2015-06548
Federal Register, Volume 80 Issue 56 (Tuesday, March 24, 2015)
[Federal Register Volume 80, Number 56 (Tuesday, March 24, 2015)]
[Rules and Regulations]
[Pages 15507-15510]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-06548]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AE22
Residual Interest Deadline for Futures Commission Merchants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is amending its regulations to remove the December 31, 2018
automatic termination date for the phased-in compliance schedule for
futures commission merchants (``FCMs'') and provides assurance that the
residual interest deadline, as defined in the regulations (``Residual
Interest Deadline''), will only be revised through a separate
Commission rulemaking.
DATES: The final rule is effective May 26, 2015.
FOR FURTHER INFORMATION CONTACT:
Division of Swap Dealer and Intermediary Oversight: Thomas Smith,
Acting Director, 202-418-5495, [email protected]; Jennifer Bauer, Special
Counsel, 202-418-5472, [email protected]; Joshua Beale, Attorney-Advisor,
202-418-5446, [email protected], Three Lafayette Centre, 1155 21st Street
NW., Washington, DC 20581.
Division of Clearing and Risk: Kirsten V.K. Robbins, Associate
Chief Counsel, 202-418-5313, [email protected], Three Lafayette Centre,
1155 21st Street NW., Washington, DC 20581.
Office of the Chief Economist: Stephen Kane, Research Economist,
202-418-5911, [email protected], Three Lafayette Centre, 1155 21st Street
NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
On October 30, 2013, the Commission amended Regulation 1.22 to
enhance the safety of funds deposited by customers with FCMs as margin
for futures transactions.\1\ The amendments require an FCM to maintain
its own capital (hereinafter referred to as the FCM's ``Residual
Interest'') in customer segregated accounts in an amount equal to or
greater than its customers' aggregate undermargined amounts.\2\ The
Commission established a phased-in compliance schedule for Regulation
1.22 with an initial Residual Interest Deadline of 6:00 p.m. Eastern
Time on the date of the settlement referenced in Regulation
1.22(c)(2)(i) or (c)(4) (the ``Settlement Date''), beginning November
14, 2014.\3\ Amended Regulation 1.22 also directs staff to host a
public roundtable and publish a report for public comment by May 16,
2016 addressing, to the extent information is practically available,
the practicability (for both FCMs and customers) of moving the Residual
Interest Deadline from 6:00 p.m. Eastern Time on the Settlement Date,
to the time of settlement or to some other time of day.\4\ Furthermore,
amended Regulation 1.22 provides that, absent Commission action, the
phased-in compliance period for the Residual Interest Deadline
automatically terminates on December 31, 2018.\5\ In the case of such
automatic termination, the Residual Interest Deadline would change to
the time of settlement on the Settlement Date.
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\1\ Enhancing Protections Afforded Customers and Customer Funds
Held by Futures Commission Merchants and Derivatives Clearing
Organizations, Final Rule, 78 FR 68506 (Nov. 14, 2013) (amending 17
CFR parts 1, 3, 22, 30 and 140).
\2\ See 17 CFR 1.22(c)(3)(i). As defined in Regulation
1.22(c)(1), a customer's account is ``undermargined,'' when the
value of the customer funds for a customer's account is less than
the total amount of collateral required by derivatives clearing
organizations for that account's contracts. See 78 FR 68513, n.30.
\3\ See 17 CFR 1.22(c)(5)(ii); See 78 FR at 68578.
\4\ See 17 CFR 1.22(c)(5)(iii)(A).
\5\ See 17 CFR 1.22(c)(5)(iii)(C).
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II. The Proposal
On November 3, 2014, the Commission proposed to revise Regulation
1.22 to remove the December 31, 2018 automatic termination of the
phase-in compliance period.\6\ In the NPRM, the Commission stated the
intention to retain the Residual Interest
[[Page 15508]]
Deadline \7\ at 6 p.m. Eastern Time, unless the Commission takes
further action via rulemaking.
