Derivatives Clearing Organization Risk Management Regulations To Account for the Treatment of Separate Accounts by Futures Commission Merchants, 22934-22955 [2023-06248]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 88, Number 72 (Friday, April 14, 2023)]
[Proposed Rules]
[Pages 22934-22955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-06248]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 39

RIN 3038-AF21


Derivatives Clearing Organization Risk Management Regulations To 
Account for the Treatment of Separate Accounts by 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 amend its derivatives clearing organization (DCO) risk 
management regulations adopted under the Commodity Exchange Act (CEA) 
to permit futures commission merchants (FCMs) that are clearing members 
(clearing FCMs) to treat the

[[Page 22935]]

separate accounts of a single customer as accounts of separate entities 
for purposes of certain Commission regulations. The proposed amendments 
would establish the conditions under which a DCO may permit such 
separate account treatment.

DATES: Comments must be received on or before June 13, 2023.

ADDRESSES: You may submit comments, identified by RIN 3038-AF21, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     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: 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 https://comments.cftc.gov. 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 Sec.  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 https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel, 
Division of Clearing and Risk, at 202-418-5092 or [email protected], 
or Daniel O'Connell, Special Counsel, Division of Clearing and Risk, at 
202-418-5583 or [email protected], at the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 
20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. The Commission's Customer Funds Protection Regulations
    B. The Divisions' No-Action Position
II. Proposed Amendments to Regulation Sec.  39.13
    A. Overview of Proposed Regulation Sec.  39.13(j)
    B. Proposed Regulation Sec.  39.13(j)(1)
    C. Proposed Regulation Sec.  39.13(j)(2)
    D. Proposed Regulation Sec.  39.13(j)(3)
    E. Proposed Regulation Sec.  39.13(j)(4)
    F. Proposed Regulation Sec.  39.13(j)(5) through (10)
    G. Proposed Regulation Sec.  39.13(j)(11)
    H. Proposed Regulation Sec.  39.13(j)(12)
    I. Proposed Regulation Sec.  39.13(j)(13)
    J. Proposed Regulation Sec.  39.13(j)(14)
III. Cost Benefit Considerations
    A. Statutory and Regulatory Background
    B. Consideration of the Costs and Benefits of the Commission's 
Action
    C. Costs and Benefits of the Commission's Action as Compared to 
Alternatives
    D. Section 15(a) Factors
IV. Related Matters
    A. Antitrust Considerations
    B. Regulatory Flexibility Act
    C. Paperwork Reduction Act

I. Background

A. The Commission's Customer Funds Protection Regulations

    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.\1\ The Commission has promulgated a number of 
regulations in furtherance of those objectives, including regulations 
designed to ensure that clearing 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, these 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.
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    \1\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
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    Section 4d(a)(2) of the CEA and Commission regulation Sec.  1.20(a) 
require an FCM to separately account for and segregate all money, 
securities, and property which it has received to margin, guarantee, or 
secure the trades or contracts of its commodity customers.\2\ 
Additionally, section 4d(a)(2) of the CEA and Commission regulation 
Sec.  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.\3\ 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.\4\ Section 4d(a)(2) of the CEA and Commission 
regulations Sec. Sec.  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 deficits to prevent the FCM from being induced to use one 
customer's funds to margin or carry another customer's trades or 
contracts.\5\
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    \2\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20(a).
    \3\ 7 U.S.C. 6d(a)(2); 17 CFR 1.22(a).
    \4\ Prohibition of Guarantees Against Loss, 46 FR 11668, 11669 
(Feb. 10, 1981).
    \5\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20; 17 CFR 1.22; Prohibition of 
Guarantees Against Loss, 46 FR at 11669.
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    Section 5b of the CEA,\6\ as amended by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010,\7\ 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.\8\ 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 in 
order to mitigate the risk that such clearing members pose to the DCO. 
Specifically, regulation Sec.  39.13(g)(8)(iii) provides that a DCO 
shall require its clearing members to ensure that their customers do 
not withdraw funds from their accounts with such clearing members 
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 the products 
or portfolios in the customer's account, which are cleared by the 
DCO.\9\ Regulation Sec.  39.13(g)(8)(iii) was designed to mitigate the 
risk that a clearing member fails to hold, from a customer, funds 
sufficient to cover the required initial margin for the customer's 
cleared positions, and, in light of the use of omnibus margin accounts, 
mitigate the likelihood that the clearing member will effectively cover 
one customer's margin shortfall using another customer's funds.
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    \6\ 7 U.S.C. 7a-1(b).
    \7\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \8\ 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).
    \9\ 17 CFR 39.13(g)(8)(iii).
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    In adopting regulation Sec.  39.13(g)(8)(iii), the Commission

[[Page 22936]]

stated \10\ that the regulation was consistent with the definition of 
``Margin Funds Available for Disbursement'' in the Margins Handbook 
\11\ prepared by the Joint Audit Committee (JAC), a representative 
committee of U.S. futures exchanges and the National Futures 
Association (NFA).\12\ The Commission noted that while designated self-
regulatory organizations (DSROs) reviewed FCMs to determine whether 
they appropriately prohibited their customers from withdrawing funds 
from their futures accounts, it was unclear to what extent that 
requirement applied to cleared swap accounts when such swaps were 
executed on a designated contract market that participated in the 
JAC.\13\ The Commission also noted that clearing members that cleared 
only swaps that were executed on a swap execution facility were not 
subject to the requirements of the JAC Margins Handbook or review by a 
DSRO.\14\ Thus, regulation Sec.  39.13(g)(8)(iii) was also designed to 
provide certainty as to the scope of these risk mitigation and customer 
protection standards as they relate to futures and swap positions 
carried in customer accounts by clearing members and cleared by a DCO.
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    \10\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69379.
    \11\ JAC Margins Handbook, available at https://www.jacfutures.com/jac/MarginHandBookWord.aspx.
    \12\ Joint Audit Committee, JAC Members, available at https://www.jacfutures.com/jac/Members.aspx. Self-regulatory organizations, 
such as commodity exchanges and registered futures associations 
(e.g., NFA), enforce minimum financial and reporting requirements, 
among other responsibilities, for their members. See Commission 
regulation Sec.  1.3, 17 CFR 1.3. Pursuant to Commission regulation 
Sec.  1.52(d), when an FCM is a member of more than one self-
regulatory organization, the self-regulatory organizations may 
decide among themselves which of them will assume primary 
responsibility for these regulatory duties and, upon approval of 
such a plan by the Commission, the self-regulatory organization 
assuming such primary responsibility will be appointed the 
designated self-regulatory organization for the FCM. 17 CFR 1.52(d).
    \13\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69379.
    \14\ Id.
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B. The Divisions' No-Action Position

    On July 10, 2019, the Division of Swap Dealer and Intermediary 
Oversight (DSIO) (now Market Participants Division (MPD)) and the 
Division of Clearing and Risk (DCR) published CFTC Letter No. 19-17, 
which, among other things, provides guidance with respect to the 
processing of margin withdrawals under regulation Sec.  
39.13(g)(8)(iii) and announced a conditional and time-limited no-action 
position for certain such withdrawals.\15\ The advisory followed 
discussions with and written representations from the Asset Management 
Group of the Securities Industry and Financial Markets Association 
(SIFMA-AMG), the Chicago Mercantile Exchange (CME), the Futures 
Industry Association (FIA), the JAC, and several FCMs, regarding 
practices among FCMs and their customers related to the handling of 
separate accounts of the same customer.\16\ CFTC Letter No. 19-17 used 
the term ``beneficial owner'' synonymously with the term ``customer,'' 
as ``beneficial owner'' was, in this context, commonly used to refer to 
the customer that is financially responsible for an account. 
Additionally, as discussed further below, in the customer relationship 
context, FCMs often deal directly with a commodity trading advisor 
acting as an agent of the customer rather than the customer itself. For 
the avoidance of confusion (e.g., with regard to the terms ``owner'' or 
``ownership,'' as those terms are used in Forms 40 and 102, or parts 
17-20, or with regard to the term ``beneficial owner,'' as that term 
may be used by other agencies), this proposed rulemaking uses only the 
term ``customer.''
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    \15\ CFTC Letter No. 19-17, July 10, 2019, available at https://www.cftc.gov/csl/19-17/download as extended by CFTC Letter No. 20-
28, Sept. 15, 2020, available at https://www.cftc.gov/csl/20-28/download; CFTC Letter No. 21-29, Dec. 21, 2021, available at https://www.cftc.gov/csl/21-29/download; and CFTC Letter No. 22-11, Sept. 
15, 2022, available at https://www.cftc.gov/csl/22-11/download.
    \16\ SIFMA-AMG letter dated June 7, 2019 to Brian A. Bussey and 
Matthew B. Kulkin (SIFMA-AMG Letter); CME letter dated June 14, 2019 
to Brian A. Bussey and Matthew B. Kulkin (CME Letter); and FIA 
letter dated June 26, 2019 to Brian A. Bussey and Matthew B. Kulkin 
(First FIA Letter).
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    The written representations preceding the issuance of CFTC Letter 
No. 19-17 included letters filed separately by SIFMA-AMG, CME, and FIA 
(collectively, the ``Industry Letters'').\17\ Citing regulation Sec.  
39.13(g)(8)(iii)'s requirements related to the withdrawal of customer 
initial margin, and JAC Regulatory Alert #19-02 reminding FCMs of those 
requirements,\18\ SIFMA-AMG and FIA explained that provisions in 
certain FCM customer agreements provide that certain accounts carried 
by the FCM that have the same customer are treated as accounts for 
different legal entities (i.e., ``separate accounts'').\19\
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    \17\ The Commission notes that while CME disagreed with certain 
aspects of FIA's letter that fall beyond the scope of this 
rulemaking, CME's letter noted that CME was ``amenable to the 
Commission amending Rule 39.13(g)(8)(iii) to allow a DCO to permit 
a[n] FCM to release excess funds from a customer's separate account 
notwithstanding an outstanding margin call in another account of the 
same customer provided that certain specified risk-mitigating 
conditions . . . are satisfied.'' CME Letter.
    \18\ JAC, Regulatory Alert #19-02, May 14, 2019, available at 
https://www.jacfutures.com/jac/jacupdates/2019/jac1902.pdf.
    \19\ SIFMA-AMG Letter; First FIA Letter.
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    As FIA explained, there are a variety of reasons why a customer may 
want separate treatment for its accounts under such an agreement.\20\ 
For instance, an institutional customer, such as an investment or 
pension fund, may allocate assets to investment managers under 
investment management agreements that require each investment manager 
to invest a specified portion of the customer's assets under management 
in accordance with an agreed trading strategy, independent of the 
trading that may be undertaken for the customer by the same or other 
investment managers acting on behalf of other accounts of the 
customer.\21\ In such a situation, an investment manager may, in order 
to implement their trading strategy effectively, want assurance that 
the portion of funds they have been given to manage is entirely 
available to them, and will not be affected by the activities of other 
investment managers who manage other portions of the customer's assets. 
Additionally, a commercial enterprise may establish separate agreements 
to leverage specific broker expertise on products or to diversify risk 
management strategies.\22\ In such cases, each separate account is 
subject to a separate customer agreement, which the FCM negotiates 
directly with, in many cases, the customer's agent, which often will be 
an investment manager.\23\
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    \20\ First FIA Letter.
    \21\ See id.
    \22\ Id.
    \23\ Cf. id.
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    SIFMA-AMG and FIA asserted that, subject to appropriate FCM 
internal controls and procedures, separate accounts should be treated 
as separate legal entities for purposes of regulation Sec.  
39.13(g)(8)(iii); i.e., separate accounts should not be combined when 
determining an account's margin funds available for disbursement.\24\ 
SIFMA-AMG and FIA maintained that such separate account treatment 
should not be expected to expose an FCM to any greater regulatory or 
financial risk, and asserted that an FCM's internal controls and 
procedures could be designed to assure that the FCM does not undertake 
any additional risk as to the separate account.\25\ The Industry 
Letters included a number of examples of such controls and 
procedures.\26\
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    \24\ SIFMA-AMG Letter; First FIA Letter.
    \25\ SIFMA-AMG Letter; First FIA Letter.
    \26\ SIFMA-AMG Letter; First FIA Letter; CME Letter.
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    In its letter, SIFMA-AMG suggested that it would be possible to 
allow for

[[Page 22937]]

separate account treatment without undermining the risk mitigation and 
customer protection goals of regulation Sec.  39.13(g)(8)(iii).\27\ 
SIFMA-AMG recognized that there may be some instances, such as a 
customer default, in which separate account treatment would no longer 
be appropriate.\28\ SIFMA-AMG stated that an FCM could agree to first 
satisfy any amounts owed from agreed assets related to a separate 
account, and continue to release funds until the FCM provided the 
separate account with a notice of an event of default under the 
applicable clearing account agreement, and determined that it is no 
longer prudent to continue to separately margin the separate accounts, 
provided that such actions are consistent with the FCM's written 
internal controls and procedures.\29\ SIFMA-AMG further stated that, in 
such instance, the FCM would retain the ability to ultimately look to 
funds in other accounts of the customer, including accounts under 
different control, and the right to call the customer for funds.\30\ 
CME similarly asserted that disbursements on a separate account basis 
should not be permitted in certain circumstances, such as financial 
distress, that fall outside the ``ordinary course of business.'' \31\ 
While CME asserted that the plain language of regulation Sec.  
39.13(g)(8)(iii) unambiguously forbids disbursements on a separate 
account basis, CME noted that it would be amenable to the Commission 
amending the regulation to permit such disbursements, subject to 
certain such risk-mitigating conditions.\32\
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    \27\ SIFMA-AMG Letter.
    \28\ Id.
    \29\ Id.
    \30\ Id.
    \31\ CME Letter.
    \32\ Id.
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    SIFMA-AMG and FIA requested that DCR confirm that it would not 
recommend that the Commission initiate an enforcement action against a 
DCO that permits its clearing FCMs to treat certain separate accounts 
as accounts of separate entities for purposes of regulation Sec.  
39.13(g)(8)(iii),\33\ and confirm that a clearing FCM may release 
excess funds from a separate customer account notwithstanding an 
outstanding margin call in another account of the same customer.\34\
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    \33\ FIA specifically noted that such a no-action position could 
be conditioned on the FCM maintaining certain internal controls and 
procedures.
    \34\ SIFMA-AMG Letter; First FIA Letter; see also CME Letter.
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    In CFTC Letter No. 19-17, DCR stated that, in the context of 
separate accounts, the risk management goals of regulation Sec.  
39.13(g)(8)(iii) may effectively be addressed if a clearing FCM 
carrying a customer with separate accounts meets certain conditions, 
which were derived from the Industry Letters and specified in CFTC 
Letter No. 19-17.\35\ DCR stated that it would not recommend that the 
Commission take enforcement action against a DCO if the DCO permits its 
clearing FCMs to treat certain separate accounts as accounts of 
separate entities for purposes of regulation Sec.  39.13(g)(8)(iii) 
subject to these conditions.\36\ The no-action position extended until 
June 30, 2021, in order to provide DCR with time to recommend, and the 
Commission with time to determine whether to conduct and, if so, 
conduct, a rulemaking to implement a permanent solution.\37\ CFTC 
Letter No. 20-28, published on September 15, 2020, extended the no-
action position until December 31, 2021 due to challenges presented by 
the COVID-19 pandemic.\38\ CFTC Letter No. 20-28 stated that if the 
process to consider codifying the no-action position provided for by 
CFTC Letter No. 19-17 was not completed by that date, DSIO and DCR 
would consider further extending the no-action position.\39\ MPD and 
DCR published CFTC Letter No. 21-29, further extending the no-action 
position until September 30, 2022.\40\ On September 15, 2022, MPD and 
DCR published CFTC Letter No. 22-11, which further extended the no-
action position until the earlier of September 30, 2023 or the 
effective date of any final Commission action relating to regulation 
Sec.  39.13(g).\41\ As with CFTC Letter No. 21-29, this latest 
extension was issued in order to provide additional time for the 
Commission to consider a rulemaking.
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    \35\ CFTC Letter No. 19-17.
    \36\ Id.
    \37\ Id.
    \38\ CFTC Letter No. 20-28.
    \39\ Id.
    \40\ CFTC Letter No. 21-29.
    \41\ CFTC Letter No. 22-11.
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II. Proposed Amendments to Regulation Sec.  39.13

    The Commission preliminarily believes that proposed regulation 
Sec.  39.13(j) relating to separate account treatment in connection 
with the withdrawal of customer initial margin is consistent with the 
customer protection and risk management goals of regulation Sec.  
39.13(g)(8)(iii). As further described below, the Commission 
preliminarily believes that preventing the under-margining of customer 
accounts and mitigating the risk of a clearing member default (and the 
potential for systemic risk), is effectively addressed by the standards 
set forth in the proposed regulation where the clearing FCM treats the 
separate accounts of a customer as accounts of separate entities 
consistent with the conditions outlined in proposed regulation Sec.  
39.13(j).

