, daily computations were
previously required with respect to the
subject matter of these schedules and
monthly filing procedure for these
schedules is already in place, and these
schedules are already subject to an OMB
control number. Thus, the revision of
collection 3038–0024 requires only
incremental change to capture the new
elements of § 1.10. One time initial
system changes, if any, that will need to
be made to effect daily filing of the
detail previously required in the
monthly report is anticipated to require
between 40 and 80 burden hours for the
approximately 72 firms required to
comply with the new provisions of
§ 1.10, depending on the size of the firm
the complexity of their systems. The
additional filing requirement, which
may be effected electronically by the
approximately 72 firms that will be
required to make daily filings, is
anticipated to increase the burdens
associated with § 1.10 by an anticipated
10–20 minutes for each of the
approximately 20 days per month that
such reports were not previously
required to be filed.
Additionally, the proposed
amendments include new requirements
for FCMs to establish comprehensive
risk management programs under new
§ 1.11, and maintain associated
recordkeeping as well as furnish reports
related to such risk management
programs to the Commission and the
FCM’s DSRO. Included within the risk

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67929

management programs will be specific
requirements for FCMs to establish and
maintain written policies and
procedures regarding the safeguarding
of all customer funds.
Collection burdens associated with
the safeguarding of customer funds
under the Commission’s regulations
prior to the proposed amendments are
already subject to OMB control
numbers. Accordingly, the proposed
revisions to collection 3038–0024
require only incremental change to
capture the new elements of § 1.11. The
estimated burden associated with § 1.11
will be divided into two components, a
onetime cost to establish the written
policies and procedures and an annual
burden to maintain the such policies
and procedures. Currently there are 72
respondents subject to this change,
many of which are expected simply to
establish and maintain policies and
procedures around their existing risk
management programs. The estimated
number of hours to create the initial set
of policies and procedures by
consolidation of existing risk
management practices is anticipated to
average 75 hours across the 72
respondents that will be obligated to
comply. The estimated total annual
maintenance burden on each
respondent is anticipated increase by an
average 25 hours annually across the 72
recordkeepers.
The collection is further being revised
to reflect additional proposed
requirements for notifications under
§ 1.12, and the additional required
filings contained in the proposed
amendments under §§ 1.20, 1.23, 1.32,
and 30.7. Currently there are 72
respondents estimated to be subject to
these changes. The total of all proposed
changes to the Schedules of the Form 1–
FR, which is already subject to an OMB
control number, is anticipated to be
incremental, and it is estimated that the
proposed changes will add 15 minutes
to the preparation and filing of each
report.
The proposed revision to § 1.12(i) will
require FCMs to report to the
Commission if the FCM discovers or is
informed that it has invested funds held
for futures customers in instruments
that are not permitted investments
under § 1.25. This new report will be
done on an as required basis. It is
estimated that this report will be
completed by two respondents per year
with a burden of one hour for each
report.
The proposed revision to § 1.12(j) will
require FCMs to immediately report to
the Commission if a withdrawal of
funds from accounts holding futures
customers funds causes the amount on

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deposit in such accounts to be less than
the FCM’s targeted excess or residual
interest in such accounts, or if the
residual interest is less than the sum of
all margin deficits. The accounting
needed to make these reports is already
conducted under the Commission’s
regulations for the purpose of ensuring
compliance with the Commission’s
existing customer protection
regulations. Once an event requiring
notice is identified, it is anticipated that
five respondents per year will be
obligated to provide notices to the
Commission under § 1.12(j), with an
additional burden of up to two hours for
each notice.
The Commission is also proposing to
amend paragraphs (k) and (l) of § 1.12
which will require an FCM to provide
notice to the Commission in the event
of a material change in the financial
condition of the firm or the firm’s
operations. These new reports each will
be prepared and submitted on an as
required basis, and are similar to other
notices required to be filed by FCMs in
Parts 1 and 190, for example, of the
Commission’s regulations. Moreover,
FCMs are already subject to significant
regulations in Part 1 that require each
FCM to continuously monitor their
financial condition and report shortfalls
in net capital. It is estimated that the
notices that would be required under
paragraphs (k) and (l) of § 1.12 will be
made by five respondents per year with
a burden of up to three hours for each
notice.
FCMs will be required under § 1.20 to
obtain and submit to the Commission
written acknowledgments, in a form and
format being proposed and expected to
be required by the Commission, from
any depository institution, including
certain DCOs, at which futures customer
funds will be segregated. It is estimated
that the execution and filing of new
acknowledgment letters will be
completed by five respondents per year
with a burden of up to two hours for
completion and filing. It is estimated
that the maintaining of acknowledgment
letters prescribed by the Commission
will be conducted by as many as 40
depository institutions annually with an
estimated burden of 45 minutes per
respondent.
FCMs are currently required to obtain
and maintain in its files an
acknowledgment letter from
depositories for each account holding
customer funds, in the form specified by
the Commission. The obtaining and
maintaining of the acknowledgement
letters will be done on an as required
basis and are already subject to an OMB
control number. Proposed revisions to
§ 1.20(d) additionally would require

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FCMs to retain and file these
acknowledgment letters electronically
with the Commission. This new
retention and filing will be done on an
as required basis. It is estimated that the
filing of an estimated 1 to 2 new
acknowledgment letters will be
conducted by 72 respondents per year,
with a burden of 30 minutes associated
with the retention and filing of each of
these acknowledgments.
Finally with respect to § 1.20, a
derivatives clearing organization may
adopt and submit to the Commission
rules providing for the segregation of
customer funds that may be carried by
the DCO that would substitute for the
acknowledgment letters completed by
other depositories. It is anticipated that
approximately 17 of the DCOs registered
with the Commission will adopt and
submit such rules, with an estimated
burden of 45 hours for the adoption and
submission of such rules. The DCO also
must obtain acknowledgment letters
from any depository institution at which
the DCO places segregated funds, and
these depository institutions must
provide the Commission with direct
access to the customer account
information at all times. It is anticipated
that as many as 40 depository
institutions may complete such letters,
and provide ongoing access to the
Commission, with a one-time burden of
45 minutes per respondent for the
completion of such letters, and an
estimated annual burden of 60 hours
associated with providing account
access to the Commission.
Similarly, § 30.7(d) is being revised to
require FCMs that maintain 30.7
Customer Accounts to obtain and
maintain in its files, an
acknowledgment letter from
depositories for each account holding
30.7 Customer Funds, in the form
specified by the Commission, and § 1.26
provides for the same from any
institution segregating customer funds
in a money market mutual fund
account. The proposed revisions to
these regulations require FCMs to file
such acknowledgment letters
electronically with the Commission.
The obtaining and maintaining of the
acknowledgement letters will be done
on an as required basis. It is estimated
that the maintaining of acknowledgment
letters will be completed by 56
respondents with a burden of 45
minutes per respondent. The
completion of the acknowledgment
letters by the depositories, estimated at
approximately 90 institutions, is
expected to be 45 minutes per letter.
Additionally, the requirement that these
acknowledgement letters be
electronically filed with the

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Commission is anticipated to result in 6
minutes of burden to 56 respondents per
year with respect to the proposed
revisions to § 30.7 and the same for the
proposed revisions to § 1.26.
The Commission is also proposing to
amend § 1.23(c) to require an FCM to
immediately file written notice with the
Commission if the firm withdraws more
than 25 percent of its residual interest
in segregated accounts. This new filing
will be done on an as required basis. It
is estimated that the filing of these
notices will be completed by ten
respondents per year with a burden of
one hour for each filing.
Pursuant to the proposed revisions of
§§ 1.32(c) and (d), the Segregation
Statement shall be completed on a daily
basis and filed by noon the following
business day. Although the rule
proposed herein now require daily filing
of the Segregation Statement, it should
be noted that the Segregation Statement
is statement is already required to be
prepared and retained on a daily basis,
thus the additional time electronically
filing the statement on a daily basis is
minimal. Currently there are 72
respondents subject to this change. The
estimated total annual burden on each
respondent is 2 hours.
Pursuant to the proposed revisions of
§ 1.32(g) each FCM that holds customer
funds is required to file the segregated
investment detail report twice monthly.
Although the rule proposed herein
requires twice monthly filing of the
segregated investment detail report, it
should be noted that the segregated
investment detail report is already
required to be prepared twice monthly
by the FCM’s designated self-regulatory
organization. Thus the additional time
to electronically file the statement with
the Commission is minimal. Currently
there are 72 respondents subject to this
change. The estimated total annual
burden on each respondent is 5 minutes
per report.
Similar to the proposed revisions of
§ 1.32 discussed above, § 30.7(m)
requires that the Statement of Secured
Amounts shall be completed on a daily
basis and filed electronically by noon
the following business day. Although
the rule proposed herein now require
daily filing of the Secured Amounts
Statement, it should be noted that the
Secured Amounts is statement is
already required to be prepared and
retained on a daily basis, thus the
additional time electronically filing the
statement on a daily basis is minimal.
Currently there are 56 respondents
subject to this change. The estimated
total annual burden on each respondent
is 2 hours.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
Revisions to § 30.7(i) will also require
that FCMs keep records of customer
funds including a daily valuation of
each instrument and supporting
documentation of such daily valuation.
Currently there are 56 respondents
subject to this change. The estimated
total annual burden on each respondent
is 100 hours.
Finally, § 1.55 would require public
disclosures to be made by an FCM to its
customers respecting the limitations
applicable to and risks associated with
the segregation of funds, among other
things. It is anticipated that 72 FCMs
will provide such notices through the
standardization of account opening
documents or distribution of the notices
therewith. Each FCM is expected to
expend up to 4–20 hours incorporating
the notice, which is prescribed by
regulation, into its account opening
process for customers that will establish
new accounts, and up to 10 minutes per
customer providing the notices on a
one-time basis to as many as 3,000
customers and accounts opened by
existing customers.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

b. Proposed Revision to Collection
3038–0052
The above-referenced collection titled
‘‘Part 38—Designated Contract Markets’’
includes all burden associated with
§ 1.52, ‘‘Self-regulatory organization
adoption and surveillance of minimum
financial requirements’’. The proposed
amendments include additional
requirements for SROs to adopt for their
examination procedures, including the
requirement to have examination
programs reviewed by an examinations
expert and having the report of such
examinations expert filed with the
Commission at least once every two
years. Regulation 1.52 already contains
significant requirements with respect to
the examination programs to be
established and maintained by SROs,
which are subject already to an OMB
control number. The increase in the
burden under this collection for the
adoption of enhanced examination
procedures, including the recordkeeping
and reporting, to the extent such may be
necessary by any SRO to which § 1.52
is necessary, is estimated to add up to
50 burden hours to as many as 15
DCMs.
c. Proposed Revision to Collection
3038–0091
Collection 3038–0091was established
with the adoption of Part 22 of the
Commissions regulations concerning
Cleared Swaps in .February 2012 The
proposed amendments would require
revisions to this collection with respect
to recordkeeping and reporting

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associated with additional filings of the
Cleared Swaps Segregation Schedule
daily under § 22.2(g), and the associated
recordkeeping and reporting with
respect to notices of withdrawals under
a newly proposed § 22.17. The
collection burden associated with the
proposed amendments is anticipated to
increase by 10 minutes per day and is
anticipated to affect 100 entities.
2. Information Collection Comments
The Commission invites the public
and other Federal agencies to comment
on any aspect of the proposed
information collection requirements
discussed above. Pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission will
consider public comments on such
proposed requirements in:
Æ Evaluating whether the proposed
collections of information are necessary
for the proper performance of the
functions of the Commission, including
whether the information will have a
practical use;
Æ Evaluating the accuracy of the
estimated burden of the proposed
information collection requirements,
including the degree to which the
methodology and the assumptions that
the Commission employed were valid;
Æ Enhancing the quality, utility, and
clarity of the information proposed to be
collected; and
Æ Minimizing the burden of the
proposed information collection
requirements on FCMs, SDs, and MSPs,
including through the use of appropriate
automated, electronic, mechanical, or
other technological information
collection techniques, e.g., permitting
electronic submission of responses.
Copies of the submission from the
Commission to OMB are available from
the CFTC Clearance Officer, 1155 21st
Street NW., Washington, DC 20581,
(202) 418–5160 or from http://
RegInfo.gov. Organizations and
individuals desiring to submit
comments on the proposed information
collection requirements should send
those comments to the OMB Office of
Information and Regulatory Affairs at:
Æ The Office of Information and
Regulatory Affairs, Office of
Management and Budget, Room 10235,
New Executive Office Building,
Washington, DC 20503, Attn: Desk
Officer of the Commodity Futures
Trading Commission;
Æ (202) 395–6566 (fax); or
Æ [email protected]
(email).
Please provide the Commission with
a copy of submitted comments so that
all comments can be summarized and
addressed in the final rulemaking.
Please refer to the ADDRESSES section of

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this rulemaking for instructions on
submitting comments to the
Commission. OMB is required to make
a decision concerning the proposed
information collection requirements
between thirty (30) and sixty (60) days
after publication of the NPRM in the
Federal Register. Therefore, a comment
to OMB is best assured of receiving full
consideration if OMB (as well as the
Commission) receives it within thirty
(30) days of publication of this NPRM.
The time frame for commenting on the
PRA does not affect the deadline
established by the Commission on the
proposed rules, provided in the DATES
section of this rulemaking.
V. Text of Proposed Rules
List of Subjects
17 CFR Part 1
Brokers, Commodity futures,
Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 3
Associated persons, Brokers,
Commodity futures, Customer
protection, Major swap participants,
Registration, Swap dealers.
17 CFR Part 22
Brokers, Clearing, Consumer
protection, Reporting and recordkeeping
requirements, Swaps.
17 CFR Part 30
Commodity futures, Consumer
protection, Currency, Reporting and
recordkeeping requirements.
17 CFR Part 140
Authority delegations (Government
agencies), Organization and functions
(Government agencies).
In consideration of the foregoing and
pursuant to the authority contained in
the Act, as indicated herein, the
Commission hereby proposes to amend
chapter I of title 17 of the Code of
Federal Regulations as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to be read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6m, 6n, 6o, 6p,
6r, 6s, 7, 7a, 7b, 8, 9, 10a 12, 12a, 12c, 13a,
13a–1, 16, 16a, 19, 21, 23, and 24 as amended
by Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L.
111–203, 124 Stat. 1376 (2010).

2. Amend § 1.3 by revising paragraph
(rr) to read as follows:

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§ 1.3

Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

Definitions.

*

*
*
*
*
(rr) Foreign futures or foreign options
secured amount. This term means all
money, securities and property received
by a futures commission merchant from,
for, or on behalf of 30.7 Customers as
defined in § 30.1 of this chapter:
(1) To margin, guarantee, or secure
foreign futures contracts and all money
accruing to such 30.7 Customers as the
result of such contracts;
(2) In connection with foreign options
transactions representing premiums
payable or premiums received, or to
guarantee or secure performance on
such transactions; and
(3) All money accruing to such 30.7
Customers as the result of trading in
foreign futures contracts or foreign
options.
*
*
*
*
*
3. Amend § 1.10 by:
a. Revising paragraph (b)(1)(ii);
b. Adding paragraph (b)(5); and
c. Revising paragraphs (c)(1), (c)(2)(i),
(d)(1)(v), (d)(2)(iv), (d)(2)(vi), and
(g)(2)(ii).
The revisions and addition read as
follows:
§ 1.10 Financial reports of futures
commission merchants and introducing
brokers.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

*

*
*
*
*
(b) * * *
(1) * * *
(ii) In addition to the monthly
financial reports required by paragraph
(b)(1)(i) of this section, each person
registered as a futures commission
merchant must file a Form 1–FR–FCM
as of the close of its fiscal year, which
must be certified by an independent
public accountant in accordance with
§ 1.16, and must be filed no later than
60 days after the close of the futures
commission merchant’s fiscal year:
Provided, however, that a registrant
which is registered with the Securities
and Exchange Commission as a
securities broker or dealer must file this
report not later than the time permitted
for filing an annual audit report under
§ 240.17a–5(d)(5) of this title.
*
*
*
*
*
(5) Each futures commission merchant
must file with the Commission the
measure of the future commission
merchant’s leverage (i.e., total balance
sheet assets, less any instruments
guaranteed by the U.S. Government and
held as an asset or to collateralize an
asset (e.g., a reverse repo) divided by
total capital (the sum of stockholders’
equity and subordinated debt) all
computed in accordance with U.S.
generally accepted accounting
principles as of the close of business

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each month. The filing is required to be
made to the Commission within 17
business days of the close of the futures
commission merchant’s month end.
(c) Where to file reports. (1) Form 1–
FR filed by an introducing broker
pursuant to paragraph (b)(2) of this
section need be filed only with, and will
be considered filed when received by,
the National Futures Association. Other
reports or information provided for in
this section will be considered filed
when received by the Regional office of
the Commission with jurisdiction over
the state in which the registrant’s
principal place of business is located (as
set forth in § 140.02 of this chapter) and
by the designated self-regulatory
organization, if any; and reports or other
information required to be filed by this
section by an applicant for registration
will be considered filed when received
by the National Futures Association.
Any report or information filed with the
National Futures Association pursuant
to this paragraph shall be deemed for all
purposes to be filed with, and to be the
official record of, the Commission.
(2)(i) All filings or other notices
prepared by a futures commission
merchant pursuant to this section must
be submitted to the Commission in
electronic form using a form of user
authentication assigned in accordance
with procedures established by or
approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission, if the futures
commission merchant or a designated
self-regulatory organization has
provided the Commission with the
means necessary to read and to process
the information contained in such
report. A Form 1–FR required to be
certified by an independent public
accountant in accordance with § 1.16
which is filed by a futures commission
merchant must be filed electronically.
*
*
*
*
*
(d) * * *
(1) * * *
(v) For a futures commission
merchant only, the statements of
segregation requirements and funds in
segregation for customers trading on
U.S. commodity exchanges and for
customers’ dealer options accounts, the
statement of secured amounts and funds
held in separate accounts for 30.7
Customers (as defined in § 30.1 of this
chapter) in accordance with § 30.7 of
this chapter, and the statement of
cleared swaps customer segregation
requirements and funds in cleared
swaps customer accounts under section

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4d(f) of the Act as of the date for which
the report is made; and
*
*
*
*
*
(2) * * *
(iv) For a futures commission
merchant only, the statements of
segregation requirements and funds in
segregation for customers trading on
U.S. commodity exchanges and for
customers’ dealer options accounts, the
statement of secured amounts and funds
held in separate accounts for 30.7
Customers (as defined in § 30.1 of this
chapter) in accordance with § 30.7 of the
chapter, and the statement of cleared
swaps customers segregation
requirements and funds in cleared
swaps customer accounts under section
4d(f) of the Act as of the date for which
the report is made;
*
*
*
*
*
(vi) A reconciliation, including
appropriate explanations, of the
statement of the computation of the
minimum capital requirements pursuant
to § 1.17 of this part and, for a futures
commission merchant only, the
statements of segregation requirements
and funds in segregation for customers
trading on U.S. commodity exchanges
and for customers’ dealer option
accounts, the statement of secured
amounts and funds held in separate
accounts for 30.7 Customers (as defined
in § 30.1 of this chapter) in accordance
with § 30.7 of this chapter, and the
statement of cleared swaps customer
segregation requirements and funds in
cleared swaps customer accounts under
section 4d(f) of the Act, in the certified
Form 1–FR with the applicant’s or
registrant’s corresponding uncertified
most recent Form 1–FR filing when
material differences exist or, if no
material differences exist, a statement so
indicating; and
*
*
*
*
*
(g) * * *
(2) * * *
(ii) The following statements and
footnote disclosures thereof: the
Statement of Financial Condition in the
certified annual financial reports of
futures commission merchants and
introducing brokers; the Statements (to
be filed by a futures commission
merchant only) of Segregation
Requirements and Funds in Segregation
for customers trading on U.S.
commodity exchanges and for
customers’ dealer options accounts, the
Statement (to be filed by a futures
commission merchant only) of Secured
Amounts and Funds held in Separate
Accounts for 30.7 Customers (as defined
in § 30.1of this chapter) in accordance
with § 30.7 of this chapter, and the
Statement (to be filed by futures

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
commission merchants only) of Cleared
Swaps Customer Segregation
Requirements and Funds in Cleared
Swaps Customer Accounts under
section 4d(f) of the Act.
*
*
*
*
*
4. Add § 1.11 to read as follows:

emcdonald on DSK67QTVN1PROD with PROPOSALS2

§ 1.11 Risk Management Program for
Futures Commission Merchants.

(a) Applicability. Nothing in this
section shall apply to a futures
commission merchant that does not
accept any money, securities, or
property (or extend credit in lieu
thereof) to margin, guarantee, or secure
any trades or contracts that result from
soliciting or accepting orders for the
purchase or sale of any commodity
interest.
(b) Definitions. For purposes of this
section:
(1) ‘‘Business Unit’’ means any
department, division, group, or
personnel of a futures commission
merchant or any of its affiliates, whether
or not identified as such that:
(i) Engages in soliciting or in
accepting orders for the purchase or sale
of any commodity interest and that, in
or in connection with such solicitation
or acceptance of orders, accepts any
money, securities, or property (or
extends credit in lieu thereof) to margin,
guarantee, or secure any trades or
contracts that result or may result
therefrom; or
(ii) Otherwise handles Segregated
Funds, including managing, investing,
and overseeing the custody of
Segregated Funds, or any
documentation in connection therewith,
other than for risk management
purposes; and
(iii) Any personnel exercising direct
supervisory authority of the
performance of the activities described
in paragraph (b)(1)(i) or (ii) of this
section.
(2) ‘‘Customer’’ means a futures
customer as defined at § 1.3 of this part,
Cleared Swaps Customer as defined at
§ 22.1 of this chapter, and 30.7
Customer as defined at § 30.1 of this
chapter.
(3) ‘‘Governing Body’’ means the
proprietor, if the futures commission
merchant is a sole proprietorship; a
general partner, if the futures
commission merchant is a partnership;
the board of directors if the futures
commission merchant is a corporation;
the chief executive officer, the chief
financial officer, the manager, the
managing member, or those members
vested with the management authority if
the futures commission merchant is a
limited liability company or limited
liability partnership.

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(4) ‘‘Segregated Funds’’ means money,
securities, or other property held by a
futures commission merchant in
separate accounts pursuant to § 1.20 of
this part for futures customers, pursuant
to § 22.2 of this chapter for Cleared
Swaps Customers, and pursuant to
§ 30.7 of this chapter for § 30.7
Customers; and
(5) ‘‘Senior Management’’ means, any
officer or officers specifically granted
the authority and responsibility to fulfill
the requirements of senior management
by the Governing Body.
(c) Risk Management Program. (1)
Each futures commission merchant shall
establish, maintain, and enforce a
system of risk management policies and
procedures designed to monitor and
manage the risks associated with the
activities of the futures commission
merchant as such. For purposes of this
section, such policies and procedures
shall be referred to collectively as a
‘‘Risk Management Program.’’
(2) Each futures commission merchant
shall maintain written policies and
procedures that describe the Risk
Management Program of the futures
commission merchant.
(3) The Risk Management Program
and the written risk management
policies and procedures, and any
material changes thereto, shall be
approved in writing by the Governing
Body of the futures commission
merchant.
(4) Each futures commission merchant
shall furnish a copy of its written risk
management policies and procedures to
the Commission and its designated selfregulatory organization upon
application for registration and
thereafter upon request.
(d) Risk management unit. As part of
the Risk Management Program, each
futures commission merchant shall
establish and maintain a risk
management unit with sufficient
authority; qualified personnel; and
financial, operational, and other
resources to carry out the risk
management program established
pursuant to this section. The risk
management unit shall report directly to
Senior Management and shall be
independent from the Business Unit.
(e) Elements of the Risk Management
Program. The Risk Management
Program of each futures commission
merchant shall include, at a minimum,
the following elements:
(1) Identification of risks and risk
tolerance limits. (i) The Risk
Management Program shall take into
account market, credit, liquidity, foreign
currency, legal, operational, settlement,
segregation, technological, capital, and
any other applicable risks together with

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67933

a description of the risk tolerance limits
set by the futures commission merchant
and the underlying methodology in the
written policies and procedures. The
risk tolerance limits shall be reviewed
and approved quarterly by Senior
Management and annually by the
Governing Body. Exceptions to risk
tolerance limits shall be subject to
written policies and procedures.
(ii) The Risk Management Program
shall take into account risks posed by
affiliates, all lines of business of the
futures commission merchant, and all
other trading activity engaged in by the
futures commission merchant. The Risk
Management Program shall be
integrated into risk management at the
consolidated entity level.
(iii) The Risk Management Program
shall include policies and procedures
for detecting breaches of risk tolerance
limits set by the futures commission
merchant, and alerting supervisors
within the risk management unit and
Senior Management, as appropriate.
(2) Periodic Risk Exposure Reports. (i)
The risk management unit of each
futures commission merchant shall
provide to Senior Management and to
its Governing Body quarterly written
reports setting forth all applicable risk
exposures of the futures commission
merchant; any recommended or
completed changes to the Risk
Management Program; the
recommended time frame for
implementing recommended changes;
and the status of any incomplete
implementation of previously
recommended changes to the Risk
Management Program. For purposes of
this section, such reports shall be
referred to as ‘‘Risk Exposure Reports.’’
The Risk Exposure Reports also shall be
provided to the Senior Management and
the Governing Body immediately upon
detection of any material change in the
risk exposure of the futures commission
merchant.
(ii) Furnishing to the Commission.
Each futures commission merchant shall
furnish copies of its Risk Exposure
Reports to the Commission within five
(5) business days of providing such
reports to its Senior Management.
(3) Specific risk management
considerations. The Risk Management
Program of each futures commission
merchant shall include, but not be
limited to, policies and procedures
necessary to monitor and manage the
following risks:
(i) Segregation Risk. The written
policies and procedures shall be
reasonably designed to ensure that
Segregated Funds are separately
accounted for and segregated or secured
as belonging to Customers as required

