2014-26978
[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]
[Proposed Rules]
[Pages 68148-68151]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26978]
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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: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing to revise the Residual Interest Deadline in
Commission Rule 1.22. The amendment would remove the December 31, 2018
termination date for the phased-in compliance schedule for futures
commission merchants (``FCMs'') and provide assurance that the Residual
Interest Deadline would only be revised through a separate Commission
rulemaking.
DATES: Comments must be received on or before January 13, 2015.
ADDRESSES: You may submit comments, identified by RIN 3038-AE22, by any
of the following methods:
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: Send to 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 may be exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures set forth in
Sec. 145.9 of the Commission's regulations.\1\
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\1\ Commission regulations referred to herein are found at 17
CFR Ch. 1 (2012). Commission regulations are accessible on the
Commission's Web site, www.cftc.gov.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
[[Page 68149]]
applicable laws, and may be accessible under the Freedom of Information
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Act.
FOR FURTHER INFORMATION CONTACT:
Division of Swap Dealer and Intermediary Oversight: Thomas Smith,
Deputy 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: M. Laura Astrada, Associate Chief
Counsel, 202-418-7622, [email protected], or Kirsten V. K. Robbins,
Special 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,
[email protected], 202-418-5911, 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.\2\ 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.\3\
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\2\ 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).
\3\ 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.
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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.\4\ 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) (the ``Settlement Date''), beginning November
14, 2014.\5\
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\4\ See 17 CFR 1.22(c)(3)(i). The term ``Residual Interest
Deadline'' is defined in Regulation 1.22(c)(5).
\5\ See 17 CFR 1.22(c)(5)(ii)(A); see 78 FR 68578.
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In addition, the Commission directed staff to publish for public
comment a report (the ``Report'') 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.\6\ The Report is also to address whether and on
what schedule it would be feasible to move the Residual Interest
Deadline, and the costs and benefits of such potential requirements.\7\
The Commission further directed staff to solicit public comment and
conduct a public roundtable regarding specific issues to be covered by
the Report.\8\ The Report is to be completed by May 16, 2016.\9\
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\6\ See 17 CFR 1.22(c)(5)(iii)(A).
\7\ Id.
\8\ Id.
\9\ Id.
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Within nine months after the publication of the Report, the
Commission may, by Order, terminate the phase-in period, or determine
that it is necessary or appropriate in the public interest to propose
through a separate rulemaking a different Residual Interest
Deadline.\10\ Finally, absent Commission action, the phased-in
compliance period for the Residual Interest Deadline will terminate on
December 31, 2018, and the Residual Interest Deadline will change to
the time of settlement on the Settlement Date.\11\
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\10\ See 17 CFR 1.22(c)(5)(iii)(B).
\11\ See 17 CFR 1.22(c)(5)(iii)(C).
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II. Discussion
As noted above, absent Commission action, the phase-in of the
compliance period for the Residual Interest Deadline will automatically
terminate on December 31, 2018, and change to the time of settlement on
the Settlement Date. The Commission is proposing to revise Regulation
1.22 to remove the December 31, 2018 automatic termination of the
phase-in compliance period. The proposal would instead provide that the
Residual Interest Deadline would remain at 6:00 p.m. Eastern Time,
unless the Commission takes further action via publication of a new
rule.
The Commission is proposing to amend Regulation 1.22 in order to
provide the Commission with a greater degree of flexibility to assess
the issues and all relevant data associated with revising the Residual
Interest Deadline. In this regard, the proposal would afford the
Commission the opportunity to fully and carefully consider the views
expressed during the public roundtable, the views and issues raised
during the solicitation of public comments, and the results of the
staff's Report, regarding the practicability and costs and benefits of
revising the Residual Interest Deadline without the constraints of an
established regulatory deadline for Commission action. The Commission
is also proposing to revise Regulation 1.22 to make clear that any
subsequent revision to the Residual Interest Deadline may only be
effected through a separate rulemaking.
The Commission notes that this proposal does not alter the
requirement in Regulation 1.22(c)(3)(i) that, commencing November 14,
2014, all FCMs maintain the requisite Residual Interest in customer
accounts by no later than 6:00 p.m. Eastern Time on the Settlement
Date.
The Commission invites comments on all aspects of the proposed
amendments to the phase-in compliance period, including the costs and
benefits of this proposed change. For example, does the automatic
termination of the phase-in compliance period serve any useful
purposes, such as focusing attention on the Report, that the Commission
should consider? At this time, are there indications that issues
regarding the practicability and costs and benefits of revising the
Residual Interest Deadline will require significant time to consider,
such that the automatic termination of the phase-in compliance period
would hamper consideration of those issues? What are the particular
concerns, if any, suggesting that the automatic termination of the
phase-in compliance period is inappropriate in the specific context of
Regulation 1.22?
III. 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.\12\
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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\12\ 7 U.S.C. 19(a).