A. Overview of Proposed Regulation Sec.  39.13(j)

    The Commission proposes to amend regulation Sec.  39.13 to add new 
paragraph (j) allowing a DCO to permit a clearing FCM to treat the 
separate accounts of customers as accounts of separate entities for 
purposes of regulation Sec.  39.13(g)(8)(iii), if such clearing 
member's written internal controls and procedures permit it to do so, 
and the DCO requires its clearing members to comply with conditions 
specified in proposed regulation Sec.  39.13(j)(1) through (14), which 
are substantially similar to the conditions specified in CFTC Letter 
No. 19-17.\42\ Those conditions are in turn designed to ensure that 
clearing FCMs (i) carry out such separate account treatment in a 
consistent and documented manner; (ii) monitor customer accounts on a 
separate and combined basis; (iii) identify and act upon instances of 
financial or operational distress that necessitate a cessation of 
separate account treatment; (iv) provide appropriate disclosures to 
customers regarding separate account treatment; and (v) apprise their 
DSROs when they apply separate account treatment or an event has 
occurred that would necessitate cessation of separate account 
treatment. The Commission believes that separate account treatment, 
subject to these conditions, is consistent with Core Principle D. In 
addition, the Commission notes that nothing in this proposed 
rulemaking, or in proposed regulation Sec.  39.13(j), would preclude a 
DCO from establishing or enforcing requirements for clearing FCMs that 
are additional to or more stringent than those set forth in the 
proposed regulation. Rather, proposed regulation Sec.  39.13(j) is 
intended to establish a minimum set of risk-mitigating

[[Page 22938]]

conditions that DCOs that wish to permit separate account treatment 
must require of their clearing FCMs that choose to engage in such 
treatment.
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    \42\ CFTC Letter No. 19-17 conditioned the no-action position 
with regard to the treatment of separate accounts on 16 enumerated 
conditions. Proposed regulation Sec.  39.13(j) incorporates 
conditions 15 and 16 in CFTC Letter No. 19-17, regarding, 
respectively, (i) the clearing member's notification to its DSRO and 
DCOs of which it is a clearing member of the application of separate 
account treatment; and (ii) the clearing member's maintenance of a 
list of all separate accounts, as proposed regulation Sec.  
39.13(j)(14)(ii) and (iii), respectively.
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    Proposed regulation Sec.  39.13(j) is intended to provide an 
alternative means of achieving the risk management goals served by 
regulation Sec.  39.13(g)(8)(iii). As a result, proposed regulation 
Sec.  39.13(j) would not prohibit the application of portfolio 
margining or cross-margining treatment within a particular separate 
account. The Commission notes that because a number of clearing FCMs 
already comply with the conditions set forth in CFTC Letter No. 19-17, 
such clearing FCMs already comply in significant part with the 
requirements of proposed regulation Sec.  39.13(j), which, if adopted, 
DCOs choosing to permit separate account treatment would be required to 
apply to such clearing FCMs.
    Regulation Sec.  39.13(g)(8)(iii) applies to margin in a customer's 
account with respect to all products and swap portfolios held in such 
customer's account which are cleared by the derivatives clearing 
organization (emphasis added). Accordingly, the requirements of 
regulation Sec.  39.13(g)(8)(iii) apply to a DCO \43\ with respect to 
the clearing of (a) futures, (b) swaps, or (c) foreign futures or 
foreign options subject to Commission regulation Sec.  30.7, to the 
extent the DCO clears those specific products in a customer's account. 
Additionally, because the requirements of proposed regulation Sec.  
39.13(j) are an alternative means to achieve the risk management goals 
of regulation Sec.  39.13(g)(8)(iii), the requirements of proposed 
regulation Sec.  39.13(j) would apply to a DCO with respect to the 
clearing of futures, swaps, or foreign futures or foreign options 
subject to regulation Sec.  30.7, to the extent the DCO permits 
separate account treatment and clears those specific types of products 
in a customer account subject to separate account treatment.
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    \43\ This discussion does not apply to a DCO regulated pursuant 
to subpart D of part 39.
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    For example, if a DCO that permits separate account treatment 
clears only futures contracts (or only futures and swaps), regulation 
Sec.  39.13(g)(8)(iii) (and the alternative path in proposed regulation 
Sec.  39.13(j)) would apply to the DCO only with respect to the 
clearing by its members of such futures contracts (or, respectively, 
such futures and swaps). Similarly, if a DCO clears foreign futures or 
foreign options subject to regulation Sec.  30.7, regulation Sec.  
39.13(g)(8)(iii) (and the alternative path in proposed regulation Sec.  
39.13(j)) would apply to that DCO with respect to the clearing by its 
member of such 30.7 contracts.
    As a practical matter, an FCM's futures account for a customer 
includes all futures products that the FCM clears for that customer, 
and the initial margin requirement for that account would be the sum of 
the initial margin the FCM charges the customer for each of those 
contracts (including, e.g., effects of portfolio margining), regardless 
of the DCO at which such contracts are cleared. The margin value 
available--``net liquidating value plus the margin deposits 
remaining''--is calculated across the account. Thus, by way of example, 
a customer whose account contains products cleared by an FCM as a 
clearing member at two DCOs could generally not be under-margined with 
respect to products cleared at only one of the two DCOs. Rather, since 
the margin value available collateralizes the products cleared at both 
DCOs, the customer would necessarily be under-margined with respect to 
products cleared at both DCOs, or at neither DCO.\44\
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    \44\ There may be slight complications if, e.g., for certain of 
the collateral posted by the customer, one DCO requires the FCM to 
apply higher haircuts than the other DCO.
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    The same applies, mutatis mutandis, to a customer's swap portfolios 
cleared through the FCM at multiple DCOs. It would also apply, mutatis 
mutandis, to a customer's foreign futures or foreign options subject to 
regulation Sec.  30.7 cleared through the FCM at multiple 
clearinghouses, with a slight modification: If all of those foreign 
futures or foreign options are cleared at a clearinghouse that is not 
registered with the Commission as a DCO (or is so registered, but only 
subject to subpart D of part 39), then there would be no DCO subject to 
Sec.  39.13(g)(8)(iii) that would be required to apply that regulation 
to the FCM. However, if any of those foreign futures or foreign options 
are cleared by the FCM as a clearing member of a DCO registered with 
the Commission (other than one registered subject to subpart D), then 
that DCO would be required to apply Sec.  39.13(g)(8)(iii), or, if 
adopted, the alternative in proposed Sec.  39.13(j), and (because 
margin requirements apply across the customer's account, here, a Sec.  
30.7 account) the margin requirement that would need to be met would 
take into account all such foreign futures and foreign options, 
regardless of the clearinghouse at which they ultimately are cleared.
    Clearing FCMs are additionally bound by the rules of DCOs and/or 
self-regulatory organizations (SROs), and such entities have taken the 
position that such rules apply to a broader set of circumstances than 
Sec.  39.13(g)(8)(iii). For example, the JAC Margins Handbook, the 
provisions of which SROs may apply directly to FCMs, contains 
provisions that regulation Sec.  39.13(g)(8)(iii) was based on.\45\ The 
JAC Margins Handbook provides that ``[a]ll identically owned accounts 
must be combined for purposes of determining the amount of funds 
available for disbursement within the account classifications of 
customer segregated, customer secured, or nonsegregated.'' \46\ The JAC 
Margins Handbook further provides that an FCM may not make a 
disbursement to a customer if the value of such customer's combined 
accounts, less required margin on open positions in such accounts, is 
zero or negative.\47\ Therefore the JAC Margins Handbook effectively 
calls for each FCM to ensure that its customers, including customers 
holding accounts subject to regulation Sec.  30.7 (30.7 customers), do 
not withdraw funds from their accounts with such FCM unless the net 
liquidating value plus the margin deposits remaining in the applicable 
customer's account after the withdrawal is sufficient to meet the 
customer's margin requirements with respect to the products or 
portfolios in the customer's account.
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    \45\ See supra n. 11 and accompanying text.
    \46\ JAC Margins Handbook at 10-2, available at https://www.jacfutures.com/jac/MarginHandBookWord.aspx.
    \47\ Id.
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    The JAC issued Regulatory Alert 19-06 to effectively incorporate 
the no-action position provided by CFTC Letter 19-17 to the provisions 
of the JAC Margins Handbook as it relates to 30.7 customer 
accounts.\48\ Specifically, Regulatory Alert 19-06 provides that, 
notwithstanding the restrictions contained in the JAC Margins Handbook, 
FCMs may apply CFTC Letter No. 19-17, including the appropriate 
conditions, to the separate accounts of 30.7 customers in determining 
margin funds available for disbursement.\49\
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    \48\ JAC, Regulatory Alert #19-06, Aug. 28, 2019, available at 
https://www.jacfutures.com/jac/jacupdates/2019/jac1906.pdf.
    \49\ Id. at 2. The JAC subsequently issued Regulatory Alert 20-
02 extending the relief for withdrawals from separate 30.7 customer 
accounts under the JAC Margins Handbook to the earlier of the 
termination of the no-action position provided by CFTC Staff Letters 
or to the adoption of a final regulation addressing the withdrawal 
of funds from separate 30.7 customer accounts. JAC, Regulatory Alert 
#20-02, Sept. 23, 2020, available at https://www.jacfutures.com/jacupdates/2020/jac2002.pdf.

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[[Page 22939]]

    Similarly, CME, in Financial and Regulatory Bulletin 19-02,\50\ 
noted that the foregoing provisions of the JAC Margins Handbook apply 
to CME, CBOT, NYMEX, and COMEX Rule 930.F. and CME Rule 8G930.F. 
(Release of Excess Performance Bond), and that ``CME Clearing is 
permitting its FCM clearing members to treat separate accounts of the 
same beneficial owner as separate accounts under Rule 930.F. for 
purposes of determining performance bond funds available for 
disbursement under the conditions of the CFTC Letter.''
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    \50\ Available at https://www.cmegroup.com/notices/clearing/2019/07/FRB-19-02.html.
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Request for Comment
    Question 1: The Commission requests comment regarding whether it 
should consider any conditions additional to those contained in 
proposed regulation Sec.  39.13(j) below, or modify or remove any of 
the conditions proposed herein.
    Question 2: The Commission requests comment regarding whether any 
further action is necessary and appropriate to apply the requirements 
DCOs are required to apply to their clearing members regarding customer 
withdrawal of initial margin under regulation Sec.  39.13(g)(8)(iii) 
and proposed regulation Sec.  39.13(j), directly to non-clearing FCMs 
or to FCMs that carry regulation Sec.  30.7 customer accounts that are 
not cleared at a DCO that is registered with the Commission (or are so 
registered, but only subject to subpart D of part 39) . If so, who 
(e.g., SROs or the Commission) should take such action, and what should 
that action be? Would such actions risk causing actual or potential 
conflicts with the rules or practices of foreign clearing organizations 
or foreign contract markets? If so, please provide references.

B. Proposed Regulation Sec.  39.13(j)(1)

    Proposed regulation Sec.  39.13(j)(1)(i) defines ``separate 
account'' as referring to any one of multiple accounts of the same 
customer that are carried by the same FCM that is a clearing member of 
a DCO. Proposed regulation Sec.  39.13(j)(1) also sets forth the first 
condition: the clearing member may only permit disbursements on a 
separate account basis during the ``ordinary course of business,'' as 
that term is defined therein. Proposed regulation Sec.  39.13(j)(1)(ii) 
provides that, for purposes of proposed regulation Sec.  39.13(j), the 
term ``ordinary course of business'' refers to the standard day-to-day 
operation of the clearing member's business relationship with its 
customer, a condition where there are no unusual circumstances that 
might indicate either an increased level of risk that the customer may 
fail promptly to perform its financial obligations to the clearing FCM, 
or decreased financial resilience on the part of the clearing FCM.
    Consistent with the conditions set forth in CFTC Letter No. 19-17, 
proposed regulation Sec.  39.13(j)(1)(ii)(A) through (I) specifies 
events that are inconsistent with the ordinary course of business. The 
occurrence of such an event would require the clearing member to cease 
permitting disbursements on a separate account basis as to one or more 
specific customers (in the case of (A) through (F) below), or as to all 
customer accounts receiving separate account treatment (in the case of 
(G) through (I) below).\51\ Such events are as follows:
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    \51\ Whether the clearing member would be required to cease 
permitting disbursements on a separate account basis as to one or 
more specific customers or as to all customer accounts receiving 
separate account treatment depends on whether the relevant non-
ordinary course of business event occurs with respect to one or more 
specific customers or with respect to the clearing member itself.
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     (A) The customer, including any separate account of the 
customer, fails to deposit or maintain initial or maintenance margin or 
make payment of variation margin or option premium as specified in 
proposed regulation Sec.  39.13(j)(4).
     (B) The occurrence and declaration by the clearing member 
of an event of default as defined in the account documentation executed 
between the clearing member and the customer.
     (C) A good faith determination by the clearing member's 
chief compliance officer, senior risk managers, or other senior 
management, following the clearing member's own internal escalation 
procedures, that the customer is in financial distress, or there is 
significant and bona fide risk that the customer will be unable 
promptly to perform its financial obligations to the clearing member, 
whether due to operational reasons or otherwise.
     (D) The insolvency or bankruptcy of the customer or a 
parent company of the customer.
     (E) The clearing member receives notification that a board 
of trade, a DCO, an SRO (as defined in Commission regulation Sec.  1.3 
or section 3(a)(26) of the Securities Exchange Act of 1934), the 
Commission, or another regulator with jurisdiction over the customer, 
has initiated an action with respect to the customer based on an 
allegation that the customer is in financial distress.
     (F) The clearing member is directed to cease permitting 
disbursements on a separate account basis, with respect to one or more 
customers, by a board of trade, a DCO, an SRO, the Commission, or 
another regulator with jurisdiction over the clearing member, pursuant 
to, as applicable, board of trade or DCO rules, government regulations, 
or law.
     (G) The clearing member is notified by a board of trade, a 
DCO, an SRO, the Commission, or another regulator with jurisdiction 
over the clearing member,\52\ that the board of trade, the DCO, the 
SRO, the Commission, or other regulator, as applicable, believes the 
clearing member is in financial or other distress.
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    \52\ E.g., the Securities and Exchange Commission, or a foreign 
regulator.
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     (H) The clearing member is under financial or other 
distress, as determined in good faith by its chief compliance officer, 
one of its senior risk managers, or other senior manager.
     (I) The bankruptcy of the clearing member or a parent 
company of the clearing member.
    Proposed regulation Sec.  39.13(j)(1)(iii) provides that the 
clearing member must communicate to its DSRO and any DCO of which it is 
a clearing member the occurrence of any one of the events enumerated in 
proposed regulation Sec.  39.13(j)(1)(ii)(A) through (I). The clearing 
member would need to make such communication promptly in writing, and 
in any case no later than the next business day following the date on 
which the clearing member identifies or is informed that such event has 
occurred.
    Additionally, proposed regulation Sec.  39.13(j)(1)(iv) provides 
that a clearing member that has ceased permitting disbursements on a 
separate account basis as a result of the occurrence of a non-ordinary 
course of business event may resume permitting such disbursements if it 
reasonably believes, based on new information, that the circumstances 
leading it to cease separate account treatment have been cured.\53\ The 
clearing member would be required to provide in writing to its DSRO and 
any DCO of which it is a clearing member a notification that it will 
resume separate account treatment, and the factual basis and rationale 
for its conclusion that the circumstances leading it to originally 
cease separate account treatment have been cured.
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    \53\ If the circumstances in question were an action or 
direction by one of the entities described in paragraphs (E) through 
(G), then the cure of those circumstances would require the 
withdrawal or other appropriate termination of such action or 
direction.
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    In requesting a no-action position, SIFMA-AMG stated that separate 
account treatment should not be