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\6\ Residual Interest Deadline for Futures Commission Merchants,
Notice of Proposed Rulemaking, 79 FR 68148 (Nov. 14, 2014) (amending
17 CFR part 1).
\7\ See 17 CFR 1.22(c)(3)(i). The term ``Residual Interest
Deadline'' is defined in Regulation 1.22(c)(5). If an FCM is
required to increase its Residual Interest as a result of customer
undermargined accounts, the FCM must deposit additional funds into
the customer segregated accounts by the specified Residual Interest
Deadline.
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In the NPRM, the Commission stated that the removal of the
automatic termination of the phase-in compliance period would provide
the Commission with a greater degree of flexibility to assess all
relevant data, including the costs and benefits of revising the
Residual Interest Deadline. The Commission also retained in Regulation
1.22 the requirement for Commission staff to publish for public comment
a report addressing the practicability and costs and benefits of
revising the Residual Interest Deadline, and the additional requirement
for Commission staff to conduct a public roundtable on the issue.
The Commission invited comments on all aspects of the amendments,
particularly those regarding the practicability and costs and benefits
of revising the Residual Interest Deadline.
III. Comments and Response
The Commission received ten comments on the NPRM. The comments were
submitted by the Futures Industry Association (``FIA''), CME Group
(``CME''), National Futures Association (``NFA''), National Introducing
Brokers Association (``NIBA''), Managed Funds Association (``MFA''),
Coalition of National Producers and Agribusiness (``Agribusiness
Coalition''),\8\ National Grain and Feed Association (``NGFA''),
National Council of Farmer Cooperatives (``NCFC''), the Honorable Heidi
Heitkamp, United States Senate, and Chris Barnard.\9\ All ten comments
supported the proposed amendments.
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\8\ The Commission received two comment letters filed by the
Coalition of National Producers and Agribusiness. The second comment
letter was identical to the first with the exception of an amendment
adding two additional signatories.
\9\ The comments are available on the Commission's Web site,
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1537.
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The FIA and its member firms supported the amendments, stating
their willingness to participate in the study and citing concerns that
a residual interest deadline earlier than 6:00 p.m. Eastern Time on the
Settlement Date might impose significant financial and operational
burdens on both customers and FCMs. The NFA encouraged the Commission
to consider industry comment on the timing and parameters of the study
to ensure the Commission has the most complete information available.
The NIBA, NCFC, NGFA, Agribusiness Coalition, and MFA added that an
earlier Residual Interest Deadline could force the pre-funding of
margin by FCMs, in turn causing increased operational costs on FCMs and
their customers, which could result in the possible exit of certain
customers from the marketplace. Senator Heitkamp also supported the
proposed amendments and stated that the rule would provide end users
with the certainty they need to run their businesses.
All commenters supported the position that any future revisions
should be done through separate rulemaking. The FIA and CME further
stated that the opportunity to provide input on the setting of the
Residual Interest Deadline was something consistent with the goals of,
if not required by, the Administrative Procedure Act. Chris Barnard
asked for certainty on the proposed retention of the existing deadline
absent further Commission rulemaking, stating that such a requirement
is open-ended.
The Commission has considered the comments and is adopting the
amendments as proposed. Amending Regulation 1.22 to require the
Commission to conduct a separate rulemaking prior to revising the
Residual Interest Deadline will provide market participants with an
opportunity to review and comment on the Commission's staff's
roundtable and public report. The amendments also provide market
participants with an opportunity to review and to provide comments, via
a rulemaking process, on any Commission proposed revisions to the
Residual Interest Deadline.
IV. Cost-Benefit Considerations
Section 15(a) of the Commodity Exchange Act (``CEA'') requires the
Commission to consider the costs and benefits of its actions before
promulgating a regulation under the CEA or issuing certain orders.\10\
Section 15(a) further specifies that the 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 considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors.
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\10\ 7 U.S.C. 19(a).
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As noted in the NPRM, the status quo baseline with which the costs
and benefits are compared is the Residual Interest Deadline of 6:00
p.m. Eastern Time on the Settlement Date, which would apply until the
Commission takes further action or, in the absence of further action,
until December 31, 2018. The status quo baseline includes the automatic
termination of the phase-in compliance period at December 31, 2018,
which, absent Commission action, would move the Residual Interest
Deadline to the time of settlement referenced in Regulation
1.22(c)(2)(i), or as appropriate, 1.22(c)(4).