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The proposed rule and the status quo baseline with which the costs
and benefits are compared are similar. The baseline for this costs and
benefits consideration is the status quo, in which
[[Page 68150]]
the 6:00 p.m. Eastern Time on the Settlement Date would apply until the
Commission takes further action or, in the absence of further action,
December 31, 2018. Inasmuch as the proposed rule would not change the
settlement date, but would eliminate the December 31, 2018 deadline
requiring FCMs to maintain sufficient Residual Interest in its customer
accounts by the time of settlement on the Settlement Date, the
Commission believes that there is not likely to be any material
difference between this proposed rulemaking and the status quo baseline
in terms of the first four section 15(a) factors.
With respect to the fifth section 15(a) factor, ``other public
interest considerations,'' the Commission has considered that the
presence of an automatic termination of the phase-in compliance period
in the regulation may have beneficial effects. For example, the
automatic termination of the phase-in compliance period may focus
attention on the results of the Report and provide a timeline for the
Commission's consideration of issues about the Residual Interest
requirement. On the other hand, the Commission has considered that time
will be required to consider the Report and related roundtable and
public comments, prior to any change in the Residual Interest Deadline.
As it does not have relevant data to quantify a monetary value of the
public interest considerations likely to be implicated by the proposed
elimination of the December 31, 2018 deadline, the Commission has
considered them qualitatively in reaching its preliminary decision to
propose the elimination of the regulatory deadline. The Commission
invites comment on the cost and benefit implications of all of the
public interest considerations that are relevant to its proposal, as
well as on the other section 15(a) factors.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \13\ 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.\14\ The proposed regulations 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.\15\ 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.\16\ Accordingly, the Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed
regulations will not have a significant economic impact on a
substantial number of small entities.
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\13\ 5 U.S.C. 601 et seq.
\14\ 47 FR 18618 (Apr. 30, 1982).
\15\ Id. at 18619.
\16\ Id.
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The Commission invites comments on the impact of this proposed
regulation on small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') provides that a Federal
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number issued by the Office of Management and Budget
(``OMB''). This proposed rulemaking 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 MarketPlace, OMB control number 3038-0024''. This
collection of information is not expected to be impacted by the rule
amendment proposed herein, as the calculations which are already
reflected in the burden estimate are not expected to change, but the
phase-in period for assessing compliance relative to such calculations
is solely proposed to 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 amendment proposed.
Accordingly, for purposes of the PRA, these proposed rule
amendments, if promulgated in final form, would not impose any new
reporting or recordkeeping requirements. The Commission invites public
comment on the accuracy of its estimate that no additional information
collection requirements or changes to existing collection requirements
would result from the rules proposed herein.
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 proposes to amend 17 CFR chapter I 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 November 3, 2014, by the
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
[[Page 68151]]
Appendices to Residual Interest Deadline for Futures Commission
Merchants--Commission Voting Summary and Chairman's Statement 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
I support the Staff's recommendation. One of my priorities has
been to fine-tune our rules to make sure they work as intended and
do not impose undue burdens or unintended consequences, particularly
for the nonfinancial commercial businesses that use these markets to
hedge commercial risks. The proposed amendment is consistent with
that goal. It is designed to help ensure that the funds deposited by
customers with Futures Commission Merchants, or FCMs, remain safe.
It is not a major change, but it is significant in making sure that
manufacturers, farmers, ranchers, and other companies that rely on
the derivatives markets to hedge routine business risks can continue
to use them efficiently and effectively.
The rule prohibits an FCM from using customer funds of one
customer for the benefit of another customer. Last fall, the
Commission amended Regulation 1.22 to further enhance the safety of
such funds by making sure that customer accounts have sufficient
margin. On any day when a customer is required to post additional
margin but has not yet done so, the FCM must maintain its own
capital--often referred to as the FCM's ``Residual Interest''--in
customer segregated accounts to make up the difference. The
amendments provided that the FCM must deposit the additional funds
by a specified deadline. Specifically, the amendments said that as
of November 14, 2014, the deadline would be 6:00 p.m. Eastern Time
on the settlement date. The deadline for the FCMs to post their
capital affects the deadline for customers to increase their own
funds.
The amendments passed last fall also provide that the Commission
will conduct a study, and solicit public comment--including by way
of a public roundtable--concerning the practicability, for both FCMs
and their customers, of moving that deadline from 6:00 p.m. to the
morning daily clearing settlement cycle or the time of settlement,
which I will refer to as 9:00 a.m. for convenience. The amendments
said the Commission would decide, within nine months after
publication of the report, whether to move the deadline to 9:00 a.m.
Finally, the amendments said that if the Commission failed to take
any action, the deadline would automatically move to 9:00 a.m. as of
December 31, 2018.
Today, we are making a minor, but important, change. We are
proposing to eliminate the provision that says the deadline will
automatically move to 9:00 a.m. as of December 31, 2018. The
deadline will still move to 6:00 p.m. as of November 14 of this
year, and we will still conduct a study of the practicability of
making the deadline earlier. An earlier residual interest deadline
better protects customers from one another, in line with the
statute, but we want to make sure we move deliberately so that the
model works best for customers in light of all of their interests,
since the deadline will affect how much margin customers have to
post and when. Today's proposal will make sure that customers have
an opportunity to not only review the study but give us input when
we consider whether to accelerate the deadline.
[FR Doc. 2014-26978 Filed 11-13-14; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: November 14, 2014