2016-13055
Federal Register, Volume 81 Issue 106 (Thursday, June 2, 2016)
[Federal Register Volume 81, Number 106 (Thursday, June 2, 2016)]
[Notices]
[Pages 35337-35345]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13055]
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COMMODITY FUTURES TRADING COMMISSION
Notice of Proposed Order and Request for Comment on a Proposal To
Exempt, Pursuant to the Authority in Section 4(c) of the Commodity
Exchange Act, the Federal Reserve Banks From Sections 4d and 22 of the
Commodity Exchange Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed order and request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is proposing to permit Federal Reserve Banks to hold
money, securities, and property deposited into a customer account by a
systemically important derivatives clearing organization in accordance
with the standards to which Federal Reserve Banks are held, as
specified below. Thus, the Commission is proposing to exempt Federal
Reserve Banks that provide customer accounts and other services to
systemically important derivatives clearing organizations from Sections
4d and 22 of the Commodity Exchange Act (``CEA'' or the ``Act'').
DATES: Comments must be received by July 5, 2016.
ADDRESSES: You may submit comments by any of the following methods:
CFTC Web site: http://comments.cftc.gov. Follow the
instructions for submitting comments through the Comments Online
process on the Web site.
Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as Mail, above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one of these methods.
All comments must be submitted in English, or if not, accompanied
by an 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 you believe 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 established
procedures in Sec. 145.9 of the Commission's regulations, 17 CFR
145.9.
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 http://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 this action 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: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected]; M. Laura Astrada, Associate Director,
202-418-7622, [email protected]; or Parisa Abadi, Attorney-Advisor,
202-418-6620, [email protected], in each case, at the Division of
Clearing and Risk, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581; or Joe
Opron, Special Counsel, 312-596-0653, [email protected], Division of
Clearing and Risk, Commodity Futures Trading Commission, 525 West
Monroe Street, Suite 1100, Chicago, IL 60661.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
A. Customer Protection
B. Designation of Financial Market Utilities Under Title VIII of
the Dodd-Frank Act
C. Access to Federal Reserve Bank Accounts and Services
III. Standards of Depository Liability
A. Depository Liability Under Section 4d of the CEA
B. Federal Reserve Bank Liability Under Federal Reserve Bank
Governing Documents
IV. Features Specific to the Federal Reserve Banks
V. Section 4(c) of the CEA
VI. Proposed Exemption From Sections 4d and 22 of the CEA
VII. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost and Benefit Considerations
VIII. Request for Comment
IX. Proposed Order of Exemption
I. Introduction
In 2013, in response to significant segregated account shortfalls
experienced by futures customers, the Commission adopted rules that
aimed to improve the protection of customer funds.\1\ Recognizing that
such protection is critical to the sound functioning of the futures and
swaps markets, the Commission reiterated that money, securities, and
other property deposited by customers must be carefully safeguarded and
segregated at all times.
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\1\ Enhancing Protections Afforded Customers and Customer Funds
Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68506 (Nov. 14, 2013).
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That same year, the Commission adopted enhanced risk management
standards \2\ and additional requirements for compliance with the
derivatives clearing organization (``DCO'') core principles set forth
in the CEA \3\ for DCOs that are designated as systemically important
(``SIDCOs'') by the Financial Stability Oversight Council.\4\ The
Commission adopted these requirements in part because of the critical
role SIDCOs play in fostering
[[Page 35338]]
financial stability \5\ and because the ``failure of a SIDCO to
complete core clearing and settlement functions within a rapid period
could create systemic liquidity and credit dislocations on a global
scale.'' \6\ Accordingly, these additional requirements were designed
to promote a SIDCO's financial strength, operational integrity,
security, and reliability.\7\ By requiring a SIDCO's liquidity
arrangements to be highly reliable in stressed market conditions, the
Commission sought to bolster a SIDCO's ability to promptly meet its
cash obligations to its members in order to help avoid the loss of
market confidence and cascading defaults.\8\
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\2\ Enhanced Risk Management Standards for Systemically
Important Derivatives Clearing Organizations, 78 FR 49663 (Aug. 15,
2013).
\3\ See Section 5b(c)(2) of the CEA; see also Derivatives
Clearing Organizations and International Standards, 78 FR 72476
(Dec. 2, 2013).
\4\ Under Commission Regulation 39.2, a SIDCO is defined as a
financial market utility that is a registered DCO under Section 5b
of the Act, which has been designated by the Financial Stability
Oversight Council to be systemically important and for which the
Commission acts as the Supervisory Agency pursuant to Section 803(8)
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act''). 17 CFR 39.2. ``Supervisory Agency'' is defined
as the Federal agency that has primary jurisdiction over a
designated financial market utility under Federal banking,
securities, or commodity futures laws. Section 803(8)(A) of the
Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010). The text
of the Dodd-Frank Act is available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
\5\ See, e.g., 78 FR at 49672.
\6\ Id. at 49674.
\7\ See id. at 49668-49669; see also 78 FR at 72509.
\8\ See 78 FR at 72509.
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Title VIII of the Dodd-Frank Act, entitled ``Payment, Clearing, and
Settlement Supervision Act of 2010,'' \9\ also included provisions
aimed at safeguarding the U.S. financial system. One example of this is
Section 806(a), which expressly permits the Board of Governors of the
Federal Reserve System (``Board'') to authorize a Federal Reserve Bank
to establish and maintain a deposit account for a SIDCO and provide
certain services to the SIDCO, subject to any applicable rules, orders,
standards, or guidelines prescribed by the Board.\10\
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\9\ Section 801 of the Dodd-Frank Act.
\10\ See Section 806(a) of the Dodd-Frank Act.
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The Commission believes that establishing SIDCO segregated customer
accounts at a Federal Reserve Bank and enabling SIDCOs to access
related services there would both augment a SIDCO's liquidity
arrangements and enhance the protection of customer funds.\11\ The
Commission recognizes, however, that Section 4d of the CEA was not
developed with a particular focus on the Federal Reserve Banks.\12\ As
a result, the unique role that the Federal Reserve Banks play in the
financial system was not expressly taken into account when the
Commission's standard of liability was developed for depositories. The
Commission notes that Federal Reserve financial services provided by
the Federal Reserve Banks are governed by the terms and conditions that
are set forth in various federal rules, Federal Reserve Board policies,
and Federal Reserve Bank operating circulars, which have been carefully
developed over several decades. The Commission further recognizes that
the Federal Reserve Banks could be exposed to liability under Sections
4d and 22 \13\ of the CEA, which could have disparate impact on the
treatment of deposits at the Federal Reserve Banks and ultimately harm
U.S. taxpayers. Accordingly, to facilitate SIDCOs' use of Federal
Reserve Banks as depositories for customer funds, the Commission is
proposing, pursuant to its authority under Section 4(c) of the CEA, to
exempt Federal Reserve Banks that provide customer accounts and other
services to SIDCOs from Sections 4d and 22 of the CEA.\14\ The
exemption would enable the Federal Reserve Banks to maintain SIDCO
customer accounts in accordance with the standards set forth in the
relevant Federal Reserve Bank governing documents, as specified below.