[[Page 22940]]

expected to expose an FCM to any greater regulatory or financial risk, 
and that, subject to appropriate controls and procedures, an FCM could 
agree to release funds from separate accounts until the FCM provides 
the separate account with a notice of default and determines it is no 
longer prudent to continue separate account treatment.\54\ That 
separate account treatment should be discontinued under certain 
circumstances is further reflected in CME's recommendation that 
separate account treatment be permitted only during the ordinary course 
of business. As CME explained, FCMs should maintain the flexibility to 
determine that either the customer or the FCM itself is in distress and 
pause disbursements until the customer's other account can demonstrably 
meet the call to deposit funds.\55\ Similarly, as CME noted, an FCM 
should not be purposely releasing funds to a customer when the 
customer's overall account is in deficit, as doing so may create a 
shortfall in segregated, secured or cleared swaps accounts in the event 
the FCM becomes insolvent.\56\ However, the Commission acknowledges 
that in some instances, an FCM or customer may exit a state of 
financial, operational, or other distress, such that resumption of 
separate account treatment would be appropriate. By explicitly 
providing clearing members with an avenue to resume separate account 
treatment consistent with the resumption of the ordinary course of 
business, while requiring disclosure of the basis for doing so, the 
Commission seeks to incentivize transparency between clearing members 
and their DSROs and DCOs with respect to (a) conditions at clearing 
members or customers that could indicate operational or financial 
distress, and (b) more generally, the risk management program at the 
clearing member.
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    \54\ SIFMA-AMG Letter.
    \55\ CME Letter.
    \56\ Id.
---------------------------------------------------------------------------

    Proposed regulation Sec.  39.13(j)(1) is designed to ensure that 
disbursements are permitted on a separate account basis only during the 
sound and routine operation of the clearing member's business 
relationship with its customer. Certain events signaling financial 
distress of the clearing member or customer are inconsistent with the 
normal operation of the business relationship between the clearing 
member and its customer. The Commission believes that, when such events 
occur--and during the duration of their occurrence--continuing to allow 
DCOs to permit separate account treatment would be contrary to the 
goals of protecting customer funds and mitigating systemic risk.
Request for Comment
    Question 3: The Commission requests comment regarding whether it 
should (i) consider any events beyond those enumerated in proposed 
regulation Sec.  39.13(j)(1)(ii)(A) through (I) as inconsistent with 
the ordinary course of business for purposes of the application of 
proposed regulation Sec.  39.13(j); (ii) change the specification of 
any of the events in proposed regulation Sec.  39.13(j)(1)(ii)(A) 
through (I); or (iii) delete any of those events (because the proposed 
event is not inconsistent with the ordinary course of business).

C. Proposed Regulation Sec.  39.13(j)(2)

    Proposed regulation Sec.  39.13(j)(2) would require that the 
clearing member obtain from the customer or, as applicable, the manager 
of a separate account, information sufficient to (i) assess the value 
of the assets dedicated to the separate account and (ii) identify the 
direct or indirect parent company of the customer, as applicable, if 
the customer has a direct or indirect parent company.\57\ Proposed 
regulation Sec.  39.13(j)(2)(i) is intended to ensure that clearing 
members have visibility with respect to customers' financial resources 
appropriate to ensure that a customer's separate account is adequately 
margined, and to identify when a customer's financial circumstances 
would necessitate the cessation of separate account treatment. Proposed 
regulation Sec.  39.13(j)(2)(i) contemplates that, in certain 
instances, an investment manager may manage one or more accounts under 
power of attorney on a customer's behalf; in such cases, a clearing 
member may obtain the requisite financial information from the 
investment manager. Proposed regulation Sec.  39.13(j)(2)(ii) is 
intended to ensure that clearing members have sufficient information to 
identify the direct or indirect parent company of a customer so that 
they may identify when a parent company of a customer has become 
insolvent, for purposes of proposed regulation Sec.  
39.13(j)(1)(ii)(D).
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    \57\ The Commission understands that, in certain cases, such as 
when a customer is a fund, the customer may not have a parent 
company. In such cases, the requirement to obtain information 
sufficient to identify the direct or indirect parent company would 
not apply.
---------------------------------------------------------------------------

Request for Comment
    Question 4: The Commission requests comment on whether proposed 
regulation Sec.  39.13(j)(2) should require a clearing member to obtain 
from a customer or, as applicable, the manager of a separate account, 
any specific information or documentation relevant to determining the 
value of assets dedicated to a separate account, or, more broadly, any 
information relevant to determining the value of assets available to 
meet the obligations of the customer's accounts on a combined basis. 
The Commission further requests comment on whether it should prescribe 
a minimum requirement of how often such information should be obtained 
and/or updated.

D. Proposed Regulation Sec.  39.13(j)(3)

    Proposed regulation Sec.  39.13(j)(3) provides that the clearing 
member's internal risk management policies and procedures must provide 
for stress testing and credit limits for customers with separate 
accounts. Furthermore, proposed regulation Sec.  39.13(j)(3) provides 
that stress testing must be performed, and credit limits must be 
applied, both on an individual separate account and on a combined 
account basis. By conducting stress testing on both an individual 
separate account and on a combined account basis, a clearing member can 
determine the potential for significant loss in the event of extreme 
market conditions, and the ability of traders and clearing members to 
absorb those losses, with respect to each individual account of a 
customer, as well as with respect to all of the customer's 
accounts.\58\ Additionally, by applying credit limits on both an 
individual separate account basis and on a combined account basis, a 
clearing member can be in a better position to manage the financial 
risks they incur as a result of clearing trades both for a customer's 
separate account and for all of the customer's accounts.\59\ By better 
managing the financial risks posed by customers and understanding the 
extent of customers' risk exposures, clearing members can better 
mitigate the risk that customers do not maintain sufficient funds to 
meet initial margin requirements, and anticipate and mitigate the risk 
of the occurrence of

[[Page 22941]]

certain of the events detailed in proposed regulation Sec.  
39.13(j)(1)(ii)(A)-(I), such as a customer's failure to make margin 
payments as specified by proposed regulation Sec.  39.13(j)(4).
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    \58\ See 17 CFR 1.73(a)(4) (requiring each FCM that is a 
clearing member of a DCO to conduct stress tests under extreme but 
plausible conditions of all positions in the proprietary account and 
in each customer account that could pose material risk to the FCM at 
least once per week); see also Customer Clearing Documentation, 
Timing of Acceptance for Clearing, and Clearing Member Risk 
Management, 77 FR 217278, 21289 (Apr. 9, 2012).
    \59\ See 17 CFR 1.73(a)(1) (requiring clearing FCMs to establish 
risk-based limits in the proprietary account, and in each customer 
account, based on position size, order size, margin requirements, or 
similar factors); see also Customer Clearing Documentation, Timing 
of Acceptance for Clearing, and Clearing Member Risk Management, 77 
FR at 21287.
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E. Proposed Regulation Sec.  39.13(j)(4)

    Proposed regulation Sec.  39.13(j)(4) provides that each separate 
account must be on a one business day margin call, subject to certain 
requirements that apply solely for purposes of that proposed 
regulation. Providing for a ``one business day margin call,'' as 
defined in this paragraph, ensures that margin shortfalls are timely 
corrected, and a customer's inability to meet a margin call is timely 
identified. However, in certain circumstances, it may be impracticable 
for payments to be received on a same-day basis due to the mechanics of 
international payment systems. In proposing requirements to define 
timely payment of margin for purposes of the standard set forth in 
proposed regulation Sec.  39.13(j)(4), the Commission's goal is to 
establish requirements that reflect industry best practices among DCOs, 
clearing members, and customers.
    Specifically, the Commission understands that, while margin calls 
made in the morning in the U.S. Eastern Time Zone are typically capable 
of being met on a same-day basis when margin is paid in United States 
dollars (USD) and Canadian dollars (CAD), the operation of time zones 
and banking conventions in other jurisdictions may necessitate 
additional time when margin is paid in other currencies. For example, 
the Commission understands that margin paid in Japanese yen (JPY) is 
typically received two business days after a margin call is issued, and 
margin paid in British pounds (GBP), euros (EUR), and other non-USD/
CAD/JPY currencies is typically received one business day after a 
margin call is issued.
    Proposed regulation Sec.  39.13(j)(4)(i) provides that, subject to 
certain exceptions, discussed below, a ``one business day margin call'' 
(as that term used in proposed regulation Sec.  39.13(j)(4)), issued by 
11:00 a.m. Eastern Time (ET) on a United States business day,\60\ must 
be met by the applicable customer by the close of the Fedwire Funds 
Service \61\ on the day on which it is issued. A margin call issued 
after 11:00 a.m. ET on a United States business day, or on a Saturday, 
Sunday, or a Federal holiday, would be considered to have been issued 
before 11:00 a.m. ET on the next day that is a United States business 
day. The Commission proposes that a clearing member be prohibited from 
contractually agreeing to delay calling for margin until after 11:00 
a.m. ET on any given United States business day, and from engaging in 
practices that are designed to circumvent proposed regulation Sec.  
39.13(j)(4) by causing such delay.\62\ Additionally, the Commission 
proposes, in proposed regulation Sec.  39.13(j)(4)(vi), that a clearing 
member would not be in compliance with the requirements of proposed 
regulation Sec.  39.13(j)(4) if it contractually agrees to provide for 
a period of time to meet margin calls that extends beyond the time 
periods specified in proposed regulation Sec.  39.13(j)(4)(i)-(v) \63\ 
or engages in practices designed to circumvent the requirements of 
proposed regulation Sec.  39.13(j)(4).
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    \60\ The definition of ``United States business day'' is 
discussed below.
    \61\ The Fedwire Funds Service is an electronic funds transfer 
service commonly used for settlement and clearing arrangements. The 
service currently closes at 7:00 p.m. ET. For purposes of the 
Fedwire Funds Service, Federal Reserve Banks observe as holidays all 
Saturdays, all Sundays, and the holidays listed on the Federal 
Reserve Banks' Holiday Schedules. See The Federal Reserve, 
Fedwire[supreg] Funds Service and National Settlement Service 
Operating Hours and FedPayments[supreg] Manager Hours of 
Availability, available at https://www.frbservices.org/resources/financial-services/wires/operating-hours.html. Because the Fedwire 
Funds Service hours of operations may be subject to change, the 
Commission has determined to tie the timeframe to fulfill the one 
business day margin call requirements of proposed regulation Sec.  
39.13(j)(4) to the Fedwire Funds Service's closing rather than an 
absolute time.
    \62\ The clearing member would not be prohibited from making a 
margin call after 11:00 a.m. ET if it deemed it appropriate to do 
so, it simply would be prohibited from contractually agreeing to 
delay making the margin call until after that time (which would have 
the effect of delaying the date on which payment is due).
    \63\ For example, if a clearing FCM and a customer contract for 
a grace or cure period that would operate to make margin due and 
payable later than the deadlines described herein, including a case 
where the FCM would not have the discretion to liquidate the 
customer's positions and/or collateral where margin is not paid by 
such time, such an agreement would be inconsistent with the 
conditions under which such clearing FCM may engage in separate 
account treatment.
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    The Commission proposes this provision in order to make clear that 
it is establishing a maximum period of time in which a margin call must 
be met for purposes of this regulation, rather than establishing a 
minimum time that must be allowed. Proposed regulation Sec.  
39.13(j)(4) would not preclude a clearing member from having customer 
agreements that provide for more stringent margining requirements, or 
applying more stringent margining requirements in appropriate 
circumstances.\64\ Moreover, the statement that these requirements 
apply solely for purposes of this paragraph (j)(4) means that such 
requirements are not intended to apply to any other provision; e.g., 
they are not intended to define when an account is under-margined for 
purposes of Commission regulation Sec.  1.17.
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    \64\ For example, a clearing member (or other contractual) 
requirement that a margin call issued by 12:00 p.m. ET be met by the 
applicable customer by 6:00 p.m. ET on the same day would not be 
inconsistent with proposed regulation Sec.  39.13(j)(4).
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    Conversely, the Commission does not propose to prohibit contractual 
arrangements inconsistent with proposed regulation Sec.  39.13(j)(4). 
However, the clearing member would not be permitted to engage in 
separate account treatment under such arrangements.
    In light of challenges to same-day settlement posed by margining in 
certain currencies, as described above, and in recognition of the 
particular banking conventions around payments in JPY, proposed 
regulation Sec.  39.13(j)(4)(ii) provides that payment of margin in JPY 
shall be considered in compliance with the requirements of proposed 
regulation Sec.  39.13(j)(4) if received by the applicable clearing 
member by 12:00 p.m. ET on the second United States business day after 
the margin call is issued. Furthermore, proposed regulation Sec.  
39.13(j)(4)(iii) provides that payment of margin in fiat currencies 
other than USD, CAD, or JPY shall be considered in compliance with the 
requirements of proposed regulation Sec.  39.13(j)(4) if received by 
the applicable clearing member by 12:00 p.m. ET on the United States 
business day after the day the margin call is issued.\65\ The 
Commission proposes to define ``United States business day'' in 
proposed regulation Sec.  39.13(j)(4)(vii) as meaning weekdays, not 
including Federal holidays as established by 5 U.S.C. 6103. The term 
``United States business day'' is intended to encompass days on which 
banks and custodians are open in the United States to facilitate 
payment

[[Page 22942]]

of margin for clearing members and their customers.\66\
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    \65\ The Commission notes that while it proposes to require that 
a one business day margin call be met by the applicable customer by 
the close of the Fedwire Funds Service on the day it is issued (as 
long as it is issued by 11:00 a.m. ET on a United States business 
day) where margin is paid in USD or CAD, it proposes to require that 
a one business day margin call be received by the applicable 
clearing member by 12:00 p.m. ET on the next United States business 
day after the margin call is issued, where the payment of margin is 
in fiat currencies other than USD, CAD, or JPY, and received by the 
applicable clearing member by 12:00 p.m. ET on the second United 
States business day after the margin call is issued, where the 
payment of margin is in JPY. As discussed above, these distinct 
requirements are intended to account for the lead time required when 
fund transfers are made in non-USD and CAD currencies, and to ensure 
that clearing members are not unduly delayed in collecting margin.
    \66\ As used in proposed regulation Sec.  39.13(j)(4), the term 
``United States business day'' is specifically intended to be 
distinct from the intraday period encompassed by the definition of 
business day in regulation Sec.  39.2.
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    The occurrence of a foreign holiday during which banks are closed 
may also create difficulties in payment of margin in a fiat currency 
other than USD. Therefore, the Commission proposes regulation Sec.  
39.13(j)(4)(iv), which provides that the relevant deadline for payments 
of margin in fiat currencies other than USD may be extended by up to 
one United States business day and still considered in compliance with 
the requirements of proposed regulation Sec.  39.13(j)(4) if payment is 
delayed due to a banking holiday in the jurisdiction of issue of the 
currency in which margin is paid. Where margin is paid in EUR, the 
customer or investment manager managing the separate account may 
designate one country within the Eurozone with which the customer or 
investment manager, as applicable, has the most significant contacts 
for purposes of meeting margin calls, whose banking holidays will be 
referred to for purposes of compliance with the regulation.\67\ 
Proposed regulation Sec.  39.13(j)(4)(iv) is designed to provide 
clearing FCMs with a level of discretion in how they manage risk by 
allowing for limited delays in margin payments due to non-U.S. banking 
conventions. Proposed regulation Sec.  39.13(j)(4)(iv) would not, 
however, require a clearing FCM to extend the deadline for payments of 
margin. Here, the Commission is seeking to allow DCOs to permit their 
members to exercise risk management judgment in balancing, within 
limits, the risk management challenges caused by extending the time 
before a margin call is met with the burdens involved in requiring the 
client or investment manager to prefund potential margin calls in 
advance of the holiday or to arrange to pay margin more promptly in USD 
or another currency not affected by the holiday.
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    \67\ With respect to margin payments in EUR, proposed regulation 
Sec.  39.13(j)(4)(iv) is intended to prevent customers or investment 
managers from leveraging banking holidays in jurisdictions with 
which they have no significant commercial nexus, or in a 
multiplicity of jurisdictions, to circumvent requirements to pay 
margin timely. The Commission requests comment on the practicability 
of this standard below.
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    The Commission expects that clearing FCM risk management decisions, 
including the use of any extension permitted under proposed regulation 
Sec.  39.13(j)(4)(iv), will be made in consideration of a client's risk 
profile, market conditions, and other relevant factors, evaluated at 
the time the risk management decisions are made.\68\
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    \68\ This expectation is consistent with the statement of the 
directors of DCR and DSIO in issuing CFTC Letter No. 19-17. CFTC, 
Statement by the Directors of the Division of Clearing and Risk and 
the Division of Swap Dealer and Intermediary Oversight Concerning 
the Treatment of Separate Accounts of the Same Beneficial Owner, 
Sept. 13, 2019, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/dcrdsiodirectorstatement091319 (``We fully expect 
that DCOs and FCMs and their customers will agree that FCMs must 
retain, at all times, the discretion to determine that the facts and 
circumstances of a particular shortfall are extraordinary and 
therefore necessitate accelerating the timeline and relying on the 
FCM's protocol for liquidation or for accessing funds in the other 
accounts of the beneficial owner held at the FCM.''). See also CFTC 
Letter No. 20-28 (stating the same).
---------------------------------------------------------------------------