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

by the Act and Commission regulations
and must, at a minimum, include or
address the following:
(A) A process for the evaluation of
depositories of Segregated Funds,
including, at a minimum, documented
criteria that any depository that will
hold Segregated Funds, including an
entity affiliated with the futures
commission merchant, must meet,
including criteria addressing the
depository’s capitalization,
creditworthiness, operational reliability,
and access to liquidity. The criteria
should further consider the extent to
which Segregated Funds are
concentrated with any depository or
group of depositories. The criteria also
should include the availability of
deposit insurance and the extent of the
regulation and supervision of the
depository;
(B) A program to monitor an approved
depository on an ongoing basis to assess
its continued satisfaction of the futures
commission merchant’s established
criteria, including a thorough due
diligence review of each depository at
least annually;
(C) An account opening process for
depositories, including documented
authorization requirements, procedures
that ensure that Segregated Funds are
not deposited with a depository prior to
the futures commission merchant
receiving the acknowledgment letter
required from such depository pursuant
to § 1.20 of this part, and §§ 22.2 and
30.7 of this chapter, and procedures that
ensure that such account is properly
titled to reflect that it is holding
Segregated Funds pursuant to the Act
and Commission regulations;
(D) A process for establishing a
targeted amount of residual interest that
the futures commission merchant seeks
to maintain as its residual interest in the
Segregated Funds accounts and such
process must be designed to reasonably
ensure that the futures commission
merchant maintains the targeted
residual amounts and remains in
compliance with the Segregated Funds
requirements at all times. The policies
and procedures must require that Senior
Management, in establishing the total
amount of the targeted residual interest
in the Segregated Funds accounts,
perform appropriate due diligence and
consider various factors, as applicable,
relating to the nature of the futures
commission merchant’s business
including, but not limited to, the
composition of the futures commission
merchant’s Customer base, the general
creditworthiness of the Customer base,
the general trading activity of the
Customers, the types of markets and
products traded by the Customers, the

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proprietary trading of the futures
commission merchant, the general
volatility and liquidity of the markets
and products traded by Customers, the
futures commission merchant’s own
liquidity and capital needs, and the
historical trends in Customer Segregated
Fund balances, including margin debit
and net deficit balances in Customers’
accounts. The analysis and calculation
of the targeted amount of the future
commission merchant’s residual interest
must be described in writing with the
specificity necessary to allow the
Commission and the futures
commission merchant’s designated selfregulatory organization to duplicate the
analysis and calculation and test the
assumptions made by the futures
commission merchant. The adequacy of
the targeted residual interest and the
process for establishing the targeted
residual interest must be reassessed
periodically by Senior Management and
revised as necessary;
(E) A process for the withdrawal of
cash, securities, or other property from
accounts holding Segregated Funds,
where the withdrawal is not for the
purpose of payments to or on behalf of
the futures commission merchant’s
Customers. Such policies and
procedures must satisfy the
requirements of § 1.23 of this part,
§ 22.17 of this chapter, or § 30.7 of this
chapter, as applicable;
(F) A process for assessing the
appropriateness of specific investments
of Segregated Funds in permitted
investments in accordance with § 1.25
of this part. Such policies and
procedures must take into consideration
the market, credit, counterparty,
operational, and liquidity risks
associated with such investments, and
assess whether such investments
comply with the requirements in § 1.25
of this part including that the futures
commission merchant manage the
permitted investments consistent with
the objectives of preserving principal
and maintaining liquidity;
(H) Procedures requiring the
appropriate separation of duties among
individuals responsible for compliance
with the Act and Commission
regulations relating to the protection
and financial reporting of Segregated
Funds, including the separation of
duties among personnel that are
responsible for advising customers on
trading activities, approving or
overseeing cash receipts and
disbursements (including investment
operations), and recording and reporting
financial transactions. The policies and
procedures must require that any
movement of funds to affiliated

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companies and parties are properly
approved and documented;
(I) A process for the timely recording
of all transactions, including
transactions impacting Customers’
accounts, in the firm’s books of record;
(J) A program for conducting annual
training of all finance, treasury,
operations, regulatory, compliance,
settlement, and other relevant officers
and employees regarding the segregation
requirements for Segregated Funds
required by the Act and regulations, the
requirements for notices under § 1.12 of
this part, procedures for reporting of
suspected breaches of the policies and
procedures required by this section to
the chief compliance officer, without
fear of retaliation, and the consequences
of failing to comply with the segregation
requirements of the Act and regulations;
and
(K) Policies and procedures for
assessing the liquidity, marketability
and mark-to-market valuation of all
securities or other non-cash assets held
as Segregated Funds, including
permitted investments under § 1.25 of
this part, to ensure that all non-cash
assets held in the Customer segregated
accounts, both customer-owned
securities and investments in
accordance with § 1.25 of this part, are
readily marketable and highly liquid.
Such policies and procedures must
require daily measurement of liquidity
needs with respect to Customers;
assessment of procedures to liquidate all
non-cash collateral in a timely manner
and without significant effect on price;
and application of appropriate collateral
haircuts that accurately reflect market
and credit risk.
(ii) Operational Risk. The Risk
Management Program shall include
automated financial risk management
controls reasonably designed to prevent
the placing of erroneous orders,
including those that exceed pre-set
capital, credit, or volume thresholds.
The Risk Management Program shall
ensure that the use of automated trading
programs is subject to policies and
procedures governing the use,
supervision, maintenance, testing, and
inspection of such programs.
(iii) Capital Risk. The written policies
and procedures shall be reasonably
designed to ensure that the futures
commission merchant has sufficient
capital to be in compliance with the Act
and the regulations, and sufficient
capital and liquidity to meet the
reasonably foreseeable needs of the
futures commission merchant.
(4) Supervision of the Risk
Management Program. The Risk
Management Program shall include a
supervisory system that is reasonably

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
designed to ensure that the policies and
procedures required by this section are
diligently followed.
(f) Review and testing. (1) The Risk
Management Program of each futures
commission merchant shall be reviewed
and tested on at least an annual basis,
or upon any material change in the
business of the futures commission
merchant that is reasonably likely to
alter the risk profile of the futures
commission merchant.
(2) The annual reviews of the Risk
Management Program shall include an
analysis of adherence to, and the
effectiveness of, the risk management
policies and procedures, and any
recommendations for modifications to
the Risk Management Program. The
annual testing shall be performed by
qualified internal audit staff that are
independent of the Business Unit or by
a qualified third party audit service
reporting to staff that are independent of
the Business Unit. The results of the
annual review of the Risk Management
Program shall be promptly reported to
and reviewed by the chief compliance
officer, Senior Management, and
Governing Body of the futures
commission merchant.
(3) Each futures commission merchant
shall document all internal and external
reviews and testing of its Risk
Management Program and written risk
management policies and procedures
including the date of the review or test;
the results; any deficiencies identified;
the corrective action taken; and the date
that corrective action was taken. Such
documentation shall be provided to
Commission staff, upon request.
(g) Distribution of risk management
policies and procedures. The Risk
Management Program shall include
procedures for the timely distribution of
its written risk management policies
and procedures to relevant supervisory
personnel. Each futures commission
merchant shall maintain records of the
persons to whom the risk management
policies and procedures were
distributed and when they were
distributed.
(h) Recordkeeping. (1) Each futures
commission merchant shall maintain
copies of all written approvals required
by this section.
(2) All records or reports, including,
but not limited to, the written policies
and procedures and any changes
thereto, that a futures commission
merchant is required to maintain
pursuant to this regulation shall be
maintained in accordance with § 1.31
and shall be made available promptly
upon request to representatives of the
Commission.

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5. Amend § 1.12 by revising
paragraphs (a)(1) and (2), (b)(1), (2), and
(4), (c), (d), (e), (f)(2) through (4),
(f)(5)(i), (g), (h), and (i), and by adding
new paragraphs (j), (k), (l), (m), and (n),
to read as follows:
§ 1.12 Maintenance of minimum financial
requirements by futures commission
merchants and introducing brokers.

(a) * * *
(1) Give notice, as set forth in
paragraph (n) of this section, that the
applicant’s or registrant’s adjusted net
capital is less than required by § 1.17 of
this part or by other capital rule,
identifying the applicable capital rule.
The notice must be given immediately
after the applicant or registrant knows
or should have known that its adjusted
net capital is less than required by any
of the aforesaid rules to which the
applicant or registrant is subject; and
(2) Provide together with such notice
documentation, in such form as
necessary, to adequately reflect the
applicant’s or registrant’s capital
condition as of any date on which such
person’s adjusted net capital is less than
the minimum required; Provided,
however, that if the applicant or
registrant cannot calculate or otherwise
immediately determine its financial
condition, it must provide the notice
required by paragraph (a)(1) of this
section and include in such notice a
statement that the entity cannot
presently calculate its financial
condition. The applicant or registrant
must provide similar documentation of
its financial condition for other days as
the Commission may request.
(b) * * *
(1) 150 percent of the minimum dollar
amount required by § 1.17(a)(1)(i)(A) of
this part;
(2) 110 percent of the amount
required by § 1.17(a)(1)(i)(B) of this part;
*
*
*
*
*
(4) For securities brokers or dealers,
the amount of net capital specified in
Rule 17a–11(c) of the Securities and
Exchange Commission (17 CFR
240.17a–11(c)), must file notice to that
effect, as set forth in paragraph (n) of
this section, as soon as possible and no
later than twenty-four (24) hours of such
event.
(c) If an applicant or registrant at any
time fails to make or keep current the
books and records required by these
regulations, such applicant or registrant
must, on the same day such event
occurs, provide notice of such fact as
specified in paragraph (n) of this
section, specifying the books and
records which have not been made or
which are not current, and as soon as
possible, but not later than forty-eight

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67935

(48) hours after giving such notice, file
a report as required by paragraph (n) of
this section stating what steps have been
and are being taken to correct the
situation.
(d) Whenever any applicant or
registrant discovers or is notified by an
independent public accountant,
pursuant to § 1.16(e)(2) of this part, of
the existence of any material
inadequacy, as specified in § 1.16(d)(2)
of this part, such applicant or registrant
must give notice of such material
inadequacy, as provided in paragraph
(n) of this section, as soon as possible
but not later than twenty-four (24) hours
of discovering or being notified of the
material inadequacy. The applicant or
registrant must file, in the manner
provided for under paragraph (n) of this
section, a report stating what steps have
been and are being taken to correct the
material inadequacy within forty-eight
(48) hours of filing its notice of the
material inadequacy.
(e) Whenever any self-regulatory
organization learns that a member
registrant has failed to file a notice or
report as required by this section, that
self-regulatory organization must
immediately report this failure by
notice, as provided in paragraph (n) of
this section.
(f) * * *
(2) Whenever a registered futures
commission merchant determines that
any position it carries for another
registered futures commission merchant
or for a registered leverage transaction
merchant must be liquidated
immediately, transferred immediately or
that the trading of any account of such
futures commission merchant or
leverage transaction merchant shall be
only for purposes of liquidation,
because the other futures commission
merchant or the leverage transaction
merchant has failed to meet a call for
margin or to make other required
deposits, the carrying futures
commission merchant must
immediately give notice, as provided in
paragraph (n) of this section, of such a
determination.
(3) Whenever a registered futures
commission merchant determines that
an account which it is carrying is
undermargined by an amount which
exceeds the futures commission
merchant’s adjusted net capital
determined in accordance with § 1.17 of
this part, the futures commission
merchant must immediately provide
notice, as provided in paragraph (n) of
this section, of such a determination to
the designated self-regulatory
organization and the Commission. This
paragraph (f)(3) shall apply to any
account carried by the futures

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commission merchant, whether a
customer, noncustomer, omnibus or
proprietary account. For purposes of
this paragraph (f)(3), if any person has
an interest of 10 percent or more in
ownership or equity in, or guarantees,
more than one account, or has
guaranteed an account in addition to its
own account, all such accounts shall be
combined.
(4) A futures commission merchant
shall provide immediate notice, as
provided in paragraph (n) of this
section, whenever any commodity
interest account it carries is subject to a
margin call, or call for other deposits
required by the futures commission
merchant, that exceeds the futures
commission merchant’s excess adjusted
net capital, determined in accordance
with § 1.17 of this part, and such call
has not been answered by the close of
business on the day following the
issuance of the call. This applies to all
accounts carried by the futures
commission merchant, whether
customer, noncustomer, or omnibus,
that are subject to margining, including
commodity futures, cleared swaps, and
options. In addition to actual margin
deposits by an account owner, a futures
commission merchant may also take
account of favorable market moves in
determining whether the margin call is
required to be reported under this
paragraph.
(5)(i) A futures commission merchant
shall provide immediate notice, as
provided in paragraph (n) of this
section, whenever its excess adjusted
net capital is less than six percent of the
maintenance margin required by the
futures commission merchant on all
positions held in accounts of a
noncustomer other than a noncustomer
who is subject to the minimum financial
requirements of:
(A) A futures commission merchant,
or
(B) The Securities and Exchange
Commission for a securities broker or
dealer.
*
*
*
*
*
(g) A futures commission merchant
shall provide notice, as provided in
paragraph (n) of this section, of a
substantial reduction in capital as
compared to that last reported in a
financial report filed with the
Commission pursuant to § 1.10 of this
part. This notice shall be provided as
follows:
(1) If any event or series of events,
including any withdrawal, advance,
loan or loss cause, on a net basis, a
reduction in net capital (or, if the
futures commission merchant is
qualified to use the filing option

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available under § 1.10(h) of this part,
tentative net capital as defined in the
rules of the Securities and Exchange
Commission) of 20 percent or more,
notice must be provided as provided in
paragraph (n) of this section within two
business days of the event or series of
events causing the reduction stating the
reason for the reduction and steps the
futures commission merchant will be
taking to ensure an appropriate level of
net capital is maintained by the futures
commission merchant; and
(2) If equity capital of the futures
commission merchant or a subsidiary or
affiliate of the futures commission
merchant consolidated pursuant to
§ 1.17(f) of this part (or 17 CFR
240.15c3–1e) would be withdrawn by
action of a stockholder or a partner or
a limited liability company member or
by redemption or repurchase of shares
of stock by any of the consolidated
entities or through the payment of
dividends or any similar distribution, or
an unsecured advance or loan would be
made to a stockholder, partner, sole
proprietor, limited liability company
member, employee or affiliate, such that
the withdrawal, advance or loan would
cause, on a net basis, a reduction in
excess adjusted net capital (or, if the
futures commission merchant is
qualified to use the filing option
available under § 1.10(h) of this part,
excess net capital as defined in the rules
of the Securities and Exchange
Commission) of 30 percent or more,
notice must be provided as provided in
paragraph (n) of this section at least two
business days prior to the withdrawal,
advance or loan that would cause the
reduction: Provided, however, That the
provisions of paragraphs (g)(1) and (g)(2)
of this section do not apply to any
futures or securities transaction in the
ordinary course of business between a
futures commission merchant and any
affiliate where the futures commission
merchant makes payment to or on
behalf of such affiliate for such
transaction and then receives payment
from such affiliate for such transaction
within two business days from the date
of the transaction.
(3) Upon receipt of such notice from
a futures commission merchant, or upon
a reasonable belief that a substantial
reduction in capital has occurred or will
occur, the Director of the Division of
Swap Dealer and Intermediary
Oversight or the Director’s designee may
require that the futures commission
merchant provide or cause a Material
Affiliated Person (as that term is defined
in § 1.14(a)(2) of this part) to provide,
within three business days from the date
of request or such shorter period as the
Division Director or designee may

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specify, such other information as the
Division Director or designee
determines to be necessary based upon
market conditions, reports provided by
the futures commission merchant, or
other available information.
(h) Whenever a person registered as a
futures commission merchant knows or
should know that the total amount of its
funds on deposit in segregated accounts
on behalf of customers trading on
designated contract markets, or the
amount of funds on deposit in
segregated accounts for customers
transacting in Cleared Swaps under part
22 of this chapter, or that the total
amount set aside on behalf of customers
trading on non-United States markets
under part 30 of this chapter, is less
than the total amount of such funds
required by the Act and the regulations
to be on deposit in segregated or secured
amount accounts on behalf of such
customers, the registrant must report
such deficiency immediately by notice
to the registrant’s designated selfregulatory organization and the
Commission, as provided in paragraph
(n) of this section.
(i) A futures commission merchant
must provide immediate notice, as set
forth in paragraph (n) of this section,
whenever it discovers or is informed
that it has invested funds held for
futures customers trading on designated
contract markets pursuant to § 1.20 of
this part, Cleared Swaps Customer
Collateral, as defined in § 22.1 of this
chapter, or 30.7 Customer Funds, as
defined in § 30.1 of this chapter, in
instruments that are not permitted
investments under § 1.25 of this part, or
has otherwise violated the requirements
governing the investment of funds
belonging to customers under § 1.25 of
this part.
(j) A futures commission merchant
must provide immediate notice, as
provided in paragraph (n) of this
section, whenever the futures
commission merchant does not hold a
sufficient amount of funds in segregated
accounts for futures customers under
§ 1.20 of this part, in segregated
accounts for Cleared Swaps Customers
under part 22 of this chapter, or in
secured amount accounts for customers
trading on foreign market under part 30
of this chapter to meet the futures
commission merchant’s targeted
residual interest in the segregated or
secured amount accounts pursuant to its
policies and procedures required under
§ 1.11 of this part, or whenever the
futures commission merchant’s amount
of residual interest in any such accounts
is less than the sum of all margin
deficits for such accounts.

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(k) A futures commission merchant
must provide immediate notice, as
provided in paragraph (n) of this
section, whenever the futures
commission merchant, or the futures
commission merchant’s parent or
material affiliate, experiences a material
adverse impact to its creditworthiness
or ability to fund its obligations.
(l) A futures commission merchant
must provide immediate notice, as
provided in paragraph (n) of this
section, whenever the futures
commission merchant experiences a
material change in its operations or risk
profile, including a change in the senior
management of the futures commission
merchant, the establishment or
termination of a line of business, a
material adverse change in the futures
commission merchant’s clearing
arrangements, or a material adverse
change to the futures commission
merchant’s credit arrangements,
including any change that could
adversely impact the firm’s liquidity
resources.
(m) In the event that a futures
commission merchant receives a notice,
examination report, or any other
correspondence from a designated selfregulatory organization, the Securities
and Exchange Commission or a
securities industry self-regulatory
organization, the futures commission
merchant must immediately file a copy
of such notice, examination report, or
any other correspondence, and the
registrant’s response, as appropriate, as
provided in paragraph (n) of this
section.
(n) Notice. (1) Every notice and report
required to be filed by this section by a
futures commission merchant or a selfregulatory organization must be filed
with the Commission, with the
designated self-regulatory organization,
if any, and with the Securities and
Exchange Commission, if such registrant
is a securities broker or dealer. Every
notice and report required to be filed by
this section by an applicant for
registration as a futures commission
merchant must be filed with the
National Futures Association (on behalf
of the Commission), with the designated
self-regulatory organization, if any, and
with the Securities and Exchange
Commission, if such applicant is a
securities broker or dealer. Every notice
or report that is required to be filed by
this section by a futures commission
merchant or a self-regulatory
organization must include a discussion
of how the reporting event originated
and what steps have been, or are being
taken, to address the reporting event.
(2) Every notice and report which an
introducing broker or applicant for

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registration as an introducing broker is
required to file by paragraphs (a), (c),
and (d) of this section must be filed with
the National Futures Association (on
behalf of the Commission), with the
designated self-regulatory organization,
if any, and with every futures
commission merchant carrying or
intending to carry customer accounts for
the introducing broker or applicant for
registration as an introducing broker.
Any notice or report filed with the
National Futures Association pursuant
to this paragraph shall be deemed for all
purposes to be filed with, and to be the
official record of, the Commission.
Every notice or report that is required to
be filed by this section by an
introducing broker or applicant for
registration as an introducing broker
must include a discussion of how the
reporting event originated and what
steps have been, or are being taken, to
address the reporting event.
(3) Every notice or report that is
required to be filed by a futures
commission merchant with the
Commission or with a designated selfregulatory organization under this
section must be in writing and must be
filed via electronic transmission using a
form of user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission; Provided, however,
that if the registered futures commission
merchant cannot file the notice or report
using the electronic transmission
approved by the Commission due to a
transmission or systems failure, the
futures commission merchant must
immediately contact the Commission’s
Regional office with jurisdiction over
the futures commission merchant as
provided in § 140.02 of this chapter, and
by email to [email protected]. Any
such electronic submission must clearly
indicate the futures commission
merchant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer.
6. Amend § 1.15 by revising paragraph
(a)(4) to read as follows:
§ 1.15 Risk assessment reporting
requirements for futures commission
merchants.

(a) * * *
(4) The reports required to be filed
pursuant to paragraphs (a)(1) and (2) of
this section must be filed via electronic
transmission using a form of user
authentication assigned in accordance
with procedures established by or

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67937

approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer.
*
*
*
*
*
7. Amend § 1.16 by revising
paragraphs (a)(4), (b)(1), (c)(1), (c)(2),
and (f)(1)(i)(C), and by adding paragraph
(b)(4) to read as follows:
§ 1.16 Qualifications and reports of
accountants.

(a) * * *
(4) Customer. The term ‘‘customer’’
means customer, as defined in § 1.3 of
this part, and 30.7 Customer, as defined
in § 30.1 of this chapter.
(b) Qualifications of accountants. (1)
The Commission will recognize any
person as a certified public accountant
who is duly registered and in good
standing as such under the laws of the
place of his residence or principal
office; Provided, however, that a
certified public accountant engaged to
conduct an examination of a futures
commission merchant must be
registered with the Public Company
Accounting Oversight Board, have
undergone an examination by the Public
Company Accounting Oversight Board,
and any deficiencies noted during such
examination must have been remediated
to the satisfaction of the Public
Company Accounting Oversight Board
within three years of such report.
*
*
*
*
*
(4) The governing body of each
futures commission merchant must
ensure that the certified public
accountant engaged is duly qualified to
perform an audit of the futures
commission merchant. Such an
evaluation of the qualifications of the
certified public accountant should
include, among other issues, the
certified public accountant’s experience
in auditing futures commission
merchants, the depth of the certified
public accountant’s staff, the certified
public accountant’s knowledge of the
Act and Regulations, the size and
geographic location of the futures
commission merchant, and the
independence of the certified public
accountant.
(c) * * *
(1) Technical requirements. The
accountant’s report must:
(i) Be dated;
(ii) Indicate the city and State where
issued; and

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(iii) Identify without detailed
enumeration the financial statements
covered by the report.
(2) Representations as to the audit.
The accountant’s report must state
whether the audit was made in
accordance with U.S. generally accepted
auditing standards after full
consideration to the auditing standards
adopted by the Public Company
Accounting Oversight Board, and must
designate any auditing procedures
deemed necessary by the accountant
under the circumstances of the
particular case which have been omitted
and the reasons for their omission.
However, nothing in this paragraph
(c)(2) shall be construed to imply
authority for the omission of any
procedure which independent
accountants would ordinarily employ in
the course of an audit made for the
purposes of expressing the opinion
required by paragraph (c)(3) of this
section.
*
*
*
*
*
(f)(1) * * *
(i) * * *
(C) Any copy that under this
paragraph (f)(1)(i) is required to be filed
with the Commission must be filed via
electronic transmission using a form of
user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instructions issued by or approved by
the Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer.
*
*
*
*
*
8. Amend § 1.17 by revising
paragraphs (a)(4), (b)(2), (b)(7), (c)(5)(v),
(c)(5)(viii), and (c)(5)(ix) to read as
follows:

emcdonald on DSK67QTVN1PROD with PROPOSALS2

§ 1.17 Minimum financial requirements for
futures commission merchants and
introducing brokers.

(a) * * *
(4) A futures commission merchant
who is not in compliance with this
section, or is unable to demonstrate
such compliance as required by
paragraph (a)(3) of this section, or who
cannot certify to the Commission
immediately upon request and
demonstrate with verifiable evidence
that it has sufficient access to liquidity
to continue operating as a going
concern, must transfer all customer
accounts and immediately cease doing
business as a futures commission
merchant until such time as the firm is

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able to demonstrate such compliance;
Provided, however, The registrant may
trade for liquidation purposes only
unless otherwise directed by the
Commission and/or the designated selfregulatory organization; And, Provided
further, That if such registrant
immediately demonstrates to the
satisfaction of the Commission or the
designated self-regulatory organization
the ability to achieve compliance, the
Commission or the designated selfregulatory organization may in its
discretion allow such registrant up to a
maximum of 10 business days in which
to achieve compliance without having
to transfer accounts and cease doing
business as required above. Nothing in
this paragraph (a)(4) shall be construed
as preventing the Commission or the
designated self-regulatory organization
from taking action against a registrant
for non-compliance with any of the
provisions of this section.
*
*
*
*
*
(b) * * *
(2) Customer. This term means a
futures customer as defined in § 1.3 of
this chapter, a cleared over the counter
customer as defined in paragraph (b)(10)
of this section, and a 30.7 Customer as
defined in § 30.1 of this chapter.
*
*
*
*
*
(7) Customer account. This term
means an account in which commodity
futures, options or cleared over the
counter derivative positions are carried
on the books of the applicant or
registrant which is an account that is
included in the definition of customer
as defined in § 1.17(b)(2).
*
*
*
*
*
(c) * * *
(5) * * *
(v) In the case of securities and
obligations used by the applicant or
registrant in computing net capital, and
in the case of a futures commission
merchant that invests funds deposited
by futures customers as defined in § 1.3
of this part, Cleared Swaps Customers as
defined in § 22.1 of this chapter, and
30.7 Customers as defined in § 30.1 of
this chapter in securities as permitted
investments under § 1.25 of this part,
the deductions specified in Rule
240.15c3–1(c)(2)(vi) or Rule 240.15c3–
1(c)(2)(vii) of the Securities and
Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi) and 17 CFR
240.15c3–1(c)(2)(vii)) (‘‘securities
haircuts’’). Futures commission
merchants that establish and enforce
written policies and procedures to
assess the credit risk of commercial
paper, convertible debt instruments, or
nonconvertible debt instruments in
accordance with Rule 240.15c3–

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1(c)(2)(vi) of the Securities and
Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)) may apply the
lower haircut percentages specified in
Rule 240.15c3–1(c)(2)(vi) for such
commercial paper, convertible debt
instruments and nonconvertible debt
instruments. Futures commission
merchants must maintain their written
policies and procedures in accordance
with § 1.31 of this part;
*
*
*
*
*
(viii) In the case of a futures
commission merchant, for
undermargined customer commodity
futures accounts and commodity option
customer accounts the amount of funds
required in each such account to meet
maintenance margin requirements of the
applicable board of trade or if there are
no such maintenance margin
requirements, clearing organization
margin requirements applicable to such
positions, after application of calls for
margin or other required deposits which
are outstanding no more than one
business day. If there are no such
maintenance margin requirements or
clearing organization margin
requirements, then the amount of funds
required to provide margin equal to the
amount necessary, after application of
calls for margin or other required
deposits outstanding no more than one
business day, to restore original margin
when the original margin has been
depleted by 50 percent or more:
Provided, To the extent a deficit is
excluded from current assets in
accordance with paragraph (c)(2)(i) of
this section such amount shall not also
be deducted under this paragraph
(c)(5)(viii). In the event that an owner of
a customer account has deposited an
asset other than cash to margin,
guarantee or secure his account, the
value attributable to such asset for
purposes of this subparagraph shall be
the lesser of (A) the value attributable to
the asset pursuant to the margin rules of
the applicable board of trade, or (B) the
market value of the asset after
application of the percentage
deductions specified in this paragraph
(c)(5);
(ix) In the case of a futures
commission merchant, for
undermargined commodity futures and
commodity option noncustomer and
omnibus accounts the amount of funds
required in each such account to meet
maintenance margin requirements of the
applicable board of trade or if there are
no such maintenance margin
requirements, clearing organization
margin requirements applicable to such
positions, after application of calls for
margin or other required deposits which

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are outstanding no more than one
business day. If there are no such
maintenance margin requirements or
clearing organization margin
requirements, then the amount of funds
required to provide margin equal to the
amount necessary after application of
calls for margin or other required
deposits outstanding no more than one
business day to restore original margin
when the original margin has been
depleted by 50 percent or more:
Provided, To the extent a deficit is
excluded from current assets in
accordance with paragraph (c)(2)(i) of
this section such amount shall not also
be deducted under this paragraph
(c)(5)(ix). In the event that an owner of
a noncustomer or omnibus account has
deposited an asset other than cash to
margin, guarantee or secure his account
the value attributable to such asset for
purposes of this subparagraph shall be
the lesser of the value attributable to
such asset pursuant to the margin rules
of the applicable board of trade, or the
market value of such asset after
application of the percentage
deductions specified in this paragraph
(c)(5);
*
*
*
*
*
9. Revise § 1.20 to read as follows:

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§ 1.20 Futures customer funds to be
segregated and separately accounted for.