As also noted in the NPRM, the status quo baseline is similar to
this final rulemaking and, as such, the Commission believes that there
is not likely to be any material differences between this final
rulemaking and the status quo baseline in terms of the first four
section 15(a) factors. The Commission notes that the amendments will
alter the procedure followed with regard to the removal of the
automatic termination of the phase-in period, which could alter the
cost and benefit with respect to the fifth section 15(a) factor. The
Commission specifically invited comment on the cost and benefit
implications related to the fifth section 15(a) factor (``other public
interest considerations''). However, the Commission received no
comments that contained any quantitative data regarding the monetary
value of any public interest considerations. As such, the Commission
has considered the fifth section 15(a) factor qualitatively.
All commenters supported the termination of the automatic phase-in
compliance period. The CME stated that removing the automatic moving of
the residual interest deadline will allow impacted market participants,
including customers and FCMs, to provide comments on any proposed rule
change that results from the study. In addition, the FIA stated the
adoption of the amendment will also afford the Commission the
opportunity to carefully consider the results of the staff study
without being bound by an unnecessary deadline.
The Commission agrees with commenters that a separate rulemaking
prior to revising the Residual Interest Deadline will afford the public
an opportunity to participate in any future decision-making concerning
any possible movement of the Residual Interest Deadline. The
termination of the automatic phase-in compliance period will grant the
Commission more opportunity to consider the study and
[[Page 15509]]
the public roundtable, as well as an opportunity to receive and
evaluate additional public comment on any proposed rule change.
V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \11\ requires Federal
agencies, in promulgating regulations, to consider the impact of those
regulations on small entities. The Commission has previously
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its rules on small entities in
accordance with the RFA.\12\ The final amendments would affect FCMs.
The Commission previously has determined that FCMs are not small
entities for purposes of the RFA, and, thus, the requirements of the
RFA do not apply to FCMs.\13\ 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.\14\ Accordingly, the Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b) that the final amendments
will not have a significant economic impact on a substantial number of
small entities.
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\11\ 5 U.S.C. 601 et seq.
\12\ 47 FR 18618 (Apr. 30, 1982).
\13\ Id. at 18619.
\14\ Id.
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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 rulemaking amends requirements that contain a
collection of information for which the Commission has previously
received a control number from OMB. The title for this collection of
information is ``Regulations and Forms Pertaining to Financial
Integrity of the Market Place, OMB control number 3038-0024''. This
collection of information is not expected to be impacted by the rule
amendment approved herein, as the calculations which are already
reflected in the burden estimate are not expected to change; the phase-
in period for assessing compliance relative to such calculations is the
sole aspect of the collection of information that will be altered. The
PRA burden hours associated with this collection of information are
therefore not expected to be increased or reduced as a result of the
final amendments.
Accordingly, for purposes of the PRA, these final rule amendments
would not impose any new reporting or recordkeeping requirements.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
For the reasons discussed in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 1 as set forth below:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9,
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).
0
2. In Sec. 1.22, revise paragraphs (c)(5)(iii)(B) and (C) to read as
follows:
Sec. 1.22 Use of futures customer funds restricted.
* * * * *
(c) * * *
(5) * * *
(iii) * * *
(B) Nine months after publication of the report required by
paragraph (c)(5)(iii)(A) of this section, the Commission may (but shall
not be required to) do either of the following:
(1) Terminate the phase-in period through rulemaking, in which case
the phase-in period shall end as of a date established by a final rule
published in the Federal Register, which date shall be no less than one
year after the date such rule is published; or
(2) Determine that it is necessary or appropriate in the public
interest to propose through rulemaking a different Residual Interest
Deadline. In that event, the Commission shall establish, if necessary,
a phase-in schedule in the final rule published in the Federal
Register.
(C) If the phase-in schedule has not been terminated or revised
pursuant to paragraph (c)(5)(iii)(B) of this section, then the Residual
Interest Deadline shall remain 6:00 p.m. Eastern Time on the date of
the settlement referenced in paragraph (c)(2)(i) or, as appropriate,
(c)(4) of this section until such time that the Commission takes
further action through rulemaking.