    Lastly, in CFTC Letter No. 19-17, staff stated that a failure to 
deposit, maintain, or pay margin or option premium due to 
administrative errors or operational constraints would not constitute a 
failure to timely deposit or maintain initial or variation margin that 
would place a customer out of the ordinary course of business. This 
provision was intended to prevent a clearing FCM from being excluded 
from relying on the no-action position as a result of one-off 
exceptions, such as mis-entered data, a flawed software update, or an 
unusual and unexpected information technology outage (e.g., an 
unanticipated outage of the Fedwire Funds Service). Accordingly, the 
Commission proposes regulation Sec.  39.13(j)(4)(v), which provides 
that a failure to deposit, maintain, or pay margin or option premium 
does not constitute a failure to comply with the requirements of 
proposed regulation Sec.  39.13(j)(4) if such failure is due to unusual 
administrative error or operational constraints that a customer or 
investment manager acting diligently and in good faith could not have 
reasonably foreseen.\69\ Proposed regulation Sec.  39.13(j)(4)(v) 
provides that, for these purposes, a clearing member's determination 
that failure to deposit, maintain, or pay margin or option premium is 
due to such administrative error or operational constraint would be 
based on the clearing member's reasonable belief in light of 
information known to the clearing member, at the time the clearing 
member learns of the relevant administrative error or operational 
constraint.\70\
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    \69\ One would expect that administrative errors at a well-run 
clearing FCM or money manager to be unusual and unforeseen. For the 
avoidance of doubt, ``unforeseen'' refers to the particular 
occurrence of a constraint or error; for example, the fact that some 
small percentage of errors may be foreseen does not mean that any 
particular error is foreseen (and ``unusual'' means that such 
percentage should indeed be small).
    \70\ For purposes of clarity and certainty, the Commission 
proposes to establish this reasonableness standard for a clearing 
member's determination that a failure to timely deposit, maintain, 
or pay margin or option premium on the basis of administrative error 
or operational constraints. The Commission believes the proposed 
standard confers significant discretion upon clearing FCMs to assess 
the disposition of their customers while requiring that clearing 
FCMs act reasonably and on the basis of current and relevant 
information, diligently gathered.
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Request for Comment
    Question 5: The Commission requests comment on whether the 
regulatory framework set forth in proposed regulation Sec.  39.13(j)(4) 
appropriately balances practicability and burden with risk management. 
If not, what alternative approach should be taken? How would such an 
alternative approach better balance those considerations? In 
particular, the Commission requests comment on whether the proposed 
standard of timeliness for a one business day margin call set forth in 
proposed regulation Sec.  39.13(j)(4)(i)-(iii) presents practicability 
challenges and, if so, what those challenges are, and how the proposed 
standard of timeliness could be improved.
    Question 6: With respect to the proposed standard of timeliness for 
a one business day margin call:
    (a) Are there other currencies, besides JPY, where relevant banking 
conventions render payment before the second U.S. business day after a 
margin call is issued impracticable? If so, the Commission requests 
commenters to specifically identify any such currencies, and provide 
specifics about the operational issues involved for each.
    (b) Should the Commission establish a mechanism (e.g., through 
action by Commission order, potentially with authority delegated to the 
Director of the Division of Clearing and Risk, or through action by 
DCOs) to address cases where the taxonomy of which currencies can 
practicably be paid on the same day/first U.S. business day/second U.S. 
business day after a margin call is issued should be changed, due to 
changes in banking conventions or newly discovered information?
    (c) The Commission requests comment on whether, and if so, how, 
proposed regulation Sec.  39.13(j)(4) should explicitly address timing 
of payment of margin in the event of an unscheduled United States 
banking holiday (e.g., due to a national day of mourning).
    (d) The Commission requests comment on whether, and if so, how, 
proposed regulation Sec.  39.13(j) should explicitly address timing of 
payment of margin in the event of scheduled or unscheduled closures of 
United States securities markets.

[[Page 22943]]

    Question 7: With respect to the criteria for extending payment of 
margin in EUR due to a banking holiday in the Eurozone pursuant to 
proposed regulation Sec.  39.13(j)(4)(iv), the Commission requests 
comment on whether, and if so, how, the banking laws of national 
authorities within the Eurozone, operational issues, or other factors 
present practicability challenges to compliance. If commenters believe 
such challenges exist, the Commission seeks comment on whether a 
different standard would be more practicable, while achieving the goal 
of preventing customers or investment managers from claiming an 
extension of time to pay margin due to banking holidays in a 
multiplicity of jurisdictions, or in (a) jurisdiction(s) with which 
such customer or investment manager has no significant commercial 
nexus.
    Question 8: In anticipation of potential developments with respect 
to the use of central bank digital currencies or other digital assets, 
the Commission requests comment on whether and, if so, how, proposed 
regulation Sec.  39.13(j)(4) should explicitly address the timing of 
payment of margin in digital assets.
    Question 9: The Commission requests comment regarding whether there 
are any other international considerations, beyond the time required to 
process payment of margin in different currencies, that the Commission 
should take into account in establishing requirements for compliance 
with the ``one business day'' margin call standard for purposes of 
proposed regulation Sec.  39.13(j)(4). If so, the Commission requests 
comment regarding how proposed regulation Sec.  39.13(j) should be 
modified, if at all, to account for such considerations.

F. Proposed Regulation Sec.  39.13(j)(5)-(10)

    Where a clearing member permits disbursements on a separate account 
basis, it is important that the clearing member treat such accounts as 
separate in a consistent manner. As FIA noted in its June 26, 2019 
letter, customer agreements that provide for separate account treatment 
generally require that a separate account be margined separately from 
any other account maintained for the customer with the FCM, and assets 
held in one separate account should not ordinarily be used to meet or 
offset any obligations of another separate account, including 
obligations that it or another investment manager may have incurred on 
behalf of a different account of the same customer.\71\ FIA observed 
that these restrictions serve to assure the customer, or the asset 
manager responsible for a particular account, that the account will not 
be subject to unanticipated interference that may exacerbate stress on 
a customer's aggregate exposure to the FCM.\72\ Additionally, FIA noted 
that where an FCM treats separate accounts as separate customers for 
risk management purposes, the FCM may manage risk more conservatively 
against the customer under the assumption that the customer has fewer 
assets than it may in fact have.\73\
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    \71\ First FIA Letter.
    \72\ Id.
    \73\ Id.
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    Accordingly, the Commission in proposed regulation Sec.  
39.13(j)(5)-(10) proposes to adopt those conditions in CFTC Letter No. 
19-17 designed to provide for consistent treatment of separate 
accounts. Proposed regulation Sec.  39.13(j)(5)-(10) requires a 
separate account of a customer to be treated separately from other 
separate accounts of the same customer for purposes of certain existing 
computational and recordkeeping requirements, which would otherwise be 
met by treating accounts of the same customer on a combined basis. 
Because accounts subject to proposed regulation Sec.  39.13(j) would be 
risk-managed on a separate basis, the Commission believes it is 
appropriate for the proposed regulation to provide that DCOs that 
permit separate account treatment require that the relevant clearing 
FCMs similarly apply these risk-mitigating computational and 
recordkeeping requirements on a separate account basis. The effect of 
the requirements in these paragraphs is to augment the FCM's existing 
obligations under various provisions of regulation Sec.  1.17.
    Proposed regulation Sec.  39.13(j)(5) provides that the margin 
requirement for each separate account is calculated independently from 
all other separate accounts of the same customer, with no offsets or 
spreads recognized across the separate accounts. A clearing member 
would be required to treat each separate account of a customer 
independently from all other separate accounts of the same customer for 
purposes of computing capital charges for under-margined customer 
accounts in determining its adjusted net capital under regulation Sec.  
1.17. Additionally, proposed regulation Sec.  39.13(j)(6) provides that 
the clearing member must record each separate account independently in 
its books and records. In other words, the clearing member must record 
the balance of each separate account either as a receivable or payable, 
with no offsets between other separate accounts of the same customer. A 
clearing member would be required to treat each separate account of a 
customer independently from all other separate accounts of the same 
customer for purposes of determining whether a receivable from a 
separate account that represents a debit or deficit ledger balance may 
be included in the clearing member's current assets in computing its 
adjusted net capital under regulation Sec.  1.17(c)(2).
    Proposed regulation Sec.  39.13(j)(7) provides that the receivable 
for a debit or deficit from a separate account must only be considered 
a current or allowable asset for purposes of regulation Sec.  
1.17(c)(2) based on the assets of that separate account, and not on the 
assets held in another separate account of the same customer. Proposed 
regulation Sec.  39.13(j)(8) provides that in calculating the amount of 
its own funds it must use to cover debit or deficit balances, the 
clearing member must include any debit or deficit of any separate 
account, and reflect that calculation on the applicable report.
    Proposed regulation Sec.  39.13(j)(9) provides that the clearing 
member must include the margin deficiency of each separate account, and 
cover such deficiency with its own funds, as applicable, for purposes 
of its residual interest and legally segregated operationally 
commingled compliance calculations, as applicable under Commission 
regulations Sec. Sec.  1.22, 22.2, and 30.7. Lastly, proposed 
regulation Sec.  39.13(j)(10) provides that in determining its residual 
interest target for purposes of Commission regulation Sec.  1.23(c), 
the clearing member must calculate customer receivables computed on a 
separate account basis. Currently, Commission regulations require an 
FCM to maintain its own capital, or residual interest, in customer 
segregated accounts in an amount equal to or greater than its 
customers' aggregate under-margined accounts.\74\ Additionally, each 
day, an FCM is required to perform a segregated calculation to verify 
its compliance with segregation requirements. The FCM must file a daily 
electronic report showing its segregation calculation with its DSRO, 
and the DSRO must be provided with electronic access to the FCM's bank 
accounts to verify that the funds are maintained. The FCM must also 
assure its DSRO that when it meets a margin call for customer 
positions, it never uses value provided by one customer to meet another 
customer's

[[Page 22944]]

obligation.\75\ These requirements are intended to prevent FCMs from 
being induced to cover one customer's margin shortfall with another 
customer's excess margin, and allow DSROs to verify that FCMs are not 
in fact doing so. Proposed regulation Sec.  39.13(j)(10) is designed to 
ensure that margin deficiencies are calculated accurately for accounts 
receiving separate treatment, and that such deficiencies are covered 
consistent with existing Commission regulations.
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    \74\ See e.g., 17 CFR 1.22(c)(3); 17 CFR 22.2(f)(6)(iii)(A).
    \75\ See e.g., 17 CFR 22.2(g).
---------------------------------------------------------------------------

G. Proposed Regulation Sec.  39.13(j)(11)

    Proposed regulation Sec.  39.13(j)(11) provides that where the 
customer of separate accounts subject to separate treatment has 
appointed a third party as the primary contact to the clearing member, 
the clearing member must obtain and maintain current contact 
information of an authorized representative at the customer and take 
reasonable steps to verify that such person is in fact an authorized 
representative of the customer. The clearing member would be required 
to review and, if necessary, update such information no less than 
annually. In many cases, an investment manager acts under a power of 
attorney on behalf of a customer, and the FCM has little direct contact 
with the customer. Proposed regulation Sec.  39.13(j)(11) is designed 
to ensure that clearing FCMs have a reliable means of contacting 
customers directly if the investment manager fails to pay promptly.
Request for Comment
    Question 10: The Commission requests comment on whether it should 
prescribe specific steps that a DCO must require a clearing member to 
take to verify the identity of an authorized representative of a 
customer, and if so, what such steps should entail. The Commission 
further requests comment on the potential time and cost burden of such 
steps. Commenters are requested to provide quantitative data where 
available.

H. Proposed Regulation Sec.  39.13(j)(12)

    Proposed regulation Sec.  39.13(j)(12) provides that the clearing 
member must provide each customer using separate accounts with a 
disclosure that, pursuant to part 190 of the Commission's regulations, 
all separate accounts of the customer in each account class will be 
combined in the event of the clearing member's bankruptcy. The 
disclosure statement must be delivered separately to the customer via 
electronic means in writing or in another manner in which the clearing 
member customarily delivers disclosures pursuant to applicable 
Commission regulations, and as permissible under its customer 
documentation. The clearing member must also maintain documentation 
demonstrating that the disclosure statement was delivered directly to 
the customer. The clearing member must also include the disclosure 
statement on its website or within its disclosure documentation, as 
required by Commission regulation Sec.  1.55(i).
    The Bankruptcy Reform Act of 1978 \76\ enacted subchapter IV of 
chapter 7 of the Bankruptcy Code, title 11 of the U.S. Code, to add 
certain provisions designed to afford enhanced protections to commodity 
customer property and protect markets from the reversal of certain 
transfers of money or other property, in recognition of the complexity 
of the commodity business.\77\ The Commission enacted part 190 of its 
regulations, 17 CFR part 190, to implement subchapter IV. Under part 
190, all separate accounts of a customer in an account class will be 
combined in the event of a clearing member's bankruptcy.\78\ The 
Commission proposes to adopt proposed regulation Sec.  39.13(j)(12) so 
that customers receive full and fair disclosure as to the treatment of 
their accounts in a clearing FCM bankruptcy.
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    \76\ Public Law 95-598, 92 Stat. 2549.
    \77\ Bankruptcy, 46 FR 57535, 57535-36 (Nov. 24, 1981)
    \78\ 17 CFR 190.08(b)(2)(i) and (xii) (Aggregate the credit and 
debit equity balances of all accounts of the same class held by a 
customer in the same capacity--Except as otherwise provided in this 
paragraph (b)(2), all accounts that are deemed to be held by a 
person in its individual capacity shall be deemed to be held in the 
same capacity--Except as otherwise provided in this section, an 
account maintained with a debtor by an agent or nominee for a 
principal or a beneficial owner shall be deemed to be an account 
held in the individual capacity of such principal or beneficial 
owner.).
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I. Proposed Regulation Sec.  39.13(j)(13)

    Proposed regulation Sec.  39.13(j)(13) provides that the clearing 
member must disclose in its Disclosure Document required under 
Commission regulation Sec.  1.55(i) that it permits the separate 
treatment of accounts for the same customer. Regulation Sec.  1.55 was 
adopted to ``advise new customers of the substantial risk of loss 
inherent in trading commodity futures.'' \79\ The Commission amended 
regulation Sec.  1.55 in 2013 to, among other things, add new paragraph 
(i) requiring FCMs to disclose to customers all information about the 
FCM, including its business, operations, risk profile, and affiliates, 
that would be material to the customer's decision to entrust funds to 
and otherwise do business with the FCM and that is otherwise necessary 
for full and fair disclosure.\80\ Such disclosures include material 
information regarding specific topics identified in regulation Sec.  
1.55(k), which include a basic overview of customer fund segregation, 
as well as current risk practices, controls, and procedures.\81\ These 
disclosures are designed to enable customers to make informed judgments 
regarding the appropriateness of selecting an FCM and enhance the 
diligence that a customer can conduct prior to opening an account and 
on an ongoing basis.\82\
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    \79\ Adoption of Customer Protection Rules, 43 FR 31886, 31888 
(July 24, 1978).
    \80\ 17 CFR 1.55(i).
    \81\ 17 CFR 1.55(k)(8), (11).
    \82\ Enhancing Protections Afforded Customers and Customer Funds 
Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506, 68564 (Nov. 14, 2013).
---------------------------------------------------------------------------

    The Commission believes that the application of separate account 
treatment for some customers of a clearing FCM, as permitted by a DCO, 
is material to the decision to entrust funds to and otherwise do 
business with the FCM with respect to customers of such FCM generally 
because, in the event that separate account treatment for some 
customers were to contribute to a loss that exceeds the FCM's ability 
to cover, that loss might affect the segregated funds of all of the 
FCM's customers in one or more account classes. Accordingly, the 
Commission proposes regulation Sec.  39.13(j)(13) to ensure that 
customers are apprised of a matter that is relevant to the clearing 
FCM's risk management policies.