(a) General. A futures commission
merchant must separately account for
all futures customer funds and segregate
such funds as belonging to its futures
customers. A futures commission
merchant shall deposit futures customer
funds under an account name which
clearly identifies them as futures
customer funds and shows that such
funds are segregated as required by
sections 4d(a) and 4d(b) of the Act and
this part. A futures commission
merchant must at all times maintain in
the separate account or accounts money,
securities and property in an amount at
least sufficient in the aggregate to cover
its total obligations to all futures
customers. The futures commission
merchant must perform appropriate due
diligence as required by § 1.11 of this
part on any and all locations of futures
customer funds, as specified in
paragraph (b) of this section, to ensure
that the location in which the futures
commission merchant has deposited
such funds is a financially sound entity.
(b) Location of futures customer
funds. A futures commission merchant
may deposit futures customer funds,
subject to the risk management policies
and procedures of the futures
commission merchant required by § 1.11
of this part, with the following
depositories:

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(1) A bank or trust company;
(2) A derivatives clearing
organization; or
(3) Another futures commission
merchant.
(c) Limitation on the holding of
futures customer funds outside of the
United States. A futures commission
merchant may hold futures customer
funds with a depository outside of the
United States only in accordance with
§ 1.49 of this part.
(d) Written acknowledgment from
depositories. (1) A futures commission
merchant must obtain a written
acknowledgment from each bank, trust
company, derivatives clearing
organization, or futures commission
merchant prior to or contemporaneously
with the opening of an account by the
futures commission merchant with such
depositories; Provided, however, that a
written acknowledgment need not be
obtained from a derivatives clearing
organization that has adopted and
submitted to the Commission rules that
provide for the segregation of futures
customer funds in accordance with all
relevant provisions of the Act and the
rules and orders promulgated
thereunder.
(2) The written acknowledgment must
be in the form as set out in Appendix
A to this part.
(3) A futures commission merchant
may deposit futures customer funds
only with a depository that provides the
Commission and the futures
commission merchant’s designated selfregulatory organization with direct,
read-only access to account information
on 24-hour a day basis. The Commission
and the futures commission merchant’s
designated self-regulatory organization
must receive the direct access when the
account is opened. The written
acknowledgment must contain the
futures commission merchant’s
authorization to the depository to
provide direct and immediate account
access to the Commission and the
futures commission merchant’s
designated self-regulatory organization
without further notice to or consent
from the futures commission merchant.
(4) A futures commission merchant
may deposit futures customer funds
only with a depository that agrees to
provide the Commission and the futures
commission merchant’s designated selfregulatory organization with a copy of
the executed written acknowledgment
within three business days of the
opening of the account. The
Commission must receive the written
acknowledgment from the depository
via electronic mail at
[email protected]. The
written acknowledgment must contain

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67939

the futures commission merchant’s
authorization to the depository to
provide the written acknowledgment to
the Commission and to the futures
commission merchant’s designated selfregulatory organization without further
notice to or consent from the futures
commission merchant.
(5) A futures commission merchant
may deposit futures customer funds
only with a depository that agrees to
reply promptly and directly to the
Commission’s or to the futures
commission merchant’s designated selfregulatory organization’s requests for
confirmation of account balances or
other account information without
further notice to or consent from the
futures commission merchant. The
written acknowledgment must contain
the futures commission merchant’s
authorization to the depository to
respond directly and immediately to
requests from the Commission or the
futures commission merchant’s
designated self-regulatory organization
for confirmation of account balances
and other account information without
further notice to or consent from the
futures commission merchant.
(6) The futures commission merchant
shall promptly file a copy of the written
acknowledgment with the Commission
in the manner specified by the
Commission and in no event later than
the later of:
(i) The effective date of this rule; or
(ii) Three business days after the
account is opened.
(7) A futures commission merchant
shall amend the written
acknowledgment and promptly file the
amended acknowledgment with the
Commission within 120 days of any
changes in the following:
(i) The name or business address of
the futures commission merchant;
(ii) The name or business address of
the bank, trust company, derivatives
clearing organization or futures
commission merchant receiving futures
customer funds; or
(iii) The account number(s) under
which futures customer funds are held.
(8) A futures commission merchant
must maintain each written
acknowledgment readily accessible in
its files in accordance with § 1.31 of this
part, for as long as the account remains
open, and thereafter for the period
provided in § 1.31 of this part.
(e) Commingling. (1) A futures
commission merchant may for
convenience commingle the futures
customer funds that it receives from, or
on behalf of, multiple futures customers
in a single account or multiple accounts
with one or more of the depositories
listed in paragraph (b) of this section.

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(2) A futures commission merchant
shall not commingle futures customer
funds with the money, securities or
property of such futures commission
merchant, or with any proprietary
account of such futures commission
merchant, or use such funds to secure
or guarantee the obligation of, or extend
credit to, such futures commission
merchant or any proprietary account of
such futures commission merchant;
Provided, however, a futures
commission merchant may deposit
proprietary funds in segregated accounts
as permitted under § 1.23 of this part.
(3) A futures commission merchant
may not commingle futures customer
funds with funds deposited by 30.7
Customers as defined in § 30.1 of this
chapter and set aside in separate
accounts as required by part 30 of this
chapter, or with funds deposited by
Cleared Swaps Customers as defined in
§ 22.1 of this chapter and held in
segregated accounts pursuant to Section
4d(f) of the Act; Provided, however, that
a futures commission merchant may
commingle futures customer funds with
funds deposited by 30.7 Customers or
Cleared Swaps Customers if expressly
permitted by a Commission regulation
or order, or by a derivatives clearing
organization rule approved in
accordance with § 39.15(b)(2) of this
chapter.
(f) Limitation on use of futures
customer funds. (1) A futures
commission merchant shall treat and
deal with the funds of a futures
customer as belonging to such futures
customer. A futures commission
merchant shall not use the funds of a
futures customer to secure or guarantee
the commodity interests, or to secure or
extend the credit, of any person other
than the futures customer for whom the
funds are held.
(2) A futures commission merchant
shall obligate futures customer funds to
a derivatives clearing organization, a
futures commission merchant, or any
depository solely to purchase, margin,
guarantee, secure, transfer, adjust or
settle trades, contracts or commodity
option transactions of futures
customers; Provided, however, that a
futures commission merchant is
permitted to use the funds belonging to
a futures customer that are necessary in
the normal course of business to pay
lawfully accruing fees or expenses on
behalf of the futures customer’s
positions including commissions,
brokerage, interest, taxes, storage and
other fees and charges.
(3) No person, including any
derivatives clearing organization or any
depository, that has received futures
customer funds for deposit in a

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segregated account, as provided in this
section, may hold, dispose of, or use any
such funds as belonging to any person
other than the futures customers of the
futures commission merchant which
deposited such funds.
(g) Derivatives clearing organizations.
(1) General. All futures customer funds
received by a derivatives clearing
organization from a member to
purchase, margin, guarantee, secure or
settle the trades, contracts or commodity
options of the clearing member’s futures
customers and all money accruing to
such futures customers as the result of
trades, contracts or commodity options
so carried shall be separately accounted
for and segregated as belonging to such
futures customers, and a derivatives
clearing organization shall not hold, use
or dispose of such futures customer
funds except as belonging to such
futures customers. A derivatives
clearing organization shall deposit
futures customer funds under an
account name that clearly identifies
them as futures customer funds and
shows that the futures customer funds
are segregated as required by section
4(d)(a) and 4d(b) of the Act and this
part.
(2) Location of futures customer
funds. A derivatives clearing
organization may deposit futures
customer funds with a bank or trust
company, which shall include a Federal
Reserve Bank with respect to deposits of
a systemically important derivatives
clearing organization.
(3) Limitation on the holding of
futures customer funds outside of the
United States. A derivatives clearing
organization may hold futures customer
funds with a depository outside of the
United States only in accordance with
§ 1.49 of this part.
(4) Written acknowledgment from
depositories. (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;
(ii) The written acknowledgment must
be in the form as set out in Appendix
A to this part;
(iii) A derivatives clearing
organization may deposit futures
customer funds only with a depository
that provides the Commission with
direct, read-only access to account
information on 24-hour a day basis. The
Commission must receive the direct
access when the account is opened. The
written acknowledgment must contain
the derivatives clearing organization’s
authorization to the depository to
provide direct and immediate account
access to the Commission without

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further notice to or consent from the
derivatives clearing organization;
(iv) A derivatives clearing
organization may deposit futures
customer funds only with a depository
that agrees to provide the Commission
with a copy of the executed written
acknowledgment within three business
days of the opening of the account. The
Commission must receive the written
acknowledgment from the depository
via electronic mail at
[email protected]. The
written acknowledgment must contain
the derivatives clearing organization’s
authorization to the depository to
provide the written acknowledgment to
the Commission without further notice
to or consent from the derivatives
clearing organization;
(v) A derivatives clearing organization
may deposit futures customer funds
only with a depository that agrees to
reply promptly and directly to the
Commission’s requests for confirmation
of account balances or other account
information without further notice to or
consent from the derivatives clearing
organization. The written
acknowledgment must contain the
derivatives clearing organization’s
authorization to the depository to
respond directly and immediately to
requests from the Commission for
confirmation of account balances and
other account information without
further notice to or consent from the
derivatives clearing organization;
(vi) A derivatives clearing
organization shall promptly file a copy
of the written acknowledgment with the
Commission in the manner specified by
the Commission and in event later than
the later of:
(A) The effective date of this rule; or
(B) Three business days after the
account is opened.
(vii) A derivatives clearing
organization shall amend the written
acknowledgment and promptly file the
amended acknowledgment with the
Commission within 120 days of any
changes in the following:
(A)The name or business address of
the derivatives clearing organization;
(B) The name or business address of
the depository receiving futures
customer funds; or
(C) The account number(s) under
which futures customer funds are held.
(viii) A derivatives clearing
organization must maintain each written
acknowledgment readily accessible in
its files in accordance with § 1.31 of this
part, for as long as the account remains
open, and thereafter for the period
provided in § 1.31 of this part.
(5) Commingling. (i) A derivatives
clearing organization may for

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convenience commingle the futures
customer funds that it receives from, or
on behalf of, multiple futures
commission merchants in a single
account or multiple accounts with one
or more of the depositories listed in
paragraph (g)(2) of this section.
(ii) A derivatives clearing organization
shall not commingle futures customer
funds with the money, securities or
property of such derivatives clearing
organization or with any proprietary
account of any of its clearing members,
or use such funds to secure or guarantee
the obligations of, or extend credit to,
such derivatives clearing organization or
any proprietary account of any of its
clearing members.
(iii) A derivatives clearing
organization may not commingle funds
held for futures customers with funds
deposited by clearing members on
behalf of their 30.7 Customers as
defined in § 30.1 of this chapter and set
aside in separate accounts as required
by part 30 of this chapter, or with funds
deposited by clearing members on
behalf of their Cleared Swaps Customers
as defined in § 22.1 of this chapter and
held in segregated accounts pursuant
section 4d(f) of the Act; Provided,
however, that a derivatives clearing
organization may commingle futures
customer funds with funds deposited by
clearing members on behalf of their 30.7
Customers or Cleared Swaps Customers
if expressly permitted by a Commission
regulation or order, or by a derivatives
clearing organization rule approved in
accordance with § 39.15(b)(2) of this
chapter.
(h) Immediate availability of bank
and trust company deposits. All futures
customer funds deposited by a futures
commission merchant or a derivatives
clearing organization with a bank or
trust company must be immediately
available for withdrawal upon the
demand of the futures commission
merchant or derivatives clearing
organization.
(i) Requirements as to Amount. (1) For
purposes of this paragraph (i), the term
‘‘account’’ shall mean the entries on the
books and records of a futures
commission merchant pertaining to the
futures customer funds of a particular
futures customer.
(2) The futures commission merchant
must reflect in the account that it
maintains for each futures customer:
(i) The market value of any futures
customer funds that it receives from
such customer, as adjusted by:
(A) Any uses permitted under § 1.20(f)
of this part;
(B) Any accruals on permitted
investments of such collateral under
§ 1.25 of this part that, pursuant to the

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futures commission merchant’s
customer agreement with that customer,
are creditable to such customer;
(C) Any gains and losses with respect
to contracts for the purchase or sale of
a commodity for future delivery and any
options on such contracts;
(D) Any charges lawfully accruing to
the futures customer, including any
commission, brokerage fee, interest, tax,
or storage fee; and
(E) Any appropriately authorized
distribution or transfer of such
collateral.
(ii) The amount of collateral required
for the futures customer’s contracts for
the purchase or sale of a commodity for
future delivery and any options on such
contracts at each derivatives clearing
organization on which the futures
commission merchant is a member, or
by each other futures commission
merchant through which the futures
commission merchant clears futures
customer contracts, and the total of such
required collateral amounts.
(3)(i) If the market value of futures
customer funds in the account of a
futures customer is positive after
adjustments, then that account has a
credit balance. If the market value of
futures customer funds in the account of
a futures customer is negative after
adjustments, then that account has a
debit balance.
(ii) If the value of the futures customer
funds, as calculated in paragraph
(i)(2)(i) of this section, for a futures
customer’s account is less than the total
amount of collateral required for that
account’s contracts for the purchase or
sale of a commodity for future delivery
and any options on such contracts at
derivatives clearing organizations, as
calculated in paragraph (i)(2)(ii) of this
section, the difference is a margin
deficit.
(4) The futures commission merchant
must maintain in segregation an amount
equal to the sum of any credit balances
that the futures customers of the futures
commission merchant have in their
accounts, excluding from such sum any
debit balances that the futures
customers of the futures commission
merchant have in their accounts. In
addition, the futures commission
merchant must at all times maintain
residual interest in segregated fund
sufficient to exceed the sum of all
margin deficits that the futures
customers of the futures commission
merchant have in their accounts. Such
residual interest may not be withdrawn
pursuant to § 1.23 of this part.

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67941

Appendix A to § 1.20—
Acknowledgment Letter for CFTC
Regulation 1.20 Customer Segregated
Account
[Date]
[Name and Address of Bank, Trust
Company, Derivatives Clearing Organization
or Futures Commission Merchant]
We refer to the Segregated Account(s)
which [Name of Futures Commission
Merchant or Derivatives Clearing
Organization] (‘‘we’’ or ‘‘our’’) have opened
or will open with [Name of Bank, Trust
Company, Derivatives Clearing Organization
or Futures Commission Merchant] (‘‘you’’ or
‘‘your’’) entitled:
[Name of Futures Commission Merchant or
Derivatives Clearing Organization] [if
applicable, add ‘‘FCM Customer Omnibus
Account’’] CFTC Regulation 1.20 Customer
Segregated Account
Account Number(s): [
]
You acknowledge and agree that we have
opened or will open the above-referenced
Account(s) for the purpose of depositing, as
applicable, money, securities and other
property (collectively the ‘‘Funds’’) of our
customers who trade commodities, options,
swaps, other cleared OTC derivatives
products and other products, as required by
Commodity Futures Trading Commission
(‘‘CFTC’’) Regulations, including Regulation
1.20, as amended; that the Funds held by
you, hereafter deposited in the Account(s) or
accruing to the credit of the Accounts, will
be separately accounted for and segregated
on your books from our own funds and all
other accounts maintained by us in
accordance with the provisions of the
Commodity Exchange Act, as amended (the
‘‘Act’’), and Part 1 of the CFTC’s regulations,
as amended; and that the Funds must
otherwise be treated in accordance with the
provisions of the Act and CFTC regulations.
Furthermore, you acknowledge and agree
that such Funds may not be used by you or
by us to secure or guarantee any obligations
that we might owe to you, nor may they be
used by us to secure credit from you. You
further acknowledge and agree that the
Funds in the Account(s) shall not be subject
to any right of offset or lien for or on account
of any indebtedness, obligations or liabilities
we may now or in the future have owing to
you. This prohibition does not affect your
right to recover funds advanced in the form
of cash transfers you make in lieu of
liquidating non-cash assets held in the
Account(s) for purposes of variation
settlement or posting initial (original) margin.
In addition, you agree that the Account(s)
may be examined at any reasonable time by
an appropriate officer, agent or employee of
the CFTC or a self-regulatory organization of
which we are a member, and this letter
constitutes the authorization and direction of
the undersigned to permit any such
examination or audit to take place. You agree
to respond promptly and directly to requests
for confirmation of account balances and
other account information from an
appropriate officer, agent, or employee of the
CFTC or a self-regulatory organization of
which we are a member, without further
notice to or consent from the futures

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commission merchant or derivatives clearing
organization, as applicable. You also agree
that, immediately upon instruction by the
director of the Division of Swap Dealer and
Intermediary Oversight of the CFTC or the
director of the Division of Clearing and Risk
of the CFTC, or any successor divisions, or
such directors’ designees, or any appropriate
official of a self-regulatory organization of
which we are a member, you will provide
any and all information regarding or related
to the Funds or the Accounts as shall be
specified in such instruction and as directed
in such instruction. You further agree that
you will provide the CFTC and our
designated self-regulatory organization with
the necessary software, a user log-in, and
password that will allow the CFTC and our
designated self-regulatory organization to
have read-only access to the accounts listed
above on your Web site or via an alternative
electronic medium on a 24-hour a day basis.
You acknowledge and agree that the Funds
in the Account(s) shall be released
immediately, subject to the requirements of
U.S. or non-U.S. law as applicable, upon
proper notice and instruction from an
appropriate officer or employee of us or from
the director of the Division of Clearing and
Risk of the CFTC, the director of the Division
of Swap Dealer and Intermediary Oversight
of the CFTC, or any successor divisions, or
such directors’ designees.
We will not hold you responsible for acting
pursuant to any instruction from the CFTC or
the self-regulatory organization upon which
you have relied after having taken reasonable
measures to assure that such instruction was
provided to you by the director of the
Division of Clearing and Risk of the CFTC,
the director of the Division of Swap Dealer
and Intermediary Oversight of the CFTC, or
any successor divisions, or such directors’
designees, or any appropriate official of a
self-regulatory organization of which we are
a member.
In the event that we become subject to
either a voluntary or involuntary petition for
relief under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation
to release the Funds held in the Account(s),
except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the
respective U.S. Bankruptcy Court.
Notwithstanding anything in the foregoing to
the contrary, nothing contained herein shall
be construed as limiting your right to assert
any right of set off against or lien on assets
other than assets maintained in the
Account(s), nor to impose such charges
against us or any proprietary account
maintained by us with you. Further, it is
understood that amounts represented by
checks, drafts or other items shall not be
considered to be part of the Account(s) until
finally collected. Accordingly, checks, drafts
and other items credited to the Account(s)
and subsequently dishonored or otherwise
returned to you, or reversed, for any reason
and any claims relating thereto, including but
not limited to claims of alteration or forgery,
may be charged back to the Account(s), and
we shall be responsible to you as a general
endorser of all such items whether or not
actually so endorsed. You may conclusively
presume that any withdrawal from the

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Account(s) and the balances maintained
therein are in conformity with the Act and
CFTC regulations without any further
inquiry, provided that you have no notice of
or actual knowledge of, or could not
reasonably know of, a violation of the Act or
other provision of law by us; and you shall
not in any manner not expressly agreed to
herein be responsible for ensuring
compliance by us with the provisions of the
Act and CFTC regulations. You may, and are
hereby authorized to, obey the order,
judgment, decree or levy of any court of
competent jurisdiction or any governmental
agency with jurisdiction, which order,
judgment, decree or levy relates in whole or
in part to the Account(s). In any event, you
shall not be liable by reason of any such
action or omission to act, to us or to any
other person, firm, association or corporation
even if thereafter any such order, decree,
judgment or levy shall be reversed, modified,
set aside or vacated.
The terms of this letter agreement shall
remain binding upon the parties, their
successors and assigns, including for the
avoidance of doubt, regardless of the change
in name of any party. This letter agreement
supersedes and replaces any prior agreement
between the parties in connection with the
Account(s), including but not limited to any
prior acknowledgment letter, to the extent
that such prior agreement is inconsistent
with the terms hereof. In the event of any
conflict between this letter agreement and
any other agreement between the parties in
connection with the Account(s), this letter
agreement shall govern with respect to
matters specific to Section 4d of the Act and
the CFTC’s regulations, as amended.
This letter agreement shall be governed by
and construed in accordance with the laws
of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide
by the requirements and conditions set forth
above by signing and returning the enclosed
copy of this letter. You further acknowledge
and agree to provide a copy of this fully
executed letter directly to the CFTC (via
electronic mail to
[email protected]) and our
designated self-regulatory organization.
[Name of Futures Commission Merchant or
Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Bank, Trust Company,
Derivatives Clearing Organization or Futures
Commission Merchant]
By:
Print Name:
Title:
Contact Information: [Insert phone number
and email address]
DATE:

10. Revise § 1.22 to read as follows:
§ 1.22 Use of futures customer funds
restricted.

(a) No futures commission merchant
shall use, or permit the use of, the
futures customer funds of one futures

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customer to purchase, margin, or settle
the trades, contracts, or commodity
options of, or to secure or extend the
credit of, any person other than such
futures customer. The prohibition on
the use of one futures customer’s funds
to extend credit to, or to purchase,
margin, or settle the contracts of another
person applies at all times. For this
purpose, a futures commission
merchant which operationally
commingles the funds of its futures
customers must ensure that at all times
its residual interest in futures customer
funds exceeds the sum of the margin
deficits of all of its futures customers.
(b) Futures customer funds shall not
be used to carry trades or positions of
the same futures customer other than in
contracts for the purchase of sale of any
commodity for future delivery or for
options thereon traded through the
facilities of a designated contract
market.
11. Revise § 1.23 to read as follows:
§ 1.23 Interest of futures commission
merchant in segregated futures customer
funds; additions and withdrawals.