Issued in Washington, DC, on March 18, 2015, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Residual Interest Deadline for Futures Commission
Merchants--Commission Voting Summary, Chairman's Statement, and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Wetjen, Bowen,
and Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2--Statement of Chairman Timothy G. Massad
Today we are finalizing a change to a rule that concerns one of
the most important objectives of the Commission, which is to protect
customer funds. In addition, today's action reflects one of my key
priorities since taking office, which is to make sure our rules do
not impose undue burdens or unintended consequences for the
nonfinancial commercial businesses that depend on the derivatives
markets to hedge commercial risks.
Today's action concerns Regulation 1.22, regarding the posting
of collateral. When a customer's account has insufficient margin, a
futures commission merchant must commit its own capital--often
referred to as the FCM's ``residual interest''--to make up the
difference. Regulation 1.22 sets the deadline for posting residual
interest. That deadline, in turn, affects when customers must post
collateral. The regulation provided that the deadline, which is
currently 6:00 p.m. on the next day, would automatically become
earlier in a couple years, without any Commission action or
opportunity for public input.
Last fall, we proposed to amend the rule so that the FCM's
deadline to post ``residual interest'' will not become earlier than
6:00 p.m. without an affirmative Commission action and an
opportunity for public comment. Today, we are finalizing that
change.
An earlier deadline can help make sure that FCMs always hold
sufficient margin and do not use one customer's margin to support
another customer, but it can also impose costs on customers who must
deliver margin sooner. We will do a study of how well the current
rule and deadline are working, the practicability of changing the
deadline, and the costs and benefits of any change. Today's action
will make sure that the Commission considers all those issues and
that customers will have an opportunity to provide us with input on
any future change the Commission may consider.
Appendix 3--Statement of Commissioner Mark P. Wetjen
In the fall of 2013, the Commission made some important changes
to rule 1.22, to which registered futures commission
[[Page 15510]]
merchants (FCMs) are subject. The revision to this rule, known as
the ``residual-interest requirement'', clarified that one customer's
funds could not be used by an FCM to cover another customer's margin
deficit, but phased in a deadline for stricter compliance with this
clarified standard. The change was designed to reduce risks to those
customer funds placed in the care of FCMs, and were among a host of
regulatory enhancements adopted by the Commission after two failures
of large, registered FCMs in 2011 and 2012--MF Global and Peregrine
Financial.
I supported those regulatory enhancements--including the
revision to rule 1.22--because of the importance of the matter
addressed in each: The safekeeping of customer money, which is the
most sacrosanct duty that any financial institution owes to its
customers. Today, the overall framework of regulatory requirements
that registered FCMs must comply with is substantially different
today than in 2011. For example, FCMs are no longer permitted to use
customer funds for in-house lending through repurchase agreements;
they are subject to restrictions on the types of securities that
customer funds can be invested in; they must pass on customer
initial margin on a gross basis to the clearinghouse; through LSOC
(legal segregation with operational comingling) they must legally
segregate cleared swaps customer collateral on an individual basis;
and they were required to significantly enhance their supervision of
and accounting for customer funds. As a result, the risks posed to
customers funds stewarded by FCMs have been significantly reduced.
The recent customer protection rulemakings all were well
intentioned, but indisputably carried some additional costs and
burdens for both FCMs and their customers. The analysis was made at
the time, however, that those burdens and costs were outweighed by
the benefits to FCM customers, especially against the very recent
backdrop of hundreds of millions of dollars of customer funds having
been stolen, or tied up in a bankruptcy proceeding, for at least a
period of time.
The release before us essentially re-weighs the cost or burden
on one hand, and the benefit on the other, and comes up with a
slightly different, but well supported, conclusion regarding the
residual-interest requirement. The costs or burdens revisited in the
release: (1) Uncertainty to the marketplace invited by a time-of-
settlement compliance deadline that was subject to future review by
the Commission staff, which suggested a change could come to the
requirements, but might not; and (2) the anticipated costs to FCMs
of having to finance the funding to top up their customers' margin
deficits, or the cost to customers of pre-funding their margin
accounts with FCMs. And the benefit at issue in the release: The
value to an FCM customer of ensuring that its funds will never be
borrowed by an FCM to cover another customer's deficit.