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\11\ See discussion infra Part VI.
\12\ Section 4d of the CEA permits customer funds to be
deposited with a bank, trust company, or DCO. 7 U.S.C. 6d.
\13\ As discussed in further detail below, Section 22 of the CEA
would typically provide for private rights of action for damages
against persons who violate Section 4d, or persons who willfully
aid, abet, counsel, induce, or procure the commission of a violation
of Section 4d. See discussion supra Part VI.
\14\ 7 U.S.C. 6(c); 7 U.S.C. 25.
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II. Background
A. Customer Protection
The protection of customers--and the safeguarding of money,
securities, or other property deposited by customers--is a fundamental
component of the regulatory and oversight framework of the futures and
swaps markets. Section 4d of the CEA requires a futures commission
merchant (``FCM'') to segregate from its own assets all money,
securities, and other property deposited by futures or cleared swaps
customers to margin, secure, or guarantee futures contracts and options
on futures contracts traded on designated contract markets, and cleared
swaps. Section 4d further requires an FCM to treat customer funds as
belonging to the customer, and prohibits an FCM from using the funds
deposited by a customer to margin or extend credit to any person other
than the customer that deposited the funds. Similarly, Section 4d of
the CEA prohibits a DCO and any depository that has received such funds
from holding, disposing of, or using such funds as belonging to the
depositing FCM or any person other than the customers of such FCM.
The importance of this statutory mandate to protect customer
funds--to treat them as belonging to customers and not use the funds
inappropriately--was reinforced in light of the FCM insolvency
proceedings involving MF Global, Inc. (``MF Global'') and Peregrine
Financial Group, Inc. (``Peregrine''). In October 2011, MF Global,
which was dually-registered as an FCM with the Commission and as a
securities broker-dealer with the U.S. Securities and Exchange
Commission, was placed into a liquidation proceeding under the
Securities Investor Protection Act by the Securities Investor
Protection Corporation. At the time, the trustee appointed to oversee
the liquidation of MF Global 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. The shortfall in customer segregated accounts was attributed
by the MF Global trustee to significant transfers of funds out of the
customer accounts that were used by MF Global, Inc. for various
purposes other than to meet obligations to or on behalf of
customers.\15\
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\15\ 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). Customer claims were eventually paid
in full after customer funds were recovered through bankruptcy
proceedings and the Commission's enforcement action.
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Shortly thereafter, in 2012, the Commission filed a civil
injunctive complaint in federal district court against Peregrine and
its Chief Executive Officer and sole owner, Russell R. Wasendorf, Sr.
(``Wasendorf''), alleging that Peregrine and Wasendorf misappropriated
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. According
to the complaint, Peregrine falsely represented that it held in excess
of $220 million of customer funds, when it actually held only
approximately $5.1 million.\16\ Spurred in part by these shocking
failures, the Commission promulgated several rules aimed at
strengthening the protection of customer funds and the U.S. financial
markets.\17\
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\16\ See 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).
\17\ See discussion supra Part I; see also, e.g., Investment of
Customer Funds and Funds Held in an Account for Foreign Futures and
Foreign Options Transactions, 76 FR 78776 (Dec. 19, 2011) (revising
the types of investments that an FCM or DCO could make with customer
funds under Regulation 1.25 to minimize the exposure of such funds
to liquidity, credit, and market risks).
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In an effort to further strengthen customer protection, the
Commission has also examined the current
[[Page 35339]]
regulatory framework through a series of roundtables and other public
meetings. The Commission held a public roundtable to solicit input on
customer protection issues from a broad cross-section of the
derivatives industry, including market participants, FCMs, DCOs, self-
regulatory organizations, securities regulators, and academics.\18\ The
Commission also hosted a public meeting of the Technology Advisory
Committee to discuss potential technological solutions directed at
enhancing the protection of customer funds.\19\
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\18\ Further information on the public roundtable, including
video recordings and transcripts of the discussions, are available
on 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).
\19\ Additional information, including documents submitted by
meeting participants, is available on the Commission's Web site. See
http://www.cftc.gov/PressRoom/Events/opaevent_tac072612.
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Customer protection continues to be a bedrock guiding principle for
the Commission, as the protection of customer funds is paramount to a
trusted marketplace.
B. Designation of Financial Market Utilities Under Title VIII of the
Dodd-Frank Act
Title VIII of the Dodd-Frank Act was enacted to mitigate risk in
the financial system and promote financial stability.\20\ Accordingly,
Section 804 of the Dodd-Frank Act requires the Financial Stability
Oversight Council (``Council'') \21\ to designate those financial
market utilities (``FMUs'') that the Council determines are, or are
likely to become, systemically important.\22\ An FMU includes any
person that manages or operates a multilateral system for the purpose
of transferring, clearing, or settling payments, securities, or other
financial transactions among financial institutions or between
financial institutions and the person.\23\ As noted by the Council,
FMUs are vital to the nation's financial infrastructure, and ``their
smooth operation is integral to the soundness of the financial system
and the overall economy.'' \24\
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\20\ See Section 802(b) of the Dodd-Frank Act.
\21\ The Council was established by Section 111 of the Dodd-
Frank Act. In general, the Council is tasked with identifying risks
to the financial stability of the United States that could arise
from the material financial distress or failure, or ongoing
activities, of large, interconnected bank holding companies or
nonbank financial companies, or that could arise outside the
financial services marketplace, promoting market discipline, by
eliminating expectations on the part of shareholders, creditors, and
counterparties of such companies that the Government will shield
them from losses in the event of failure, and responding to emerging
threats to the stability of the United States financial system.
Section 112(a)(1) of the Dodd-Frank Act.
\22\ See Section 804(a) of the Dodd-Frank Act. The term
``systemically important'' means a situation where the failure of or
a disruption to the functioning of a financial market utility could
create, or increase, the risk of significant liquidity or credit
problems spreading among financial institutions or markets and
thereby threaten the stability of the financial system of the United
States. Section 803(9) of the Dodd-Frank Act; see also Authority to
Designate Financial Market Utilities as Systemically Important, 76
FR 44763, 44774 (July 27, 2011).
\23\ Section 803(6)(A) of the Dodd-Frank Act.
\24\ 76 FR at 44763.
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In determining whether an FMU is systemically important, the
Council follows a detailed two-stage designation process, using
statutory considerations \25\ and other metrics to assess, among other
things, ``whether possible disruptions [to the functioning of an FMU]
are potentially severe, not necessarily in the sense that they
themselves might trigger damage to the U.S. economy, but because such
disruptions might reduce the ability of financial institutions or
markets to perform their normal intermediation functions.'' \26\ Thus,
if a systemically important FMU fails to perform, this failure could
pose significant risk to its participants and to the U.S. financial
system more broadly. For example, if a systemically important FMU fails
to complete timely settlement, there could be significant credit and/or
liquidity problems for its participants and participants' customers. On
July 18, 2012, the Council designated eight FMUs as systemically
important under Title VIII.\27\ Two of these designated FMUs, Chicago
Mercantile Exchange, Inc. and ICE Clear Credit LLC, are SIDCOs.