J. Proposed Regulation Sec.  39.13(j)(14)

    Proposed regulation Sec.  39.13(j)(14) provides that, to the extent 
the clearing member treats the separate accounts of a customer as 
accounts of separate entities, the clearing member must (i) apply such 
treatment in a consistent manner over time; (ii) provide a one-time 
notification to its DSRO and any DCO of which it is a clearing member 
that it will apply such treatment; \83\ and (iii) maintain and keep 
current a list of all separate accounts receiving such treatment. With 
respect to proposed regulation Sec.  39.13(j)(14)(iii), the clearing 
member would be required to conduct a review of its records of accounts 
receiving separate treatment no less than quarterly. Proposed 
regulation

[[Page 22945]]

Sec.  39.13(j)(14) is intended to ensure that clearing FCMs employ 
separate account treatment in a way that is consistent with the 
customer protection and DCO risk management provisions of the CEA and 
Commission regulations, that DSROs are able to effectively monitor and 
regulate clearing FCMs that engage in separate account treatment, and 
that clearing FCMs have the records necessary to understand which 
accounts receive separate treatment for purposes of monitoring 
compliance with the proposed regulation.
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    \83\ As stated in the proposed regulatory text below, once this 
notification is made, the clearing member would not be required to 
repeat it. In other words, once a clearing member notifies its DSRO 
that it will apply separate account treatment to one or more 
customers, such clearing member would not be required to provide the 
same notification to its DSRO each time it applies separate account 
treatment to a new or additional customer.
---------------------------------------------------------------------------

    The Commission recognizes that, while bona fide business or risk 
management purposes may at times warrant application or cessation of 
separate account treatment, clearing members should not apply or cease 
separate account treatment for reasons, or in a manner, that would 
contravene the customer protection and risk mitigation purposes of the 
CEA and Commission regulations. For instance, a clearing member should 
not switch between separate and combined treatment for customer 
accounts in order to achieve more preferable margining outcomes or 
offset margin shortfalls in particular accounts. The Commission 
recognizes that there are a wide variety of circumstances that may 
indicate inconsistent application of separate account treatment, and 
proposes to provide DCOs with a degree of discretion in ascertaining, 
consistent with their rules, whether a clearing member applies such 
treatment consistently over time.\84\
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    \84\ Core Principle A provides that a DCO shall have reasonable 
discretion in establishing the manner by which it complies with each 
core principle. Section 5b(c)(2)(A)(ii) of the CEA, 7 U.S.C. 7a-
1(c)(2)(A)(ii).
---------------------------------------------------------------------------

Request for Comment
    Question 11: The Commission requests comment on the appropriateness 
of its proposed approach of providing DCOs with discretion in 
determining whether a clearing FCM has applied separate account 
treatment consistently over time.

III. Cost Benefit Considerations

A. Statutory and Regulatory Background

    Core Principle D, concerning risk management, imposes a number of 
duties upon DCOs related to their ability to manage the risks 
associated with discharging their responsibilities as DCOs, measuring 
credit exposures, limiting exposures to potential default-related 
losses, margin requirements, and risk management models and 
parameters.\85\ Among other requirements, Core Principle D requires 
that the margin required from each member and participant of a DCO be 
sufficient to cover potential exposures in normal market 
conditions.\86\ Commission regulation Sec.  39.13 implements Core 
Principle D, including through regulation Sec.  39.13(g)(8)(iii)'s 
restrictions on withdrawal of customer initial margin. Regulation Sec.  
39.13(g)(8)(iii) is designed to ensure that DCOs do not permit clearing 
FCMs to allow customers to withdraw funds from their accounts unless 
sufficient funds remain to meet customer initial margin requirements 
with respect to all products and swap portfolios held in the customer's 
account and cleared by the DCO. This requirement is intended to prevent 
the under-margining of customer accounts, and thus mitigate the risk of 
a clearing member default and the consequences that could accrue to the 
broader financial system.
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    \85\ Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D).
    \86\ Section 5b(c)(2)(D)(iv) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(iv).
---------------------------------------------------------------------------

    Proposed regulation Sec.  39.13(j) amends regulation Sec.  39.13 by 
allowing a DCO to permit a clearing FCM to treat accounts separately 
for purposes of regulation Sec.  39.13(g)(8)(iii), subject to specified 
conditions. Those conditions are in turn designed to ensure that 
clearing FCMs (i) carry out such separate account treatment in a 
consistent and documented manner; (ii) monitor customer accounts on a 
separate and combined basis; (iii) identify and act upon instances of 
financial or operational distress that necessitate a cessation of 
separate account treatment; (iv) provide appropriate disclosures to 
customers regarding separate account treatment; and (v) apprise their 
DSROs when they apply separate account treatment or an event has 
occurred that would necessitate cessation of separate account 
treatment. The Commission believes that separate account treatment, 
subject to these conditions, is consistent with Core Principle D.

B. Consideration of the Costs and Benefits of the Commission's Action

1. CEA Section 15(a)
    Section 15(a) of the CEA requires the Commission to ``consider the 
costs and benefits'' of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\87\ 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 markets, (3) price discovery, (4) sound risk 
management practices, and (5) other public interest considerations 
(collectively referred to herein as the Section 15(a) Factors). 
Accordingly, the Commission considers the costs and benefits associated 
with the proposed regulation in light of the Section 15(a) Factors. In 
the sections that follow, the Commission considers: (1) the costs and 
benefits of the proposed regulation; (2) the alternatives contemplated 
by the Commission and their costs and benefits; and (3) the impact of 
the proposed regulation on the Section 15(a) Factors.
---------------------------------------------------------------------------

    \87\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission notes that this consideration of costs and benefits 
is based on, inter alia, the understanding that the futures and swaps 
markets function internationally, with many transactions involving U.S. 
firms taking place across international boundaries, with some 
Commission registrants and their clients being organized outside of the 
United States, with leading industry members typically conducting 
operations both within and outside the United States, and with industry 
members commonly following substantially similar business practices 
wherever located. Where the Commission does not specifically refer to 
matters of location, the discussion of costs and benefits below refers 
to the effects of the proposed regulation on all relevant futures and 
swaps activity, whether by virtue of the activity's physical location 
in the United States or by virtue of the activity's connection with 
activities in, or effect on, U.S. commerce under CEA section 2(i).
2. Costs and Benefits of the Proposed Regulation
    The baseline for the Commission's consideration of the costs and 
benefits of the proposal is the Commission's current regulation Sec.  
39.13. The Commission recognizes, however, that to the extent that 
clearing FCMs have relied on CFTC Letter No. 19-17, the actual costs 
and benefits of the proposed regulation may not be as significant.
a. Benefits
    Regulation Sec.  39.13(g)(8)(iii) provides that a DCO shall require 
its clearing members to ensure that their customers do not withdraw 
funds from their accounts with such clearing members if such withdrawal 
would result in funds insufficient to meet the customer initial margin 
requirements with respect to all products and swap portfolios held in 
the customer's account which are cleared by the DCO. This requirement

[[Page 22946]]

serves important customer funds protection and risk mitigation 
purposes. However, combination of all accounts of the same customer 
within the same regulatory account classification for purposes of 
margining and determining funds available for disbursement may make it 
challenging for certain customers and their investment managers to 
achieve certain commercial purposes.\88\ For example, where a customer 
has apportioned assets among multiple investment managers, neither the 
customer nor their investment managers may be able to obtain certainty 
that the individual portion of funds allocated to one investment 
manager will not be affected by the activities of other investment 
managers. Where clearing FCMs are able to treat the separate accounts 
of a single customer as accounts of separate entities, subject to 
certain regulatory safeguards, customers are better able to leverage 
the skills and expertise of investment managers, and realize the 
benefits of a balance of investment strategies in order to meet 
specific commercial goals in a manner that would not contravene the 
customer funds protection and risk mitigation purposes of the CEA and 
Commission regulations.
---------------------------------------------------------------------------

    \88\ See First FIA Letter.
---------------------------------------------------------------------------

    The Commission also notes that, to the extent that DCOs and their 
clearing FCMs currently rely on the no-action position in CFTC Letter 
No. 19-17, those FCMs would retain the benefit of costs and resources 
already expended in order to comply with the conditions of the no-
action position. In a letter to the Commission staff dated April 1, 
2022, FIA noted that, ``For many FCMs and their customers, the terms 
and conditions of the no-action position . . . presented significant 
operational and systems challenges,'' as FCMs were required to ``(i) 
adopt new practices for stress testing accounts; (ii) review and 
possibly change margin-timing expectations for non-US accounts; (iii) 
undertake legal analysis to clarify interpretive questions; and (iv) 
revise their segregation calculation and recordkeeping practices,'' as 
well as engage in ``time-consuming documentation changes and customer 
outreach.'' \89\
---------------------------------------------------------------------------

    \89\ FIA letter dated Apr. 1, 2022 to Clark Hutchison and Amanda 
Olear (Second FIA Letter).
---------------------------------------------------------------------------

    FIA further described these challenges in a letter to the 
Commission staff dated May 11, 2022, noting that in order to meet the 
conditions of the no-action position, FCMs were required to review and 
in some cases amend customer agreements, and identify and implement 
information technology systems changes.\90\ FIA also asserted that FCMs 
were likely required to revise internal controls and procedures.\91\ 
FIA stated that while the costs incurred by each FCM varied depending 
on its customer base, among larger FCMs with a significant 
institutional customer base, personnel costs would have included 
identifying and reviewing up to 3,000 customer agreements to determine 
which agreements required modification, and then negotiating amendments 
with customers or their advisers.\92\ FIA further stated that because 
the relevant provisions of these agreements were not uniform, they 
generally required individual attention.\93\
---------------------------------------------------------------------------

    \90\ FIA letter dated May 11, 2022 to Robert Wasserman (Third 
FIA Letter). FIA noted that these changes were particularly 
challenging for FCMs that are part of a bank holding company 
structure, as ``[m]odifying integrated technology information 
systems across a bank holding company structure is complicated, 
expensive and time consuming.'' Id.
    \91\ Id.
    \92\ Id.
    \93\ Id.
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    If the Commission were to decide to forego this rulemaking, and if 
the no-action position expired, these changes would need to be 
reversed. FIA noted that, if required to reverse these changes, the 
burdens on FCMs and their customers would be ``significant.'' \94\ 
Specifically, FIA asserted that FCMs would again be required to review 
and amend customer agreements, noting that negotiations to amend such 
agreements would likely prove ``extremely difficult'' as ``advisers 
would seek to assure that their ability to manage their clients' assets 
entrusted to them would not be adversely affected by the actions (or 
inactions) of another adviser.'' \95\ FCMs would also again be required 
to revise their internal controls and procedures, and identify and 
implement information technology systems changes.\96\ DCOs, FCMs, and 
customers of FCMs already relying on the no-action position would also 
obtain the benefit of continuing to leverage existing systems and 
procedures to provide for separate account treatment.
---------------------------------------------------------------------------

    \94\ Second FIA Letter.
    \95\ Third FIA Letter. FIA further noted that ``an adviser may 
be less likely to use exchange-traded derivatives to hedge its 
customers' cash market positions if the adviser could not have 
confidence that it would be able to withdraw its customers' excess 
margin as necessary to meet its obligations in other markets.'' Id.
    \96\ Id.
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Request for Comment
    Question 12: The Commission requests comment on the extent to which 
DCOs, clearing members, and customers currently rely on the no-action 
position in CFTC Letter No. 19-17 (including the extensions of time in 
CFTC Letters No. 20-28, 21-29, and 22-11) to permit and/or engage in 
separate account treatment. Commenters are requested to provide data 
where available (e.g., number of DCOs and/or clearing members that 
allow for separate account treatment, or size of clearing members 
providing for separate account treatment by customer funds in 
segregation or number of customers, as well as the nature and the 
extent of the costs that they would incur if the relevant no-action 
position were to be permitted to expire).
b. Costs
    The proposed regulation would not require DCOs to allow for 
separate account treatment, and DCOs that do not presently allow for 
separate account treatment, and do not desire to do so in the future, 
would not incur any costs as a result of the proposed regulation. 
Furthermore, the Commission believes that a DCO electing to allow for 
separate account treatment will do so because they believe that the 
benefits of doing so will exceed the costs of doing so.
    DCOs that wish to allow for separate account treatment would likely 
incur certain costs related to the implementation of the proposed 
regulation, some of which would be incurred on a one-time basis, and 
some of which would be recurring. DCOs that wish to allow for separate 
account treatment would likely incur costs in connection with updating 
their rulebooks to allow for separate account treatment under the 
conditions codified in the proposed regulation. The Commission 
anticipates that this would generally be a one-time cost. Such DCOs 
would also likely incur legal, compliance, and other costs related to 
monitoring, examination, and enforcement with respect to clearing 
members and customers that engage in separate account treatment. The 
Commission expects that such costs may be reduced where a DCO already 
allows for separate account treatment under the terms of the no-action 
position and is able to leverage existing rules and compliance 
infrastructure to implement the proposed regulation. While the 
Commission anticipates that certain DCOs that do not now rely on the 
no-action position may in the future choose to allow for separate 
account treatment, the Commission also expects that the number of DCOs 
that would do so would be small.
    The Commission notes however that because the provisions of the 
proposed regulation vary in some respects from the terms of the no-
action position, and

[[Page 22947]]