(a)(1) The provision in sections
4d(a)(2) and 4d(b) of the Act and the
provision in § 1.20 of this part that
prohibit the commingling of futures
customer funds with the funds of a
futures commission merchant, shall not
be construed to prevent a futures
commission merchant from having a
residual financial interest in the futures
customer funds segregated as required
by the Act and the regulations in this
part and set apart for the benefit of
futures customers; nor shall such
provisions be construed to prevent a
futures commission merchant from
adding to such segregated futures
customer funds such amount or
amounts of money, from its own funds
or unencumbered securities from its
own inventory, of the type set forth in
§ 1.25 of this part, as it may deem
necessary to ensure any and all futures
customers’ accounts from becoming
undersegregated at any time.
(2) If a futures commission merchant
discovers at any time that it is holding
insufficient funds in segregated
accounts to meet its obligations under
§§ 1.20 and 1.22 of this part, the futures
commission merchant shall
immediately deposit sufficient funds
into segregation to bring the account
into compliance.
(b) A futures commission merchant
may not withdraw funds on any
business day for its own proprietary use
from an account or accounts holding
futures customer funds unless the
futures commission merchant has
prepared the daily segregation

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
calculation required by § 1.32 of this
part as of the close of business on the
previous business day. A futures
commission merchant that has
completed its daily segregation
calculation may make withdrawals for
its own use, to the extent of its actual
residual financial interest in funds held
in segregated futures accounts, adjusted
to reflect market activity and other
events that may have decreased the
amount of the firm’s residual financial
interest since the close of business on
the previous business day, including the
withdrawal of securities held in
segregated safekeeping accounts held by
a bank, trust company, derivatives
clearing organization or other futures
commission merchant. Such
withdrawal(s), however, shall not result
in the funds of one futures customer
being used to purchase, margin or carry
the trades, contracts or commodity
options, or extend the credit of any
other futures customer or other person.
(c) Notwithstanding paragraphs (a)
and (b) of this section, each futures
commission merchant shall establish a
targeted residual interest (i.e., excess
funds) that is in an amount that, when
maintained as its residual interest in the
segregated funds accounts, reasonably
ensures that the futures commission
merchant shall remain in compliance
with the segregated funds requirements
at all times. Each futures commission
merchant shall establish policies and
procedures designed to reasonably
ensure that the futures commission
merchant maintains the targeted
residual amounts in segregated funds at
all times. The futures commission
merchant shall maintain sufficient
capital and liquidity, and take such
other appropriate steps as are necessary
or appropriate, to reasonably ensure that
such amount of targeted residual
interest is maintained as the futures
commission merchant’s residual interest
in the segregated funds accounts at all
times. In determining the amount of the
targeted residual interest, the futures
commission merchant shall analyze all
relevant factors affecting the amounts in
segregated funds from time to time,
including without limitation various
factors, as applicable, relating to the
nature of the futures commission
merchant’s business including, but not
limited to, the composition of the
futures commission merchant’s
customer base, the general
creditworthiness of the customer base,
the general trading activity of the
customers, the types of markets and
products traded by the customers, the
proprietary trading of the futures
commission merchant, the general

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volatility and liquidity of the markets
and products traded by customers, the
futures commission merchant’s own
liquidity and capital needs, and the
historical trends in Customer segregated
fund balances and debit balances in
Customers’ and undermargined
accounts. The analysis and calculation
of the targeted amount of the future
commission merchant’s residual interest
must be described in writing with the
specificity necessary to allow the
Commission and the futures
commission merchant’s designated selfregulatory organization to duplicate the
analysis and calculation and test the
assumptions made by the futures
commission merchant. The adequacy of
the targeted residual interest and the
process for establishing the targeted
residual interest must be reassessed
periodically by the futures commission
merchant and revised as necessary.
Notwithstanding any other provision of
this section, a futures commission
merchant must at all times maintain an
amount of residual interest in segregated
accounts that exceeds the sum of all
margin deficits of its futures customers
under § 1.20 of this part, and such
residual interest may not be withdrawn
by the futures commission merchant.
(d) Notwithstanding any other
paragraph of this section, a futures
commission merchant may not
withdraw funds for its own proprietary
use, in a single transaction or a series of
transactions on a given business day,
from futures accounts if such
withdrawal(s) would exceed 25 percent
of the futures commission merchant’s
residual interest in such accounts as
reported on the daily segregation
calculation required by § 1.32 of this
part and computed as of the close of
business on the previous business day,
unless:
(1) The futures commission
merchant’s Chief Executive Officer,
Chief Finance Officer or other senior
official that is listed as a principal of the
futures commission merchant on its
Form 7–R and is knowledgeable about
the futures commission merchant’s
financial requirements and financial
position pre-approves in writing the
withdrawal, or series of withdrawals;
(2) The futures commission merchant
files written notice of the withdrawal or
series of withdrawals, with the
Commission and with its designated
self-regulatory organization immediately
after the Chief Executive Officer, Chief
Finance Officer or other senior official
as described in paragraph (c)(1) of this
section pre-approves the withdrawal or
series of withdrawals. The written
notice must:

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(i) Be signed by the Chief Executive
Officer, Chief Finance Officer or other
senior official as described in paragraph
(c)(1) of this section that pre-approved
the withdrawal, and give notice that the
futures commission merchant has
withdrawn or intends to withdraw more
than 25 percent of its residual interest
in segregated accounts holding futures
customer funds;
(ii) Include a description of the
reasons for the withdrawal or series of
withdrawals;
(iii) List the amount of funds provided
to each recipient and each recipient’s
name;
(iv) Include the current estimate of the
amount of the futures commission
merchant’s residual interest in the
futures accounts after the withdrawal;
(v) Contain a representation by the
Chief Executive Officer, Chief Finance
Officer or other senior official as
described in paragraph (c)(1) of this
section that pre-approved the
withdrawal, or series of withdrawals,
that, after due diligence, to such
person’s knowledge and reasonable
belief, the futures commission merchant
remains in compliance with the
segregation requirements after the
withdrawal. The Chief Executive
Officer, Chief Finance Officer or other
senior official as described in paragraph
(c)(1) of this section must consider the
daily segregation calculation as of the
close of business on the previous
business day and any other factors that
may cause a material change in the
futures commission merchant’s residual
interest since the close of business the
previous business day, including known
unsecured futures customer debits or
deficits, current day market activity and
any other withdrawals made from the
futures accounts; and
(vi) Any such written notice filed
with the Commission must be filed via
electronic transmission using a form of
user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instruction issued by or approved by the
Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer. Any written notice
filed must be followed up with direct
communication to the Regional office of
the Commission that has supervisory
authority over the futures commission
merchant whereby the Commission
acknowledges receipt of the notice; and

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

(3) After making a withdrawal
requiring the approval and notice
required in paragraphs (c)(1) and (2) of
this section, and before the completion
of its next daily segregated funds
calculation, no futures commission
merchant may make any further
withdrawals from accounts holding
futures customer funds, except to or for
the benefit of commodity and option
customers, without, for each
withdrawal, obtaining the approval
required under paragraph (c)(1) of this
section and filing a written notice in the
manner specified under paragraph (c)(2)
of this section with the Commission and
its designated self-regulatory
organization signed by the Chief
Executive Officer, Chief Finance Officer,
or other senior official. The written
notice must:
(i) List the amount of funds provided
to each recipient and each recipient’s
name;
(ii) Disclose the reason for each
withdrawal;
(iii) Confirm that the Chief Executive
Officer, Chief Finance Officer, or other
senior official (and identify of the
person if different from the person who
signed the notice) pre-approved the
withdrawal in writing;
(iv) Disclose the current estimate of
the futures commission merchant’s
remaining total residual interest in the
segregated accounts holding futures
customer funds after the withdrawal;
and
(v) Include a representation that, after
due diligence, to the best of the notice
signatory’s knowledge and reasonable
belief the futures commission merchant
remains in compliance with the
segregation requirements after the
withdrawal.
(e) If a futures commission merchant
withdraws funds from futures accounts
for its own proprietary use, and the
withdrawal causes the futures
commission merchant to not hold
sufficient funds in the futures accounts
to meet its targeted residual interest, as
required to be computed under § 1.11 of
this part, the futures commission
merchant should deposit its own funds
into the futures accounts to restore the
account balance to the targeted residual
interest amount by the close of business
on the next business day, or, if
appropriate, revise the futures
commission merchant’s targeted amount
of residual interest pursuant to the
policies and procedures required by
§ 1.11 of this part. Notwithstanding the
foregoing, if at any time the futures
commission merchant’s residual interest
in customer accounts is less than the
sum of its futures customers’ margin
deficits as set forth in § 1.20(i) of this

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part, the futures commission merchant
must immediately restore the residual
interest to exceed the sum of such
margin deficits. Any proprietary funds
deposited in the futures accounts must
be unencumbered and otherwise
compliant with § 1.25 of this part, as
applicable.
12. Amend § 1.25 by removing
paragraph (b)(6) and by revising
paragraphs (b)(3)(v), (c)(3), (d)(7),
(d)(11), and (e) to read as follows:
§ 1.25

Investment of customer funds.

*

*
*
*
*
(b) * * *
(3) * * *
(v) Counterparty concentration limits.
Securities purchased by a futures
commission merchant or derivatives
clearing organization from a single
counterparty, or from one or more
counterparties under common
ownership or control, subject to an
agreement to resell the securities to the
counterparty or counterparties, shall not
exceed 25 percent of total assets held in
segregation or under § 30.7 of this
chapter by the futures commission
merchant or derivatives clearing
organization.
*
*
*
*
*
(c) * * *
(3) A futures commission merchant or
derivatives clearing organization shall
maintain the confirmation relating to
the purchase in its records in
accordance with § 1.31 of this part and
note the ownership of fund shares (by
book-entry or otherwise) in a custody
account of the futures commission
merchant or derivatives clearing
organization in accordance with § 1.26
of this part. The futures commission
merchant or the derivatives clearing
organization shall obtain the
acknowledgment letter required by
§ 1.26 of this part from an entity that has
substantial control over the fund shares
purchased with customer funds and has
the knowledge and authority to facilitate
redemption and payment or transfer of
the customer funds. Such entity may
include the fund sponsor or depository
acting as custodian for fund shares.
*
*
*
*
*
(d) * * *
(7) Securities transferred to the
futures commission merchant or
derivatives clearing organization under
the agreement are held in a safekeeping
account with a bank as referred to in
paragraph (d)(2) of this section, a
Federal Reserve Bank, a derivatives
clearing organization, or the Depository
Trust Company in an account that
complies with the requirements of
§ 1.26 of this part.
*
*
*
*
*

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(11) The transactions effecting the
agreement are recorded in the record
required to be maintained under § 1.27
of this part of investments of customer
funds, and the securities subject to such
transactions are specifically identified
in such record as described in paragraph
(d)(1) of this section and further
identified in such record as being
subject to repurchase and reverse
repurchase agreements.
*
*
*
*
*
(e) Deposit of firm-owned securities
into segregation. A futures commission
merchant may deposit unencumbered
securities of the type specified in this
section, which it owns for its own
account, into a customer account. A
futures commission merchant must
include such securities, transfers of
securities, and disposition of proceeds
from the sale or maturity of such
securities in the record of investments
required to be maintained by § 1.27 of
this part. All such securities may be
segregated in safekeeping only with a
bank, trust company, derivatives
clearing organization, or other registered
futures commission merchant in
accordance with the provisions of § 1.20
of this part. For purposes of this section
and §§ 1.27, 1.28, 1.29, and 1.32 of this
part, securities of the type specified by
this section that are owned by the
futures commission merchant and
deposited into a customer account shall
be considered customer funds until
such investments are withdrawn from
segregation in accordance with the
provisions of § 1.23 of this part.
Investments permitted by § 1.25 that are
owned by the futures commission
merchant and deposited into a futures
customer account pursuant to § 1.26 of
the part shall be considered futures
customer funds until such investments
are withdrawn from segregation in
accordance with § 1.23 of this part.
Investments permitted by § 1.25 that are
owned by the futures commission
merchant and deposited into a Cleared
Swaps Customer Account, as defined in
§ 22.1 of this chapter, shall be
considered Cleared Swaps Customer
Collateral, as defined in § 22.1 of this
chapter, until such investments are
withdrawn from segregation in
accordance with § 22.17 of this chapter.
*
*
*
*
*
13. Revise § 1.26 to read as follows:
§ 1.26 Deposit of instruments purchased
with futures customer funds.

(a) Each futures commission merchant
who invests futures customer funds in
instruments described in § 1.25 of this
part, except for investments in money
market mutual funds, shall separately
account for such instruments as futures

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
customer funds and segregate such
instruments as funds belonging to such
futures customers in accordance with
the requirements of § 1.20 of this part.
Each derivatives clearing organization
which invests money belonging or
accruing to futures customers of its
clearing members in instruments
described in § 1.25 of this part, except
for investments in money market
mutual funds, shall separately account
for such instruments as customer funds
and segregate such instruments as
customer funds belonging to such
futures customers in accordance with
§ 1.20 of this part.
(b) Each futures commission merchant
or derivatives clearing organization
which invests futures customer funds in
money market mutual funds, as
permitted by § 1.25 of this part, shall
separately account for such funds and
segregate such funds as belonging to
such futures customers. Such funds
shall be deposited under an account
name which clearly shows that they
belong to futures customers and are
segregated as required by sections 4d(a)
and 4d(b) of the Act and this part. Each
futures commission merchant or
derivatives clearing organization, upon
opening such an account, shall obtain
and maintain readily accessible in its
files in accordance with § 1.31 of this
part, for as long as the account remains
open, and thereafter for the period
provided in § 1.31 of this part, a written
acknowledgment and shall file such
acknowledgment in accordance with the
requirements of § 1.20 of this part. In the
event such funds are held directly with
the money market mutual fund or its
affiliate, the written acknowledgment
letter shall be in the form as set out in
Appendix A to this section. In the event
such funds are held with a depository
the written acknowledgment letter shall
be in the form as set out in Appendix
A to § 1.20 of this part. In either case,
the written acknowledgment letter shall
be obtained, provided to the
Commission and designated selfregulatory organizations, and retained as
required under § 1.20 of this part.

emcdonald on DSK67QTVN1PROD with PROPOSALS2

Appendix to § 1.26—Acknowledgment
Letter for CFTC Regulation 1.26
Customer Segregated Money Market
Mutual Fund Account
[Date]
[Name and Address of Money Market
Mutual Fund]
We propose to invest funds held by [Name
of Futures Commission Merchant or
Derivatives Clearing Organization] (‘‘we’’ or
‘‘our’’) on behalf of our customers in shares
of [Name of Money Market Mutual Fund]
(‘‘you’’ or ‘‘your’’) under account(s) entitled
(or shares issued to):

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[Name of Futures Commission Merchant or
Derivatives Clearing Organization] [if
applicable, add ‘‘FCM Customer Omnibus
Account’’] CFTC Regulation 1.26 Customer
Segregated Money Market Mutual Fund
Account
[If applicable, include any abbreviated
name of the Account(s) as reflected in the
Depository’s electronic systems (provided
any such abbreviated name must reflect that
the Account(s) is a CFTC regulated customer
segregated account)]
Account Number(s): [llll ]
(collectively, the ‘‘Account(s)’’).
You acknowledge and agree that we are
holding these funds, including any shares
issued and amounts accruing in connection
therewith (collectively, the ‘‘Shares’’), for the
benefit of our customers who trade
commodities, options, cleared OTC
derivatives products and other products
(‘‘Commodity Customers’’), as required by
Commodity Futures Trading Commission
(‘‘CFTC’’) Regulation 1.26, as amended; that
the Shares held by you, hereafter deposited
in the Account(s) or accruing to the credit of
the Accounts, will be separately accounted
for and segregated on your books from our
own funds and from any other funds or
accounts held by us in accordance with the
provisions of the Commodity Exchange Act,
as amended (the ‘‘Act’’), and Part 1 of the
CFTC’s regulations, as amended; and that the
Shares must otherwise be treated in
accordance with the provisions of the Act
and CFTC regulations.
Furthermore, you acknowledge and agree
that such Shares may not be used by you or
by us to secure or guarantee any obligations
that we might owe to you, nor may they be
used by us to secure credit from you. You
further acknowledge and agree that the
Shares in the Account(s) shall not be subject
to any right of offset or lien for or on account
of any indebtedness, obligations or liabilities
we may now or in the future have owing to
you.
In addition, you agree that the Account(s)
may be examined at any reasonable time by
an appropriate officer, agent or employee of
the CFTC or a self-regulatory organization,
and this letter constitutes the authorization
and direction of the undersigned to permit
any such examination or audit to take place.
You agree to respond promptly and directly
to requests for confirmation of account
balances and other account information from
an appropriate officer, agent, or employee of
the CFTC or a self-regulatory organization of
which we are a member, without further
notice to or consent from the futures
commission merchant or the derivatives
clearing organization, as applicable. You also
agree that, immediately upon instruction by
the director of the Division of Swap Dealer
and Intermediary Oversight of the CFTC or
the director of the Division of Clearing and
Risk of the CFTC, or any successor divisions,
or such directors’ designees, or any
appropriate official of a self-regulatory
organization of which we are a member, you
will provide any and all information
regarding or related to the Shares or the
Accounts as shall be specified in such
instruction and as directed in such
instruction. You further agree that you will

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provide the CFTC and our designated selfregulatory organization with the necessary
software, a user log-in, and password that
will allow the CFTC and our designated selfregulatory organization to have read-only
access to the accounts listed above on your
Web site on a 24-hour a day basis.
You acknowledge and agree that the Shares
in the Account(s) shall be released
immediately, subject to the requirements of
U.S. or non-U.S. law as applicable, upon
proper notice and instruction from an
appropriate officer or employee of us or from
the director of the Division of Clearing and
Risk of the CFTC, or from the director of the
Division of Swap Dealer and Intermediary
Oversight, or any successor divisions, or such
directors’ designees. We will not hold you
responsible for acting pursuant to any
instruction from the CFTC or from the selfregulatory organization upon which you have
relied after having taken reasonable measures
to assure that such instruction was provided
to you by the director of the Division of
Clearing and Risk of the CFTC, or the director
of the Division of Swap Dealer and
Intermediary Oversight, or any successor
divisions, or such directors’ designees, or any
appropriate official of a self-regulatory
organization of which we are a member. You
further acknowledge that we will provide to
the CFTC a copy of this acknowledgment. In
the event we become subject to either a
voluntary or involuntary petition for relief
under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation
to release the Shares held in the Account(s),
except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the
respective U.S. Bankruptcy Court.
Notwithstanding anything in the foregoing
to the contrary, nothing contained herein
shall be construed as limiting your right to
assert any right of set off against or lien on
assets other than assets maintained in the
Account(s), nor to impose such charges
against us or any proprietary account
maintained by us with you. Further, it is
understood that amounts represented by
checks, drafts or other items shall not be
considered to be part of the Account(s) until
finally collected. Accordingly, checks, drafts
and other items credited to the Account(s)
and subsequently dishonored or otherwise
returned to you, or reversed, for any reason
and any claims relating thereto, including but
not limited to claims of alteration or forgery,
may be charged back to the Account(s), and
we shall be responsible to you as a general
endorser of all such items whether or not
actually so endorsed. You may conclusively
presume that any withdrawal from the
Account(s) and the balances maintained
therein are in conformity with the Act and
CFTC regulations without any further
inquiry, provided that you have no notice of
or actual knowledge of, or could not
reasonably know of, a violation of the Act or
other provision of law by us; and you shall
not in any manner not expressly agreed to
herein be responsible for ensuring
compliance by us with the provisions of the
Act and CFTC regulations.
You may, and are hereby authorized to,
obey the order, judgment, decree or levy of
any court of competent jurisdiction or any

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governmental agency with jurisdiction,
which order, judgment, decree or levy relates
in whole or in part to the Account(s). In any
event, you shall not be liable by reason of any
such action or omission to act, to us or to any
other person, firm, association or corporation
even if thereafter any such order, decree,
judgment or levy shall be reversed, modified,
set aside or vacated.
We are permitted to invest our Commodity
Customers’ funds in money market mutual
funds pursuant to CFTC Regulation 1.25.
That rule sets forth the following conditions,
among others, with respect to any investment
in a money market mutual fund:
(1) The net asset value of the fund must be
computed by 9:00 a.m. of the business day
following each business day and be made
available to us by that time;
(2) The fund must be legally obligated to
redeem an interest in the fund and make
payment in satisfaction thereof by the close
of the business day following the day on
which we make a redemption request except
as otherwise specified in CFTC Regulation
1.25(c)(5)(ii); and,
(3) The agreement under which we invest
our Commodity Customers’ funds must not
contain any provision that would prevent us
from pledging or transferring fund shares.
The terms of this letter agreement shall
remain binding upon the parties, their
successors and assigns, including for the
avoidance of doubt, regardless of the change
in name of any party. This letter agreement
supersedes and replaces any prior agreement
between the parties in connection with the
Account(s), including but not limited to any
prior acknowledgment letter, to the extent
that such prior agreement is inconsistent
with the terms hereof. In the event of any
conflict between this letter agreement and
any other agreement between the parties in
connection with the Account(s), this letter
agreement shall govern with respect to
matters specific to Section 4d of the Act and
the CFTC’s regulations, as amended.
This letter agreement shall be governed by
and construed in accordance with the laws
of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide
by the requirements and conditions set forth
above by signing and returning the enclosed
copy of this letter. You further acknowledge
and agree to provide a copy of this fully
executed letter directly to the CFTC (via
electronic mail to
[email protected]) and our
designated self-regulatory organization in
accordance with CFTC Regulation 1.20.
[Name of Futures Commission Merchant or
Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Money Market Mutual Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number
and email address]
Date:

14. Revise § 1.29 to read as follows:

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§ 1.29 Gains and losses resulting from
investment of customer funds.

and Exchange Commission (17 CFR
241.15c3–1(c)(2)(vi)), held for the same
futures customer’s account. Futures
(a) The investment of customer funds
commission merchants that establish
in instruments described in § 1.25 of
and enforce written policies and
this part shall not prevent the futures
procedures to assess the credit risk of
commission merchant or derivatives
commercial paper, convertible debt
clearing organization so investing such
funds from receiving and retaining as its instruments, or nonconvertible debt
own any incremental income or interest instruments in accordance with Rule
240.15c3–1(c)(2)(vi) of the Securities
income resulting therefrom.
(b) The futures commission merchant and Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)) may apply the
or derivatives clearing organization, as
applicable, shall bear sole responsibility lower haircut percentages specified in
Rule 240.15c3–1(c)(2)(vi) for such
for any losses resulting from the
commercial paper, convertible debt
investment of customer funds in
instruments and nonconvertible debt
instruments described in § 1.25 of this
instruments. The futures commission
part. No investment losses shall be
merchant must maintain a security
borne or otherwise allocated to the
interest in the securities, including a
customers of the futures commission
written authorization to liquidate the
merchant and, if customer funds are
securities at the futures commission
invested by a derivatives clearing
merchant’s discretion, and must
organization in its discretion, to the
segregate the securities in a safekeeping
futures commission merchant.
account with a bank, trust company,
15. Revise § 1.30 to read as follows:
derivatives clearing organization, or
§ 1.30 Loans by futures commission
another futures commission merchant.
merchants; treatment of proceeds.
For purposes of this section, a security
Nothing in these regulations shall
will be considered readily marketable if
prevent a futures commission merchant it is traded on a ‘‘ready market’’ as
from lending its own funds to customers defined in Rule 15c3–1(c)(11)(i) of the
on securities and property pledged by
Securities and Exchange Commission
such customers, or from repledging or
(17 CFR 240.15c3–1(c)(11)(i)).
(c) Each futures commission merchant
selling such securities and property
is required to document its segregation
pursuant to specific written agreement
computation required by paragraph (a)
with such customers. The proceeds of
of this section by preparing a Statement
such loans used to purchase, margin,
of Segregation Requirements and Funds
guarantee, or secure the trades,
in Segregation for Customers Trading on
contracts, or commodity options of
U.S. Commodity Exchanges contained
customers shall be treated and dealt
with by a futures commission merchant in the Form 1–FR–FCM as of the close
of each business day. Nothing in this
as belonging to such customers, in
paragraph shall affect the requirement
accordance with and subject to the
that a futures commission merchant at
provisions of the Act and these
all times maintain sufficient money,
regulations. A futures commission
securities and property to cover its total
merchant may not loan funds on an
obligations to all futures customers, in
unsecured basis to finance customers’
accordance with § 1.20 of this part.
trading, nor may a futures commission
(d) Each futures commission
merchant loan funds to customers
merchant is required to submit to the
secured by the customer accounts of
Commission and to the firm’s
such customers.
designated self-regulatory organization
16. Amend § 1.32 by revising the
the daily Statement of Segregation
section heading and paragraphs (b) and
(c) and by adding paragraphs (d), (e), (f), Requirements and Funds in Segregation
(g), (h), (i), (j), and (k), to read as follows: for Customers Trading on U.S.
Commodity Exchanges required by
§ 1.32 Reporting of segregated account
paragraph (c) of this section by noon the
computation and details regarding the
following business day.
holding of futures customer funds
(e) Each futures commission merchant
*
*
*
*
*
shall file the Statement of Segregation
(b) In computing the amount of
Requirements and Funds in Segregation
futures customer funds required to be in for Customers Trading on U.S.
segregated accounts, a futures
Commodity Exchanges required by
commission merchant may offset any
paragraph (c) of this section in an
net deficit in a particular futures
electronic format using a form of user
customer’s account against the current
authentication assigned in accordance
market value of readily marketable
with procedures established or
securities, less applicable deductions
approved by the Commission.
(f) Each futures commission merchant
(i.e., ‘‘securities haircuts’’) as set forth in
is required to submit to the Commission
Rule 15c3–1(c)(2)(vi) of the Securities

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and to the firm’s designated selfregulatory organization a report listing
the names of all banks, trust companies,
futures commission merchants,
derivatives clearing organizations, or
any other depository or custodian
holding futures customer funds as of the
fifteenth day of the month, or the first
business day thereafter, and the last
business day of each month. This report
must include:
(1) The name and location of each
entity holding futures customer funds;
(2) The total amount of futures
customer funds held by each entity
listed in paragraph (f)(1) of this section;
and
(3) The total amount of cash and
investments that each entity listed in
paragraph (f)(1) of this section holds for
the futures commission merchant. The
futures commission merchant must
report the following investments:
(i) Obligations of the United States
and obligations fully guaranteed as to
principal and interest by the United
States (U.S. government securities);
(ii) General obligations of any State or
of any political subdivision of a State
(municipal securities);
(iii) General obligation issued by any
enterprise sponsored by the United
States (government sponsored enterprise
securities);
(iv) Certificates of deposit issued by a
bank;
(v) Commercial paper fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation;
(vi) Corporate notes or bonds fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation; and
(vii) Interests in money market mutual
funds.
(g) Each futures commission merchant
must report the total amount of futures
customer-owned securities held by the
futures commission merchant as margin
collateral and must list the names and
locations of the depositories holding
such margin collateral.
(h) Each futures commission
merchant must report the total amount
of futures customer funds that have
been used to purchase securities under
agreements to resell the securities
(reverse repurchase transactions).
(i) Each futures commission merchant
must report which, if any, of the
depositories holding futures customer
funds under paragraph (f)(1) of this
section are affiliated with the futures
commission merchant.

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(j) Each futures commission merchant
shall file the detailed list of depositories
required by paragraph (f) of this section
by 11:59 p.m. the next business day in
an electronic format using a form of user
authentication assigned in accordance
with procedures established or
approved by the Commission.
(k) Each futures commission merchant
shall retain its daily segregation
computation and the Statement of
Segregation Requirements and Funds in
Segregation for Customers Trading on
U.S. Commodity Exchanges required by
paragraph (c) of this section, and its
detailed list of depositories required by
paragraph (f) of this section, together
with all supporting documentation, in
accordance with the requirements of
§ 1.31 of this part.
17. Revise § 1.52 to read as follows:
§ 1.52 Self-regulatory organization
adoption and surveillance of minimum
financial requirements.

