I support the issuance and publication of the proposed rule on the protection of clearing member funds held by derivatives clearing organizations (DCOs).  The Commission has longstanding regulations that provide comprehensive protections for funds belonging to customers of a Futures Commission Merchant (FCM).[1]  Similar protections, however, do not exist for funds belonging to clearing members of a DCO, whether they are individual market participants or FCMs themselves.  The proposed rule would implement a regime for the protection of clearing member funds largely analogous to the current regime applicable to FCM customer funds.  Specifically, the proposed rule would ensure that clearing member funds and assets receive proper treatment if a DCO enters bankruptcy by requiring segregation of clearing member funds from the DCO’s own funds[2] and that the funds be held in a depository that acknowledges in writing that the funds belong to clearing members,[3] not the DCO.  The proposed rule would require new regulations regarding the commingling of clearing member or proprietary funds;[4] limitations on the use of these funds;[5] and limit investments of the funds to the investments permitted for customer funds under Regulation 1.25[6].  In addition, the proposed rule would permit DCOs to hold customer and clearing member funds at foreign central banks subject to certain requirements.  Finally, the proposed rule would require DCOs to conduct a daily calculation and reconciliation of the amount of funds owed to customers and clearing members and the amount actually held for customers and clearing members.[7]

Commission regulations addressing the custody and safeguarding of customer funds have historically responded to the characteristics of the prevailing model in which all, or nearly all, clearing members of a DCO were FCMs acting as intermediaries.  However, as noted in the proposed rule, the Commission has granted registration to a number of DCOs that clear directly for market participants without the intermediation of FCMs.[8]  Additionally, many DCOs that use the traditional FCM clearing model have at least some non-FCM clearing members.  The growth and evolution of the non-intermediated clearing model necessitates ensuring that our regulations establish a regime for the safeguarding and protection of clearing member funds that addresses the issues and risks presented.

Lastly, I am pleased that the proposed rule would, in effect, codify the no-action and exemptive relief previously given to four DCOs[9] by permitting DCOs to hold customer funds at foreign central banks and use a modified acknowledgment letter.  The proposed rule would also extend these amended provisions to clearing member funds.  Permitting DCOs to hold customer and clearing member funds at a central bank allows them to take advantage of the credit and liquidity risk management benefits that central bank accounts provide.  This is sound policy and risk management.

I look forward to hearing the public's comments on the proposed rule.  The 60-day comment period will begin upon the Commission’s publication of the proposed rule on its website.