DCOs may implement the proposed regulation in their rules in a 
different manner than the conditions of the no-action position,\97\ at 
least some additional costs are likely to be incurred by DCOs that 
already rely on the no-action position.
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    \97\ For instance, CME has provided for separate account 
treatment under the terms of the no-action position through member 
bulletins. See, e.g., Financial and Regulatory Bulletin # 20-01, 
CFTC Letter No. 20-28 Extension of CFTC Letter No. 19-17 Time-
Limited No-Action Relief with Respect to the Treatment of Separate 
Accounts by Futures Commission Merchants, Sept. 23, 2020, available 
at https://www.cmegroup.com/notices/clearing/2020/09/frb_20-
01.html.
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    The costs of the proposed regulation will likely vary across DCOs 
depending on whether they already allow for separate account treatment 
and the nature of their existing rule and compliance infrastructures to 
support separate account treatment, and as such would be difficult to 
quantify with precision.
    Similarly, the proposed regulation would not require clearing FCMs 
to engage in separate account treatment. Clearing FCMs that do not now 
engage in separate account treatment, and wish not to do so in the 
future, would not incur any costs as a result of the proposed 
regulation. However, for those clearing FCMs that choose to comply with 
the proposed regulation, the costs of compliance could be significant, 
and may vary based on factors such as the size and existing compliance 
resources of a particular FCM. While the Commission, in connection with 
its Paperwork Reduction Act assessment below, estimates that certain 
reporting, disclosure, and recordkeeping costs would not be significant 
on an entity level, as FIA noted, taken as a whole, compliance with the 
conditions that the proposed regulation would codify could result in 
significant operational and systems costs.
    In other words, the Commission anticipates that clearing FCMs--
specifically, existing clearing FCMs that do not already rely on the 
no-action position, but may choose in future to rely upon the proposed 
regulation--may incur relatively significant costs related to designing 
and implementing new systems, or enhancing existing systems, to comply 
with the proposed regulation, as well as negotiation costs, even where 
direct recordkeeping costs may not be significant on an entity-by-
entity basis.\98\ However, the Commission notes that many of the 
requirements of the proposed regulation would involve one-time costs in 
order to update systems, procedures, disclosure documents, and 
recordkeeping practices, and that ongoing costs of maintaining 
compliance may be less significant. To the extent clearing FCMs already 
rely on the no-action position, the tools (e.g., software, as well as 
policies and procedures) necessary to comply with the proposed 
regulations on an ongoing basis will largely have already been built, 
and the costs associated with compliance will largely have already been 
incurred. Furthermore, while the Commission expects that certain FCMs 
that do not now rely on the no-action position may in the future choose 
to engage in separate account treatment, and would need to incur these 
costs to come into compliance with the proposed regulation, the 
Commission also anticipates that the number of FCMs that would do so 
would be small.
---------------------------------------------------------------------------

    \98\ This may be true to a lesser extent with respect to new 
entrants to the FCM business, in that those FCMs would incur the 
cost of implementing policies, procedures, and systems that comply 
with the conditions of the proposed regulation, but would not need 
to retrofit existing policies, procedures, and systems.
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C. Costs and Benefits of the Commission's Action as Compared to 
Alternatives

    The Commission considered several alternatives to the proposed 
regulation. On one hand, the Commission, for analytical completeness, 
considered allowing the no-action position announced in CFTC Letter No. 
19-17 and its superseding letters to expire. When compared only to the 
existing regulation Sec.  39.13(g)(8)(iii), which is the baseline for 
the cost and benefit considerations, this alternative imposes neither 
costs nor benefits, because this approach would effectively constitute 
a reversion to regulation Sec.  39.13(g)(8)(iii) prior to the issuance 
of CFTC Letter No. 19-17 and its superseding letters. However, the 
Commission does not anticipate that there would be any significant 
benefit to this approach relative to the approach contemplated by the 
proposed regulation, and indeed, preliminarily believes that there 
would be significant costs to market participants when compared to the 
proposed regulation, particularly in consideration of market 
participants' reliance on the no-action letters, which the proposed 
regulation is designed to codify. Allowing the no-action position to 
expire without codifying its terms would, as noted above, preclude 
customers from achieving certain important financial objectives that 
could be achieved in a manner consistent with the customer funds 
protection and risk mitigation purposes of the CEA and Commission 
regulations. Additionally, while it would not result in costs for FCMs 
that do not now choose to comply with the conditions of the no-action 
position, it would appear to require clearing FCMs that currently rely 
on the no-action position to make significant expenditures of funds and 
resources in order to rework systems, procedures, and customer 
documentation to ensure compliance with regulation Sec.  
39.13(g)(8)(iii).
    Because the no-action position has been applied successfully since 
July 2019, the Commission preliminarily believes codifying its 
provisions to be the most appropriate and beneficial approach for FCMs 
and their customers, and will preserve the customer funds protection 
and risk mitigation conditions of the no-action position.
    Alternatively, the Commission, for analytical completeness, also 
considered extending the no-action position absent the conditions. This 
alternative would preserve the benefits of the no-action position for 
DCOs, FCMs, and customers. However, as discussed further below, the 
conditions of the no-action position--proposed to be codified herein--
are designed to permit separate account treatment only to the extent 
that such treatment would not contravene the risk mitigation goals of 
regulation Sec.  39.13. The Commission preliminarily believes that 
extending the no-action position without the conditions would 
exacerbate risks for DCOs, FCMs, and customers. For instance, without a 
requirement to cease separate account treatment in cases in which a 
customer is in financial distress, it is more likely that an under-
margining scenario would be exacerbated, and a customer default to the 
clearing FCM--and potentially a default of the clearing FCM to the 
DCO--would be more likely.

D. Section 15(a) Factors

    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
1. Protection of Market Participants and the Public
    Section 15(a)(2)(A) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of 
considerations of protection of market participants and the public. The 
Commission preliminarily believes that the amendments proposed herein 
maintain the efficacy of protections for customers and the broader 
financial system contained in Core Principle D and regulation Sec.  
39.13.
    Regulation Sec.  39.13(g)(8)(iii) implements Core Principle D 
requirements for DCOs to limit exposure to potential losses from 
defaults and

[[Page 22948]]

maintain margin sufficient to cover potential exposures in normal 
market conditions \99\ by requiring DCOs to ensure that their members 
do not allow customers to withdraw funds from their accounts if such 
withdrawal would create or exacerbate an initial margin shortfall. This 
requirement protects not only market participants by requiring clearing 
FCMs to ensure that adequate margin exists to cover customer positions; 
it also protects the public from disruption to the wider financial 
system by mitigating the risk that a clearing FCM will default due to 
customer nonpayment of variation margin obligations combined with 
insufficient initial margin. While DCOs are required to, and do, 
maintain robust default management protections and procedures, any 
default of a clearing FCM nonetheless increases the risk of a DCO 
default. The conditions of the no-action position outlined in CFTC 
Letter No. 19-17, and proposed to be codified herein, are designed to 
effectuate these customer protection and risk mitigation goals 
notwithstanding a clearing FCM's application of separate account 
treatment. For example, separate account treatment is not permitted in 
certain circumstances outside the ordinary course of business (e.g., 
where a clearing FCM learns a customer is in financial distress, and 
thus may be unable promptly to meet initial margin requirements, 
whether in one or more separate accounts or on a combined account 
basis).
---------------------------------------------------------------------------

    \99\ 7 U.S.C. 7a-1(c)(2)(D)(iii)-(iv).
---------------------------------------------------------------------------

    Proposed regulation Sec.  39.13(j) would also codify conditions for 
clearing FCMs designed to ensure that they collect information 
sufficient to understand the value of assets dedicated to a separate 
account, apply separate account treatment consistently, and maintain 
reliable lines of contact for the ultimate customer of the account. 
DCOs have successfully relied on these conditions for over two years, 
and the Commission believes codification of these conditions, as 
proposed herein, supports protection of market participants and the 
public.
2. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Section 15(a)(2)(B) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of efficiency, 
competitiveness, and financial integrity of futures markets. The 
Commission preliminarily believes that the proposed regulation may 
carry potential implications for the financial integrity of markets, 
but not for the efficiency or competitiveness of markets, which the 
Commission preliminarily believes remain unchanged.
    As stated above, the purposes of the Commission's customer funds 
protection and risk management regulations, including regulation Sec.  
39.13(g)(8)(iii) include not just protection of customer assets, but 
also mitigation of systemic risk: a customer in default to a clearing 
FCM may in turn trigger the clearing FCM to default to the DCO, with 
cascading consequences for the DCO and the wider financial system. The 
proposed amendments reflect the Commission's preliminary determination 
that the conditions of CFTC Letter No. 19-17, as proposed to be 
codified herein, are sufficient and appropriate to guard against such 
risk for purposes of regulation Sec.  39.13(g)(8)(iii).
    In CFTC Letter No. 19-17, the Commission staff highlighted market 
participants' concerns that the Commission should recognize ``diverse 
practices among FCMs and their customers with respect to the handling 
of separate accounts of the same beneficial owner'' as consistent with 
regulation Sec.  39.13(g)(8)(iii). FIA, in particular, outlined several 
business cases in which a customer or a clearing FCM may want to apply 
separate account treatment, and each of SIFMA-AMG, FIA, and CME 
outlined controls that clearing FCMs could apply to ensure that, in 
instances in which separate account treatment is desired, such 
treatment can be applied in a manner that effectively prevents systemic 
risk.\100\ By proposing to codify the no-action position provided for 
by CFTC Letter No. 19-17 and its superseding letters, the Commission is 
proposing to preserve the option for clearing FCMs to engage in 
separate account treatment, thereby providing clearing FCMs with 
further opportunity to compete on services offered to customers, and 
providing customers with a greater variety of options to address their 
financial needs.
---------------------------------------------------------------------------

    \100\ See First FIA Letter; SIFMA-AMG Letter; CME Letter.
---------------------------------------------------------------------------

3. Price Discovery
    Section 15(a)(2)(C) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of price 
discovery considerations. The Commission preliminarily believes that 
the proposed amendments will not have a significant impact on price 
discovery.
4. Sound Risk Management Practices
    Section 15(a)(2)(D) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of sound risk 
management practices. As discussed above, regulation Sec.  
39.13(g)(8)(iii) implements the risk management standards of Core 
Principle D by requiring DCOs to ensure that their members do not allow 
customers to increase under-margining in their accounts through 
withdrawals of funds. Thus, any amendment to regulation Sec.  39.13 
should not undermine these risk management goals. As discussed further 
above with regard to protection of customers and the public, the 
conditions of the no-action position proposed to be codified herein are 
designed, and have been successfully used, to allow clearing FCMs to 
engage in separate account treatment in a manner that is consistent 
with the protection of customer funds and the mitigation of systemic 
risk, including by requiring the application of separate account 
treatment in a consistent manner, and requiring regulatory 
notifications and the cessation of separate account treatment in 
certain instances of operational or financial distress. The Commission 
therefore preliminarily believes the proposed regulations promotes 
sound DCO risk management practices.\101\
---------------------------------------------------------------------------

    \101\ See, e.g., First FIA Letter (describing use of separate 
account treatment for hedging purposes).
---------------------------------------------------------------------------

5. Other Public Interest Considerations
    Section 15(a)(2)(e) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of other 
public interest considerations. The Commission is identifying a public 
interest benefit in codifying the Divisions' no-action position, where 
the efficacy of that position has been demonstrated. In such a 
situation, the Commission believes it serves the public interest and, 
in particular, the interests of market participants, to engage in 
notice-and-comment rulemaking, where it seeks and considers the views 
of the public in amending its regulations, rather than for market 
participants to continue to rely on a time-limited no-action position 
that can be easily withdrawn, provides less long-term certainty for 
market participants, and offers a more limited opportunity for public 
input.
Request for Comment \102\
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    \102\ In section II above, the Commission requested comment on 
the potential time and cost burden associated with specific steps to 
verify the identity of an authorized representative of a customer 
pursuant to proposed regulation Sec.  39.13(j)(11), to the extent 
that commenters believe the Commission should prescribe such steps.
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    Question 13: The Commission requests comment, including any

[[Page 22949]]

available quantifiable data and analysis, concerning the costs and 
benefits of the proposed regulation for DCOs, FCMs, and any other 
market participant(s), including regarding the extent to which market 
participants already enjoy any such benefits or incur any such costs.
    Question 14: The Commission requests comment, including any 
available quantifiable data and analysis, concerning whether the 
tradeoff of costs and benefits of the proposed regulation for DCOs, 
FCMs, and any other market participant(s), could be improved by 
modifying the set of conditions set forth therein (i.e., by deleting or 
modifying in a specified fashion any of the proposed conditions, or by 
adding specified additional conditions).
    Question 15: The Commission requests comment regarding whether 
there are FCMs which chose not to rely on the no-action position 
provided by CFTC Letter No. 19-17 due to the conditions required to 
rely on that position. The Commission further requests comment on how 
those conditions could be modified to mitigate the burden of compliance 
while achieving the goals of mitigating systemic risk and protecting 
customer funds.

IV. Related Matters

A. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA in issuing any order or adopting any Commission 
rule or regulation.\103\
---------------------------------------------------------------------------

    \103\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the proposed regulation implicates any 
other specific public interest to be protected by the antitrust laws.
    The Commission has considered the proposed regulation to determine 
whether it is anticompetitive and has preliminarily identified no 
anticompetitive effects. The Commission requests comment on whether the 
proposed regulation is anticompetitive and, if it is, what the 
anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
proposed regulation is not anticompetitive and has no anticompetitive 
effects, the Commission has not identified any less anticompetitive 
means of achieving the purposes of the CEA. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the CEA that would otherwise be served by 
adopting the proposed regulation.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies to consider 
whether the rules they propose will have a significant economic impact 
on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis with respect to such impact.\104\ The 
rules proposed herein would establish conditions under which DCOs may 
permit clearing FCMs to engage in separate account treatment, and 
therefore the rules would directly affect DCOs. However, the proposed 
regulation would also affect FCMs, insofar as FCMs permitted by DCOs to 
engage in separate account treatment, and which choose to do so, would 
be required to comply with the conditions proposed to be codified. The 
Commission has previously established certain definitions of ``small 
entities'' to be used by the Commission in evaluating the impact of its 
regulations on small entities in accordance with the RFA.\105\ The 
Commission has previously determined that neither DCOs nor FCMs are 
small entities for the purpose of the RFA.\106\ Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies pursuant to 5 
U.S.C. 605(b) that these proposed rules will not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \104\ 5 U.S.C. 601 et seq.
    \105\ Bankruptcy Regulations, 86 FR 19324, 19416 (Apr. 13, 2021) 
(citing Policy Statement and Establishment of Definitions of ``Small 
Entities'' for Purposes of the Regulatory Flexibility Act, 47 FR 
18618 (Apr. 30, 1982)).
    \106\ See id. (citing New Regulatory Framework for Clearing 
Organizations, 66 FR 45604, 45609 (Aug. 29, 2001); Customer Margin 
Rules Relating to Security Futures, 67 FR 53146, 53171 (Aug. 14, 
2002)).
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA) \107\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. Any 
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. The Office of Management and Budget (OMB) has not 
yet assigned a control number to the new collection.
---------------------------------------------------------------------------

    \107\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    This proposed rulemaking would result in a new collection of 
information within the meaning of the PRA, as discussed below. The 
Commission therefore is submitting this proposal to OMB for review, in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. If adopted, 
responses to this collection of information would be required to obtain 
a benefit. Specifically, clearing FCMs would be required to respond to 
the collection in order to obtain the benefit of engaging in separate 
account treatment for purposes of regulation Sec.  39.13(g)(8)(iii), to 
the extent permitted by the DCOs of which they are clearing members.
    The Commission will protect proprietary information it may receive 
according to the Freedom of Information Act and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the CEA strictly prohibits the Commission, unless specifically 
authorized by the CEA, from making public ``data and information that 
would separately disclose the business transactions or market positions 
of any person and trade secrets or names of customers.'' \108\ The 
Commission also is required to protect certain information contained in 
a government system of records according to the Privacy Act of 1974, 5 
U.S.C. 552a.
---------------------------------------------------------------------------

    \108\ 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------

1. Information Provided by Reporting Entities/Persons
    The proposed regulation applies directly to DCOs and would not 
result in any new collections of information from DCOs. However, to the 
extent a DCO permits clearing FCMs to engage in separate account 
treatment pursuant to the proposed regulation, such clearing FCMs would 
be subject to certain reporting, disclosure, and recordkeeping 
requirements as a result of DCO requirements to comply with the 
conditions specified in proposed regulation Sec.  39.13(j)(1)-(14). The 
Commission estimates burden hours and costs using current regulation 
Sec.  39.13 as a baseline. However, the Commission notes that many 
clearing FCMs already comply with the conditions of the no-action 
position, which are substantially similar to the proposed regulation. 
For these clearing FCMs, the Commission expects that any additional 
cost or administrative burden associated with complying with the

[[Page 22950]]

proposed regulation would be negligible.\109\
---------------------------------------------------------------------------