(a) For purposes of this section, the
following terms are defined as follows:
(1) ‘‘Examinations expert’’ is defined
as a Nationally recognized accounting
and auditing firm with substantial
expertise in audits of futures
commission merchants, risk assessment
and internal control reviews, and is an
accounting and auditing firm that is
acceptable to the Commission;
(2) ‘‘Generally accepted auditing
standards’’ is defined as U.S. generally
accepted auditing standards, developed
by the Auditing Standards Board of the
American Institute of Certified Public
Accountants; and
(3) ‘‘Material weakness’’ is defined as
a deficiency, or a combination of
deficiencies, in internal control over
financial reporting such that there is a
reasonable possibility that a material
misstating of the entities financial
statements and regulatory computations
will not be prevented or detected on a
timely basis by the entity’s internal
controls;
(b)(1) Each self-regulatory
organization must adopt rules
prescribing minimum financial and
related reporting requirements for
members who are registered futures
commission merchants, registered retail
foreign exchange dealers, or registered
introducing brokers. The self-regulatory
organization’s minimum financial and
related reporting requirements must be
the same as, or more stringent than, the
requirements contained in §§ 1.10 and
1.17 of this part, for futures commission
merchants and introducing brokers, and
§§ 5.7 and 5.12 of this chapter for retail
foreign exchange dealers; provided,
however, that a self-regulatory
organization may permit its member

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registrants that are registered with the
Securities and Exchange Commission as
securities brokers or dealers to file (in
accordance with § 1.10(h) of this part) a
copy of their Financial and Operational
Combined Uniform Single Report under
the Securities Exchange Act of 1934
(‘‘FOCUS Report’’), Part II, Part IIA, or
Part II CSE, as applicable, in lieu of
Form 1–FR; provided, further, that such
self-regulatory organization must
require such member registrants to
provide all information in Form 1–FR
that is not included in the FOCUS
Report Part provided by such member
registrant. The definition of adjusted net
capital must be the same as that
prescribed in § 1.17(c) of this chapter for
futures commission merchants and
introducing brokers, and § 5.7(b)(2) of
this chapter for futures commission
merchants offering or engaging in retail
forex transactions and for retail foreign
exchange dealers.
(2) In addition to the requirements set
forth in paragraph (b)(1) of this section,
each self-regulatory organization that
has a futures commission merchant
member registrant must adopt rules
prescribing risk management
requirements for futures commission
merchant member registrants that shall
be the same as, or more stringent than,
the requirements contained in § 1.11 of
this part.
(c)(1) Each self-regulatory
organization must establish and operate
a supervisory program that includes
written policies and procedures
concerning the application of such
supervisory program in the examination
of its member registrants for the purpose
of assessing whether each member
registrant is in compliance with the
applicable self-regulatory organization
and Commission regulations governing
minimum net capital and related
financial requirements, the obligation to
segregate customer funds, risk
management requirements, financial
reporting requirements, recordkeeping
requirements, and sales practice and
other compliance requirements. The
supervisory program also must address
the following elements:
(i) Adequate levels and independence
of examination staff. A self-regulatory
organization must maintain staff of an
adequate size, training, and experience
to effectively implement a supervisory
program. Staff of the self-regulatory
organization, including officers,
directors, and supervising committee
members, must maintain independent
judgment and its actions must not
impair its independence nor appear to
impair its independence in matters
related to the supervisory program. The
self-regulatory organization must

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provide annual ethics training to all
staff with responsibilities for the
supervisory program.
(ii) Ongoing surveillance. A selfregulatory organization’s ongoing
surveillance of member registrants must
include the review and analysis of
financial reports and regulatory notices
filed by member registrants with the
designated self-regulatory organization.
(iii) High-risk firms. A self-regulatory
organization’s supervisory program
must include procedures for identifying
member registrants that are determined
to pose a high degree of potential
financial risk, including the potential
risk of loss of customer funds. High-risk
member registrants must include firms
experiencing financial or operational
difficulties, failing to meet segregation
or net capital requirements, failing to
maintain current books and records, or
experiencing material inadequacies in
internal controls. Enhanced monitoring
for high risk firms should include, as
appropriate, daily review of net capital,
segregation, and secured calculations, to
assess compliance with self-regulatory
organization and Commission
requirements.
(iv) On-site examinations. (A) A selfregulatory organization must conduct
routine periodic on-site examinations of
member registrants. Member futures
commission merchants and retail
foreign exchange dealers must be
subject to on-site examinations no less
frequently than once every eighteen
months. A self-regulatory organization
shall establish a risk-based method of
establishing the scope of each on-site
examination; provided, however, that
the scope of each on-site examination of
a futures commission merchant or retail
foreign exchange dealer must include an
assessment of whether the registrant is
in compliance with applicable
Commission and self-regulatory
organization minimum capital,
customer fund protection,
recordkeeping, and reporting
requirements.
(B) A self-regulatory organization
must establish the frequency of on-site
examinations of member introducing
brokers that do not operate pursuant to
guarantee agreements with futures
commission merchants or retail foreign
exchange dealers using a risk-based
approach; provided, however, that each
introducing broker is subject to an onsite examination no less frequently than
once every three years.
(C) A self-regulatory organization
must conduct on-site examinations of
member registrants in accordance with
uniform examination programs and
procedures that have been submitted to
the Commission.

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(v) Adequate documentation. A selfregulatory organization must adequately
document all aspects of the operation of
the supervisory program, including the
conduct of risk-based scope setting and
the risk-based surveillance of high-risk
member registrants, and the imposition
of remedial and punitive action(s) for
material violations.
(2) In addition to the requirements set
forth in paragraph (c)(1) of this section,
the supervisory program of a selfregulatory organization that has a
registered futures commission merchant
member must satisfy the following
requirements:
(i) The supervisory program must set
forth in writing the examination
standards that the self-regulatory
organization must apply in its
examination of its registered futures
commission merchant member. The
supervisory program must be based on
controls testing as well as substantive
testing and must address all areas of risk
to which futures commission merchants
can reasonably be foreseen to be subject.
The determination as to which elements
of the supervisory program are to be
performed on any examination must be
based on the risk profile of each
registered futures commission merchant
member as well as any additional areas
of risk to be addressed in such
examination.
(ii) All aspects of the supervisory
program, including the standards
pursuant to paragraph (c)(2)(iii) of this
section, must, at minimum, conform to
generally accepted auditing standards
after giving full consideration to those
auditing standards as prescribed by the
Public Company Accounting Oversight
Board.
(iii) The supervisory program must, at
a minimum, have standards addressing
the following:
(A) The ethics of an examiner;
(B) The independence of an examiner;
(C) The supervision, review, and
quality control of an examiner’s work
product;
(D) The evidence and documentation
to be reviewed and retained in
connection with an examination;
(E) The sampling size and techniques
used in an examination;
(F) The examination risk assessment
process;
(G) The examination planning
process;
(H) Materiality assessment;
(I) Quality control procedures to
ensure that the examinations maintain
the level of quality expected;
(J) Communications between an
examiner and the regulatory oversight
committee of the self-regulatory
organization of which the registered

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futures commission merchant is a
member;
(K) Communications between an
examiner and a futures commission
merchant’s audit committee of the board
of directors or other similar governing
body;
(L) Analytical review procedures;
(M) Record retention; and
(N) Required items for inclusion in
the examination report, such as repeat
violations, material items, and high risk
issues.
(iv) A self-regulatory organization
must cause an examinations expert to
evaluate the supervisory program and
such self-regulatory organization’s
application of the supervisory program
at least once every two years.
(A) The self-regulatory organization
must obtain from such examinations
expert a written report that includes the
following:
(1) An affirmation that the
examinations expert has evaluated the
supervisory program, including the
sufficiency of the risk-based approach
and the internal controls testing thereof,
and comments and recommendations in
connection with such evaluation from
such examinations expert;
(2) An affirmation that the
examinations expert has evaluated the
application of the supervisory program
by the self-regulatory organization, and
comments and recommendations in
connection with such evaluation from
such examinations expert;
(3) The examinations expert’s opinion
as to whether the supervisory program
is reasonably likely to identify a
material weakness in internal controls
over financial and/or regulatory
reporting and in any of the other items
that are the subject of an examination
conducted in accordance with the
supervisory program; and
(4) A discussion and recommendation
of any new or best practices as
prescribed by industry sources,
including, but not limited to, those from
the American Institute of Certified
Public Accountants, the Institute of
Internal Auditors, and The Risk
Management Association.
(B) The self-regulatory organization
must provide the written report to the
Commission no later than fifteen days
following the receipt thereof. Upon
resolution of any questions or comments
raised by the Commission, and upon
notice from the Commission that it has
no further comments or questions on the
supervisory program as amended (by
reason of the examinations expert’s
proposals, considerations of the
Commission’s questions or comments,
or otherwise), the self-regulatory
organization shall commence applying

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such supervisory program as the
standard for examining its registered
futures commission merchant members.
(v) The supervisory program must
require the self-regulatory organization
to report to its risk and/or audit
committee of the board of directors with
timely reports of the activities and
findings of the supervisory program to
assist the risk and/or audit committee of
the board of directors to fulfill its
responsibility of overseeing the
examination function.
(vi) The initial supervisory program
shall be established as follows. Within
120 days following the effective date of
this section, or such other time as the
Commission may approve, the selfregulatory organization shall submit a
proposed supervisory program to the
Commission for its review and
comment, together with a written report
that includes the elements found in
paragraphs (c)(2)(iv)(A)(1) and (3) of this
section from an examinations expert
who has evaluated the supervisory
program. Upon resolution of any
questions or comments raised by the
Commission, and upon notice from the
Commission that it has no further
comments or questions on the proposed
supervisory program as amended (by
reason of the considerations of the
Commission’s questions or comments or
otherwise), the self-regulatory
organizations shall commence applying
such supervisory program as the
standard for examining its members that
are registered as futures commission
merchants.
(d)(1) Any two or more self-regulatory
organizations may file with the
Commission a plan for delegating to a
designated self-regulatory organization,
for any registered futures commission
merchant, retail foreign exchange
dealer, or introducing broker that is a
member of more than one such selfregulatory organization, the function of:
(i) Monitoring and examining for
compliance with the minimum financial
and related reporting requirements and
risk management requirements,
including policies and procedures
relating to the receipt, holding,
investing and disbursement of customer
funds, adopted by such self-regulatory
organizations and the Commission in
accordance with paragraphs (b) and (c)
of this section; and
(ii) Receiving the financial reports and
notices necessitated by such minimum
financial and related reporting
requirements; provided, however, that
the self-regulatory organization that
delegates the functions set forth in this
paragraph (d)(1) shall remain
responsible for its member registrants’
compliance with the regulatory

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obligations, and if such self-regulatory
organization becomes aware that a
delegated function is not being
performed as required under this
section, the self-regulatory organization
shall promptly take any necessary steps
to address any noncompliance.
(2) If a plan established pursuant to
paragraph (d)(1) of this section applies
to any registered futures commission
merchant, then such plan must include
the following elements:
(i) The Joint Audit Committee. The
self-regulatory organizations that choose
to participate in the plan shall form a
Joint Audit Committee, consisting of all
self-regulatory organizations in the plan
as members. The members of the Joint
Audit Committee shall establish,
operate and maintain a Joint Audit
Program in accordance with the
requirements of this section to ensure an
effective and a high quality program for
examining futures commission
merchants, to designate the designated
self-regulatory organizations that will be
responsible for the examinations of
futures commission merchants pursuant
to the Joint Audit Program, and to
satisfy such additional obligations set
forth in this section in order to facilitate
the examinations of futures commission
merchants by their respective
designated self-regulatory organizations.
(ii) The Joint Audit Program. The Joint
Audit Program must, at minimum,
satisfy the following requirements.
(A) The purpose of the Joint Audit
Program must be to assess whether each
registered futures commission merchant
member of the Joint Audit Committee
members is in compliance with the Joint
Audit Program and Commission
regulations governing minimum net
capital and related financial
requirements, the obligation to segregate
customer funds, risk management
requirements, including policies and
procedures relating to the receipt,
holding, investment, and disbursement
of customer funds, financial reporting
requirements, recordkeeping
requirements, and sales practice and
other compliance requirements.
(B) The Joint Audit Program must
include written policies and procedures
concerning the application of the Joint
Audit Program in the examination of the
registered futures commission merchant
members of the Joint Audit Committee
members.
(C)(1) Adequate levels and
independence of examination staff. A
designated self-regulatory organization
must maintain staff of an adequate size,
training, and experience to effectively
implement the Joint Audit Program.
Staff of the designated self-regulatory
organization, including officers,

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67949

directors, and supervising committee
members, must maintain independent
judgment and its actions must not
impair its independence nor appear to
impair its independence in matters
related to the Joint Audit Program. The
designated self-regulatory organization
must provide annual ethics training to
all staff with responsibilities for the
Joint Audit Program.
(2) Ongoing surveillance. A
designated self-regulatory organization’s
ongoing surveillance of futures
commission merchant member
registrants over which it has oversight
responsibilities must include the review
and analysis of financial reports and
regulatory notices filed by such member
registrants with the designated selfregulatory organization.
(3) High-risk firms. The Joint Audit
Program must include procedures for
identifying futures commission
merchant member registrants over
which it has oversight responsibilities
that are determined to pose a high
degree of potential financial risk,
including the potential risk of loss of
customer funds. High-risk member
registrants must include firms
experiencing financial or operational
difficulties, failing to meet segregation
or net capital requirements, failing to
maintain current books and records, or
experiencing material inadequacies in
internal controls. Enhanced monitoring
for high risk firms should include, as
appropriate, daily review of net capital,
segregation, and secured calculations, to
assess compliance with self-regulatory
and Commission requirements.
(4) On-site examinations. A
designated self-regulatory organization
must conduct routine periodic on-site
examinations of futures commission
merchant member registrants over
which it has oversight responsibilities.
Such member registrants must be
subject to on-site examinations no less
frequently than once every eighteen
months. A designated self-regulatory
organization shall establish a risk-based
method of establishing the scope of each
on-site examination, provided, however,
that the scope of each on-site
examination of a futures commission
merchant must include an assessment of
whether the registrant is in compliance
with applicable Commission and selfregulatory organization minimum
capital, customer fund protection,
recordkeeping, and reporting
requirements. A designated selfregulatory organization must conduct
on-site examinations of futures
commission merchant registrants in
accordance with the Joint Audit
Program.

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(D) The Joint Audit Committee
members must adequately document all
aspects of the operation of the Joint
Audit Program, including the conduct of
risk-based scope setting and the riskbased surveillance of high-risk member
registrants, and the imposition of
remedial and punitive action(s) for
material violations.
(E) The Joint Audit Program must set
forth in writing the examination
standards that a designated selfregulatory organization must apply in
its examination of a registered futures
commission merchant. The Joint Audit
Program must be based on controls
testing as well as substantive testing and
must address all areas of risk to which
registered futures commission
merchants can reasonably be foreseen to
be subject. The determination as to
which elements of the Joint Audit
Program are to be performed on any
examination must be based on the risk
profile of each registered futures
commission merchant as well as any
additional areas of risk to be addressed
in such examination.
(F) All aspects of the Joint Audit
Program, including the standards
required pursuant to paragraph
(d)(2)(ii)(G) of this section, must, at
minimum, conform to generally
accepted auditing standards after full
consideration to those auditing
standards as prescribed by the Public
Company Accounting Oversight Board.
(G) The Joint Audit Program must
have standards addressing those items
listed in paragraph (c)(2)(iii) of this
section.
(H) The initial Joint Audit Program
shall be established as follows. Within
120 days following the effective date of
this section, or such other time as the
Commission may approve, the Joint
Audit Committee members shall submit
a proposed initial Joint Audit Program
to the Commission for its review and
comment, together with a written report
that includes the elements found in
paragraphs (d)(2)(ii)(I)(1) and (3) of this
section from an examinations expert
who has evaluated the Joint Audit
Program. Upon resolution of any
questions or comments raised by the
Commission, and upon notice from the
Commission that it has no further
comments or questions on the proposed
Joint Audit Program as amended (by
reason of the considerations of the
Commission’s questions or comments or
otherwise), the designated selfregulatory organizations shall
commence applying such Joint Audit
Program as the standard for examining
their respective registered futures
commission merchants.

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(I) Following the establishment of the
Joint Audit Program, no less frequently
than once every two years, the Joint
Audit Committee members must cause
an examinations expert to evaluate the
Joint Audit Program and each
designated self-regulatory organization’s
application of the Joint Audit Program.
The Joint Audit Committee members
must obtain from such examinations
expert a written report, and must
provide the written report to the
Commission no later than forty-five
days prior to the annual meeting of the
members of the Joint Audit Committee
to be held in that year pursuant to
paragraph (d)(2)(iii)(A) of this section.
The written report must include the
following:
(1) An affirmation that the
examinations expert has evaluated the
Joint Audit Program, including the
sufficiency of the risk-based approach
and the internal controls testing thereof,
and comments and recommendations in
connection with such evaluation from
such examinations expert;
(2) An affirmation that the
examinations expert has evaluated the
application of the Joint Audit Program
by each designated self-regulatory
organization, and comments and
recommendations in connection with
such evaluation from such examinations
expert;
(3) The examinations expert’s opinion
as to whether the Joint Audit Program
is reasonably likely to identify a
material deficiency in internal controls
over financial and/or regulatory
reporting and in any of the other items
that are the subject of an examination
conducted in accordance with the Joint
Audit Program; and
(4) A discussion and recommendation
of any new or best practices as
prescribed by industry sources,
including, but not limited to, those from
the American Institute of Certified
Public Accountants, the Internal Audit
Association and The Risk Management
Association.
(J) The Joint Audit Program must
require each Joint Audit Committee
member to report to its risk and/or audit
committee of the board of directors with
timely reports of the activities and
findings of the Joint Audit Program to
assist the risk and/or audit committee of
the board of directors to fulfill its
responsibility of overseeing the
examination function.
(iii) Meetings of the Joint Audit
Committee. (A) No less frequently than
once every year, the Joint Audit
Committee members must meet to
consider whether changes to the Joint
Audit Program are appropriate, and in
considering such, in meetings

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corresponding to the biennial written
report obtained from an examinations
expert pursuant to paragraph (d)(2)(ii)(I)
of this section, the Joint Audit
Committee members must consider such
written report, including the results of
the examinations expert’s assessment of
the Joint Audit Program and any
additional recommendations. The
Commission’s questions, comments and
proposals must also be considered.
Upon notice from the Commission that
it has no further comments or questions
on the Joint Audit Program as amended
(by reason of the examinations expert’s
proposals, considerations of the
Commission’s questions, comments and
proposals, or otherwise), the designated
self-regulatory organizations shall
commence applying such Joint Audit
Program as the standard for examining
their respective registered futures
commission merchants.
(B) In addition to the items
considered in paragraph (d)(2)(iii)(A) of
this section, the Joint Audit Committee
members must consider the following
items during the annual meeting:
(1) The role of the Joint Audit
Committee and its members as it relates
to self-regulatory organization
responsibilities;
(2) Developing and maintaining the
Joint Audit Program for all designated
self-regulatory organizations to follow
with no exceptions;
(3) Coordinating self-regulatory
organization responsibilities with those
of independent certified public
accountants, the Commission and other
regulators and self-regulatory
organizations (e.g., the Securities and
Exchange Commission, the Financial
Industry Regulatory Authority, and
others, as the case may be for futures
commission merchants subject to
regulation by multiple regulators and
self-regulatory organizations);
(4) Coordinating and sharing
information between the Joint Audit
Committee members, including issues
and industry concerns in connection
with examinations of futures
commission merchants;
(5) Identifying industry financial and
regulatory reporting issues and financial
and operational internal control issues
and modifying the Joint Audit Program
accordingly;
(6) Issuing an annual risk alert for
futures commission merchants;
(7) Issuing an annual examination
alert for certified public accountants
and designated self-regulatory
organization examiners;
(8) Responding to industry issues;
(9) Providing industry feedback to
Commission proposals; and

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(10) Developing and maintaining a
standard of ethics and independence
with which all examination units of the
Joint Audit Committee members must
comply.
(C) Minutes must be taken of all
meetings and distributed to all members
on a timely basis.
(D) The Commission must receive
timely prior notice of each meeting,
have to right to attend and participate in
each meeting and receive written copies
of the reports and minutes required
pursuant to paragraphs (d)(2)(ii)(J) and
(d)(2)(iii)(C) of this section, respectively.
(3) The plan referenced in paragraph
(d)(1) of this section shall not be
effective without Commission approval
pursuant to paragraph (h) of this
section.
(e) Any plan filed under this section
may contain provisions for the
allocation of expenses reasonably
incurred by designated self-regulatory
organizations among the self-regulatory
organizations participating in such a
plan.
(f) A plan’s designated self-regulatory
organizations must report to:
(1) That plan’s other self-regulatory
organizations any violation of such
other self-regulatory organizations’ rules
and regulations for which the
responsibility to monitor or examine has
been delegated to such designated selfregulatory organization under this
section; and
(2) The Director of the Division of
Swap Dealer and Intermediary
Oversight of the Commission any
violation of a self-regulatory
organization’s rules and regulations or
any violation of the Commission’s
regulations for which the responsibility
to monitor, audit, or examine has been
delegated to such designated selfregulatory organization under this
section.
(g) The Joint Audit Committee
members may, among themselves,
establish programs to provide access to
any necessary financial or related
information.
(h) After appropriate notice and
opportunity for comment, the
Commission may, by written notice,
approve such a plan, or any part of the
plan, if it finds that the plan, or any part
of it:
(1) Is necessary or appropriate to serve
the public interest;
(2) Is for the protection and in the
interest of customers;
(3) Reduces multiple monitoring and
multiple examining for compliance with
the minimum financial rules of the
Commission and of the self-regulatory
organizations submitting the plan of any
futures commission merchant, retail

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foreign exchange dealer, or introducing
broker that is a member of more than
one self-regulatory organization;
(4) Reduces multiple reporting of the
financial information necessitated by
such minimum financial and related
reporting requirements by any futures
commission merchant, retail foreign
exchange dealer, or introducing broker
that is a member of more than one selfregulatory organization;
(5) Fosters cooperation and
coordination among the self-regulatory
organizations; and
(6) Does not hinder the development
of a registered futures association under
section 17 of the Act.
(i) After the Commission has
approved a plan, or part thereof, under
paragraph (h) of this section, a selfregulatory organization delegating the
functions described in paragraph (d)(1)
of this section must notify each of its
members that are subject to such a plan:
(1) Of the limited scope of the
delegating self-regulatory organization’s
responsibility for such a member’s
compliance with the Commission’s and
self-regulatory organization’s minimum
financial and related reporting
requirements; and
(2) Of the identity of the designated
self-regulatory organization that has
been delegated responsibility for such a
member; provided, however, that the
self-regulatory organization that
delegates, pursuant to paragraph (d) of
this section, the functions set forth in
paragraphs (b) and (c) of this section
shall remain responsible for its member
registrants’ compliance with the
regulatory obligations, and if such selfregulatory organization becomes aware
that a delegated function is not being
performed as required under this
section, the self-regulatory organization
shall promptly take any necessary steps
to address any noncompliance.
(j) The Commission may at any time,
after appropriate notice and opportunity
for hearing, withdraw its approval of
any plan, or part thereof, established
under this section, if such plan, or part
thereof, ceases to adequately effectuate
the purposes of section 4f(b) of the Act
or of this section.
(k) Whenever a registered futures
commission merchant, a registered retail
foreign exchange dealer, or a registered
introducing broker holding membership
in a self-regulatory organization ceases
to be a member in good standing of that
self-regulatory organization, such selfregulatory organization must, on the
same day that event takes place, give
electronic notice of that event to the
Commission at its Washington, DC,
headquarters and send a copy of that
notification to such futures commission

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merchant, retail foreign exchange
dealer, or introducing broker.
(l) Nothing in this section shall
preclude the Commission from
examining any futures commission
merchant, retail foreign exchange
dealer, or introducing broker for
compliance with the minimum financial
and related reporting requirements, and
the risk management requirements, as
applicable, to which such futures
commission merchant, retail foreign
exchange dealer, or introducing broker
is subject.
(m) In the event a plan is not filed
and/or approved for each registered
futures commission merchant, retail
foreign exchange dealer, or introducing
broker that is a member of more than
one self-regulatory organization, the
Commission may design and, after
notice and opportunity for comment,
approve a plan for those futures
commission merchants, retail foreign
exchange dealers, or introducing brokers
that are not the subject of an approved
plan (under paragraph (h) of this
section), delegating to a designated selfregulatory organization the
responsibilities described in paragraph
(d) of this section.
18. Amend § 1.55 by revising
paragraphs (b)(2) through (8) and by
adding paragraphs (b)(9) through (14),
(i), (j), (k), (l), (m), (n), and (o), to read
as follows:
§ 1.55 Public disclosures by futures
commission merchants

*

*
*
*
*
(b) * * *
(2) The funds you deposit with a
futures commission merchant for
trading futures positions are not
protected by insurance in the event of
the bankruptcy or insolvency of the
futures commission merchant, or in the
event your funds are misappropriated
due to fraud.
(3) The funds you deposit with a
futures commission merchant for
trading futures positions are not
protected by the Securities Investor
Protection Corporation even if the
futures commission merchant is
registered with the Securities and
Exchange Commission as a broker or
dealer.
(4) The funds you deposit with a
futures commission merchant are not
guaranteed or insured by a derivatives
clearing organization in the event of the
bankruptcy or insolvency of the futures
commission merchant, or if the futures
commission merchant is otherwise
unable to refund your funds.
(5) The funds you deposit with a
futures commission merchant are not
held by the futures commission

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules

merchant in a separate account for your
individual benefit. Futures commission
merchants commingle the funds
received from customers in one or more
accounts and you may be exposed to
losses incurred by other customers if the
futures commission merchant does not
have sufficient capital to cover such
other customers’ trading losses.
(6) The funds you deposit with a
futures commission merchant may be
invested by the futures commission
merchant in certain types of financial
instruments that have been approved by
the Commission for the purpose of such
investments. Permitted investments are
listed in Commission Regulation 1.25
and include: U.S. government securities;
municipal securities; money market
mutual funds; and certain corporate
notes and bonds. The futures
commission merchant may retain the
interest and other earnings realized from
its investment of customer funds. You
should be familiar with the types of
financial instruments that a futures
commission merchant may invest
customer funds in.
(7) Futures commission merchants are
permitted to deposit customer funds
with affiliated entities, such as affiliated
banks, securities brokers or dealers, or
foreign brokers. You should inquire as
to whether your futures commission
merchant deposits funds with affiliates
and assess whether such deposits by the
futures commission merchant with its
affiliates increases the risks to your
funds.
(8) You should consult your futures
commission merchant concerning the
nature of the protections available to
safeguard funds or property deposited
for your account.
(9) Under certain market conditions,
you may find it difficult or impossible
to liquidate a position. This can occur,
for example, when the market reaches a
daily price fluctuation limit (‘‘limit
move’’).
(10) All futures positions involve risk,
and a ‘‘spread’’ position may not be less
risky than an outright ‘‘long’’ or ‘‘short’’
position.
(11) The high degree of leverage
(gearing) that is often obtainable in
futures trading because of the small
margin requirements can work against
you as well as for you. Leverage
(gearing) can lead to large losses as well
as gains.
(12) In addition to the risks noted in
the paragraphs enumerated above, you
should be familiar with the futures
commission merchant you select to
entrust your funds for trading futures
positions. The Commodity Futures
Trading Commission requires each
futures commission merchant to make