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\25\ Under Section 804(a)(2) of the Dodd-Frank Act, in
determining whether an FMU is or is likely to become systemically
important, the Council must take into consideration the following:
(A) The aggregate monetary value of transactions processed by the
FMU; (B) the aggregate exposure of the FMU to its counterparties;
(C) the relationship, interdependencies, or other interactions of
the FMU with other FMUs or payment, clearing, or settlement
activities; (D) the effect that the failure of or a disruption to
the FMU would have on critical markets, financial institutions, or
the broader financial system; and (E) any other factors the Council
deems appropriate.
\26\ 76 FR at 44766.
\27\ See Press Release, Financial Stability Oversight Council,
Financial Stability Oversight Council Makes First Designations in
Effort to Protect Against Future Financial Crises (July 18, 2012),
available at http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
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C. Access to Federal Reserve Bank Accounts and Services
As noted above, Section 806(a) of the Dodd-Frank Act permits the
Board to authorize a Federal Reserve Bank to establish and maintain an
account for a SIDCO and provide to the SIDCO the services listed in
Section 11A(b) of the Federal Reserve Act, subject to any applicable
rules, orders, standards, or guidelines prescribed by the Board.\28\ In
adopting regulations pursuant to Section 806(a) of the Dodd-Frank Act,
the Board noted that the ``terms and conditions for access to Federal
Reserve Bank accounts and services are intended to facilitate the use
of [Federal] Reserve Bank accounts and services by a designated FMU in
order to reduce settlement risk and strengthen settlement processes,
while limiting the risk presented by the designated FMU to the
[Federal] Reserve Banks.'' \29\ Accordingly, the Board ``expects that
[Federal] Reserve Banks would provide services that are consistent with
a designated FMU's need for safe and sound settlement processes under
account and service agreements generally consistent with the provisions
of existing [Federal] Reserve Bank operating circulars for such
services.'' \30\ Highlighting the importance of Federal Reserve Bank
operating circulars in this regard, the Board further requires that
designated FMUs be in compliance with existing operating circulars.\31\
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\28\ The services listed in Section 11A(b) of the Federal
Reserve Act include wire transfers, settlement, and securities
safekeeping, as well as services regarding currency and coin, check
clearing and collection, and automated clearing house transactions.
See 12 U.S.C. 248a(b). Section 806(a) of the Dodd-Frank Act also
permits the Board to authorize a Federal Reserve Bank to establish
deposit accounts under the first undesignated paragraph of Section
13 of the Federal Reserve Act, 12 U.S.C. 342.
\29\ Financial Market Utilities (Regulation HH), 78 FR 14024,
14025 (Mar. 4, 2013).
\30\ Id.
\31\ See 12 CFR 234.5(b)(2) (setting forth rules to govern
Federal Reserve Bank accounts held by designated FMUs).
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III. Standards of Depository Liability
A. Depository Liability Under Section 4d of the CEA
Under Section 4d of the CEA, a depository, which may be a bank,
trust company, or a DCO, will be held liable for the improper transfers
of customer funds by an FCM or DCO if it knew or should have known that
the transfer was improper.\32\ While a depository has no affirmative
obligation to police or monitor an FCM or DCO account holder's
compliance with the CEA or Commission regulations, a depository cannot
ignore signs of wrongdoing.\33\
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\32\ See CFTC Interpretative Letter No. 79-1, [1977-1980
Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 20,835 (May 29, 1979).
Section 4d of the CEA covers customer funds only; it does not relate
to proprietary funds of clearing members.
\33\ See 78 FR at 68539.
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To ensure that a depository that holds customer funds has been
informed that
[[Page 35340]]
the deposited funds are those of customers being held in accordance
with Section 4d of the CEA, the Commission requires an FCM or DCO to
obtain from each depository with which it deposits customer funds a
written acknowledgment in this regard.\34\ Commission regulations
require FCMs and DCOs to use a template acknowledgment letter in order
to promote a uniform understanding among FCMs, DCOs, and depositories
as to their obligations under the CEA and Commission regulations with
respect to the proper treatment of customer funds. The template
acknowledgment letter contains a provision that reflects the
Commission's expectation that a depository will engage in its customary
practices and will be held liable for a violation of Section 4d if it
knew or should have known of the violation.\35\
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\34\ See 17 CFR 1.20, Appendices A and B.
\35\ See 78 FR at 68535; see also 17 CFR 1.20(g)(4)(ii).
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It is important to note that as the aforementioned standard of
liability was developed, the unique nature of the Federal Reserve Banks
was not taken into account. Indeed, until recently, there was no
statutory authority permitting a SIDCO to hold customer funds at a
Federal Reserve Bank. However, and as discussed below, the standard of
liability for Federal Reserve Banks acting as depositories has been
carefully developed by the Board and not the Commission.
B. Federal Reserve Bank Liability Under Federal Reserve Bank Governing
Documents
The Federal Reserve System, which serves as the nation's central
bank, was created by an act of Congress in 1913. The Federal Reserve
System consists of a seven member Board, and twelve Federal Reserve
Banks. The Federal Reserve Banks operate under the general supervision
of the Board, although each Bank has a Board of Directors that oversees
its operations. Federal Reserve Banks generate their own income, which
is generally from interest earned on U.S. government securities that
are acquired in the course of Federal Reserve monetary policy actions
and from the provision of priced services to depository institutions.
Federal Reserve Banks do not, however, operate for a profit. Indeed,
each year they return to the U.S. Department of Treasury all earnings
in excess of Federal Reserve Bank operating and other expenses. Federal
Reserve Banks are, in essence, the operating arms of the United States'
central banking system. In addition to their many responsibilities,
Federal Reserve Banks operate as a bank for depository institutions and
the U.S. government.\36\
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\36\ For example, Federal Reserve Banks provide checking
accounts for the U.S. Department of Treasury, issue and redeem U.S.
government securities, and act in other ways as a fiscal agent for
the U.S. government. See Federal Reserve Board, The Structure of the
Federal Reserve System (Apr. 17, 2009), http://www.federalreserve.gov/pubs/frseries/frseri3.htm.
