Regulations To Address Margin Adequacy and To Account for the Treatment of Separate Accounts by Futures Commission Merchants

COMMODITY FUTURES TRADING COMMISSION <CFR>17 CFR Parts 1, 22, 30, and 39</CFR> <RIN>RIN 3038-AF21</RIN> <SUBJECT>Regulations To Address Margin Adequacy and To Account for the Treatment of Separate Accounts by Futures Commission Merchants</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Commodity Futures Trading Commission. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking; withdrawal. <SUM> <HD SOURCE="HED">SUMMARY:</HD> On April 14, 2023, the Commodity Futures Trading Commission (Commission or CFTC) published a notice of proposed rulemaking (First Proposal) that proposed to amend the derivatives clearing organization (DCO) risk management regulations adopted under the Commodity Exchange Act (CEA) to permit futures commission merchants (FCMs) that are clearing members of DCOs (clearing FCMs), subject to specified requirements, to treat separate accounts of a single customer as accounts of separate legal entities for purposes of certain Commission regulations. In light of comments received supporting direct application of separate account treatment requirements to FCMs in the Commission's regulations, the Commission has determined to withdraw the First Proposal. The Commission now proposes regulations to require an FCM to ensure that a customer does not withdraw funds from its account with the FCM if the balance in such account after such withdrawal would be insufficient to meet the customer's initial margin requirements, and relatedly, to permit an FCM, in certain circumstances and subject to certain conditions, to treat the separate accounts of a single customer as accounts of separate entities for purposes of certain Commission regulations (Second Proposal). The proposed amendments would establish the conditions under which an FCM may engage in such separate account treatment. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Comments must be received on or before April 22, 2024. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> You may submit comments, identified by RIN 3038-AF21, by any of the following methods: • <E T="03">CFTC Comments Portal: https://comments.cftc.gov.</E> Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form. • <E T="03">Mail:</E> Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. • <E T="03">Hand Delivery/Courier:</E> Follow the same instructions as for Mail, above. Please submit your comments using only one of these methods. Submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to <E T="03">https://comments.cftc.gov.</E> 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 procedures established in § 145.9 of the Commission's regulations. 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 <E T="03">https://comments.cftc.gov</E> 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 proposed determination and order 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 FOIA. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Robert B. Wasserman, Chief Counsel, 202-418-5092, <E T="03">rwasserman@cftc.gov;</E> Daniel O'Connell, Special Counsel, 202-418-5583, <E T="03">doconnell@cftc.gov,</E> Division of Clearing and Risk; Thomas Smith, Deputy Director, 202-418-5495, <E T="03">tsmith@cftc.gov;</E> Joshua Beale, Associate Director, 202-418-5446, <E T="03">jbeale@cftc.gov;</E> Jennifer Bauer, Special Counsel, 202-418-5472, <E T="03">jbauer@cftc.gov,</E> Market Participants Division, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Table of Contents</HD> <EXTRACT> <FP SOURCE="FP-2">I. Background</FP> <FP SOURCE="FP1-2">A. The Commission's Customer Funds Protection Regulations</FP> <FP SOURCE="FP1-2">B. The Divisions' No-Action Position</FP> <FP SOURCE="FP1-2">C. The Commission's First Proposal and It's Withdrawal</FP> <FP SOURCE="FP1-2">D. The Commission's Second Proposal</FP> <FP SOURCE="FP-2">II. Proposed Regulations</FP> <FP SOURCE="FP1-2">A. Proposed Amendments to Regulation § 1.3</FP> <FP SOURCE="FP1-2">B. Proposed Amendments to Regulation § 1.17</FP> <FP SOURCE="FP1-2">C. Proposed Amendments to Regulations §§ 1.20, 1.32, 22.2, and 30.7</FP> <FP SOURCE="FP1-2">D. Proposed Regulation § 1.44(a)</FP> <FP SOURCE="FP1-2">E. Proposed Regulation § 1.44(b)</FP> <FP SOURCE="FP1-2">F. Proposed Regulation § 1.44(c)</FP> <FP SOURCE="FP1-2">G. Proposed Regulation § 1.44(d)</FP> <FP SOURCE="FP1-2">H. Proposed Regulation § 1.44(e)</FP> <FP