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2013-26665a

2013-26665a

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Vol. 78 Thursday, No. 220 November 14, 2013 Part II
Commodity Futures Trading Commission
17 CFR Parts 1, 3, 22, et al. Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations; Final Rule
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68506
Federal Register
/Vol. 78, No. 220/Thursday, November 14, 2013/Rules and Regulations
COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 3, 22, 30, and 140
RIN 3038–AD88
Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations
AGENCY
:
Commodity Futures Trading Commission.
ACTION
:
Final rule.
SUMMARY
:
The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is adopting new regulations and amending existing regulations to require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and examination programs for futures commission merchants (‘‘FCMs’’). The regulations also address certain related issues concerning derivatives clearing organizations (‘‘DCOs’’) and chief compliance officers (‘‘CCOs’’). The final rules will afford greater assurances to market participants that: Customer segregated funds, secured amount funds, and cleared swaps funds are protected; customers are provided with appropriate notice of the risks of futures trading and of the FCMs with which they may choose to do business; FCMs are monitoring and managing risks in a robust manner; the capital and liquidity of FCMs are strengthened to safeguard their continued operations; and the auditing and examination programs of the Commission and the self-regulatory organizations (‘‘SROs’’) are monitoring the activities of FCMs in a prudent and thorough manner.
DATES
:
Effective date:
 January 13, 2014.
Compliance date:
The applicable compliance dates are discussed in the section of the release titled ‘‘III. Compliance Dates.’’
FOR FURTHER INFORMATION CONTACT
:
Division of Swap Dealer and Intermediary Oversight:
Gary Barnett, Director, 202–418–5977,
; Thomas Smith, Deputy Director, 202–418–5495,
tsmith@cftc.gov;mailto:
 Jennifer Bauer, Special Counsel, 202–418–5472,
; Joshua Beale, Attorney- Advisor, 202–418–5446,
, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581; Kevin Piccoli, Deputy Director, 646– 746–9834,
, 140 Broadway, 19th Floor, New York, NY 10005; or Mark Bretscher, Special Counsel, 312–596–0529,
, 525 W. Monroe Street, Suite 1100, Chicago, IL. 60661.
Division of Clearing and Risk:
Ananda Radhakrishnan, Director, 202–418– 5188,
; Robert B. Wasserman, Chief Counsel, 202–418– 5092,
; Phyllis P. Dietz, Deputy Director, 202–418–5449,
; M. Laura Astrada, Associate Chief Counsel, 202–418–7622,
, Eileen Donovan, Associate Director, 202–418–5096,
; Kirsten V. K. Robbins, Special Counsel, 202–418– 5313,
; or Shawn R. Durrani, Attorney-Advisor, 202–418– 5048,
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
Office of the Chief Economist:
Stephen Kane, Research Economist,
, 202–418–5911, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION
:
Table of Contents
I. Background A. General Statutory and Current Regulatory Structure B. Self-Regulatory Structure C. Futures Commission Merchant Insolvencies and Failures of Risk Management D. Recent Commission Rulemakings and Other Initiatives Relating to Customer Protection E. The Proposed Amendments II. Comments on the Notice of Proposed Rulemaking A. §1.10: Financial Reports of Futures Commission Merchants and Introducing Brokers 1. Amendments of the Segregation and Secured Amount Schedules With Respect to the Reporting of Residual Interest 2. New Cleared Swaps Segregation Schedules 3. Amendments to Form 1–FR–FCM 4. FCM Certified Annual Report Deadline 5. Leverage Ratio Calculation 6. Procedural Filing Requirements B. §1.11: Risk Management Program for Futures Commission Merchants 1. Applicability 2. Definitions 3. Approval of Policies and Procedures and Submission to the Commission 4. Organizational Requirements of the Risk Management Program a. Separation of Risk Management Unit From Business Unit 5. Components of the Risk Management Program 6. Annual Review, Distribution of Policies and Procedures and Recordkeeping 7. CCO or CEO Certification C. §1.12: Maintenance of Minimum Financial Requirements by Futures Commission Merchants and Introducing Brokers 1. Timing of Notices 2. Undercapitalized FCMs and IBs 3. Insufficient Segregation of Funds of Cleared Swaps Customers 4. Investment of Customer Funds in Contravention of Regulation 1.25 5. Notice of Residual Interest Falling Below Targeted Level or Undermargined Amounts 6. Events Causing Material Adverse Financial Impact or Material Change in Operations 7. Notice of Correspondence From Other Regulatory Authorities 8. Filing Process and Content 9. Public Disclosure