    \109\ However, the Commission expects that FCMs that do not 
currently rely on the no-action position, but choose to apply 
separate account treatment after the proposed regulation is 
finalized, would incur new costs.
---------------------------------------------------------------------------

a. Reporting Requirements
    The proposed regulation contains three reporting requirements that 
could result in a collection of information from ten or more persons 
over a 12-month period.
    First, proposed regulation Sec.  39.13(j)(1)(iii) requires a 
clearing member to communicate promptly in writing to its DSRO and to 
any DCO of which it is a clearing member the occurrence of certain 
enumerated ``non-ordinary course of business'' events. There are 
currently approximately 62 registered FCMs.\110\ The Commission staff 
estimates that slightly less than half of all FCMs would engage in 
separate account treatment under the proposed regulation, resulting in 
approximately 30 respondents. The Commission staff estimates that each 
such FCM may experience two non-ordinary course of business events per 
year, either with respect to themselves, or a customer. For purposes of 
determining the number of responses, the Commission staff anticipates 
that additional notifications of substantially the same information, 
and at substantially the same time, by means of electronic 
communication to additional DCOs of which the FCM is a clearing member 
(beyond the notification to the FCM's DSRO) would not materially 
increase the time and cost burden for such FCM. Therefore, for purposes 
of these estimates, the Commission staff treats a set of notifications 
sent to a DSRO and DCOs as a single response.\111\ Accordingly, the 
Commission staff estimates a total of two responses per respondent on 
an annual basis. In addition, the Commission staff estimates that each 
response would take eight hours. This yields a total annual burden of 
480 hours. In addition, the Commission staff estimates that respondents 
could expend up to $2,384 annually, based on an hourly rate of $149, to 
comply with this requirement.\112\ This would result in an aggregated 
cost of $71,520 per annum (30 respondents x $2,384).
---------------------------------------------------------------------------

    \110\ See CFTC, Selected FCM Financial Data as of October 31, 
2022 from Reports Filed by November 26, 2022, available at https://www.cftc.gov/sites/default/files/2022-12/01%20-%20FCM%20Webpage%20Update%20-%20October%202022.pdf.
    \111\ The Commission staff applies the same assumption to 
notifications to DSROs and DCOs with respect to proposed regulation 
Sec.  39.13(j)(1)(iv) and proposed regulation Sec.  
39.13(j)(14)(ii), discussed below.
    \112\ This figure is rounded to the nearest dollar and based on 
the annual mean wage for U.S. Bureau of Labor Statistics (BLS) 
category 13-2061, ``Financial Examiners.'' BLS, Occupational 
Employment and Wages, May 2021 [hereinafter ``BLS Data''], available 
at https://www.bls.gov/oes/current/oes_nat.htm. This category 
consists of professionals who ``[e]nforce or ensure compliance with 
laws and regulations governing financial and securities institutions 
and financial and real estate transactions.'' BLS, Occupational 
Employment and Wages, May 2021: 13-2061 Financial Examiners, 
available at https://www.bls.gov/oes/current/oes132061.htm. 
According to BLS, the mean salary for this category is $96,180. This 
number is divided by 1,800 work hours in a year to account for sick 
leave and vacations and multiplied by 2.5 to account for retirement, 
health, and other benefits, as well as for office space, computer 
equipment support, and human resources support. This number is 
further multiplied by 1.113625 to account for the 11.3625% change in 
the Consumer Price Index for Urban Wage-Earners and Clerical Workers 
between May 2021 and January 2023 (263.612 to 293.565). BLS, CPI for 
Urban Wage Earners and Clerical Workers (CPI-W), U.S. City Average, 
All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of $149. 
The rounding and modifications applied with respect to the estimated 
average burden hour cost for this occupational category have been 
applied with respect to each occupational category discussed as part 
of this analysis.
---------------------------------------------------------------------------

    Second, proposed regulation Sec.  39.13(j)(1)(iv) provides an 
avenue for a clearing member to resume separate account treatment when 
it returns to the ordinary course of business, which would require a 
notification to its DSRO and any DCO of which it is a clearing member. 
The Commission staff estimates that, in many cases, there may be a 
reversion to the ordinary course of business, which a clearing FCM 
would need to report to its DSRO and any DCO of which it is a clearing 
member in order to resume separate account treatment, in accordance 
with the requirements of proposed regulation Sec.  39.13(j)(1)(iv). The 
Commission staff estimates that for each non-ordinary course of 
business event, there would ultimately be a reversion to the ordinary 
course of business, resulting in two additional responses per 
respondent on an annual basis. In addition, the Commission staff 
estimates that each response would take eight hours. This yields a 
total annual burden of 480 hours. In addition, the Commission staff 
estimates that respondents could expend up to $2,384 annually, based on 
an hourly rate of $149, to comply with this requirement. This would 
result in an aggregated cost of $71,520 per annum (30 respondents x 
$2,384).
    Third, proposed regulation Sec.  39.13(j)(14)(ii) provides that, to 
the extent a clearing member treats the separate accounts of a customer 
as accounts of separate entities pursuant to the terms of proposed 
regulation Sec.  39.13(j), the clearing member must provide a one-time 
notification to its designated self-regulatory organization and any DCO 
of which it is a clearing member that it will apply such treatment. The 
Commission staff estimates this would result in a total of one response 
per respondent on a one-time basis, and that respondents could expend 
up to $149, based on an hourly rate of $149, to comply with the 
proposed regulation. This would result in an annual burden of 30 hours 
and an aggregated cost of $4,470 (30 respondents x $149). The aggregate 
information collection burden estimate associated with the proposed 
reporting requirements is as follows: \113\
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    \113\ This estimate reflects the aggregate information 
collection burden estimate associated with the proposed reporting 
requirements for the first annual period following implementation of 
the proposed regulation. Because proposed regulation Sec.  
39.13(j)(14)(ii) would result in a one-time reporting requirement, 
the Commission staff estimates that for each subsequent annual 
period, the number of reports, burden hours, and burden cost would 
be reduced accordingly.
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    Estimated number of respondents: 30.
    Estimated number of reports: 150.
    Estimated annual hours burden: 990.
    Estimated annual cost: $147,510.
b. Disclosure Requirements
    The proposed regulation contains three disclosure requirements that 
could affect ten or more persons in a 12-month period.
    First, proposed regulation Sec.  39.13(j)(12) requires a clearing 
member to provide each customer using separate accounts with a 
disclosure that, pursuant to part 190 of the Commission's regulations, 
all separate accounts of the customer will be combined in the event of 
the clearing member's bankruptcy. The Commission staff estimates that 
this would result in a total of one response per respondent on a one-
time basis, and that respondents are likely to spend three hours to 
comply with this requirement for a total of 90 annual burden hours and 
up to $447 annually, based on an hourly rate of $149. This would result 
in an aggregated cost of $13,410 (30 respondents x $447). This estimate 
reflects an initial disclosure distributed to existing customers 
subject to separate account treatment. The Commission staff expects 
that, on a going forward basis, this disclosure would be included in 
standard disclosures for new customers, and would therefore not result 
in any additional costs.
    Second, proposed regulation Sec.  39.13(j)(12)(iii) requires that a 
clearing member include the disclosure statement required by proposed 
regulation Sec.  39.13(j)(12) on its website or within its Disclosure 
Document

[[Page 22951]]

required by regulation Sec.  1.55(i). If the clearing member opts to 
update its Disclosure Document, the Commission staff estimates that 
this proposed requirement would result in a total of one response on a 
one-time basis, and that respondents could expend up to $149 annually, 
based on an hourly rate of $149, to comply with the proposed 
regulation. This would result in an estimated 30 burden hours annually 
and an aggregated cost of $4,470 (30 respondents x $149). This estimate 
reflects one updated disclosure distributed to existing customers. If 
the clearing member opts to include the disclosure on its website, the 
Commission staff estimates that this proposed requirement would result 
in a total of one response on a one-time basis, and that respondents 
could expend up to $126 annually, based on an hourly rate of $126, to 
comply with the proposed regulation.\114\ This would result in an 
estimated 30 burden hours annually and an aggregated cost of $3,780 (30 
respondents x $126). The Commission staff expects that once the 
disclosure is included in the Disclosure Document required by 
regulation Sec.  1.55(i) or posted on the clearing member's website, 
the clearing member would not incur any additional costs.
---------------------------------------------------------------------------

    \114\ This figure is based on the annual mean wage for U.S. 
Bureau of Labor Statistics (BLS) category 15-1254, ``Web 
Developers.'' BLS Data.
---------------------------------------------------------------------------

    Third, proposed regulation Sec.  39.13(j)(13) requires a clearing 
member to disclose in the Disclosure Document required under Commission 
regulation Sec.  1.55(i) that it permits the separate treatment of 
accounts for the same customer under the terms and conditions of 
regulation Sec.  39.13(j). The Commission staff estimates that this 
would result in a total of one response per respondent on a one-time 
basis, and that respondents could expend up to $149 annually, based on 
an hourly rate of $149, to comply with the proposed regulation. This 
would result in an estimated 30 burden hours annually and an aggregated 
cost of $4,470 (30 respondents x $149). This estimate reflects an 
initial updated disclosure distributed to existing customers. The 
Commission staff expects that once this disclosure is made, the 
disclosure would be included in the Disclosure Document required by 
regulation Sec.  1.55(i) going forward, and would not result in any 
additional costs.
    The aggregate information collection burden estimate associated 
with the proposed reporting requirements is as follows: \115\
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    \115\ For purposes of this analysis, the Commission staff 
calculates the aggregate information collection burden assuming that 
respondents choose to include the disclosure statement required by 
proposed regulation Sec.  39.13(j)(12) on their websites and within 
their Disclosure Document required by proposed regulation Sec.  
1.55(i), in order to comply with proposed regulation Sec.  
39.13(j)(12)(iii). Additionally, this estimate reflects the 
aggregate information collection burden estimate associated with the 
proposed disclosure requirements for the first annual period 
following implementation of the proposed regulation. Because each of 
proposed regulation Sec.  39.13(j)(12), Sec.  39.13(j)(12)(iii), and 
Sec.  39.13(j)(13)(ii) would result in a one-time disclosure 
requirement for PRA purposes, the Commission staff estimates that 
for each subsequent annual period the number of respondents, 
reports, burden hours, and burden cost would be reduced accordingly.
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    Estimated number of respondents: 30.
    Estimated number of reports: 120.
    Estimated annual hours burden: 180.
    Estimated annual cost: $26,130.
c. Recordkeeping Requirements
    The proposed regulation contains three recordkeeping requirements 
that could affect ten or more persons in a 12-month period.
    First, proposed regulation Sec.  39.13(j)(11) provides that where 
the customer of separate accounts subject to separate treatment 
pursuant to regulation Sec.  39.13(j) has appointed a third-party as 
the primary contact to the clearing member, the clearing member must 
obtain and maintain current contact information of an authorized 
representative(s) at the customer and take reasonable steps to verify 
that such person is in fact an authorized representative of the 
customer. The clearing member would be required to review and, as 
necessary, update such information on at least an annual basis. The 
Commission staff estimates this would result in a total of 600 
responses per respondent on an annual basis,\116\ and that respondents 
could expend up to $42,000 annually, based on an hourly rate of 
$70.\117\ This would result in an estimated 18,000 burden hours 
annually and an aggregated cost of $1,260,000 per annum (30 respondents 
x $42,000). This estimate contemplates annual validation of contact 
information for each customer.
---------------------------------------------------------------------------

    \116\ FIA stated that while the costs incurred by each FCM to 
comply with the conditions of CFTC Letter No. 19-17 varies depending 
on customer base, among larger FCMs with a significant institutional 
customer base, personnel costs would have included identifying and 
reviewing up to 3,000 customer agreements to determine which 
agreements required modification, and then negotiating amendments 
with customers or their advisors. The Commission staff estimates, 
based on the 30 largest FCMs by customer assets in segregation as of 
the Commission's FCM financial data report for May 31, 2022, that 
there are 18,000 customers of FCMs whose accounts could be in scope 
for the proposed regulation, with an average of 600 customers per 
FCM.
    \117\ This figure is based on the annual mean wage for BLS 
category 43-6010, ``Secretaries & Administrative Assistants.'' BLS 
Data.
---------------------------------------------------------------------------

    Second, proposed regulation Sec.  39.13(j)(12)(ii) requires that a 
clearing member maintain documentation demonstrating that the part 190 
disclosure statement required by proposed regulation Sec.  39.13(j)(12) 
was delivered directly to the customer. The Commission staff estimates 
that this would result in a total of 600 responses on a one-time basis, 
and that respondents could expend up to $4,200 annually, based on an 
hourly rate of $70, to comply with the proposed regulation. This would 
result in an estimated 1,800 burden hours annually and an aggregated 
cost of $126,000 (30 respondents x $4,200). This estimate reflects 
initial recordkeeping of documentation that the disclosure was 
delivered to existing customers subject to separate account treatment. 
The Commission staff estimates that, once such recordkeeping is 
complete, the recordkeeping required by proposed regulation Sec.  
39.13(j)(12)(ii) would be required only with respect to new customers 
who receive disclosures pursuant to proposed regulation Sec.  
39.13(j)(12), and the costs and burden hours associated with proposed 
regulation Sec.  39.13(j)(12)(ii) would be reduced accordingly.
    Third, proposed regulation Sec.  39.13(j)(14)(iii) provides that, 
to the extent the clearing member treats the separate accounts of a 
customer as accounts of separate entities, pursuant to the terms of 
proposed regulation Sec.  39.13(j), the clearing member must maintain 
and keep current a list of all separate accounts receiving such 
treatment. The Commission staff believes the cost and time burden 
associated with, on an ongoing basis, maintaining and keeping current a 
list of all separate accounts receiving separate account treatment 
would vary among FCMs based on factors such as business conditions, 
customer needs, entry of new customers, and exit of other customers, 
and would be challenging to estimate with precision. The Commission 
staff anticipates that the marginal time and cost burden of the 
recordkeeping required by the regulation, done in the routine course of 
business, would be negligible. However, proposed regulation Sec.  
39.13(j)(14)(iii) also requires a holistic review of such records no 
less than quarterly. The Commission staff estimates this would result 
in a total of four responses per respondent on an annual basis, and 
that respondents could expend up to $2,384 annually, based on an hourly 
rate of $149, to comply with the proposed

[[Page 22952]]

regulation.\118\ This would result in an estimated 480 burden hours 
annually and an aggregated cost of $71,520 per annum (30 respondents x 
$2,384).
---------------------------------------------------------------------------

    \118\ For purposes of these estimates, the Commission staff 
treats each quarterly review by an FCM as a single response.
---------------------------------------------------------------------------

    The Commission notes that while certain other provisions of the 
proposed regulation may result in recordkeeping requirements, the 
Commission anticipates that any burden associated with these 
requirements is likely to be de minimis and therefore does not expect 
these provisions to increase the recordkeeping burden for FCMs.\119\
---------------------------------------------------------------------------

    \119\ See, e.g., 17 CFR 1.32 (setting forth requirements for 
computation of customer segregated accounts); 17 CFR 1.73(a)(4) 
(requiring clearing FCMs to conduct stress tests in each customer 
account that could pose material risk to the FCM); 17 CFR 
22.7(f)(6)(iii) (requirement to maintain residual interest); 17 CFR 
1.22 & 22.7 (requirements to compute margin deficiencies).
---------------------------------------------------------------------------

    The aggregate information collection burden estimate associated 
with the proposed reporting requirements is as follows: \120\
---------------------------------------------------------------------------

    \120\ This estimate reflects the aggregate information 
collection burden estimates associated with the proposed disclosure 
requirements for the first annual period following implementation of 
the proposed regulation. Because, as noted above, proposed 
regulation Sec.  39.13(j)(12)(ii) would result in a one-time 
recordkeeping requirement as to each customer (i.e., once the 
disclosure is provided to existing customers, it would need to be 
provided only to new customers on a going forward basis), the 
Commission staff estimates that for each subsequent annual period 
the number of reports, burden hours, and burden cost would be 
reduced accordingly.
---------------------------------------------------------------------------

    Estimated number of respondents: 30.
    Estimated number of reports: 36,120.
    Estimated annual hours burden: 20,280.
    Estimated annual cost: $1,457,520.
2. Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission will consider public comments on this proposed collection of 
information regarding:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
     Evaluating the accuracy of the estimated burden of the 
proposed collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
     Enhancing the quality, utility, and clarity of the 
information proposed to be collected; and
     Reducing the burden of the proposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques; e.g., permitting electronic 
submission of responses.
    Organizations and individuals desiring to submit comments on the 
proposed information collection requirements should send those comments 
to:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
     [email protected] (email).
    Please provide the Commission with a copy of submitted comments so 
that, if the Commission determines to promulgate a final rule, all such 
comments can be summarized and addressed in the final rule preamble. 
Refer to the ADDRESSES section of this notice of proposed rulemaking 
for comment submission instructions to the Commission. A copy of the 
supporting statements for the collections of information discussed 
above may be obtained by visiting RegInfo.gov. OMB is required to make 
a decision concerning the collection of information between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment is best assured of receiving full consideration if 
OMB receives it within 30 days of publication of this notice of 
proposed rulemaking. Nothing in the foregoing affects the deadline 
enumerated above for public comment to the Commission on the proposed 
rules.