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Some of the services provided by Federal Reserve Banks include the
provision of funds and book-entry securities accounts, as well as
certain financial services, such as wire transfers, book-entry
securities transfers, and multilateral settlement services. These
accounts and services are governed by account agreements, operating
circulars issued by Federal Reserve Banks for each service, the Federal
Reserve Act, and Federal Reserve regulations and policies, and, with
respect to book-entry securities services, the regulations of the
domestic issuer of the securities or the issuer's regulator (``Federal
Reserve Bank Governing Documents'').\37\ Additionally, one or more
Federal Reserve Banks have established proprietary accounts for SIDCOs
\38\ pursuant to Section 806 of the Dodd-Frank Act. These proprietary
accounts are also governed by the Federal Reserve Bank Governing
Documents.
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\37\ See, e.g., Federal Reserve Bank Operating Circular No. 6
(governing funds transfers through the Fedwire Funds Service);
Federal Reserve Bank Operating Circular No. 7 (governing the
maintenance of and transfer services for book-entry securities
accounts); 12 CFR part 210, subpart B (governing funds transfers
through the Fedwire Funds Service); 31 CFR part 357, subpart B
(setting forth the Department of the Treasury's regulations
governing book-entry treasury bonds, notes, and bills).
\38\ A SIDCO's proprietary account holds the proprietary funds
of its clearing members.
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The Federal Reserve Banks' standard of liability for the financial
services it offers to depository institutions has been developed over
the 100-plus years of Federal Reserve Bank operations, in many cases
hand-in-hand with the development of federal and state statutory and
regulatory provisions, as well as common law governing securities
transfers, funds transfers, and other payment mechanisms. The operating
circulars of the Federal Reserve Banks began having uniform terms and
conditions across Federal Reserve Bank districts as of January 2, 1998.
The 1998 version of the uniform Operating Circular 1 (Account
Relationships) sets out the Federal Reserve Banks' standard and scope
of liability that limits a Federal Reserve Bank's liability to only
damages suffered by the account holder that are caused by the Federal
Reserve Bank's failure to exercise ordinary care, and does not include
lost profits, claims by third parties, or consequential or incidental
damages.\39\
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\39\ See Federal Reserve Board, Financial Services, https://web.archive.org/web/19990125095428/http:/www.frbservices.org/ (last
visited Apr. 28, 2016). Prior to 1998, each Federal Reserve Bank had
its own system with different numbered operating circulars; as a
result, the circular language was not necessarily uniform.
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The Commission understands that, in accordance with the Federal
Reserve Bank Governing Documents, the Federal Reserve Banks are
authorized to act on the instructions received through the use of
procedures agreed upon with the account holders, without any liability
or obligation to inquire as to the legitimacy or accuracy of the
instruction or the transaction. By agreement with the respective
account holders, the procedures for accepting an instruction are not
used to detect an error in the transmission or content of the
instruction, or compliance by the account holder with its legal
obligations. In addition to limiting the areas of liability, the
Commission understands that the Federal Reserve Bank Governing
Documents limit a Federal Reserve Bank's liability in maintaining an
account or acting on such an instruction to actual damages that are
incurred solely by the account holder \40\ and that are proximately
caused by the Federal Reserve Bank's failure to exercise ordinary care
or act in good faith in accordance with the Federal Reserve Bank
Governing Documents.
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\40\ Under the Federal Reserve Bank Governing Documents, the
Federal Reserve Banks are not liable to third parties.
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IV. Features Specific to the Federal Reserve Banks
As noted above, Federal Reserve Banks play a unique role in the
U.S. banking and payment system as compared to commercial banks and
other depositories and payment service providers.\41\ The standards set
forth in the Federal Reserve Bank Governing Documents are reflective of
this unique role and have been developed over the years to capture the
distinctive nature of
[[Page 35341]]
the Federal Reserve Banks. In addition to the accounts and services
that Federal Reserve Banks provide to the government and to other
depository institutions, the Federal Reserve Banks supervise and
examine member banks for safety and soundness. They also participate in
the setting of U.S. monetary policy, an activity that is the primary
responsibility of the Federal Reserve System. Moreover, in an effort to
reduce U.S. taxpayer burden, Congress requires that the residual
earnings of each Federal Reserve Bank be distributed to the U.S.
Treasury's general fund.\42\ In fact, the Federal Reserve Banks have
sent to the U.S. Treasury approximately $98.7 billion in residual
earnings in 2014 and about $500 billion on a cumulative basis since
2008.\43\
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\41\ Federal Reserve Banks `` `are not operated for the profit
of shareholders;' rather, they `were created and are operated in
furtherance of the national fiscal policy.' '' See Starr Int'l Co.
v. Fed. Reserve Bank of New York, 742 F.3d 37, 40 (2d Cir. 2014)
(quoting Fed. Reserve Bank of Bos. v. Comm'r of Corps. & Taxation of
the Commonwealth of Mass., 499 F.2d 60, 62 (1st Cir. 1974)).
``Because Federal Reserve Banks `conduct important governmental
functions regarding' matters including the `general fiscal duties of
the United States,' they are `instrumentalities of the federal
government.' '' See id. (quoting Fed. Reserve Bank of St. Louis v.
Metrocentre Improvement Dist. #1, 657 F.2d 183, 185-186 (8th Cir.
1981)).
\42\ The current congressional mandate requires that Federal
Reserve Banks transfer their residual earnings in excess of $10
billion to the U.S. Treasury. See FAST Act, Pub. L. 114-94, 129
Stat. 1312 (2015). For prior congressional mandates in this regard,
see, e.g., District of Columbia Appropriations Act, Pub. L. 106-113,
113 Stat. 1501 (1999) (requiring that, in fiscal year 2000, Federal
Reserve Banks transfer their residual earnings in the amount of
$3,752,000,000 to the U.S. Treasury's general fund); Omnibus Budget
Reconciliation Act of 1993, Pub. L. 103-66, 107 Stat. 312 (requiring
that, during fiscal years 1997 and 1998, Federal Reserve Banks
transfer their residual earnings in excess of 3 percent of the total
paid-in capital and surplus to the U.S. Treasury's general fund).
\43\ See Press Release, Board of Governors of the Federal
Reserve System, Reserve Bank Income and Expense Data and Transfers
to the Treasury for 2014 (Jan. 9, 2015), available at http://www.federalreserve.gov/newsevents/press/other/20150109a.htm; Annual
Report, Board of Governors of the Federal Reserve System (2014),
available at http://www.federalreserve.gov/publications/annual-report/files/2014-annual-report.pdf.
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Federal Reserve Banks also do not provide financial services to
businesses generally; rather, they serve only account holders
authorized by statute, such as depository institutions and the U.S.
government.\44\ In addition, Federal Reserve Banks may engage in a set
range of services and only with the respective account holder. As such,
Federal Reserve Banks do not provide the range of related account
services that a commercial bank might provide, such as offering
services to executives of the account holder as an additional incentive
to do business with the bank. Therefore, the Commission believes that
the Federal Reserve Banks do not have the potential conflict of
interest that may arise when a commercial bank provides such services.
