Residual Interest Deadline for Futures Commission Merchants, 15507-15510 [2015-06548]
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Issued in Washington, DC, under the
authority of 49 U.S.C. 106(f), 40101(d)(1),
40105(b)(1)(A), and 44701(a)(5), on March 19,
2015.
Michael P. Huerta,
Administrator.
[FR Doc. 2015–06697 Filed 3–20–15; 8:45 am]
BILLING CODE 4910–13–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 1
RIN 3038–AE22
Residual Interest Deadline for Futures
Commission Merchants
Authority: 49 U.S.C. 106(f), 106(g), 1155,
40101, 40103, 40105, 40113, 40120, 44101,
44111, 44701, 44704, 44709, 44711, 44712,
44715, 44716, 44717, 44722, 46306, 46315,
46316, 46504, 46506–46507, 47122, 47508,
47528–47531, 47534, articles 12 and 29 of the
Convention on International Civil Aviation
(61 Stat. 1180), (126 Stat. 11).
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department, agency, or instrumentality;
and third, for all other operations.
(2) [Reserved]
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(e) Expiration. This Special Federal
Aviation Regulation will remain in
effect until March 20, 2017. The FAA
may amend, rescind, or extend this
Special Federal Aviation Regulation as
necessary.
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:
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, tsmith@
cftc.gov; Jennifer Bauer, Special
Counsel, 202–418–5472, jbauer@
cftc.gov; Joshua Beale, AttorneyAdvisor, 202–418–5446, jbeale@
cftc.gov, 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, krobbins@cftc.gov,
Three Lafayette Centre, 1155 21st Street
NW., Washington, DC 20581.
Office of the Chief Economist:
Stephen Kane, Research Economist,
202–418–5911, skane@cftc.gov, Three
Lafayette Centre, 1155 21st Street NW.,
Washington, DC 20581.
SUMMARY:
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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.
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
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).
6 Residual Interest Deadline for Futures
Commission Merchants, Notice of Proposed
Rulemaking, 79 FR 68148 (Nov. 14, 2014)
(amending 17 CFR part 1).
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Deadline 7 at 6 p.m. Eastern Time,
unless the Commission takes further
action via rulemaking.
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.
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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.
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
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.
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, https://comments.cftc.gov/
PublicComments/CommentList.aspx?id=1537.
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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
10 7
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U.S.C. 19(a).
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determinations with respect to the
section 15(a) factors.
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
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the public roundtable, as well as an
opportunity to receive and evaluate
additional public comment on any
proposed rule change.
V. Related Matters
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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.
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
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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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
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).
2. In § 1.22, revise paragraphs
(c)(5)(iii)(B) and (C) to read as follows:
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§ 1.22 Use of futures customer funds
restricted.
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(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.
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15509
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
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Federal Register / Vol. 80, No. 56 / Tuesday, March 24, 2015 / Rules and Regulations
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
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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 margindeficit 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—
PO 00000
Frm 00008
Fmt 4700
Sfmt 4700
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
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 63
[EPA–HQ–OAR–2009–0234; FRL–9923–98–
OAR]
RIN 2060–AS39
National Emission Standards for
Hazardous Air Pollutants: Coal- and
Oil-Fired Electric Steam Generating
Units
Environmental Protection
Agency (EPA).
AGENCY:
E:\FR\FM\24MRR1.SGM
24MRR1
Agencies
[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]
=======================================================================
-----------------------------------------------------------------------
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, tsmith@cftc.gov; Jennifer Bauer, Special
Counsel, 202-418-5472, jbauer@cftc.gov; Joshua Beale, Attorney-Advisor,
202-418-5446, jbeale@cftc.gov, 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, krobbins@cftc.gov, Three Lafayette Centre,
1155 21st Street NW., Washington, DC 20581.
Office of the Chief Economist: Stephen Kane, Research Economist,
202-418-5911, skane@cftc.gov, 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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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,
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1537.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\10\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\11\ 5 U.S.C. 601 et seq.
\12\ 47 FR 18618 (Apr. 30, 1982).
\13\ Id. at 18619.
\14\ Id.
---------------------------------------------------------------------------
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