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publicly available on its Web site firm
specific disclosures and financial
information to assist you with your
assessment and selection of a futures
commission merchant. Information
regarding this futures commission
merchant may be obtained by visiting
our Web site, www.[Web site address].
ALL OF THE POINTS NOTED
ABOVE APPLY TO ALL FUTURES
TRADING WHETHER FOREIGN OR
DOMESTIC. IN ADDITION, IF YOU
ARE CONTEMPLATING TRADING
FOREIGN FUTURES OR OPTIONS
CONTRACTS, YOU SHOULD BE
AWARE OF THE FOLLOWING
ADDITIONAL RISKS:
(13) Foreign futures transactions
involve executing and clearing trades on
a foreign exchange. This is the case even
if the foreign exchange is formally
‘‘linked’’ to a domestic exchange,
whereby a trade executed on one
exchange liquidates or establishes a
position on the other exchange. No
domestic organization regulates the
activities of a foreign exchange,
including the execution, delivery, and
clearing of transactions on such an
exchange, and no domestic regulator has
the power to compel enforcement of the
rules of the foreign exchange or the laws
of the foreign country. Moreover, such
laws or regulations will vary depending
on the foreign country in which the
transaction occurs. For these reasons,
customers who trade on foreign
exchanges may not be afforded certain
of the protections which apply to
domestic transactions, including the
right to use domestic alternative dispute
resolution procedures. In particular,
funds received from customers to
margin foreign futures transactions may
not be provided the same protections as
funds received to margin futures
transactions on domestic exchanges.
Before you trade, you should familiarize
yourself with the foreign rules which
will apply to your particular
transaction.
(14) Finally, you should be aware that
the price of any foreign futures or option
contract and, therefore, the potential
profit and loss resulting therefrom, may
be affected by any fluctuation in the
foreign exchange rate between the time
the order is placed and the foreign
futures contract is liquidated or the
foreign option contract is liquidated or
exercised.
THIS BRIEF STATEMENT CANNOT,
OF COURSE, DISCLOSE ALL THE
RISKS AND OTHER ASPECTS OF THE
COMMODITY MARKETS
I hereby acknowledge that I have
received and understood this risk
disclosure statement.
lllllllllllllllllll

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Date
lllllllllllllllllll
Signature of Customer
*
*
*
*
*
(i) Notwithstanding any other
provision of this section, no futures
commission merchant may enter into a
customer account agreement or first
accept funds from a customer, unless
the futures commission merchant
discloses to the customer all
information about the futures
commission merchant, including its
business, operations, risk profile, and
affiliates, that would be material to the
customer’s decision to entrust such
funds to and otherwise do business with
the futures commission merchant and
that is otherwise necessary for full and
fair disclosure. In connection with the
disclosure of such information, the
futures commission merchant shall
provide material information about the
topics described in paragraph (k) of this
section, expanding upon such
information as necessary to keep such
disclosure from being misleading,
whether through omission or otherwise.
The futures commission merchant shall
also disclose the same information
required by this paragraph to all
customers existing on the effective date
of this paragraph even if the futures
commission merchant and such existing
customers have previously entered into
a customer account agreement or the
futures commission merchant has
already accepted funds from such
existing customers. The futures
commission merchant shall update the
information required by this section as
and when necessary, but at least
annually, to keep such information
accurate and complete and shall
promptly disclose such updated
information to all of its customers. In
connection with such obligation to
update information, the futures
commission merchant shall take into
account any material change to its
business operation, financial condition
and other factors material to the
customer’s decision to entrust the
customer’s funds and otherwise do
business with the futures commission
merchant since its most recent
disclosure pursuant to this paragraph,
and for this purpose shall without
limitation consider events that require
periodic reporting required to be filed
pursuant to § 1.12 of this part. For
purposes of this section, the disclosures
required pursuant to this paragraph (i)
will be referred to as the ‘‘Disclosure
Documents.’’ The Disclosure Documents
shall provide a detailed table of contents
referencing and describing the
Disclosure Documents.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
(j)(1) Each futures commission
merchant shall make the Disclosure
Documents available to each customer
to whom disclosure is required pursuant
to paragraph (i) of this section (for
purposes of this section, its ‘‘FCM
Customers’’) and to the general public.
(2) A futures commission merchant
shall make the Disclosure Documents
available to FCM Customers and to the
general public by posting a copy of the
Disclosure Documents on the futures
commission merchant’s Web site. A
futures commission merchant, however,
may use an electronic means other than
its Web site to make the Disclosure
Documents available to its FCM
Customers; provided that:
(i) The electronic version of the
Disclosure Documents shall be
presented in a format that is readily
communicated to the FCM Customers.
Information is readily communicated to
the FCM Customers if it is accessible to
the ordinary computer user by means of
commonly available hardware and
software and if the electronically
delivered document is organized in
substantially the same manner as would
be required for a paper document with
respect to the order of presentation and
the relative prominence of information;
and
(ii) A complete paper copy of the
Disclosure Documents shall be provided
to an FCM Customer upon request.
(k) Specific Topics. The futures
commission merchant shall provide
material information about the
following specific topics:
(1) The futures commission
merchant’s name, address of its
principal place of business, phone
number, fax number, and email address;
(2) The names and business addresses
of the futures commission merchant’s
directors and senior management,
including titles, business background,
areas of responsibility, and the nature of
duties of each;
(3) The significant types of business
activities and product lines engaged in
by the futures commission merchant,
and the approximate percentage of the
futures commission merchant’s assets
and capital that are used in each type of
activity;
(4) The futures commission
merchant’s business on behalf of its
customers, including types of accounts,
markets traded, international
businesses, and clearinghouses and
carrying brokers used, and the futures
commission merchant’s policies and
procedures concerning the choice of
bank depositories, custodians, and other
counterparties;
(5) The material risks, accompanied
by an explanation of how such risks

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may be material to its customers, of
entrusting funds to the futures
commission merchant, including,
without limitation, the nature of
investments made by the futures
commission merchant (including credit
quality, weighted average maturity, and
weighted average coupon); the futures
commission merchant’s
creditworthiness, leverage, capital,
liquidity, principal liabilities, balance
sheet leverage and other lines of
business; risks to the futures
commission merchant created by its
affiliates and their activities, including
investment of customer funds in an
affiliated entity; and any significant
liabilities, contingent or otherwise, and
material commitments;
(6) The name of the futures
commission merchant’s designated selfregulatory organization and its Web site
address and the location where the
annual audited financial statements of
the futures commission merchant is
made available;
(7) Any material administrative, civil,
enforcement, or criminal action then
pending, and any enforcement actions
taken in last three years;
(8) A basic overview of customer fund
segregation, futures commission
merchant collateral management and
investments, futures commission
merchants, and joint futures
commission merchant/broker dealers;
(9) Information on how a customer
may obtain information regarding filing
a complaint about the futures
commission merchant with the
Commission or with the firm’s
designated self-regulatory organization:
and
(10) The following financial data as of
the most recent month-end when the
Disclosure Document is prepared:
(i) The futures commission
merchant’s total equity, regulatory
capital, and net worth, all computed in
accordance with U.S. Generally
Accepted Accounting Principles and
§ 1.17 of this part, as applicable;
(ii) The dollar value of the futures
commission merchant’s proprietary
margin requirements as a percentage of
the aggregate margin requirement for
futures customers, Cleared Swaps
Customers, and 30.7 Customers;
(iii) The number of futures customers,
Cleared Swaps Customers, and 30.7
Customers that comprise 50 percent of
the futures commission merchant’s total
funds held for futures customers,
Cleared Swaps Customers, and 30.7
Customers, respectively;
(iv) The aggregate notional value, by
asset class, of all non-hedged, principal
over-the-counter transactions into

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which the futures commission merchant
has entered;
(v) The amount, generic source and
purpose of any unsecured lines of credit
(or similar short-term funding) the
futures commission merchant has
obtained but not yet drawn upon;
(vi) The aggregated amount of
financing the futures commission
merchant provides for customer
transactions involving illiquid financial
products for which it is difficult to
obtain timely and accurate prices; and
(vii) The percentage of futures
customer, Cleared Swaps Customer, and
30.7 Customer receivable balances that
the futures commission merchant had to
write-off as uncollectable during the
past 12-month period, as compared to
the current balance of funds held for
futures customers, Cleared Swaps
Customers, and 30.7 Customers; and
(11) A summary of the futures
commission merchant’s current risk
practices, controls and procedures.
(l) In addition to the foregoing, each
futures commission merchant shall
adopt policies and procedures
reasonably designed to ensure that
advertising and solicitation activities by
each such futures commission merchant
and any introducing brokers associated
with such futures commission merchant
are not misleading to its FCM Customers
in connection with their decision to
entrust funds to and otherwise do
business with such futures commission
merchant.
(m) The Disclosure Document
required by paragraph (i) of this section
is in addition to the Risk Disclosure
Statement required under paragraph (a)
of this section.
(n) All Disclosure Documents, with
each Disclosure Document dated the
date of first use, shall be maintained in
accordance with § 1.31 and shall be
made available promptly upon request
to representatives of its designated selfregulatory organization, representatives
of the Commission, and representatives
of applicable prudential regulators.
(o)(1) Each futures commission
merchant shall make the following
financial information publicly available
on its Web site:
(i) The daily Statement of Segregation
Requirements and Funds in Segregation
for Customers Trading on U.S.
Exchanges for the most current 12month period;
(ii) The daily Statement of Secured
Amounts and Funds Held in Separate
Accounts for 30.7 Customers Pursuant
to Commission Regulation 30.7 for the
most current 12-month period;
(iii) The daily Statement of Cleared
Swaps Customer Segregation
Requirements and Funds in Cleared

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Swaps Customer Accounts Under
Section 4d(f) of the Act for the most
current 12-month period;
(iv) A summary schedule of the
futures commission merchant’s adjusted
net capital, net capital, and excess net
capital, all computed in accordance
with § 1.17 of this part and reflecting
balances as of the month-end for the 12
most recent months; and
(v) The Statement of Financial
Condition, the Statement of Segregation
Requirements and Funds in Segregation
for Customers Trading on U.S.
Exchanges, the Statement of Secured
Amounts and Funds Held in Separate
Accounts for 30.7 Customers Pursuant
to Commission Regulation 30.7, the
Statement of Cleared Swaps Customer
Segregation Requirements and Funds in
Cleared Swaps Customer Accounts
Under Section 4d(f) of the Act, an all
related footnotes to the above schedules
that are part of the futures commission
merchant’s most current certified
annual report pursuant to § 1.16 of this
part.
(2) Each futures commission merchant
must include a statement on its Web site
that is available to the public that
financial information regarding the
futures commission merchant, including
how the futures commission merchant
invests and holds customer funds, may
be obtained from the National Futures
Association and include a link to the
Web site of the National Futures
Association’s Basic System where
information regarding the futures
commission merchant’s investment of
customer funds is maintained.
(3) Each futures commission merchant
must include a statement on its Web site
that is available to the public that
additional financial information on all
futures commission merchants is
available from the Commodity Futures
Trading Commission, and include a link
to the Commodity Futures Trading
Commission’s web page for financial
data for futures commission merchants.
PART 3—REGISTRATION

emcdonald on DSK67QTVN1PROD with PROPOSALS2

19. The authority citation for part 3
continues to read as follows:
Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a,
2, 6a, 6b, 6b–1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k,
6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c,
16a, 18, 19, 21, and 23, as amended by Title
VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. 111–
203, 124 Stat. 1376 (Jul. 21, 2010).

20. Amend § 3.3 by revising paragraph
(f)(2) to read as follows:
§ 3.3

*

Chief compliance officer.

*
*
(f) * * *

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*

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(2) The annual report shall be
furnished electronically to the
Commission not more than 60 days after
the end of the fiscal year of the futures
commission merchant, swap dealer, or
major swap participant, simultaneously
with the submission of Form 1–FR–
FCM, as required under § 1.10(b)(2)(ii)
of this chapter, simultaneously with the
Financial and Operational Combined
Uniform Single Report, as required
under § 1.10(h) of this chapter, or
simultaneously with the financial
condition report, as required under
section 4s(f) of the Act, as applicable.
*
*
*
*
*
PART 22—CLEARED SWAPS
21. The authority citation for part 22
continues to read as follows:
Authority: 7 U.S.C. 1a, 6d, 7a–1 as
amended by Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act,
Pub. L. 111–203, 124 Stat. 1376 (Jul. 21,
2010).

22. Amend § 22.2 by revising
paragraphs (d)(1), (e)(1), (f)(2), (f)(4),
(f)(5)(iii)(B), and (g)(2), and by adding
paragraphs (f)(6) and (g)(3) through (10)
to read as follows:
§ 22.2 Futures Commission Merchants:
Treatment of Cleared Swaps and
Associated Cleared Swap Customer
Collateral.

*

*
*
*
*
(d) Limitations on use. (1) No futures
commission merchant shall use, or
permit the use of, the Cleared Swaps
Customer Collateral of one Cleared
Swaps Customer to purchase, margin, or
settle the Cleared Swaps or any other
trade or contract of, or to secure or
extend the credit of, any person other
than such Cleared Swaps Customer.
Cleared Swaps Customer Collateral shall
not be used to margin, guarantee, or
secure trades or contracts of the entity
constituting a Cleared Swaps Customer
other than in Cleared Swaps, except to
the extent permitted by a Commission
rule, regulation or order. For this
purpose, a futures commission
merchant which operationally
commingles the funds of its Cleared
Swaps Customers must ensure that at all
times its residual interest in Cleared
Swaps Customer Accounts exceeds the
sum of the margin deficits of all of its
Cleared Swaps Customers.
*
*
*
*
*
(e) * * *
(1) Permitted investments. A futures
commission merchant may invest
money, securities, or other property
constituting Cleared Swaps Customer
Collateral in accordance with § 1.25 of
this chapter, which shall apply to such

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money, securities, or other property as
if they comprised customer funds or
customer money subject to segregation
pursuant to section 4d(a) of the Act and
the regulations thereunder; Provided,
however, that the futures commission
merchant shall bear sole responsibility
for any losses resulting from the
investment of customer funds in
instruments described in § 1.25 of this
chapter. No investment losses shall be
borne or otherwise allocated to Cleared
Swaps Customers of the futures
commission merchant.
*
*
*
*
*
(f) * * *
(2) The futures commission merchant
must reflect in the account that it
maintains for each Cleared Swaps
Customer the market value of any
Cleared Swaps Customer Collateral that
it receives from such customer, as
adjusted by:
(i) Any uses permitted under § 22.2(d)
of this part;
(ii) Any accruals on permitted
investments of such collateral under
§ 22.2(e) of this part that, pursuant to
the futures commission merchant’s
customer agreement with that customer,
are creditable to such customer;
(iii) Any gains and losses with respect
to Cleared Swaps;
(iv) Any charges lawfully accruing to
the Cleared Swaps Customer, including
any commission, brokerage fee, interest,
tax, or storage fee; and
(v) Any appropriately authorized
distribution or transfer of such
collateral.
*
*
*
*
*
(4) The futures commission merchant
must, at all times, maintain in
segregation, in its FCM Physical
Locations and/or its Cleared Swaps
Customer Accounts at Permitted
Depositories, an amount equal to the
sum of any credit balances that the
Cleared Swaps Customers of the futures
commission merchant have in their
accounts, excluding from such sum any
debit balances that the Cleared Swaps
Customers of the futures commission
merchant have in their accounts.
(5) * * *
(iii) * * *
(B) Reduce such market value by
applicable percentage deductions (i.e.,
‘‘securities haircuts’’) as set forth in
Rule 15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (§ 240.15c3–
1(c)(2)(vi) of this title). Futures
commission merchants that establish
and enforce written policies and
procedures to assess the credit risk of
commercial paper, convertible debt
instruments, or nonconvertible debt
instruments in accordance with Rule

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240.15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)) may apply the
lower haircut percentages specified in
Rule 240.15c3–1(c)(2)(vi) for such
commercial paper, convertible debt
instruments and nonconvertible debt
instruments. The portion of the debit
balance, not exceeding 100 percent, that
is secured by the reduced market value
of such readily marketable securities
shall be included in calculating the sum
referred to in paragraph (f)(4) of this
section.
(6) The FCM must reflect in the
account it maintains for each Cleared
Swaps Customer the amount of
collateral required for the Cleared
Swaps Customer’s Cleared Swaps at
each derivatives clearing organization
on which the futures commission
merchant is a member, or by each other
futures commission merchant through
which the futures commission merchant
clears Cleared Swaps, and the total of
such required collateral amounts. If the
value of the Cleared Swaps Customer
Collateral, as calculated in this section,
for a Cleared Swaps Customer is less
than the total amount of collateral
required for that Cleared Swaps
Customer’s Cleared Swaps at such
derivatives clearing organizations and
such other futures commission
merchants, the difference is a margin
deficit. The futures commission
merchant must at all times maintain a
residual interest in Cleared Swaps
Customer Accounts sufficient to exceed
the sum of all margin deficits that
Cleared Swaps Customers of the futures
commission merchant have in their
accounts. Such residual interest may not
be withdrawn pursuant to any provision
of this chapter.
(g) * * *
(2) Each futures commission merchant
is required to document its segregation
computation required by paragraph
(g)(1) of this section by preparing a
Statement of Cleared Swaps Customer
Segregation Requirements and Funds in
Cleared Swaps Customer Accounts
Under 4d(f) of the CEA contained in the
Form 1–FR–FCM as of the close of
business each business day.
(3) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization the daily
Statement of Cleared Swaps Customer
Segregation Requirements and Funds in
Cleared Swaps Customer Accounts
Under 4d(f) of the CEA required by
paragraph (g)(2) of this section by noon
the following business day.
(4) Each futures commission merchant
shall file the Statement of Cleared
Swaps Customer Segregation

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Requirements and Funds in Cleared
Swaps Customer Accounts Under 4d(f)
of the CEA required by paragraph (g)(2)
of this section in an electronic format
using a form of user authentication
assigned in accordance with procedures
established or approved by the
Commission.
(5) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization a report listing
of the names of all banks, trust
companies, futures commission
merchants, derivatives clearing
organizations, or any other depository or
custodian holding Cleared Swaps
Customer Collateral as of the fifteenth
day of the month, or the first business
day thereafter, and the last business day
of each month. This report must
include:
(i) The name and location of each
entity holding Cleared Swaps Customer
Collateral;
(ii) The total amount of Cleared
Swaps Customer Collateral held by each
entity listed in this paragraph (g)(5); and
(iii) The total amount of cash and
investments that each entity listed in
this paragraph (g)(5) holds for the
futures commission merchant. The
futures commission merchant must
report the following investments:
(A) Obligations of the United States
and obligations fully guaranteed as to
principal and interest by the United
States (U.S. government securities);
(B) General obligations of any State or
of any political subdivision of a State
(municipal securities);
(C) General obligation issued by any
enterprise sponsored by the United
States (government sponsored enterprise
securities);
(D) Certificates of deposit issued by a
bank;
(E) Commercial paper fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation;
(F) Corporate notes or bonds fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation; and
(G) Interests in money market mutual
funds.
(6) Each futures commission merchant
must report the total amount of
customer owned securities held by the
futures commission merchant as Cleared
Swaps Customer Collateral and must list
the names and locations of the
depositories holding customer owned
securities.

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(7) Each futures commission merchant
must report the total amount of Cleared
Swaps Customer Collateral that has
been used to purchase securities under
agreements to resell the securities
(reverse repurchase transactions).
(8) Each futures commission merchant
must report which, if any, of the
depositories holding Cleared Swaps
Customer Collateral under paragraph
(g)(5) of this section are affiliated with
the futures commission merchant.
(9) Each futures commission merchant
shall file the detailed list of depositories
required by paragraph (g)(5) of this
section by 11:59 p.m. the next business
day in an electronic format using a form
of user authentication assigned in
accordance with procedures established
or approved by the Commission.
(10) Each futures commission
merchant shall retain its daily
segregation computation and the
Statement of Cleared Swaps Customer
Segregation Requirements and Funds in
Cleared Swaps Customer Accounts
under section 4d(f) of the CEA required
by paragraph (g)(2) of this section and
the detailed listing of depositories
required by paragraph (g)(5) of this
section, together with all supporting
documentation, in accordance with
§ 1.31 of this chapter.
23. Add § 22.17 to read as follows:
§ 22.17 Policies and procedures governing
disbursements of Cleared Swaps Customer
Collateral from Cleared Swaps Customer
Accounts.

(a) The provision in section 4d(f)(2) of
the Act that prohibits the commingling
of Cleared Swaps Customer Collateral
with the funds of a futures commission
merchant, shall not be construed to
prevent a futures commission merchant
from having a residual financial interest
in the funds segregated as required by
the Act and the regulations in this part
and set apart for the benefit of Cleared
Swaps Customers; nor shall such
provisions be construed to prevent a
futures commission merchant from
adding to such segregated funds such
amount or amounts of money, from its
own funds or unencumbered securities
from its own inventory, of the type set
forth in § 1.25 of this chapter, as it may
deem necessary to ensure any and all
Cleared Swaps Customer Accounts are
not undersegregated at any time.
(b) A futures commission merchant
may not withdraw funds on any
business day for its own proprietary use
from a Cleared Swaps Customer
Account unless the futures commission
merchant has prepared the daily
segregation calculation required by
§ 22.2 of this part as of the close of
business on the previous business day.

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A futures commission merchant that has
completed its daily segregation
calculation may make withdrawals for
its own use, to the extent of its actual
residual financial interest in funds held
in segregated accounts, including the
withdrawal of securities held in
segregated safekeeping accounts held by
a bank, trust company, derivatives
clearing organization or other futures
commission merchant. Such
withdrawal(s) shall not result in the
funds of one Cleared Swaps Customer
being used to purchase, margin or carry
the trades, contracts or swaps positions,
or extend the credit of any other Cleared
Swaps Customer or other person.
Notwithstanding any other provision of
this chapter, a futures commission
merchant must at all times maintain an
amount of residual interest in Cleared
Swaps Customer Accounts for the
benefit of Cleared Swaps Customers that
exceeds the sum of all Cleared Swaps
Customers’ margin deficits and such
residual interest may not be withdrawn
by the futures commission merchant.
(c) A futures commission merchant
may not withdraw funds for its own
proprietary use, in a single transaction
or a series of transactions on a given
business day, from Cleared Swaps
Customer Accounts if such
withdrawal(s) would exceed 25 percent
of the futures commission merchant’s
residual interest in such accounts as
reported on the daily segregation
calculation required by § 22.2 of this
part and computed as of the close of
business on the previous business day,
unless:
(1) The futures commission
merchant’s Chief Executive Officer,
Chief Finance Officer or other senior
official that is listed as a principal of the
futures commission merchant on its
Form 7–R and is knowledgeable about
the futures commission merchant’s
financial requirements and financial
position pre-approves in writing the
withdrawal, or series of withdrawals;
(2) The futures commission merchant
files written notice of the withdrawal or
series of withdrawals, with the
Commission and with its designated
self-regulatory organization immediately
after the Chief Executive Officer, Chief
Finance Officer or other senior official
pre-approves the withdrawal or series of
withdrawals. The written notice must:
(i) Be signed by the Chief Executive
Officer, Chief Finance Officer or other
senior official that pre-approved the
withdrawal, and give notice that the
futures commission merchant has
withdrawn or intends to withdraw more
than 25 percent of its residual interest
in such accounts holding Cleared Swaps
Customer Accounts funds;

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(ii) Include a description of the
reasons for the withdrawal or series of
withdrawals;
(iii) List the amount of funds provided
to each recipient and the name of each
recipient;
(iv) Include the current estimate of the
amount of the futures commission
merchant’s residual interest in the
swaps customer funds after the
withdrawal;
(v) Contain a representation by the
Chief Executive Officer, Chief Finance
Officer or other senior official that preapproved the withdrawal, or series of
withdrawals, that, after due diligence, to
such person’s knowledge and
reasonable belief, the futures
commission merchant remains in
compliance with the segregation
requirements after the withdrawal. The
Chief Executive Officer, Chief Finance
Officer or other senior official must
consider the daily segregation
calculation as of the close of business on
the previous business day and any other
factors that may cause a material change
in the futures commission’s residual
interest since the close of business the
previous business day, including known
unsecured customer debits or deficits,
current day market activity and any
other withdrawals made from the
Cleared Swaps Customer Accounts; and
(vi) Any such written notice filed
with the Commission must be filed via
electronic transmission using a form of
user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instruction issued by or approved by the
Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer. Any written notice
filed must be followed up with direct
communication to the Regional office of
Commission which has supervisory
authority over the futures commission
merchant whereby the Commission
acknowledges receipt of the notice; and
(3) After making a withdrawal
requiring the approval and notice
required in paragraphs (c)(1) and (2) of
this section, and before the next daily
segregated funds calculation, no futures
commission merchant may make any
further withdrawals from accounts
holding Cleared Swaps Customer
Account funds, except to or for the
benefit of Cleared Swaps Customers,
without complying with paragraph
(c)(1) of this section and filing a written
notice with the Commission under

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(c)(2)(vi) of this section and its
designated self-regulatory organization
signed by the Chief Executive Officer,
Chief Finance Officer, or other senior
official. The written notice must:
(i) List the amount of funds provided
to each recipient and each recipient’s
name;
(ii) Disclose the reason for each
withdrawal;
(iii) Confirm that the Chief Executive
Officer, Chief Finance Officer, or other
senior official (and identify of the
person if different from the person who
signed the notice) pre-approved the
withdrawal in writing;
(iv) Disclose the current estimate of
the futures commission merchant’s
remaining total residual interest in the
segregated accounts holding Cleared
Swaps Customer Account funds after
the withdrawal; and
(v) Include a representation that to the
best of the notice signatory’s knowledge
and reasonable belief the futures
commission merchant remains in
compliance with the segregation
requirements after the withdrawal.
(d) If a futures commission merchant
withdraws funds from Cleared Swaps
Customer Accounts for its own
proprietary use, and the withdrawal
causes the futures commission merchant
to not hold sufficient funds in Cleared
Swaps Customer Accounts to meet its
targeted residual interest, as required to
be computed under § 1.11 of this
chapter, the futures commission
merchant must deposit its own funds
into the Cleared Swaps Customer
Accounts to restore the targeted amount
of residual interest on the next business
day, or, if appropriate, revise the futures
commission merchant’s targeted amount
of residual interest pursuant to the
policies and procedures required by
§ 1.11 of this chapter. Notwithstanding
the foregoing, if at any time the futures
commission merchant’s residual interest
in Cleared Swaps Customer Accounts is
less than the sum of its Cleared Swaps
Customers’ margin deficits, the futures
commission merchant must
immediately restore the residual interest
to exceed the sum of such margin
deficits. Any proprietary funds
deposited in Cleared Swaps Customer
Accounts must be unencumbered and
otherwise compliant with § 1.25 of this
chapter, as applicable.
(e) Notwithstanding any other
provision of this part, a futures
commission merchant may not
withdraw funds for its own proprietary
use from a Cleared Swaps Customer
Account unless the futures commission
merchant follows its policies and
procedures required by § 1.11 of this
chapter.