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\44\ See, e.g., Federal Reserve Bank of Richmond, Consumer
Issues and Information, available at https://www.richmondfed.org/faqs/consumer/ (last visited Feb. 26, 2016) (stating that ``Federal
Reserve Banks are not authorized to open accounts for individuals[;
rather, o]nly depository institutions and certain other financial
entities may open an account at a Federal Reserve Bank''); see also
Section 806(a) of the Dodd-Frank Act (authorizing accounts at a
Federal Reserve Bank for designated FMUs).
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Moreover, Federal Reserve Banks play a distinctive, dual role with
respect to SIDCOs, as they may be both account service providers and
participants in the supervision of SIDCOs. Under Title VIII of the
Dodd-Frank Act, the Board may participate in any Commission examination
of a SIDCO and otherwise consult and share information with the
Commission regarding SIDCOs. Federal Reserve Banks may be delegated
authority to assist the Board in fulfilling this function.\45\
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\45\ See Federal Reserve Board, The Structure of the Federal
Reserve System (Apr. 17, 2009), http://www.federalreserve.gov/pubs/frseries/frseri3.htm (noting that some supervisory responsibilities
are delegated to the Federal Reserve Banks by the Board).
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Further, Title VIII of the Dodd-Frank Act expressly permits the
Commission and the Board to provide confidential supervisory
information to, among others, the Federal Reserve Banks.\46\ Although a
Federal Reserve Bank may have access to confidential supervisory
information regarding a particular SIDCO, Board staff has represented
that it has a long-standing ``Wall Policy'' that generally prohibits,
subject to the limitations contained therein, the sharing of
confidential supervisory information with Federal Reserve Bank account
services staff, and requires that care be exercised to avoid actual or
apparent conflict between a Federal Reserve Bank's role as a provider
of financial services and its role as a regulator, supervisor, and
lender.\47\ The Board has adopted certain standards regarding the
organization, operations, and business practices of Federal Reserve
Bank financial services which, among other things, generally prohibit
Federal Reserve Bank personnel involved in day-to-day monetary policy,
bank supervision, or the lending function from providing confidential
information obtained in the course of their duties to Federal Reserve
Bank personnel involved in day-to-day account services. In addition,
the Wall Policy would generally prohibit Board supervisory staff from
sharing any confidential supervisory information they receive about a
SIDCO with the Federal Reserve Bank staff responsible for managing the
SIDCO's account and financial services. Accordingly, given the unique
role that Federal Reserve Banks play in the U.S. financial system,
Federal Reserve Bank account services staff are unlikely to face
conflicts of interest that would motivate them to overlook information
that would otherwise raise suspicion of wrongdoing.
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\46\ See Section 809(e)(2) of the Dodd-Frank Act.
\47\ Federal Reserve's Key Policies for the Provision of
Financial Services: Standards Related to Priced-Service Activities
of the Federal Reserve Banks (1984), available at http://www.federalreserve.gov/paymentsystems/pfs_standards.htm. The policy
permits certain limited exceptions in cases where such disclosure
fulfills an important supervisory objective, preserves the integrity
of the payment mechanism, or protects the assets of the Federal
Reserve Banks. In such cases, information will be provided on a
need-to-know basis and only with the approval of senior management.
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V. Section 4(c) of the CEA
Section 4(c) of the CEA provides that, in order to promote
responsible economic or financial innovation and fair competition, the
Commission, by rule, regulation, or order, after notice and opportunity
for hearing, may exempt any agreement, contract, or transaction, or
class thereof, including any person or class of persons offering,
entering into, rendering advice, or rendering other services with
respect to, the agreement, contract, or transaction, from the contract
market designation requirements of Section 4(a) of the CEA, or any
other provision of the CEA other than certain enumerated provisions, if
the Commission determines that the exemption would be consistent with
the public interest.\48\
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\48\ 7 U.S.C. 6(c).
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VI. Proposed Exemption From Sections 4d and 22 of the CEA
The Commission proposes to exempt Federal Reserve Banks that
provide customer accounts and other services to SIDCOs from Sections 4d
and 22 of the CEA. The Commission further proposes to permit SIDCOs to
maintain customer accounts with a Federal Reserve Bank pursuant to the
standard of liability set forth in the Federal Reserve Bank Governing
Documents. The proposed exemption would, however, require a Federal
Reserve Bank to segregate customer funds deposited by a SIDCO from the
proprietary funds deposited by a SIDCO, and to reply to any request
from Commission staff for confirmation of account balances or for
provision of any other information regarding the SIDCO account.
As discussed above, Title VIII of the Dodd-Frank Act supports
Federal Reserve Banks acting as depositories for SIDCOs. A Federal
Reserve Bank, in its capacity as an instrument of the U.S. central
bank, does not present the same types of risks as traditional
commercial banks. Federal Reserve Banks are an integral part of the
Federal Reserve System, serving the public interest and helping to
maintain stability in the U.S. financial markets. Further, deposits at
a Federal Reserve Bank have the lowest
[[Page 35342]]
credit risk. The Board and, through their role in the Federal Reserve
System, Federal Reserve Banks are also the source of liquidity with
regard to U.S. dollar deposits. A SIDCO would, therefore, face much
lower credit and liquidity risk with a deposit at a Federal Reserve
Bank than it would with a deposit at a commercial bank.
Moreover, customer funds held at a Federal Reserve Bank would not
be exposed to the risks associated with a commercial bank insolvency.
As a result, the Commission believes that customer funds would be
protected in an account held by a Federal Reserve Bank and would
continue to be required to be segregated from the funds deposited in
the SIDCO's proprietary account. The Commission notes that the standard
of liability as set forth in the Federal Reserve Bank Governing
Documents appears to be appropriate in the context of Federal Reserve
Banks because this standard has been developed over the years to more
appropriately reflect the unique nature of the Federal Reserve Banks.
At this time, the Commission does not have any reason to believe that
holding a Federal Reserve Bank to this standard would have the
potential to harm futures and cleared swaps customers.
The Federal Reserve Banks would also be exempt from liability under
Section 22 of the CEA. Section 22 of the CEA provides for private
rights of action for damages against persons who violate the CEA, or
persons who willfully aid, abet, counsel, induce, or procure the
commission of a violation of the CEA.\49\ The proposed exemption would
preclude a third party from succeeding in a private right of action
under Section 22 for a violation of Section 4d.\50\ The Commission
believes that an exemption from Section 22 is appropriate because, for
those requirements from which the Federal Reserve Banks are exempt, it
follows that there should be no claim under Section 22 of the CEA with
respect to those requirements. The Commission further notes that under
the Federal Reserve Bank Governing Documents, the Federal Reserve Banks
are currently insulated from third-party claims. While the Commission
continues to believe that private claims empower injured parties to
seek compensation for damages where the Commission lacks the resources
to do so on their behalf, and the prospect of such claims serves the
public interest in deterring misconduct, the Commission believes that,
for the reasons discussed herein, exempting the Federal Reserve Banks
from liability under Section 22 of the CEA would also serve the public
interest.