The inherent risk to this common practice by FCMs is that should
an FCM become insolvent after it posts required margin to the
clearinghouse, but before it collects margin deficits from all of
its customers, the customers whose funds were used to cover a
deficit might not see those funds again, or perhaps only after a
protracted bankruptcy proceeding. This practice also is not
technically compliant with how rule 1.22 is written, which prohibits
FCMs from ``using, or permitting the use of, the futures customer
funds of one futures 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.''
This final rule keeps the residual-interest deadline at the
close of business on the day following the margin-deficit
calculation and eliminates the future deadline of the time of
settlement on the day following the margin-deficit calculation. The
Commission staff is still required to perform a feasibility study to
determine whether future, more aggressive residual-interest
deadlines would be desirable.
The comment file overwhelmingly supported the change in today's
final rule--in other words, commenters took the view that the
potential costs associated with the 2013 residual-interest rule
appear to outweigh the risk that some of their funds could be lost
in the event their FCM becomes insolvent after the time of
settlement, but before an FCM collects margin deficits. Indeed, the
risk that an FCM becomes insolvent during this precise timeframe
without some prior notice to its customers of financial stress at
the FCM is very low. Notably, many comments supporting this final
rule were filed by FCM customers, the constituency rule 1.22 is
designed to protect, and who appreciate the aforementioned risk. The
Commission must respect the comment process and the FCM-customer
viewpoint that today's rule better balances the cost and benefits of
rule 1.22.
Another relevant factor that supports the change to rule 1.22 is
the risk of concentration within the FCM community as a whole, and
what that means for the costs to customers of trading in derivatives
and its related impacts on liquidity in those markets. The number of
registered FCMs has decreased in recent years, which may make it
more difficult for customers to manage their risk by limiting their
ability to access the markets, or by making it more difficult for
them to allocate funds between multiple FCMs to minimize
concentration risk.
The results of the public comment process, when considered in
the context of the overall stronger regulatory framework for FCMs
and the concentration in the FCM community described above, give me
the comfort needed to support the changes to 1.22 contained in
today's release.
On the other hand, without the five-year phase-in period, we
might see a reluctance by the industry to move as swiftly to
streamline margin-collection practices and to take advantage of any
technological solutions that may be developed. Some recent
technology advances hold the promise to reduce the very sorts of
risks addressed by rule 1.22 by facilitating real-time margin
collection and settlement. To be sure, those advances would have
been more seriously and expeditiously tested and--if they
demonstrate merit--embraced without the change to rule 1.22 we are
releasing today. In other words, just as in 2013 when the existing
rule was finalized, I continue to believe that the most costly
solutions for complying with rule 1.22 that were anticipated by many
commenters should not be the ones ultimately embraced by the
marketplace. Moreover, given regulatory requirements imposed by
other regulators, today members of the clearing ecosystem are
exploring a variety of solutions to new compliance and capital
burdens that also would ease and enable stricter compliance with
rule 1.22, thus minimizing further the likelihood that pre-funding
customer margin accounts with FCMs will become the preferred
solution to compliance.
Finally, I note that a study and roundtable to review these
advancements, and how they might lower risks and related costs,
still are mandated by law, and I ask the Chairman to direct staff to
move swiftly to comply with these regulatory requirements so that
the Commission may act appropriately when and if it needs to. I look
forward to continuing to collaborate with staff and market
participants as we work towards enhancing the safety and efficiency
of our markets.
Appendix 4--Statement of Commissioner J. Christopher Giancarlo
I support the Commission's action to change the residual
interest deadline, if necessary or appropriate, only upon a
Commission rulemaking following a public comment period. This
approach will allow the Commission to better understand the market
impacts and operational challenges of moving the residual interest
deadline. This approach is especially important given the likely
negative impacts on smaller futures commission merchants who provide
our farmers, ranchers and rural producers with critical risk
management services.
I call on the Commission to take the same deliberative approach
to the de minimis exception to the swap dealer definition so that
the de minimis level does not automatically adjust from $8 billion
to $3 billion, absent a rulemaking with proper notice and comment.
Like today's proposal, the Commission should only adjust the de
minimis threshold if necessary or appropriate after it has
considered the data and weighed public comments.
[FR Doc. 2015-06548 Filed 3-23-15; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: March 24, 2015