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

<RULE> 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> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Commodity Futures Trading Commission (Commission or CFTC) is amending its regulations, adopted under the Commodity Exchange Act (CEA), to require a futures commission merchant (FCM) to ensure a customer does not withdraw funds from its account with the FCM if the balance in the account after the withdrawal would be insufficient to meet the customer's initial margin requirements; and relatedly, to permit an FCM, subject to certain requirements, to treat the separate accounts of a single customer as accounts of separate entities for purposes of certain Commission regulations. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> This rule is effective March 24, 2025. <E T="03">Compliance dates:</E> The compliance date for FCMs that are clearing members of a derivatives clearing organization (DCO) as of the date of publication of this rule in the <E T="04">Federal Register</E> shall be July 21, 2025. The compliance date for all other FCMs shall be January 22, 2026. </EFFDATE> <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> Liliya Bozhanova, Associate Director, 202-418-6232, <E T="03">lbozhanova@cftc.gov;</E> Jennifer Bauer, Special Counsel, 202-418-5472, <E T="03">jbauer@cftc.gov,</E> Market Participants Division; Jasmine Lee, Special Counsel, 202-418-5226, <E T="03">jlee@cftc.gov,</E> Division of Market Oversight, 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</FP> <FP SOURCE="FP1-2">D. The Commission's Second Proposal</FP> <FP SOURCE="FP-2">II. Regulations</FP> <FP SOURCE="FP1-2">A. Amendments to Regulation § 1.3</FP> <FP SOURCE="FP1-2">B. Amendments to Regulation § 1.17</FP> <FP SOURCE="FP1-2">C. Amendments to Regulations §§ 1.20, 1.32, 22.2, and 30.7</FP> <FP SOURCE="FP1-2">D. Regulation § 1.44(a)</FP> <FP SOURCE="FP1-2">E. Regulation § 1.44(b)</FP> <FP SOURCE="FP1-2">F. Regulation § 1.44(c)</FP> <FP SOURCE="FP1-2">G. Regulation § 1.44(d)</FP> <FP SOURCE="FP1-2">H. Regulation § 1.44(e)</FP> <FP SOURCE="FP1-2">I. Regulation § 1.44(f)</FP> <FP SOURCE="FP1-2">J. Regulation § 1.44(g)</FP> <FP SOURCE="FP1-2">K. Regulation § 1.44(h)</FP> <FP SOURCE="FP1-2">L. Appendix A to Part 1</FP> <FP SOURCE="FP1-2">M. Amendments to Regulation § 1.58</FP> <FP SOURCE="FP1-2">N. Amendments to Regulation § 1.73</FP> <FP SOURCE="FP1-2">O. Amendments to Regulation § 30.2</FP> <FP SOURCE="FP1-2">P. Amendments to Regulation § 39.13</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> <FP SOURCE="FP1-2">D. Congressional Review Act</FP> </EXTRACT> <HD SOURCE="HD1">I. Background</HD> <HD SOURCE="HD2">A. The Commission's Customer Funds Protection Regulations</HD> Protection of market participants from misuses of customer assets and avoidance of systemic risk are two of the fundamental purposes of the CEA. <SU>1</SU> <FTREF/> The Commission has promulgated regulations designed to protect customer assets, 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. The Commission has also promulgated regulations designed to diminish the risk that a customer default in its obligations to an FCM that is a clearing member of a DCO (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>1</SU>  Section 3(b) of the CEA, 7 U.S.C. 5(b). </FTNT> Section 4d(a)(2) of the CEA and regulation § 1.20(a) require an FCM to separately account for, and segregate from its own funds, all money, securities, and property it has received to margin, guarantee, or secure the trades or contracts of its commodity customers. <SU>2</SU> <FTREF/> Additionally, section 4d(a)(2) of the CEA and 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>3</SU> <FTREF/> This requirement is designed to prevent an FCM from treating customers disparately and to mitigate the risk that the FCM will not maintain sufficient funds in segregation to pay all customer claims if the FCM becomes insolvent. <SU>4</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>5</SU> <FTREF/> <FTNT> <SU>2</SU>  7 U.S.C. 6d(a)(2); 17 CFR 1.20(a). </FTNT> <FTNT> <SU>3</SU>  7 U.S.C. 6d(a)(2); 17 CFR 1.22(a). </FTNT> <FTNT> <SU>4</SU>  Prohibition of Guarantees Against Loss, 46 FR 11668, 11669 (Feb. 10, 1981). </FTNT> <FTNT> <SU>5</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>6</SU> <FTREF/> as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, <SU>7</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>8</SU> <FTREF/> These regulations include a number of provisions that require a DCO to in turn require that its clearing members take certain steps to support their own risk management to mitigate the risk that such clearing members pose to the DCO. <FTNT> <SU>6</SU>  7 U.S.C. 7a-1. </FTNT> <FTNT> <SU>7</SU>  Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010). </FTNT> <FTNT> <SU>8</SU>  Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D); Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 69334, 69335 (Nov. 8, 2011). </FTNT> One such regulation, § 39.13(g)(8)(iii), provides that a DCO shall require a clearing member to ensure that a customer does not withdraw funds from its account with the clearing member unless the net liquidating value plus the margin deposits remaining in the customer's account after the withdrawal would be sufficient to meet the customer initial margin requirements with respect to all products and swap portfolios held in the customer's account that are cleared by the DCO. <SU>9</SU> <FTREF/> Regulation § 39.13(g)(8)(iii) thus establishes a “Margin Adequacy Requirement” designed to mitigate the risk that a clearing FCM fails to hold customer funds sufficient to cover the required initial margin for the customer's cleared positions. <SU>10</SU> <FTREF/> In light of the use of omnibus margin accounts, in which the funds of multiple customers are held together, this safeguard is necessary to avoid the misuse of customer funds by mitigating the likelihood that the clearing FCM will effectively cover one customer's margin shortfall using another customer's funds. <SU>11</SU> <FTREF/> <FTNT> <SU>9</SU>  17 CFR 39.13(g)(8)(iii). </FTNT> <FTNT> <SU>10</SU>  For purposes of this final rule, the Commission uses the term “Margin Adequacy Requirement” to refer to this requirement, which applies indirectly to clearing FCMs via the operation of DCO rules, and the analogous requirement set forth in regulation § 1.44(b) which will apply directly to all FCMs. </FTNT> <FTNT> <SU>11</SU>  Section 3(b) of the CEA, 7 U.S.C. 5(b). </FTNT> In adopting the Margin Adequacy Requirement of regulation § 39.13(g)(8)(iii), the Commission stated  <SU>12</SU> <FTREF/> that the regulation was consistent with the definition of “Margin Funds Available for Disbursement” in the Margins Handbook  <SU>13</SU> <FTREF/> prepared by the Joint Audit Committee (JAC), a representative committee of U.S. futures exchanges and the National Futures Association (NFA). <SU>14</SU> <FTREF/> The Commission noted that although designated self-regulatory organizations (DSROs) reviewed FCMs to determine whether they appropriately prohibited their customers from withdrawing funds from their futures accounts ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 496k characters. 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