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\49\ 7 U.S.C. 25. By enacting Section 22, Congress provided
private rights of action as a means for addressing violations of the
Act as an alternative or supplement to Commission enforcement
action. Specifically, Congress found that private damages actions
are ``critical to protecting the public and fundamental to
maintaining the credibility of the futures market.'' H.R. Rep. No.
97-565, at 57 (1982).
\50\ Cf. Effective Date for Swap Regulation, 76 FR 42508, 42517
(July 19, 2011) (stating that ``exemptive relief would, in effect,
preclude a person from succeeding in a private right of action under
CEA section 22(a)''). However, for the avoidance of doubt, the
Commission believes that an express exemption from Section 22 of the
CEA for the Federal Reserve Banks is appropriate.
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Federal Reserve Banks were created and are operated in furtherance
of the national interest; they are not for-profit enterprises.
Moreover, as discussed above, Federal Reserve Banks return all earnings
in excess of operating and other expenses to the U.S. Treasury. All
such amounts transferred to the U.S. Treasury's general fund inure to
the benefit of U.S. taxpayers. In this case, private claims against a
Federal Reserve Bank would reduce the amount of excess earnings that
could be returned to the U.S. Treasury. In the Commission's view, the
benefits afforded customers by holding SIDCO customer funds at a
Federal Reserve Bank exceed the benefits of preserving the ability to
bring any private claims under Section 22 of the CEA.
Furthermore, the Commission recognizes that Title VIII of the Dodd-
Frank Act permits a Federal Reserve Bank to have access to confidential
supervisory information. Specifically, Section 809(e)(2) provides that
the Board of Governors or any Supervisory Agency may provide
confidential supervisory information and other information obtained
under Title VIII to each other and to the Federal Reserve Banks, State
financial institution supervisory agencies, and foreign financial
supervisors, provided, however, that no person or entity receiving
information pursuant to this section may disseminate such information
to entities or persons other than those listed in this paragraph
without complying with applicable law, including section 8 of the CEA
(7 U.S.C. 12). By permitting the Federal Reserve Banks to receive
confidential supervisory information, Congress recognized the unique
role of Federal Reserve Banks in the U.S. financial system, as
distinguished from the role of commercial banks and other depository
institutions. The Commission further recognizes, however, that the fact
that Board supervisory staff may have access to confidential
supervisory information about a SIDCO could create the false perception
that Federal Reserve Bank staff responsible for managing the SIDCO's
account and financial services would gain special knowledge about the
SIDCO. Accordingly, and notwithstanding the Wall Policy described
above, the Commission recognizes that a Federal Reserve Bank acting as
a depository for customer funds could face greater scrutiny than a
commercial bank acting as such. As a result, the proposed exemption
would specify that: (1) Pursuant to the Wall Policy, information
obtained by the Board supervisory staff during the course of
supervising SIDCOs or any counterparty to a SIDCO will not be
attributed by the Commission to any Federal Reserve Bank providing
accounts and financial services to SIDCO account holders; and (2) a
Federal Reserve Bank acting as a depository for SIDCO customer funds or
otherwise providing account services to a SIDCO would continue to be
held to the standard of liability set forth in the Federal Reserve Bank
Governing Documents.
Finally, the unique role that the Federal Reserve Banks play in the
Federal Reserve System was not expressly taken into account when the
Commission's standard of liability was developed for depositories. In
fact, as described above, it was the Dodd-Frank Act that, for the first
time, authorized designated FMUs (including SIDCOs) that are not banks
or trust companies to open deposit accounts with a Federal Reserve
Bank. However, while the Federal Reserve Banks may establish deposit
accounts for SIDCOs, such accounts are subject to any applicable rules,
orders, standards, or guidelines prescribed by the Board.\51\ The
Commission notes that the Board has prescribed detailed rules and
standards that govern account services provided to SIDCOs by the
Federal Reserve Banks.\52\ These rules and standards have been
carefully developed to provide clarity surrounding the provision of
Federal Reserve financial services and to promote consistency in the
treatment of deposit accounts at the Federal Reserve Banks for the
benefit of the U.S. financial system. The Commission is concerned that
exposing the Federal Reserve Banks to the standard of liability set
forth in Section 4d of the CEA, as well as to potential third-party
claims under Section 22 of the CEA, could disrupt these goals and
ultimately
[[Page 35343]]
harm the U.S. financial system and, by extension, U.S. taxpayers.
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\51\ See Section 806(a) of the Dodd-Frank Act.
\52\ See 12 CFR 234.5 (setting forth the conditions and
requirements for Federal Reserve Banks to open and maintain accounts
for and provide financial services to designated FMUs); see also
discussion supra Part III.B (discussing the Federal Reserve Bank
Governing Documents).
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For the reasons discussed above, the Commission believes that the
proposed exemption would promote the safeguarding of futures and
cleared swaps customer funds in a manner that would also benefit U.S.
taxpayers. In light of the foregoing, the Commission believes the
proposed exemption would promote responsible economic and financial
innovation and fair competition, and would be consistent with the
``public interest,'' as that term is used in Section 4(c) of the CEA.
VII. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \53\ requires that
agencies consider whether the proposed exemption will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact. The Commission believes that the proposed exemption will not
have a significant economic impact on a substantial number of small
entities. The exemption proposed by the Commission will impact SIDCOs
and Federal Reserve Banks. The Commission has previously established
certain definitions of ``small entities'' to be used by the Commission
in evaluating the impact of its actions on small entities in accordance
with the RFA.\54\ The Commission has previously determined that DCOs,
including SIDCOs, are not small entities for purposes of the RFA.\55\
Similarly, the Commission believes that Federal Reserve Banks are not
small entities for purposes of the RFA.
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\53\ 5 U.S.C. 601 et seq.
\54\ See 47 FR 18618, 18618-21 (Apr. 30, 1982).
\55\ See New Regulatory Framework for Clearing Organizations, 66
FR 45604, 45609 (Aug. 29, 2001).
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Accordingly, the Commission does not expect the proposed exemption
to have a significant impact on a substantial number of small entities.
Therefore, the Chairman, on behalf of the Commission, hereby certifies,
pursuant to 5 U.S.C. 605(b), that the proposed exemption would not have
a significant economic impact on a substantial number of small
entities. The Commission invites the public to comment on whether the
entities covered by this proposed exemption should be considered small
entities for purposes of the RFA, and, if so, whether there is a
significant impact on a substantial number of small entities.
B. Paperwork Reduction Act
The purposes of the Paperwork Reduction Act of 1995 (``PRA'') \56\
are, among other things, to minimize the paperwork burden to the
private sector, ensure that any collection of information by a
government agency is put to the greatest possible uses, and minimize
duplicative information collections across the government. The PRA
applies to all information, ``regardless of form or format,'' whenever
the government is ``obtaining, causing to be obtained [or] soliciting''
information, and requires ``disclosure to third parties or the public,
of facts or opinions,'' when the information collection calls for
``answers to identical questions posed to, or identical reporting or
recordkeeping requirements imposed on, ten or more persons.'' The PRA
would not apply in this case given that the exemption would not impose
any new recordkeeping or information collection requirements, or other
collections of information on ten or more persons that require approval
of the Office of Management and Budget.