List of Subjects in 17 CFR Part 39

    Clearing, Clearing Organizations, Commodity Futures, Consumer 
Protection.

    For the reasons set forth in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 39 as follows:

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
1. The authority citation for part 39 continues to read as follows:

    Authority: 7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464; 
15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July 
21, 2010, 124 Stat. 1749.

0
2. In Sec.  39.13, add paragraph (j) to read as follows:


Sec.  39.13  Risk management.

* * * * *
    (j) Separate account treatment with respect to withdrawal of 
customer initial margin. For purposes of paragraph (g)(8)(iii) of this 
section, a derivatives clearing organization may permit a clearing 
member that is a futures commission merchant to treat the separate 
accounts of a customer as accounts of separate entities if such 
clearing member's written internal controls and procedures permit it to 
do so, and the derivatives clearing organization requires such clearing 
member to comply with the following conditions with respect to such 
separate accounts:
    (1) The clearing member permits disbursements on a separate account 
basis only during the ordinary course of business.
    (i) For purposes of this paragraph (j), ``separate account'' means 
any one of multiple accounts of the same customer that are carried by 
the same futures commission merchant that is a clearing member of a 
derivatives clearing organization.
    (ii) For purposes of this paragraph (j), ``ordinary course of 
business'' means the standard day-to-day operation of the clearing 
member's business relationship with its customer. The following events 
are inconsistent with the ordinary course of business and would require 
the clearing member to cease permitting disbursements on a separate 
account basis with respect to all accounts of the relevant customer 
receiving separate account treatment, where such event occurs with 
respect to a customer as described in paragraphs (j)(1)(ii)(A) through 
(F) of this section, or with respect to all customer accounts receiving 
separate account treatment, where such event occurs with respect to the 
clearing member as described in paragraphs (j)(1)(ii)(G) through (I) of 
this section.
    (A) Such customer, including any separate account of such customer, 
fails to deposit or maintain initial or maintenance margin or make 
payment of variation margin or option premium as specified in paragraph 
(j)(4) of this section.
    (B) The occurrence and declaration by the clearing member of an 
event of default as defined in the account documentation executed 
between the clearing member and the customer.
    (C) A good faith determination by the clearing member's chief 
compliance officer, one of its senior risk managers, or other senior 
manager, following such

[[Page 22953]]

clearing member's own internal escalation procedures, that the customer 
is in financial distress, or there is significant and bona fide risk 
that the customer will be unable promptly to perform its financial 
obligations to the clearing member, whether due to operational reasons 
or otherwise.
    (D) The insolvency or bankruptcy of the customer or a parent 
company of the customer.
    (E) The clearing member receives notification that a board of 
trade, a derivatives clearing organization, a self-regulatory 
organization as defined in section 1.3 of this chapter or section 
3(a)(26) of the Securities Exchange Act of 1934, the Commission, or 
another regulator with jurisdiction over the customer, has initiated an 
action with respect to the customer based on an allegation that the 
customer is in financial distress.
    (F) The clearing member is directed to cease permitting 
disbursements on a separate account basis, with respect to one or more 
customers, by a board of trade, a derivatives clearing organization, a 
self-regulatory organization, the Commission, or another regulator with 
jurisdiction over the clearing member, pursuant to, as applicable, 
board of trade, derivatives clearing organization or self-regulatory 
organization rules, government regulations, or law.
    (G) The clearing member is notified by a board of trade, a 
derivatives clearing organization, a self-regulatory organization, the 
Commission, or another regulator with jurisdiction over the clearing 
member, that the board of trade, the derivatives clearing organization, 
the self-regulatory organization, the Commission, or other regulator, 
as applicable, believes the clearing member is in financial or other 
distress.
    (H) The clearing member is under financial or other distress as 
determined in good faith by its chief compliance officer, senior risk 
managers, or other senior management.
    (I) The bankruptcy of the clearing member or a parent company of 
the clearing member.
    (iii) The clearing member must communicate to its designated self-
regulatory organization and any derivatives clearing organization of 
which it is a clearing member the occurrence of any one of the events 
enumerated in paragraphs (j)(1)(ii)(A) through (I) of this section. 
Such communication must be made promptly in writing, and in any case no 
later than the next business day following the date on which the 
clearing member identifies or has been informed that such event has 
occurred.
    (iv) A clearing member that has ceased permitting disbursements on 
a separate account basis pursuant to paragraph (j)(1)(ii) of this 
section may resume permitting disbursements on a separate account basis 
if such clearing member reasonably believes, based on new information, 
that the circumstances triggering cessation of separate account 
treatment pursuant to paragraphs (j)(1)(ii)(A) through (I) of this 
section have been cured, and such clearing member provides in writing 
to its designated self-regulatory organization and any derivatives 
clearing organization of which it is a clearing member a notification 
that it will resume separate account treatment, and the factual basis 
and rationale for its conclusion that the circumstances triggering 
cessation of separate account treatment pursuant to paragraphs 
(j)(1)(ii)(A) through (I) of this section have been cured. If the 
circumstances triggering cessation of separate account treatment were 
an action or direction by one of the entities described in paragraphs 
(j)(1)(ii)(E) through (G) of this section, then the cure of those 
circumstances would require the withdrawal or other appropriate 
termination of such action or direction by that entity.
    (2) The clearing member obtains from the customer or, as 
applicable, the manager of a separate account, information sufficient 
for the clearing member to:
    (i) Assess the value of the assets dedicated to such separate 
account; and
    (ii) Identify the direct or indirect parent company of the 
customer, as applicable, if such customer has a direct or indirect 
parent company.
    (3) The clearing member's internal risk management policies and 
procedures must provide for stress testing and credit limits for 
customers with separate accounts. This stress testing must be 
performed, and the credit limits must be applied, both on an individual 
separate account and on a combined account basis.
    (4) Each separate account must be on a ``one business day margin 
call.'' The following requirements apply solely for purposes of this 
paragraph (j)(4):
    (i) Except as explicitly provided in this paragraph (j)(4), if the 
margin call is issued by 11:00 a.m. Eastern Time on a United States 
business day, it must be met by the applicable customer no later than 
the close of the Fedwire Funds Service on the same United States 
business day. In no case can a clearing member contractually agree to 
delay issuing such a margin call until after 11:00 a.m. Eastern Time on 
any given United States business day or to otherwise engage in 
practices that are intended to circumvent this paragraph (j)(4) by 
causing such delay.
    (ii) Payment of margin in Japanese Yen shall be considered in 
compliance with the requirements of this paragraph (j)(4) if received 
by the applicable clearing member by 12:00 p.m., Eastern Time, on the 
second United States business day after the business day on which the 
margin call is issued.
    (iii) Payment of margin in fiat currencies other than U.S. Dollars, 
Canadian Dollars, or Japanese Yen shall be considered in compliance 
with the requirements of this paragraph (j)(4) if received by the 
applicable clearing member by 12:00 p.m., Eastern Time, on the United 
States business day after the business day on which the margin call is 
issued.
    (iv) The relevant deadline for payment of margin in fiat currencies 
other than U.S. Dollars may be extended by up to one additional United 
States business day and still be considered in compliance with the 
requirements of this paragraph (j)(4) if payment is delayed due to a 
banking holiday in the jurisdiction of issue of the currency. For 
payments in Euro, either the customer or the investment manager 
managing the separate account may designate one country within the 
Eurozone that they have the most significant contacts with for purposes 
of meeting margin calls, whose banking holidays shall be referred to 
for this purpose.
    (v) A failure to deposit, maintain, or pay margin or option premium 
due to unusual administrative error or operational constraints that a 
customer or investment manager acting diligently and in good faith 
could not have reasonably foreseen does not constitute a failure to 
comply with the requirements of this paragraph (j)(4). For these 
purposes, a clearing member's determination that the failure to 
deposit, maintain, or pay margin or option premium is due to such 
administrative error or operational constraints must be based on the 
clearing member's reasonable belief in light of information known to 
the clearing member at the time the clearing member learns of the 
relevant administrative error or operational constraint.
    (vi) A clearing member would not be in compliance with the 
requirements of this paragraph (j)(4) if it contractually agrees to 
provide customers with periods of time to meet margin calls that extend 
beyond the time periods specified in paragraphs (j)(4)(i) through (v) 
of this section, or engages in

[[Page 22954]]

practices that are designed to circumvent this paragraph (j)(4).
    (vii) For purposes of this paragraph (j)(4), ``United States 
business day'' means weekdays not including Federal holidays as 
established by 5 U.S.C. 6103. A margin call issued after 11:00 a.m. 
Eastern Time on a United States business day, or on a Saturday, Sunday, 
or a Federal holiday, shall be considered to have been issued before 
11:00 a.m. Eastern Time on the next day that is a United States 
business day.
    (5) The margin requirement for each separate account is calculated 
independently from all other separate accounts of the same customer 
with no offsets or spreads recognized across the separate accounts. A 
clearing member is required to treat each separate account of a 
customer independently from all other separate accounts of the same 
customer for purposes of computing capital charges for under-margined 
customer accounts in determining its adjusted net capital under Sec.  
1.17 of this chapter.
    (6) The clearing member must record each separate account 
independently in its books and records (i.e., the clearing member must 
record the balance of each separate account as a receivable (debit or 
deficit) or payable with no offsets between the other separate accounts 
of the same customer). A clearing member is required to treat each 
separate account of a customer independently from all other separate 
accounts of the same customer for purposes of determining whether a 
receivable from a separate account that represents a deficit or debit 
ledger balance may be included in the clearing member's current assets 
in computing its adjusted net capital under Sec.  1.17(c)(2) of this 
chapter.
    (7) A customer receivable for a debit or deficit from a separate 
account must only be considered a current or allowable asset for 
purposes of Sec.  1.17(c)(2) of this chapter based on the assets of 
that separate account, and not on the assets held in another separate 
account of the same customer.
    (8) In calculating the amount of its own funds the clearing member 
must use to cover debit or deficit balances pursuant to Sec.  1.20(i) 
or Sec.  22.2(f) of this chapter, the clearing member must include any 
debit or deficit of any separate account, and must reflect that 
calculation in each applicable report.
    (9) The clearing member must include the margin deficiency of each 
separate account, and cover such deficiency with its own funds, as 
applicable, for purposes of its residual interest and legally 
segregated operationally commingled compliance calculations, as 
applicable under Sec.  1.22, Sec.  22.2, and 30.7 of this chapter.
    (10) In determining its residual interest target for purposes of 
Sec.  1.23(c) of this chapter, the clearing member must calculate 
customer receivables computed on a separate account basis.
    (11) Where the customer of separate accounts subject to separate 
treatment pursuant to this paragraph (j) has appointed a third-party as 
the primary contact to the clearing member, the clearing member must 
obtain and maintain current contact information of an authorized 
representative(s) at the customer, and take reasonable steps to verify 
that such contact information is accurate and that person is in fact an 
authorized representative of the customer. The clearing member must 
review and, as applicable, update such contact information no less than 
annually.
    (12) The clearing member must provide each customer using separate 
accounts with a disclosure that, pursuant to part 190 of this chapter, 
all separate accounts of the customer in each account class will be 
combined in the event of the clearing member's bankruptcy.
    (i) The disclosure statement required by this paragraph (j)(12) 
must be delivered separately to the customer via electronic means in 
writing or in such other manner as the clearing member customarily 
delivers disclosures pursuant to applicable Commission regulations, and 
as permissible under the clearing member's customer documentation.
    (ii) The clearing member must maintain documentation demonstrating 
that the disclosure statement required by this paragraph (j)(12) was 
delivered directly to the customer.
    (iii) The clearing member must include the disclosure statement 
required by this paragraph (j)(12) on its website or within its 
Disclosure Document required by Sec.  1.55(i) of this chapter.
    (13) The clearing member must disclose in the Disclosure Document 
required under Sec.  1.55(i) of this chapter that it permits the 
separate treatment of accounts for the same customer under the terms 
and conditions of this paragraph (j).
    (14) To the extent the clearing member treats the separate accounts 
of a customer as accounts of separate entities, pursuant to the terms 
of this paragraph (j), the clearing member must:
    (i) Apply such treatment in a consistent manner over time;
    (ii) Provide a one-time notification (i.e., once such a 
notification is made, the clearing member is not required to repeat it) 
to its designated self-regulatory organization and any derivatives 
clearing organization of which it is a clearing member that it will 
apply such treatment to one or more customers; and
    (iii) Maintain and keep current a list of all separate accounts 
receiving such treatment. The clearing member must conduct a review of 
its records of accounts receiving separate treatment no less than 
quarterly.
* * * * *

    Issued in Washington, DC, on March 22, 2023 by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Derivatives Clearing Organization Risk Management 
Regulations To Account for the Treatment of Separate Accounts by 
Futures Commission Merchants--Voting Summary and Commissioner's 
Statement

Appendix 1--Voting Summary

    On this matter, Chairman Behnam and Commissioners Johnson, 
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Commissioner Kristin N. Johnson

    I support the issuance by the Commodity Futures Trading 
Commission (CFTC) of the Notice of Proposed Amendments to 
Derivatives Clearing Organization (DCO) Risk Management Regulations 
to Account for the Treatment of Separate Accounts by Futures 
Commission Merchants (FCMs) (the ``NPRM'').
    The proposed amendments codify a no-action position issued by 
the CFTC's Division of Clearing and Risk (DCR) and Market 
Participants Division (MPD) that imposed certain conditions on FCM's 
ability to treat accounts owned by a single customer as separate 
accounts.\1\ These conditions aim to protect customer assets and 
avoid systemic risk.\2\ I write today to underscore the

[[Page 22955]]

significance of these protections for customer assets.
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    \1\ Advisory and Time-Limited No-Action Relief with Respect to 
the Treatment of Separate Accounts by Futures Commission Merchants, 
CFTC Letter No. 19-17, July 10, 2019, https://www.cftc.gov/csl/19-17/download.
    \2\ These conditions aim to ensure that FCMs ``(i) carry out 
such separate account treatment in a consistent and documented 
manner; (ii) monitor customer accounts on a separate and combined 
basis; (iii) identify and act upon instances of financial or 
operational distress that necessitate a cessation of separate 
account treatment; (iv) provide appropriate disclosures to customers 
regarding separate account treatment; and (v) apprise their DSROs 
when they apply separate account treatment or an event has occurred 
that would necessitate cessation of separate account treatment.'' 
NPRM at Section II.A.
---------------------------------------------------------------------------

    Segregating or separating a firm's proprietary funds from 
customer funds is a critical element in protecting not only 
customers, but also the broader financial system. In the absence of 
the proposed risk management conditions and robust compliance with 
the same, conditions of financial distress could lead to preventable 
losses for customers or FCMs.\3\
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    \3\ Id. (discussing Proposed Regulation Sec.  39.13(j)(1)).

[FR Doc. 2023-06248 Filed 4-13-23; 8:45 am]
BILLING CODE 6351-01-P