SOURCE="FP1-2">I. Proposed Regulation § 1.44(f)</FP> <FP SOURCE="FP1-2">J. Proposed Regulation § 1.44(g)</FP> <FP SOURCE="FP1-2">K. Proposed Regulation § 1.44(h)</FP> <FP SOURCE="FP1-2">L. Proposed Appendix A to Part 1</FP> <FP SOURCE="FP1-2">M. Proposed Amendments to Regulation § 1.58</FP> <FP SOURCE="FP1-2">N. Proposed Amendments to Regulation § 1.73</FP> <FP SOURCE="FP1-2">O. Proposed Amendments to Regulation § 30.2</FP> <FP SOURCE="FP1-2">P. Proposed Amendments to Regulation § 39.13(g)(8)</FP> <FP SOURCE="FP-2">III. Cost Benefit Considerations</FP> <FP SOURCE="FP1-2">A. Introduction</FP> <FP SOURCE="FP1-2">B. Consideration of the Costs and Benefits of the Commission's Action</FP> <FP SOURCE="FP1-2">C. Costs and Benefits of the Commission's Action as Compared to Alternatives</FP> <FP SOURCE="FP1-2">D. Section 15(a) Factors</FP> <FP SOURCE="FP-2">IV. Related Matters</FP> <FP SOURCE="FP1-2">A. Antitrust Considerations</FP> <FP SOURCE="FP1-2">B. Regulatory Flexibility Act</FP> <FP SOURCE="FP1-2">C. Paperwork Reduction Act</FP> </EXTRACT> <HD SOURCE="HD1">I. Background</HD> <HD SOURCE="HD2"> A. The Commission's Customer Funds Protection Regulations   For purposes of completeness and explanation of the basis for this Second Proposal, the Commission restates its explanation of its customer funds protection regulations, as stated in the First Proposal. <E T="03">See</E> Derivatives Clearing Organization Risk Management Regulations to Account for the Treatment of Separate Accounts by Futures Commission Merchants, 88 FR 22934, 22935-22936 (Apr. 14, 2023) (First Proposal). </FTNT> Two of the fundamental purposes of the CEA are the avoidance of systemic risk and the protection of market participants from misuses of customer assets. <SU>2</SU> <FTREF/> The Commission has promulgated a number of regulations in furtherance of those objectives, including regulations designed to ensure that FCMs appropriately margin customer accounts, and are not induced to cover one customer's margin shortfall with another customer's funds. In addition to protecting customer assets, the current regulations serve the purpose of avoidance of systemic risk by mitigating the risk that a customer default in its obligations to a clearing FCM results in the clearing FCM in turn defaulting on its obligations to a DCO, which could adversely affect the stability of the broader financial system. <FTNT> <SU>2</SU>  Section 3(b) of the CEA, 7 U.S.C. 5(b). </FTNT> Section 4d(a)(2) of the CEA and Commission regulation § 1.20(a) require an FCM to separately account for and segregate from its own funds all money, securities, and property which it has received to margin, guarantee, or secure the trades or contracts of its commodity customers. <SU>3</SU> <FTREF/> Additionally, section 4d(a)(2) of the CEA and Commission regulation § 1.22(a) prohibit an FCM from using the money, securities, or property of one customer to margin or settle the trades or contracts of another customer. <SU>4</SU> <FTREF/> This requirement is designed to prevent disparate treatment of customers by an FCM and mitigate the risk that there will be insufficient funds in segregation to pay all customer claims if the FCM becomes insolvent. <SU>5</SU> <FTREF/> Section 4d(a)(2) of the CEA and regulations §§ 1.20 and 1.22 effectively require an FCM to add its own funds into segregation in an amount equal to the sum of all customer undermargined amounts, including customer account deficits, to prevent the FCM from being induced to use one customer's funds to margin or carry another customer's trades or contracts. <SU>6</SU> <FTREF/> <FTNT> <SU>3</SU>  7 U.S.C. 6d(a)(2); 17 CFR 1.20(a). </FTNT> <FTNT> <SU>4</SU>  7 U.S.C. 6d(a)(2); 17 CFR 1.22(a). </FTNT> <FTNT> <SU>5</SU>  Prohibition of Guarantees Against Loss, 46 FR 11668, 11669 (Feb. 10, 1981). </FTNT> <FTNT> <SU>6</SU>  7 U.S.C. 6d(a)(2); 17 CFR 1.20; 17 CFR 1.22; Prohibition of Guarantees Against Loss, 46 FR at 11669. </FTNT> Section 5b of the CEA, <SU>7</SU> <FTREF/> as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, <SU>8</SU> <FTREF/> sets forth eighteen core principles with which DCOs must comply to register and maintain registration as DCOs with the Commission. In 2011, the Commission adopted regulations for DCOs to implement Core Principle D, which concerns risk management. <SU>9</SU> <FTREF/> These ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 421k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━