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\56\ 44 U.S.C. 3501 et seq.
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C. Cost and Benefit Considerations
1. Costs
The proposed exemption would exempt the Federal Reserve Banks from
Sections 4d and 22 of the CEA. The Commission recognizes that such
relief could represent a cost to a SIDCO, its FCM clearing members, and
the FCMs' customers in the event of a loss of the deposited customer
funds. For instance, if customer funds were lost due to the fault of a
Federal Reserve Bank, the SIDCO, FCM clearing member, or customer would
not have a cause of action under the CEA. Rather, as discussed above,
the Federal Reserve Banks would be held to the standard of liability
set forth in the Federal Reserve Bank Governing Documents.\57\ This
cost, however, will never be realized if an incident does not occur.
Therefore, given the resilience of the Federal Reserve Banks and the
standards set forth in the Federal Reserve Bank Governing Documents,
the Commission estimates that the circumstances that may give rise to
such costs would be remote. Similarly, as discussed above, while the
Commission continues to believe that private claims empower injured
parties to seek compensation for damages where the Commission lacks the
resources to do so on their behalf, and the prospect of such claims
serves the public interest in deterring misconduct, the Commission
believes that, for the reasons discussed herein, exempting the Federal
Reserve Banks from liability under Section 22 of the CEA would also
serve the public interest. The Commission further believes that the
condition in the proposed exemption that would require Federal Reserve
Banks to segregate customer funds deposited by a SIDCO from the
proprietary funds deposited by a SIDCO and the benefits of facilitating
SIDCOs' use of these accounts mitigate any costs that would flow from
the loss of protection under Section 4d of the CEA.
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\57\ For a more detailed discussion of the standard of liability
set forth in the Federal Reserve Bank Governing Documents, see
discussion supra Part IV.
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As described above, the Commission has reinforced and enhanced the
provisions of Section 4d of the CEA in order to further protect
customer funds, and this proposal represents a limited exception to
those provisions.
2. Benefits
The proposed exemption would benefit market participants by
permitting SIDCOs to deposit customer funds at the Federal Reserve
Banks. Whereas commercial banks present credit and liquidity risks to a
SIDCO, its FCM clearing members, and the FCMs' customers, the Federal
Reserve Banks are substantially insulated from such risks. As discussed
in greater detail above, Title VIII of the Dodd-Frank Act was enacted
to mitigate systemic risk in the financial system and to promote
financial stability, in part, through an enhanced supervisory framework
for SIDCOs. In addition to this framework, Title VIII, and more
specifically, Section 806(a) of the Dodd-Frank Act, permits the Board
to authorize a Federal Reserve Bank to establish and maintain an
account for a SIDCO and provide to the SIDCO certain financial
services. By enacting Title VIII in general, and Section 806(a) in
particular, Congress recognized the importance of reducing systemic
risk and providing SIDCOs with a potential safeguard during an
extraordinary liquidity event. The proposed exemption would therefore
help promote Congress's goal of better preparing the U.S. financial
system for potential future liquidity events. A SIDCO's access to
Federal Reserve Bank deposit accounts is also consistent with the
international standards set forth in the Principles for Financial
Market Infrastructures (``PFMIs''), which acknowledge the protections
afforded by central banks from such credit and liquidity risks.\58\
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\58\ See, e.g., CPSS-IOSCO, PFMIs, ] 3.9.3 (noting that
``[c]entral banks have the lowest credit risk and are the source of
liquidity with regard to their currency of issue''); see also PFMIs,
Key Consideration 8 (specifying that a financial market
infrastructure ``with access to central bank accounts, payment
services, or securities services should use these services, where
practical, to enhance its management of liquidity risk'').
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[[Page 35344]]
Moreover, the Federal Reserve Banks' standard of liability, as set
forth in the Federal Reserve Bank Governing Documents, is better suited
for the Federal Reserve Banks than Section 4d of the CEA, which was
designed to govern customer funds deposited with a commercial bank,
trust company, or DCO. Unlike commercial banks, Federal Reserve Banks
do not operate for profit and serve only account holders authorized by
statute, such as depository institutions and the U.S. government.
Indeed, each year they return to the U.S. Department of Treasury all
earnings in excess of Federal Reserve Bank operating and other
expenses, such as litigation expenses. By exempting the Federal Reserve
Banks from certain potential enforcement actions and private suits, the
proposed exemption would reduce the Federal Reserve Banks' exposure to
litigation. Because the Federal Reserve Banks return their earnings to
the U.S. Department of Treasury's general fund, U.S. taxpayers may
benefit from the proposed exemption. Therefore, the Commission believes
that it is appropriate to apply the Federal Reserve Bank's standard of
liability in order to facilitate the use of these accounts.
3. Section 15(a) Factors
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its action before issuing an order under the
CEA.\59\ By its terms, Section 15(a) does not require the Commission to
quantify the costs and benefits of an order or to determine whether the
benefits of the order outweigh its costs. Rather, Section 15(a) simply
requires the Commission to ``consider the costs and benefits'' of its
action.
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\59\ 7 U.S.C. 19(a).
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Section 15(a) of the CEA further specifies that costs and benefits
shall be evaluated in light of 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 may in its
discretion give greater weight to any one of the five enumerated areas
and could in its discretion determine that, notwithstanding its costs,
a particular order is necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the CEA.
a. Protection of Market Participants and the Public
The proposed exemption would serve to facilitate SIDCOs' use of
Federal Reserve Banks as depositories for customer funds. As the
Federal Reserve System is the nation's central bank, such accounts
would provide SIDCOs with the lowest possible credit risk in the event
of a market disruption. Moreover, as Federal Reserve Banks are the
source of liquidity with regard to U.S. dollar deposits, SIDCOs with
access to a deposit account at a Federal Reserve Bank would also be
better equipped to handle a liquidity event. As SIDCOs have been so
designated because of their importance to the broader financial system,
reducing these risks would protect market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity
A temporary or permanent disruption to the operations of a SIDCO
could cause wide-spread and significant damage to the financial
integrity of derivatives markets as a whole. Therefore, by facilitating
a SIDCO's use of Federal Reserve Banks as depositories for customer
funds, the proposed exemption would reduce liquidity and credit risk to
the SIDCO, which would, in turn, promote the financial integrity of the
derivatives markets.