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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Proposed Rules
PART 30—FOREIGN FUTURES AND
FOREIGN OPTIONS TRANSACTIONS
24. The authority citation for part 30
continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6c, and 12a,
as amended by Title VII of the Dodd-Frank
Wall Street Reform and Consumer Protection
Act, Pub. L. 111–203, 124 Stat. 1376 (Jul. 21,
2010).

25. Amend § 30.1 by adding
paragraphs (f), (g), and (h) to read as
follows:
§ 30.1

Definitions.

*

*
*
*
*
(f) 30.7 Customer means any foreign
futures or foreign options customer as
defined in paragraph (c) of this section
as well as any foreign-domiciled person
who trades in foreign futures or foreign
options through a futures commission
merchant; Provided, however, that an
owner or holder of a proprietary account
as defined in paragraph (y) of § 1.3 of
this chapter shall not be deemed to be
a 30.7 customer.
(g) 30.7 Account means any account
maintained by a futures commission
merchant for or on behalf of 30.7
Customers to hold money, securities, or
other property to margin, guarantee, or
secure foreign futures or foreign option
positions.
(h) 30.7 Customer Funds means any
money, securities, or other property
received by a futures commission
merchant from, for, or on behalf of 30.7
Customers to margin, guarantee, or
secure foreign futures or foreign option
positions, or money, securities, or other
property accruing to 30.7 Customers as
a result of foreign futures and foreign
option positions.
26. Revise § 30.7 to read as follows:

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§ 30.7 Treatment of foreign futures or
foreign options secured amount.

(a) General. Except as provided in this
section, a futures commission merchant
must at all times maintain in a separate
account or accounts money, securities
and property in an amount at least
sufficient to cover or satisfy all of its
obligations to 30.7 Customers
denominated as the foreign futures or
foreign options secured amount. In
computing the foreign futures or foreign
options secured amount, a futures
commission merchant may offset any
net deficit in a particular 30.7
Customer’s Account against the current
market value of readily marketable
securities held for the same particular
30.7 Customer’s Account as provided
for in paragraph (l) of this section. The
amount that must be deposited in such
separate account or accounts for 30.7
Customers must be no less than the

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amount required to be held in a separate
account or accounts for or on behalf of
30.7 Customers pursuant to any law, or
rule, regulation or order thereunder, or
any rule of any self-regulatory
organization authorized thereunder, in
the jurisdiction in which the depository
or the 30.7 Customer, as appropriate, is
located. In addition, the futures
commission merchant must at all times
maintain residual interest in separate
accounts for 30.7 Customers sufficient
to exceed the sum of all margin deficits
that the 30.7 Customers of the futures
commission merchant have in their 30.7
Accounts. Such residual interest may
not be withdrawn pursuant to any
provision of this section. If the value of
a 30.7 Customer’s Funds for a 30.7
Account is less than the total amount of
collateral required for that 30.7
Customer’s 30.7 Account for foreign
futures or foreign options, the difference
is a margin deficit.
(b) Location of 30.7 Customer Funds.
A futures commission merchant shall
deposit the foreign futures or foreign
options secured amount under an
account name that clearly identifies the
funds as belonging to 30.7 Customers
and shows that the foreign futures or
foreign options secured amount is set
aside as required by this part. A futures
commission merchant may deposit
funds set aside as the foreign futures or
foreign options secured amount with the
following depositories:
(1) A bank or trust company located
in the United States;
(2) A bank or trust company located
outside the United States that has in
excess of $1 billion of regulatory capital;
(3) A futures commission merchant
registered as such with the Commission;
(4) A derivatives clearing
organization;
(5) The clearing organization of any
foreign board of trade;
(6) A member of any foreign board of
trade; or
(7) Such member’s or clearing
organization’s designated depositories.
(c) Limitation on holding foreign
futures or foreign options secured
amount outside of the United States. A
futures commission merchant may not
deposit or hold the foreign futures or
foreign options secured amount in
accounts maintained outside of the
United States with any of the
depositories listed in paragraph (b) of
this section except to meet margin
requirements, including prefunding
margin requirements, established by
rule, regulation, or order of foreign
boards of trade or foreign clearing
organizations, or to meet margin calls
issued by foreign brokers carrying the
30.7 Customers’ foreign futures and

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foreign option positions; Provided,
however, that a futures commission
merchant may deposit an additional
amount of up to 10 percent of the total
amount of funds necessary to meet
margin and prefunding margin
requirements to avoid daily transfers of
funds between the futures commission
merchant’s 30.7 Accounts maintained in
the United States and those maintained
outside of the United States. An FCM
must deposit 30.7 Customer Funds
under the laws and regulations of the
foreign jurisdiction that provide the
greatest degree of protection to such
funds. An FCM may not by contract or
otherwise waive any of the protections
afforded customer funds under the laws
of the foreign jurisdiction.
(d) Written acknowledgment from
depositories. (1) Each futures
commission merchant must obtain a
written acknowledgment from each
depository as set out in Appendix E to
this part in accordance with the
requirements of this part; Provided,
however, that an acknowledgment need
not be obtained from a derivatives
clearing organization that has adopted
and submitted to the Commission rules
that provide for the separate holding of
the foreign futures or foreign options
secured amount, in accordance with all
relevant provisions of the Act, this part
and the regulations and orders
promulgated thereunder, of all funds
held on behalf of 30.7 Customers and all
instruments purchased with funds set
aside as the foreign futures or foreign
options secured amount as provided for
under paragraph (i) of this section.
(2) The written acknowledgment must
be in the form as set out in Appendix
E to this part: Provided, however, that if
the futures commission merchant
invests funds set aside as the foreign
futures or foreign options secured
amount in money market mutual funds
as a permitted investment under
paragraph (i) of this section and in
accordance with the terms and
conditions of § 1.25(c) of this chapter,
the written acknowledgment with
respect to such investment must be in
the form as set out in Appendix F to this
part.
(3) A futures commission merchant
may deposit 30.7 Customer Funds only
with a depository that provides the
Commission and the futures
commission merchant’s designated selfregulatory organization with direct,
read-only access to account information
on 24-hour a day basis. The Commission
and the futures commission merchant’s
designated self-regulatory organization
must receive the direct access when the
account is opened. The written
acknowledgment must contain the

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futures commission merchant’s
authorization to the depository to
provide direct and immediate account
access to the Commission and the
futures commission merchant’s
designated self-regulatory organization.
(4) A futures commission merchant
may deposit 30.7 Customer Funds only
with a depository that agrees to provide
the Commission and the futures
commission merchant’s designated selfregulatory organization with a copy of
the executed written acknowledgment
within three business days of the
opening of the account. The
Commission must receive the written
acknowledgment from the depository
via electronic mail at
[email protected]. The
written acknowledgment must contain
the futures commission merchant’s
authorization to the depository to
provide the written acknowledgment to
the Commission and to the futures
commission merchant’s designated selfregulatory organization without further
notice to or consent from the futures
commission merchant.
(5) A futures commission merchant
may deposit 30.7 Customer Funds only
with a depository that agrees to reply
promptly and directly to the
Commission’s or to the futures
commission merchant’s designated selfregulatory organization’s requests for
confirmation of account balances or
other account information without
further notice to or consent from the
futures commission merchant. The
written acknowledgment must contain
the futures commission merchant’s
authorization to the depository to
respond directly and immediately to
requests from the Commission or the
futures commission merchant’s
designated self-regulatory organization
for confirmation of account balances
and other account information without
further notice to or consent from the
futures commission merchant.
(6) The futures commission merchant
shall promptly file a copy of the written
acknowledgment with the Commission
in the manner specified by the
Commission and in no event later than
the later of:
(i) The effective date of this rule; or
(ii) Three business days after the
account is opened.
(7) The futures commission merchant
shall amend the written
acknowledgment and promptly file the
amended written acknowledgment with
the Commission within 120 days of any
changes in the following:
(i) The name or business address of
the futures commission merchant;
(ii) The name or business address of
the depository; or

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(iii) The account number(s) under
which the foreign futures or foreign
options secured amount are held.
(8) Each futures commission merchant
must maintain each written
acknowledgment readily accessible in
its files in accordance with § 1.31 of this
chapter, for as long as the account
remains open, and thereafter for the
period provided in § 1.31 of this
chapter.
(e) Commingling. (1) A futures
commission merchant may commingle
the funds set aside as the foreign futures
or foreign options secured amount that
it receives from, or on behalf of,
multiple 30.7 Customers in a single
account or multiple accounts with one
or more of the depositories listed in
paragraph (b) of this section.
(2) A futures commission merchant
may not commingle the funds set aside
as the foreign futures or foreign options
secured amount held for 30.7 Customers
with the money, securities or property
of such futures commission merchant,
with any proprietary account of such
futures commission merchant, or use
such funds to secure or guarantee the
obligations of, or extend credit to, such
futures commission merchant or any
proprietary account of such futures
commission merchant; Provided,
however, a futures commission
merchant may deposit proprietary funds
into 30.7 Customer Accounts as
permitted under paragraph (g) of this
section.
(3) A futures commission merchant
may not commingle funds held for 30.7
Customers with funds deposited by
futures customers as defined in § 1.3 of
this chapter and held in account
segregated pursuant to Section 4d(a) and
4d(b) of the Act or with funds deposited
by Cleared Swap Customers as defined
under § 22.1 of this chapter and held in
segregated accounts pursuant to Section
4d(f) of the Act, or with funds of any
account holders of the futures
commission merchant unrelated to
trading foreign futures or foreign
options; Provided, however, that a
futures commission merchant may
commingle 30.7 Customer funds with
funds deposited by futures customers or
Cleared Swaps Customers pursuant to
the terms of a Commission regulation or
order authorizing such commingling.
(f) Limitations on use of 30.7
Customer Funds. (1) A futures
commission merchant shall not use, or
permit the use of, the funds of one 30.7
Customer to purchase, margin or settle
the trades, contracts, or commodity
options of, or to secure or extend credit
to, any person other than such 30.7
Customer. This prohibition on the use of
the funds of one 30.7 customer to

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extend credit to, or to purchase, margin
or settle the trades, contracts, or
commodity options of another 30.7
Customer applies at all times. For this
purpose, a futures commission
merchant which operationally
commingles the funds of its 30.7
Customers must ensure that at all times
its residual interest in funds set aside as
the foreign futures or foreign options
secured amount exceeds the sum of all
its 30.7 Customers’ margin deficits.
(2) A futures commission merchant
may not impose or permit the
imposition of a lien on any funds set
aside as the foreign futures or foreign
options secured amount, including any
residual financial interest of the futures
commission merchant in such funds.
(3) A futures commission merchant
may not include in funds set aside as
the foreign futures or foreign options
secured amount any money invested in
securities, memberships, or obligations
of any clearing organization or board of
trade. A futures commission merchant
may not include in funds set aside as
the foreign futures or foreign options
secured amount any other money,
securities, or property held by a member
of a foreign board of trade, board of
trade, or clearing organization, except if
the funds are deposited to margin,
secure, or guarantee 30.7 Customers’
foreign futures or foreign options
positions and the futures commission
merchant obtains the written
acknowledgment from the member of
the foreign board of trade, board of
trade, or clearing organization as
required by paragraph (d) of this
section.
(g) Futures commission merchant’s
residual financial interest and
withdrawal of funds. (1) The provision
in paragraph (e) of this section, which
prohibits the commingling of funds set
aside as the foreign futures or foreign
options secured amount with the funds
of a futures commission merchant, shall
not be construed to prevent a futures
commission merchant from having a
residual financial interest in the funds
set aside as required by the regulations
in this part for the benefit of 30.7
Customers; nor shall such provisions be
construed to prevent a futures
commission merchant from adding to
such set aside funds such amount or
amounts of money, from its own funds
or unencumbered securities from its
own inventory, of the type set forth in
§ 1.25 of this chapter, as it may deem
necessary to ensure any and all 30.7
Accounts from becoming undersecured
at any time.
(2) A futures commission merchant
may not withdraw funds on any
business day for its own proprietary use

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from an account or accounts holding the
foreign futures and foreign options
secured amount unless the futures
commission merchant has prepared the
daily 30.7 calculation required by
paragraph (l) of this section as of the
close of business on the previous
business day. A futures commission
merchant that has completed its daily
30.7 calculation may make withdrawals
to its own order, to the extent of its
actual residual financial interest in
funds held in 30.7 Accounts, including
the withdrawal of securities held in
secured amount safekeeping accounts
held by a bank, trust company, contract
market, clearing organization, member
of a foreign board of trade, or other
futures commission merchant. Such
withdrawal(s) shall not result in the
funds of one 30.7 Customer being used
to purchase, margin or carry the foreign
futures or foreign options positions, or
extend the credit of any other 30.7
Customer or other person.
Notwithstanding any other provision of
this section, a futures commission
merchant must at all times maintain an
amount of residual interest in separate
accounts for the benefit of 30.7
Customers that exceeds the sum of all
30.7 Customers’ margin deficits and
such residual interest may not be
withdrawn by the futures commission
merchant.
(3) A futures commission merchant
may not withdraw funds for its own
proprietary use, in a single transaction
or a series of transactions on a given
business day, from an account or
accounts holding 30.7 Customer Funds
if such withdrawal(s) would exceed 25
percent of the futures commission
merchant’s residual interest in such
accounts as reported on the daily
secured amount calculation required by
paragraph (l) of this section and
computed as of the close of business on
the previous business day, unless the
futures commission merchant’s Chief
Executive Officer, Chief Finance Officer
or other senior official that is listed as
a principal of the futures commission
merchant on its Form 7–R and is
knowledgeable about the futures
commission merchant’s financial
requirements and financial position preapproves in writing the withdrawal, or
series of withdrawals.
(4) A futures commission merchant
must file written notice of the
withdrawal or series of withdrawals that
exceed 25 percent of the futures
commission merchant’s residual interest
in 30.7 Customer Funds as computed
under paragraph (h)(2) of this section
with the Commission and with its
designated self-regulatory organization
immediately after the Chief Executive

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Officer, Chief Finance Officer or other
senior official as described in paragraph
(g)(2) of this section pre-approves the
withdrawal or series of withdrawals.
The written notice must:
(i) Be signed by the Chief Executive
Officer, Chief Finance Officer or other
senior official that pre-approved the
withdrawal, and give notice that the
futures commission merchant has
withdrawn or intends to withdraw more
than 25 percent of its residual interest
in accounts holding 30.7 Customer
Funds;
(ii) Include a description of the
reasons for the withdrawal or series of
withdrawals;
(iii) List the amount of funds provided
to each recipient and the name of each
recipient;
(iv) Include the current estimate of the
amount of the futures commission
merchant’s residual interest in the 30.7
Customer Funds after the withdrawal;
(v) Contain a representation by the
Chief Executive Officer, Chief Finance
Officer or other senior official as
described in paragraph (g)(3) of this
section that pre-approved the
withdrawal, or series of withdrawals,
that to such person’s knowledge and
reasonable belief, the futures
commission merchant remains in
compliance with the secured amount
requirements after the withdrawal. The
Chief Executive Officer, Chief Finance
Officer or other appropriate senior
official as described in paragraph (g)(2)
of this section must consider the daily
30.7 calculation as of the close of
business on the previous business day
and any other factors that may cause a
material change in the futures
commission’s residual interest since the
close of business the previous business
day, including known unsecured
customer debits or deficits, current day
market activity and any other
withdrawals made from the 30.7
Customer Accounts; and
(vi) Any such written notice filed
with the Commission must be filed via
electronic transmission using a form of
user authentication assigned in
accordance with procedures established
by or approved by the Commission, and
otherwise in accordance with
instruction issued by or approved by the
Commission. Any such electronic
submission must clearly indicate the
registrant on whose behalf such filing is
made and the use of such user
authentication in submitting such filing
will constitute and become a substitute
for the manual signature of the
authorized signer. Any written notice
filed must be followed up with direct
communication to the Regional office of
Commission which has supervisory

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authority over the futures commission
merchant whereby the Commission
acknowledges receipt of the notice.
(5) After making a withdrawal
requiring the approval and notice
required in paragraphs (c)(1) and (2) of
this section, and before the next daily
secured amount calculation, no futures
commission merchant may make any
further withdrawals from accounts
holding 30.7 Customer Funds, except to
or for the benefit of 30.7 Customers,
without, for each withdrawal, obtaining
the approval required under paragraph
(c)(1) of this section and filing a written
notice with the Commission under
paragraph (g)(4)(vi) of this section and
its designated self-regulatory
organization signed by the Chief
Executive Officer, Chief Finance Officer,
or other senior official. The written
notice must:
(i) List the amount of funds provided
to each recipient and each recipient’s
name;
(ii) Disclose the reason for each
withdrawal;
(iii) Confirm that the Chief Executive
Officer, Chief Finance Officer, or other
senior official (and identify of the
person if different from the person who
signed the notice) pre-approved the
withdrawal in writing;
(iv) Disclose the current estimate of
the futures commission merchant’s
remaining total residual interest in the
secured accounts holding 30.7 Customer
Funds after the withdrawal; and
(v) Include a representation that to the
best of the notice signatory’s knowledge
and reasonable belief the futures
commission merchant remains in
compliance with the secured amount
requirements after the withdrawal.
(6) If a futures commission merchant
withdraws funds from the separate
accounts holding 30.7 Customer Funds
for its own proprietary use, and the
withdrawal causes the futures
commission merchant to not hold
sufficient funds in the separate accounts
for the benefit of the 30.7 Customers to
meet its targeted residual interest, as
required to be computed under § 1.11 of
this chapter, the futures commission
merchant must deposit its own funds
into the separate accounts for the benefit
of 30.7 Customers to restore the account
balance to the targeted residual interest
amount on the next business day, or, if
appropriate, revise the futures
commission merchant’s targeted amount
of residual interest pursuant to the
policies and procedures required by
§ 1.11 of this chapter. Notwithstanding
the foregoing, if at any time the futures
commission merchant’s residual interest
in separate accounts for the benefit of
30.7 Customers is less than the sum of

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its 30.7 Customer’s margin deficits, the
futures commission merchant must
immediately restore the residual interest
to exceed the sum of such margin
deficits. Any proprietary funds
deposited in the 30.7 Customer
Accounts must be unencumbered and
otherwise compliant with § 1.25 of this
section, as applicable.
(7) Notwithstanding any other
provision of this part, a futures
commission merchant may not
withdraw funds for its own proprietary
use from 30.7 Accounts unless the
futures commission merchant follows
its policies and procedures required by
§ 1.11 of this chapter.
(h) Permitted investments and
deposits of 30.7 Customer Funds. (1) A
futures commission merchant may
invest 30.7 Customer Funds subject to,
and in compliance with, the terms and
conditions of § 1.25 of this chapter.
Regulation 1.25 of this chapter shall
apply to the investment of 30.7
Customer Funds as if such funds
comprised customer funds or customer
money subject to segregation pursuant
to section 4d of the Act and the
regulations thereunder.
(2) Each futures commission merchant
that invests money, securities or
property on behalf of 30.7 Customers
must keep a record showing the
following:
(i) The date on which such
investments were made;
(ii) The name of the person through
whom such investments were made;
(iii) The amount of money or current
market value of securities so invested;
(iv) A description of the obligations in
which such investments were made,
including CUSIP or ISIN numbers;
(v) The identity of the depositories or
other places where such investments are
maintained;
(vi) The date on which such
investments were liquidated or
otherwise disposed of and the amount
of money received or current market
value of securities received as a result
of such disposition;
(vii) The name of the person to or
through whom such investments were
disposed of; and
(viii) A daily valuation for each
instrument and readily available
documentation supporting the daily
valuation for each instrument. Such
supporting documentation must be
sufficient to enable third parties to
verify the valuations and the accuracy of
any information from external sources
used in those valuations.
(3) Any 30.7 Customer Funds
deposited in a bank or trust company
located in the United States or in a
foreign jurisdiction must be available for

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immediate withdrawal upon the
demand of the futures commission
merchant.
(4) Futures commission merchants
that invest 30.7 Customer Funds in
instruments described in § 1.25 of this
chapter shall include such instruments
in the computation of its secured
amount requirements, required under
paragraph (l) of this section, at values
that at no time exceed current market
value, determined as of the close of the
market on the date for which such
computation is made.
(i) Responsibility for § 1.25 investment
losses. A futures commission merchant
shall bear sole financial responsibility
for any losses resulting from the
investment of 30.7 Customer Funds in
instruments described in § 1.25 of this
chapter. No investment losses shall be
borne or otherwise allocated to the 30.7
Customers of the futures commission
merchant.
(j) Loans by futures commission
merchants; Treatment of proceeds. A
futures commission merchant may lend
its own funds to 30.7 Customers on
securities and property pledged, or from
repledging or selling such securities and
property pursuant to specific written
agreement with such 30.7 Customers.
The proceeds of such loans used to
purchase, margin, guarantee, or secure
the trades, contracts, or commodity
options of 30.7 Customers shall be
treated and dealt with by a futures
commission merchant as belonging to
such 30.7 Customers. A futures
commission merchant may not loan
funds on an unsecured basis to finance
a 30.7 Customer’s foreign futures and
foreign options trading, nor may a
futures commission merchant loan
funds to a 30.7 Customer secured by the
30.7 Customer’s trading account.
(k) Permitted withdrawals. A futures
commission merchant may withdraw
funds from 30.7 Customer Accounts in
an amount necessary in the normal
course of business to margin, guarantee,
secure, transfer, or settle 30.7
Customers’ foreign futures or foreign
option positions with a foreign broker or
clearing organization. A futures
commission merchant also may
withdraw funds from 30.7 Customer
Accounts to pay commissions,
brokerage, interest, taxes, storage, and
other charges lawfully accruing in
connection with the 30.7 Customers’
foreign futures and foreign options
positions.
(l) Daily computation of 30.7
Customer secured amount requirement
and details regarding the holding and
investing of 30.7 Customer Funds. (1)
Each futures commission merchant is
required to prepare a Statement of

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Secured Amounts and Funds Held in
Separate Accounts for 30.7 Customers
pursuant to Commission Regulation
30.7 contained in the Form 1–FR–FCM
as of the close of each business day.
Futures commission merchants that
invest funds set aside as the foreign
futures or foreign options secured
amount in instruments described in
§ 1.25 of this chapter shall include such
instruments in the computation of its
secured amount requirements at values
that at no time exceed current market
value, determined as of the close of the
market on the date for which such
computation is made. Nothing in this
paragraph shall affect the requirement
that a futures commission merchant at
all times maintain sufficient money,
securities and property to cover its total
obligations to all 30.7 Customers, in
accordance with paragraph (a) of this
section.
(2) A futures commission merchant
may offset any net deficit in a particular
30.7 Customer’s Account against the
current market value of readily
marketable securities, less deductions
(i.e. ‘‘securities haircuts’’) as set forth in
Rule 15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)), held for the same
particular 30.7 Customer’s Account in
computing the daily Foreign Futures
and Foreign Options Secured Amount.
Futures commission merchants that
establish and enforce written policies
and procedures to assess the credit risk
of commercial paper, convertible debt
instruments, or nonconvertible debt
instruments in accordance with Rule
240.15c3–1(c)(2)(vi) of the Securities
and Exchange Commission (17 CFR
240.15c3–1(c)(2)(vi)) may apply the
lower haircut percentages specified in
Rule 240.15c3–1(c)(2)(vi) for such
commercial paper, convertible debt
instruments and nonconvertible debt
instruments. The futures commission
merchant must maintain a security
interest in the securities, including a
written authorization to liquidate the
securities at the futures commission
merchant’s discretion, and must set
aside the securities in a safekeeping
account compliant with paragraph (c) of
this section. For purposes of this
section, a security will be considered
‘‘readily marketable’’ if it is traded on a
‘‘ready market’’ as defined in Rule
15c3–1(c)(11)(i) of the Securities and
Exchange Commission (17 CFR
240.15c3–1(c)(11)(i)).
(3) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization the daily
Statement of Secured Amounts and
Funds Held in Separate Accounts for

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30.7 Customers pursuant to Commission
Regulation 30.7 required by paragraph
(l)(1) of this section by noon the
following business day.
(4) Each futures commission merchant
shall file the Statement of Secured
Amounts and Funds Held in Separate
Accounts for 30.7 Customers pursuant
to Commission Regulation 30.7 required
by paragraph (l)(1) of this section in an
electronic format using a form of user
authentication assigned in accordance
with procedures established or
approved by the Commission.
(5) Each futures commission merchant
is required to submit to the Commission
and to the firm’s designated selfregulatory organization a report listing
of the names of all banks, trust
companies, futures commission
merchants, derivatives clearing
organizations, foreign brokers, foreign
clearing organizations, or any other
depository or custodian holding 30.7
Customer Funds as of the fifteenth day
of the month, or the first business day
thereafter, and the last business day of
each month. This report must include:
(i) The name and location of each
depository holding 30.7 Customer
Funds;
(ii) The total amount of 30.7 Customer
Funds held by each depository listed in
paragraph (l)(5) of this section; and
(iii) The total amount of cash and
investments that each depository listed
in paragraph (l)(5) of this section holds
for the futures commission merchant.
The futures commission merchant must
report the following investments:
(A) Obligations of the United States
and obligations fully guaranteed as to
principal and interest by the United
States (U.S. government securities);
(B) General obligations of any State or
of any political subdivision of a State
(municipal securities);
(C) General obligation issued by any
enterprise sponsored by the United
States (government sponsored enterprise
securities);
(D) Certificates of deposit issued by a
bank;
(E) Commercial paper fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation;
(F) Corporate notes or bonds fully
guaranteed as to principal and interest
by the United States under the
Temporary Liquidity Guarantee Program
as administered by the Federal Deposit
Insurance Corporation; and
(G) Interests in money market mutual
funds.
(6) Each futures commission merchant
must report the total amount of