The Commission does not anticipate the proposed exemption to have a
significant impact on the efficiency and competitiveness of the
derivatives markets.
c. Price Discovery
The Commission does not anticipate the proposed exemption to have
an impact on the price discovery process.
d. Sound Risk Management Practices
The Commission believes that establishing SIDCO segregated customer
accounts and enabling SIDCOs to access related services at a Federal
Reserve Bank would improve a SIDCO's ability to manage liquidity risk
and protect customer funds. Additionally, the Commission believes that
the availability of a Federal Reserve Bank account could allow a SIDCO
to reduce its concentration risk by adding an additional creditworthy
depository in which to diversify funds. Accordingly, the proposed
exemption promotes sound risk management practices.
The Commission further notes that, notwithstanding the proposed
exemption from Section 4d of the CEA, the Federal Reserve Banks would
still be required to segregate customer funds deposited by a SIDCO from
the proprietary funds deposited by a SIDCO and adhere to the
longstanding standards of liability that govern the Federal Reserve
Banks.
e. Other Public Interest Considerations
The Commission believes that facilitating a SIDCO's access to
Federal Reserve Bank accounts will promote the public interest by
bolstering a SIDCO's ability to conduct settlements with a high degree
of confidence under a wide range of stress scenarios, thereby
increasing the likelihood of the SIDCO being able to provide its
customers with access to their funds in times of market distress.
VIII. Request for Comment
The Commission requests comment on all aspects of the proposed
exemption, including, without limitation, the Commission's
determination that the proposed exemption is consistent with the public
interest, and the Commission's consideration of the costs and benefits
of the proposed exemption.
The Commission requests comment regarding whether the proposed
exemption should be expanded to include those customer accounts that
are established pursuant to the CEA and that are held at Federal
Reserve Banks by designated FMUs for which the Commission is not the
Supervisory Agency.
IX. Proposed Order of Exemption
After considering the above factors, the Commission proposes to
issue the following:
Proposed Order
Pursuant to Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act''), the Commodity Futures
Trading Commission (``Commission'') is the supervisory agency for
certain derivatives clearing organizations (``DCOs'') that have been
designated by the Financial Stability Oversight Council as
systemically important. Under Section 806(a) of the Dodd-Frank Act,
the Board of Governors (``Board'') of the Federal Reserve System is
permitted to authorize a Federal Reserve Bank to establish and
maintain a deposit account for a systemically important DCO
(``SIDCO'') and provide certain services to the SIDCO, subject to
any applicable rules, orders, standards, or guidelines prescribed by
the Board.
DCOs, including SIDCOs, are required to hold funds belonging to
customers of their clearing members in accounts subject to
[[Page 35345]]
Section 4d of the Commodity Exchange Act (``CEA''). In addition,
Section 22 of the CEA would typically provide for private rights of
action for damages against persons who violate Section 4d, or
persons who willfully aid, abet, counsel, induce, or procure the
commission of a violation of Section 4d. However, the Commission
understands that deposit accounts maintained by any Federal Reserve
Bank would also be governed by applicable account agreements,
operating circulars issued by Federal Reserve Banks for each
service, the Federal Reserve Act, and Federal Reserve regulations
and policies, and, with respect to book-entry securities services,
the regulations of the domestic issuer of the securities or the
issuer's regulator (``Federal Reserve Bank Governing Documents'').
The Federal Reserve Bank Governing Documents, as may be amended from
time to time, include, but are not limited to, Federal Reserve Bank
Operating Circular No. 6 (governing funds transfers through the
Fedwire Funds Service); Federal Reserve Bank Operating Circular No.
7 (governing the maintenance of and transfer services for book-entry
securities accounts); 12 CFR part 210, subpart B (governing funds
transfers through the Fedwire Funds Service); and 31 CFR part 357,
subpart B (setting forth the U.S. Department of the Treasury's
regulations governing book-entry treasury bonds, notes, and bills).
The Commission understands that under the Federal Reserve Bank
Governing Documents, a Federal Reserve Bank has no requirement or
obligation to inquire as to the legitimacy or accuracy of the
instructions, or the transactions related to those instructions, or
compliance by the SIDCO with its obligations under the CEA. To the
extent that liability may accrue under the Federal Reserve Bank
Governing Documents, the Commission understands that the Federal
Reserve Bank may be held liable only for actual damages that are (i)
incurred solely by the SIDCO account holder, and (ii) proximately
caused by the Federal Reserve Bank's failure to exercise ordinary
care or act in good faith in accordance with the Federal Reserve
Bank Governing Documents. The Commission proposes to exempt the
Federal Reserve Banks in order to facilitate Federal Reserve Banks'
ability to accept SIDCO customer accounts.
Therefore, it is ordered, pursuant to Section 4(c) of the CEA, 7
U.S.C. 6(c), that the Federal Reserve Banks are granted an exemption
from Sections 4d and 22 of the CEA, subject to the terms and
conditions specified herein:
1. Segregation. Money, securities, and property deposited into a
customer account established pursuant to the CEA by a SIDCO with a
Federal Reserve Bank shall be separately accounted for and
segregated from the money, securities, and property deposited into a
proprietary account of the SIDCO depositing such funds and from the
money, securities, and property deposited into the account of any
person other than the customers for whom the money, securities, or
property is held.
2. Information Requests. Federal Reserve Banks must reply
promptly and directly to any request for confirmation of account
balances or provision of any other information regarding or related
to the SIDCO customer account(s) that are established pursuant to
the CEA from the director of the Division of Clearing and Risk of
the Commission, or any successor division, or such director's
designees.
3. Applicability to Federal Reserve Banks. Subject to the
conditions contained herein, the order applies to all Federal
Reserve Banks that provide customer accounts and other services to
SIDCOs. In addition, pursuant to the Federal Reserve's Key Policies
for the Provision of Financial Services: Standards Related to
Priced-Service Activities of the Federal Reserve Banks, information
obtained by the Board of Governors of the Federal Reserve System or
its designees during the course of supervising SIDCOs, pursuant to
Title VIII of the Dodd-Frank Act, or any counterparty to a SIDCO
under any authority, shall not be attributed by the Commission to
any Federal Reserve Bank providing accounts and financial services
to SIDCO account holders.
4. Reservation of Rights. This order is based upon the analysis
set forth above. Any material change in law or circumstances
pursuant to which this order is granted might require the Commission
to reconsider its finding that the exemption contained herein is
appropriate and/or consistent with the public interest and purposes
of the CEA. Further, the Commission reserves the right, in its
discretion, to revisit any of the terms and conditions of the relief
provided herein, including but not limited to, making a
determination that certain entities described herein should be
subject to the Commission's full jurisdiction, and to condition,
suspend, terminate, or otherwise modify or restrict the exemption
granted in this order, as appropriate, upon its own motion.
Issued in Washington, DC, on May 27, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Appendix to Notice of Proposed Order and Request for Comment on a
Proposal To Exempt, Pursuant to the Authority in Section 4(c) of the
Commodity Exchange Act, the Federal Reserve Banks From Sections 4d and
22 of the Commodity Exchange Act--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2016-13055 Filed 6-1-16; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: June 2, 2016