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customer owned securities held by the
futures commission merchant as 30.7
Customer Funds and must list the
names and locations of the depositories
holding customer owned securities.
(7) Each futures commission merchant
must report the total amount of 30.7
Customer Funds that have been used to
purchase securities under agreements to
resell the securities (reverse repurchase
transactions).
(8) Each futures commission merchant
must report which, if any, of the
depositories holding 30.7 Customer
Funds under paragraph (l)(5) of this
section are affiliated with the futures
commission merchant.
(9) Each futures commission merchant
shall file the detailed list of depositories
required by paragraph (l)(5) of this
section by 11:59 p.m. the next business
day in an electronic format using a form
of user authentication assigned in
accordance with procedures established
or approved by the Commission.
(10) Each futures commission
merchant shall retain its daily secured
amount computation, the Statement of
Secured Amounts and Funds Held in
Separate Accounts for 30.7 Customers
pursuant to Commission Regulation
30.7 required by paragraph (l)(1) of this
section, and the detailed list of
depositories required by paragraph (l)(5)
of this section, together with all
supporting documentation, in
accordance with the requirements of
§ 1.31 of this part.
27. Add Appendix E and Appendix F
to part 30 to read as follows:
Appendix E to Part 30—
Acknowledgment Letter for CFTC
Regulation 30.7 Customer Secured
Account
[Date]
[Name and Address of Depository]
We refer to the Secured Amount
Account(s) which [Name of Futures
Commission Merchant] (‘‘we’’ or ‘‘our’’) have
opened or will open with [Name of
Depository] (‘‘you’’ or ‘‘your’’) entitled:
[Name of Futures Commission Merchant]
[if applicable, add ‘‘FCM Customer Omnibus
Account’’] CFTC Regulation 30.7 Customer
Secured Account [If applicable, include any
abbreviated name of the Account(s) as
reflected in the Depository’s electronic
systems (provided any such abbreviated
name must reflect that the Account(s) is a
CFTC regulated customer secured account)]
Account Number(s):
(collectively, the ‘‘Account(s)’’).
You acknowledge and agree that we have
opened or will open the above-referenced
Account(s) for the purpose of depositing, as
applicable, money, securities and other
property (collectively ‘‘Funds’’) for or on
behalf of our customers who are entering into
foreign futures and/or foreign options
transactions (as such terms are defined in

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U.S. Commodity Futures Trading
Commission (‘‘CFTC’’) Regulation 30.1, as
amended). The Funds deposited in the
Account(s) or accruing to the credit of the
Accounts will be kept separate and apart and
separately accounted for on your books from
our own funds and all other accounts
maintained by us in accordance with the
provisions of the Commodity Exchange Act,
as amended (the ‘‘Act’’), and Part 30 of the
CFTC’s regulations, as amended, and may not
be commingled with our own funds in any
proprietary account we maintain with you
and the Funds must otherwise be treated in
accordance with the provisions of the Act
and CFTC Regulations.
Furthermore, you acknowledge and agree
that such Funds may not be used by you or
by us to secure or guarantee any obligations
that we might owe to you, nor may they be
used by us to secure credit from you. You
further acknowledge and agree that the
Funds in the Account(s) shall not be subject
to any right of offset or lien for or on account
of any indebtedness, obligations or liabilities
we may now or in the future have owing to
you, and that you understand the nature of
the Funds held or hereafter deposited in the
Account(s) and that you will treat and
maintain such Funds in accordance with the
provisions of the Act and CFTC regulations.
This prohibition does not affect your right to
recover funds advanced in the form of cash
transfers you make in lieu of liquidating noncash assets held in the Account(s) for
purposes of variation settlement or posting
initial (original) margin.
In addition, you agree that the Account(s)
may be examined at any reasonable time by
an appropriate officer, agent or employee of
the CFTC or a self-regulatory organization,
and this letter constitutes the authorization
and direction of the undersigned to permit
any such examination or audit to take place.
You agree to respond promptly and directly
to requests for confirmation of account
balances and other account information from
an appropriate officer, agent, or employee of
the CFTC or a self-regulatory organization of
which we are a member, without further
notice to or consent from the futures
commission merchant. You also agree that,
immediately upon instruction by the director
of the Division of Swap Dealer and
Intermediary Oversight of the CFTC or the
director of the Division of Clearing and Risk
of the CFTC, or any successor divisions, or
such directors’ designees, or any appropriate
official of a self-regulatory organization of
which we are a member, you will provide
any and all information regarding or related
to the Funds or the Accounts as shall be
specified in such instruction and as directed
in such instruction. You further agree that
you will provide the CFTC and our
designated self-regulatory organization with
the necessary software, a user log-in, and
password that will allow the CFTC and our
designated self-regulatory organization to
have read-only access to the accounts listed
above on your Web site on a 24-hour a day
basis. This letter further constitutes the
consent and authorization of the undersigned
for you to respond immediately to requests
from appropriate officers, agents, or
employees of the CFTC or a self-regulatory

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organization for information and/or
confirmation of current and historical
account balances of the Account(s).
You acknowledge and agree that you meet
the requirements detailed for depositories in
CFTC Regulation 30.7, as amended. You
further acknowledge and agree that the
Funds in the Account(s) shall be released
immediately, subject to the requirements of
US or non-U.S. law as applicable, upon
proper notice and instruction from an
appropriate officer or employee of us or from
the director of the Division of Clearing and
Risk of the CFTC, the director of the Division
of Swap Dealer and Intermediary Oversight,
or any successor divisions, or such directors’
designees. We will not hold you responsible
for acting pursuant to any instruction from
the CFTC upon which you have relied after
having taken reasonable measures to assure
that such instruction was provided to you by
the director of the Division of Clearing and
Risk or the director of the Division of Swap
Dealer and Intermediary Oversight of the
CFTC, or any successor divisions, or such
directors’ designees.
In the event we become subject to either a
voluntary or involuntary petition for relief
under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation
to release the Funds held in the Account(s),
except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the
respective U.S. Bankruptcy Court.
Notwithstanding anything in the foregoing
to the contrary, nothing contained herein
shall be construed as limiting your right to
assert any right of set off against or lien on
assets other than assets maintained in the
Account(s), nor to impose such charges
against us or any proprietary account
maintained by us with you. Further, it is
understood that amounts represented by
checks, drafts or other items shall not be
considered to be part of the Account(s) until
finally collected. Accordingly, checks, drafts
and other items credited to the Account(s)
and subsequently dishonored or otherwise
returned to you, or reversed, for any reason
and any claims relating thereto, including but
not limited to claims of alteration or forgery,
may be charged back to the Account(s), and
we shall be responsible to you as a general
endorser of all such items whether or not
actually so endorsed.
You may conclusively presume that any
withdrawal from the Account(s) and the
balances maintained therein are in
conformity with the Act and CFTC
regulations without any further inquiry,
provided that you have no notice of or actual
knowledge of, or could not reasonably know
of, a violation of the Act or other provision
of law by us; and you shall not in any
manner not expressly agreed to herein be
responsible for ensuring compliance by us
with the provisions of the Act and CFTC
regulations.
You may, and are hereby authorized to,
obey the order, judgment, decree or levy of
any court of competent jurisdiction or any
governmental agency with jurisdiction,
which order, judgment, decree or levy relates
in whole or in part to the Account(s). In any
event, you shall not be liable by reason of any
such action or omission to act, to us or to any

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other person, firm, association or corporation
even if thereafter any such order, decree,
judgment or levy shall be reversed, modified,
set aside or vacated.
The terms of this letter agreement shall
remain binding upon the parties, their
successors and assigns, including for the
avoidance of doubt, regardless of the change
in name of any party. This letter agreement
supersedes and replaces any prior agreement
between the parties in connection with the
Account(s), including but not limited to any
prior acknowledgment letter, to the extent
that such prior agreement is inconsistent
with the terms hereof. In the event of any
conflict between this letter agreement and
any other agreement between the parties in
connection with the Account(s), this letter
agreement shall govern with respect to
matters specific to the Act and the CFTC’s
regulations, as amended.
This letter agreement shall be governed by
and construed in accordance with the laws
of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide
by the requirements and conditions set forth
above by signing and returning the enclosed
copy of this letter. You further acknowledge
and agree to provide a copy of this fully
executed letter directly to the CFTC (via
electronic mail to
[email protected]) and our
designated self-regulatory organization.
[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Depository]
By:
Print Name:
Title:
Contact Information: [Insert phone number
and email address]
DATE:

Appendix F to Part 30:
CFTC Regulation 30.7—Acknowledgment
Letter for CFTC Regulation 30.7 Customer
Secured Money Market Mutual Fund
Account [All of this was not proposed]
[Date]
[Name and Address of Money Market
Mutual Fund]
We propose to invest funds held by [Name
of Futures Commission Merchant or
Derivatives Clearing Organization] (‘‘we’’ or
‘‘our’’) on behalf of our customers in shares
of [Name of Money Market Mutual Fund]
(‘‘you’’ or ‘‘your’’) under account(s) entitled
(or shares issued to):
[Name of Futures Commission Merchant or
Derivatives Clearing Organization] [if
applicable, add ‘‘FCM Customer Omnibus
Account’’] CFTC Regulation 30.7 Customer
Secured Money Market Mutual Fund
Account
[If applicable, include any abbreviated
name of the Account(s) as reflected in the
Depository’s electronic systems (provided
any such abbreviated name must reflect that
the Account(s) is a CFTC regulated customer
segregated account)]
Account Number(s): [
]
(collectively, the ‘‘Account(s)’’).

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You acknowledge and agree that we are
holding these funds, including any shares
issued and amounts accruing in connection
therewith (collectively, the ‘‘Shares’’), for the
benefit of our customers who are entering
into foreign futures and/or foreign options
transactions (as such terms are defined in
U.S. Commodity Futures Trading
Commission (‘‘CFTC’’) Regulation 30.1, as
amended); that the Shares held by you,
hereafter deposited in the Account(s) or
accruing to the credit of the Accounts, will
be kept separate and apart and separately
accounted for on your books from our own
funds and from any other funds or accounts
held by us in accordance with the provisions
of the Commodity Exchange Act, as amended
(the ‘‘Act’’), and Part 30 of the CFTC’s
regulations, as amended; and that the Shares
must otherwise be treated in accordance with
the provisions of the Act and CFTC
regulations.
Furthermore, you acknowledge and agree
that such Shares may not be used by you or
by us to secure or guarantee any obligations
that we might owe to you, nor may they be
used by us to secure credit from you. You
further acknowledge and agree that the
Shares in the Account(s) shall not be subject
to any right of offset or lien for or on account
of any indebtedness, obligations or liabilities
we may now or in the future have owing to
you.
In addition, you agree that the Account(s)
may be examined at any reasonable time by
an appropriate officer, agent or employee of
the CFTC or a self-regulatory organization,
and this letter constitutes the authorization
and direction of the undersigned to permit
any such examination or audit to take place.
You agree to respond promptly and directly
to requests for confirmation of account
balances and other account information from
an appropriate officer, agent, or employee of
the CFTC or a self-regulatory organization of
which we are a member, without further
notice to or consent from the futures
commission merchant. You also agree that,
immediately upon instruction by the director
of the Division of Swap Dealer and
Intermediary Oversight of the CFTC or the
director of the Division of Clearing and Risk
of the CFTC, or any successor divisions, or
such directors’ designees, or any appropriate
official of a self-regulatory organization of
which we are a member, you will provide
any and all information regarding or related
to the Funds or the Accounts as shall be
specified in such instruction and as directed
in such instruction. You further agree that
you will provide the CFTC and our
designated self-regulatory organization with
the necessary software, a user log-in, and
password that will allow the CFTC and our
designated self-regulatory organization to
have read-only access to the accounts listed
above on your Web site on a 24-hour a day
basis. This letter further constitutes the
consent and authorization of the undersigned
for you to respond immediately to requests
from appropriate officers, agents, or
employees of the CFTC or a self-regulatory
organization for information and/or
confirmation of current and historical
account balances of the Account(s).

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You acknowledge and agree that the Shares
in the Account(s) shall be released
immediately, subject to the requirements of
U.S. or non-U.S. law as applicable, upon
proper notice and instruction from an
appropriate officer or employee of us or from
the director of the Division of Clearing and
Risk or the director of the Division of Swap
Dealers and Intermediary Oversight of the
CFTC, or any successor divisions, or such
directors’ designees. We will not hold you
responsible for acting pursuant to any
instruction from the CFTC upon which you
have relied after having taken reasonable
measures to assure that such instruction was
provided to you by the director of the
Division of Clearing and Risk of the CFTC,
or any successor division, or such director’s
designee. You further acknowledge that you
will provide to the CFTC a copy of this fully
executed acknowledgment (via electronic
mail to [email protected]).
In the event we become subject to either a
voluntary or involuntary petition for relief
under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation
to release the Shares held in the Account(s),
except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the
respective U.S. Bankruptcy Court.
Notwithstanding anything in the foregoing
to the contrary, nothing contained herein
shall be construed as limiting your right to
assert any right of set off against or lien on
assets other than assets maintained in the
Account(s), nor to impose such charges
against us or any proprietary account
maintained by us with you. Further, it is
understood that amounts represented by
checks, drafts or other items shall not be
considered to be part of the Account(s) until
finally collected. Accordingly, checks, drafts
and other items credited to the Account(s)
and subsequently dishonored or otherwise
returned to you, or reversed, for any reason
and any claims relating thereto, including but
not limited to claims of alteration or forgery,
may be charged back to the Account(s), and
we shall be responsible to you as a general
endorser of all such items whether or not
actually so endorsed.
You may conclusively presume that any
withdrawal from the Account(s) and the
balances maintained therein are in
conformity with the Act and CFTC
regulations without any further inquiry,
provided that you have no notice of or actual
knowledge of, or could not reasonably know
of, a violation of the Act or other provision
of law by us; and you shall not in any
manner not expressly agreed to herein be

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responsible for ensuring compliance by us
with the provisions of the Act and CFTC
regulations.
You may, and are hereby authorized to,
obey the order, judgment, decree or levy of
any court of competent jurisdiction or any
governmental agency with jurisdiction,
which order, judgment, decree or levy relates
in whole or in part to the Account(s). In any
event, you shall not be liable by reason of any
such action or omission to act, to us or to any
other person, firm, association or corporation
even if thereafter any such order, decree,
judgment or levy shall be reversed, modified,
set aside or vacated.
We are permitted to invest our Commodity
Customers’ funds in money market mutual
funds pursuant to CFTC Regulation 1.25.
That rule sets forth the following conditions,
among others, with respect to any investment
in a money market mutual fund:
(1) The net asset value of the fund must be
computed by 9:00 a.m. of the business day
following each business day and be made
available to us by that time;
(2) The fund must be legally obligated to
redeem an interest in the fund and make
payment in satisfaction thereof by the close
of the business day following the day on
which we make a redemption request except
as otherwise specified in CFTC Regulation
1.25(c)(5)(ii); and
(3) The agreement under which we invest
our Commodity Customers’ funds must not
contain any provision that would prevent us
from pledging or transferring fund shares.
The terms of this letter agreement shall
remain binding upon the parties, their
successors and assigns, including for the
avoidance of doubt, regardless of the change
in name of any party. This letter agreement
supersedes and replaces any prior agreement
between the parties in connection with the
Account(s), including but not limited to any
prior acknowledgment letter, to the extent
that such prior agreement is inconsistent
with the terms hereof. In the event of any
conflict between this letter agreement and
any other agreement between the parties in
connection with the Account(s), this letter
agreement shall govern with respect to
matters specific to Section 4d of the Act and
the CFTC’s regulations, as amended.
This letter agreement shall be governed by
and construed in accordance with the laws
of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide
by the requirements and conditions set forth
above by signing and returning the enclosed
copy of this letter. You further acknowledge

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and agree to provide a copy of this fully
executed letter directly to the CFTC and our
designated self-regulatory organization.
[Name of Futures Commission Merchant or
Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Money Market Mutual Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number
and email address]
DATE:

PART 140—ORGANIZATION,
FUNCTIONS, AND PROCEDURES OF
THE COMMISSION
28. The authority citation for part 140
continues to read as follows:
Authority: 7 U.S.C. 2 and 12a.

29. In § 140.91, redesignate paragraph
(a)(8) as paragraph (a)(12) and paragraph
(a)(7) as paragraph (a)(8), add new
paragraphs (a)(7), (a)(9), (a)(10), and
(a)(11), and revise paragraph (b) to read
as follows:
§ 140.91 Delegation of authority to the
Director of the Division of Clearing and Risk
and to the Director of the Division of Swap
Dealer and Intermediary Oversight.

(a) * * *
(7) All functions reserved to the
Commission in § 1.20 of this chapter.
*
*
*
*
*
(9) All functions reserved to the
Commission in § 1.26 of this chapter.
(10) All functions reserved to the
Commission in § 1.52 of this chapter.
(11) All functions reserved to the
Commission in § 30.7 of this chapter.
*
*
*
*
*
(b) The Director of the Division of
Clearing and Risk and the Director of
the Division of Swap Dealer and
Intermediary Oversight may submit any
matter which has been delegated to him
or her under paragraph (a) of this
section to the Commission for its
consideration.
*
*
*
*
*
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Issued in Washington, DC, on October 23,
2012 by the Commission.
Stacy Yochum,
Counsel.

Appendices to Enhancing Protections
Afforded Customers and Customer
Funds Held by Futures Commission
Merchants and Derivatives Clearing
Organizations—Commission Voting
Summary and Statements of
Commissioners
Note: The following appendices will not
appear in the Code of Federal Regulations.

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Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Sommers, Chilton, O’Malia
and Wetjen voted in the affirmative; no
Commissioner voted in the negative.

Appendix 2— Statement of Chairman
Gary Gensler
I support the proposed rules to enhance the
protections afforded customers that
participate in the futures and swaps markets,
including the protection of customer funds
held by futures commission merchants
(FCMs) and derivatives clearing
organizations.
The CFTC’s mission is to ensure the
integrity of the futures and swaps markets.
As part of this, we must do everything within
our authorities and resources to strengthen

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oversight programs and the protection of
customers and their funds. And that’s the
goal of this proposal. It’s about ensuring
customers have confidence that the funds
they post as margin or collateral are fully
segregated and protected.
CFTC Commissioners and staff have
reached out broadly on ways to enhance
customer protections. We hosted two
roundtables this year on issues ranging from
the segregation of customer funds to
examining the CFTC’s oversight of selfregulatory organizations (SROs).
In July, the CFTC approved a National
Futures Association (NFA) proposal that
stemmed from a coordinated effort by the
CFTC, the SROs, other financial regulators,
and market participants, including from the
CFTC’s roundtable earlier this year.
This customer protection proposal
incorporates these NFA rules into the
Commission’s regulations so that the CFTC

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can directly enforce these important rules.
Under this proposal, FCMs would be
required to:
• Hold sufficient funds in Part 30 secured
accounts (funds held for U.S. foreign futures
and options customers trading on foreign
contract markets) to meet their total
obligations to customers trading on foreign
markets computed under the net liquidating
equity method. FCMs would no longer be
allowed to use the alternative method, which
had allowed them to hold a lower amount of
funds representing the margin on their
foreign futures;
• Maintain written policies and
procedures governing the maintenance of
excess funds in customer segregated and Part
30 secured accounts. Withdrawals of 25
percent or more would necessitate preapproval in writing by senior management
and must be reported to the designated SRO
and the CFTC; and
• Make additional reports available to the
SRO and the CFTC, including daily
computations of segregated and Part 30
secured amounts.
Beyond the NFA rules, additional reforms
in this proposal benefited from the CFTC’s
broad outreach and consultation with the
SROs and market participants, as well as
substantial feedback from CFTC
Commissioners. They include:
• First, bringing the regulators’ view of
customer accounts into the 21st century by
giving the SROs and the CFTC direct
electronic access to FCMs’ bank and
custodial accounts for customer funds,
without asking the FCMs’ permission.
Further, acknowledgement letters and
confirmation letters must come directly to
regulators from banks and custodians.
• Second, increasing disclosures to
customers regarding the risks associated with
futures trading and using FCMs to invest
their funds. Futures customers, if they wish,
should have access to information about how
their assets are held, similar to that which is
available to mutual fund and securities
customers. FCMs would be required to
provide current and potential customers with
specific information about the FCM’s risks.
• Third, enhancing controls at FCMs
regarding how customer accounts are
handled, including policies and procedures
on supervision and risk management of
customer funds.
• Fourth, setting standards for the SROs’
examinations and the annual certified
financial statement audits, including raising
minimum standards for independent public
accountants who audit FCMs.
• Fifth, requiring FCMs to ensure they
back up segregated customer accounts with
funds to cover potential margin deficits.
• Sixth, implementing a more effective
early warning system for the Commission
and the SROs that alerts them to certain
problems, including a) when an FCM’s funds
are insufficient to meet the targeted residual
interest in customer accounts b) when there
is a material adverse impact to the FCM’s
creditworthiness and c) when there is a
material change to the FCM’s clearing or
financial arrangements.
• And seventh, instituting a liquidity
requirement for FCMs, in addition to the

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existing capital requirement, to better detect
FCMs that have become distressed and may
put customer funds at risk.
Prior to this proposal, the Commission
already made some important improvements
to protections for customer funds. They
include:
• The completed amendments to rule 1.25
regarding the investment of funds that bring
customers back to protections they had prior
to exemptions the Commission granted
between 2000 and 2005. Importantly, this
prevents use of customer funds for in-house
lending through repurchase agreements;
• Clearinghouses will have to collect
margin on a gross basis and FCMs will no
longer be able to offset one customer’s
collateral against another and then send only
the net to the clearinghouse;
• The so-called ‘‘LSOC rule’’ (legal
segregation with operational comingling) for
swaps ensures customer money is protected
individually all the way to the clearinghouse;
and
• The Commission included customer
protection enhancements in the final rule for
designated contract markets. These
provisions codify into rules staff guidance on
minimum requirements for SROs regarding
their financial surveillance of FCMs.
It is crucial that the CFTC, working with
SROs and market participants, continues its
efforts to enhance protections for the funds
of both futures and swaps customers. We
look forward to reviewing the public input
on this proposal.

Appendix 3—Statement of
Commissioner Jill E. Sommers
Today the Commission has proposed a new
set of rules to, among other things, increase
customer protections and disclosures,
strengthen risk management programs, and
enhance auditing and examination
procedures for futures commission
merchants (FCMs). In light of the recent
events surrounding MF Global and Peregrine,
I am, of course, supportive of such steps to
the extent that they lead to greater customer
protection and increased customer awareness
of the risks associated with their futures and
swaps accounts.
As always, I am sensitive to the fact that
some regulation, while well intended, may
not further its stated goals or may be so
burdensome that the benefits do not justify
the costs. I encourage members of the public
to comment, both to support the aspects of
this proposed rule that take appropriate steps
towards achieving the Commission’s
objectives and to highlight the areas of the
proposal that they believe may be
unnecessary or that could be accomplished
through more efficient means. In particular,
I welcome comment on the Commission’s
proposal requiring an FCM to maintain
residual interest in segregated accounts in an
amount that exceeds the sum of all futures
customers’ margin deficits. Additionally, it
would be helpful to hear from self-regulatory
organizations (SROs) regarding whether
reviews by an examinations expert would
assist the SROs in the application of their
respective supervisory programs.
I am hopeful that, with the help of
thoughtful recommendations from market

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participants, the Commission will finalize an
effective and streamlined rule improving
protections for futures and swaps customers.

Appendix 4—Statement of
Commissioner Scott O’Malia
In response to the Peregrine and MF Global
failures, the Commission has proposed a new
set of rules to enhance the level of protection
afforded customers of the futures markets. In
particular, the proposal calls for FCMs to
maintain adequate capital in their customer
accounts to ensure customers are not bearing
the credit risk of their fellow customers,
implement controls around the risks specific
to a particular FCM’s business, increase the
level of disclosures provided to customers,
and create an independent segregation
account balance verification system. While
these measures are a good start, I believe that
it is essential to focus on a comprehensive
technological solution that goes beyond what
the Commission has proposed in this release.
Technology can be a cost effective oversight
tool for both customers and the Commission
to enhance transparency and improve risk
management. Improving our capacity to
monitor money flows can serve as a
significant deterrent against fraudulent
behavior.
I encourage industry participants to voice
their opinion as to how the proposals put
forth today can be improved upon.
Specifically, what technological solutions
can be employed to facilitate the
dissemination of information about FCMs to
their customers so that they may ‘‘know their
FCM’’? How can firms implement the new
capital requirements in the most cost
effective manner? What is the best method
for an FCM to monitor its level of risk? I look
forward to hearing from market participants
on the most effective ways to implement the
customer protection rules proposed by the
Commission today.
I would also like to highlight one of today’s
proposals that will require additional
development in order to fulfill the goal of
customer protection. Today’s proposal calls
for the creation of an electronic balance
confirmation process that would allow the
Commission and Self-Regulatory
Organizations (‘‘SROs’’) to independently
check the balance of each segregated account
held on behalf of customers. While this can
be used to aid in the surveillance of account
balances, the Commission proposal only
works on an individual basis and requires
significant human involvement to log in and
monitor individual accounts. What the
industry needs is a fully automated system
that allows the Commission and SROs to
download the account balances for each
segregated account held for a customer and
compare that balance to the figures on record
at each FCM. In response to the Peregrine
and MF Global failures, industry participants
discussed the implementation of such a
system in July of this year during the
Commission’s Technology Advisory
Committee (TAC) meeting. During the
meeting, the TAC members present were
virtually unanimous in their belief that an
automated customer fund verification system
was needed. Certain TAC members also made
presentations discussing the technological

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hurdles that must be overcome in order to
put such a system in place.
On October 30th we will have another TAC
meeting during which SROs will update us
on the status of this system’s implementation
and their estimates for when it will be fully
operational. Only when this system is up and
running can customers of the futures
industry feel secure that their investments
are in safe hands and properly monitored by

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both the Commission and SROs. This is an
issue of utmost importance and requires
collaboration on the part of the Commission,
SROs and each and every Commission
registrant. The end result of this process will
provide customers with the assurance they
need to continue investing in the derivatives
markets.
I hope market participants will provide
thoughtful recommendations to improve

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customer protections and deploy technology
that is cost-effective to create and maintain.
I also encourage market participants to
provide specific data that the Commission
can use to develop a robust cost benefit
analysis.
[FR Doc. 2012–26435 Filed 11–13–12; 8:45 am]
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