of Early Warning Notices D. §1.15: Risk Assessment Reporting Requirement for Futures Commission Merchants E. §1.16: Qualifications and Reports of Accountants 1. Mandatory PCAOB Registration Requirement 2. PCAOB Inspection Requirement 3. Remediation of PCAOB Inspection Findings by the Public Accountant 4. Auditing Standards 5. Review of Public Accountant’s Qualifications by the FCM’s Governing Body 6. Electronic Filing of Certified Annual Reports F. §1.17: Minimum Financial Requirements for Futures Commission Merchants and Introducing Brokers 1. FCM Cessation of Business and Transfer of Customer Accounts if Unable To Demonstrate Adequate Liquidity 2. Reducing Time Period for FCMs To Incur a Capital Charge for Undermargined Accounts to One Day after Margin Calls Are Issued 3. Permit an FCM that is not a BD To Develop Policies and Procedures To Determine Creditworthiness 4. Revisions to Definitions in Regulation 1.17(b) G. §1.20: Futures Customer Funds To Be Segregated and Separately Accounted for 1. Identification of Customer Funds and Due Diligence 2. Permitted Depositories 3. Limitation on the Holding of Futures Customer Funds Outside of the United States 4. Acknowledgment Letters a. Background  b. Technical Changes to the Template Letters c. Federal Reserve Banks as Depositories d. Foreign Depositories e. Release of Funds Upon Commission Instruction f. Read-Only Access and Information Requests g. Requirement To File New Acknowledgment Letters h. Standard of Liability i. Liens j. Examination of Accounts 5. Prohibition Against Commingling Customer Funds 6. Limitations on the Use of Customer Funds 7. Segregation Requirements for DCOs
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68507
Federal Register
/Vol. 78, No. 220/Thursday, November 14, 2013/Rules and Regulations
1
7 U.S.C. 6d(a)(2).
2
7 U.S.C. 1 et seq.
3
The term ‘‘futures customer’’ is defined in §1.3(iiii) of the Commission’s regulations to include any person who uses an FCM as an agent in connection with trading in any contract for the purchase or sale of a commodity for future delivery or an option on such contract (excluding any proprietary accounts under §1.3(y)). The Commission adopted the definition of the term ‘‘futures customer’’ on October 16, 2012 as part of the final rulemaking that amended existing Commission regulations to incorporate swaps. The
Federal Register
Commission regulations can be found at 17 CFR Ch. 1.
4
See Dodd-Frank Act, Public Law 111–203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act may be accessed at
5
The term ‘‘Cleared Swap’’ is defined in section 1a(7) of the Act as any swap that is, directly or indirectly, submitted to and cleared by a DCO registered with the Commission. The term ‘‘Cleared Swaps Customer’’ is defined in §22.1 as any person entering into a Cleared Swap, but excludes: (1) Any owner or holder of a Cleared Swaps Proprietary Account with respect to the Cleared Swaps in such account; and (2) A clearing member of a DCO with respect to Cleared Swaps cleared on that DCO.
8. Immediate Availability of Bank and Trust Company Deposits 9. Segregated Funds Computation Requirement 10. Segregation Regimes H. §1.22: Use of Futures Customer Funds I. §1.23: Interest of Futures Commission Merchant in Segregated Futures Customer Funds; Additions and Withdrawals  J. §1.25: Investment of Customer Funds 1. General Comments Regarding the Investment of Customer Funds 2. Reverse Repurchase Agreement Counterparty Concentration Limits K. §1.26: Deposit of Instruments Purchased With Futures Customer Funds L. §1.29: Increment or Interest Resulting From Investment of Customer Funds 1. FCM’s Responsibility for Losses Incurred on the Investment of Customer Funds 2. FCM’s Obligation in Event of Bank Default M. §1.30: Loans by Futures Commission Merchants: Treatment of Proceeds N. §1.32: (§22.2(g) for Cleared Swaps Customers and §30.7(l) for Foreign Futures and Foreign Options Customers): Segregated Account: Daily Computation and Record O. §1.52: Self-Regulatory Organization Adoption and Surveillance of Minimum Financial Requirements 1. Swap Execution Facilities Excluded From the Scope of Regulation 1.52 2. Revisions to the Current SRO Supervisory Program 3. Auditing Standards Utilized in the SRO Supervisory Program 4. ‘‘Examinations Expert’’ Reports P. §1.55: Public disclosures by Futures Commission Merchants 1. Amendments to the Risk Disclosure Statement a. Firm Specific Disclosure Document i. General Requirements ii. Specific Disclosure Information Required (by rule paragraph) 2. Public Availability of FCM Financial Information Q. Part 22—Cleared Swaps R. Amendments to §1.3: Definitions; and §30.7: Treatment of Foreign Futures or Foreign Options Secured Amount 1. Elimination of the ‘‘Alternative Method’’ for Calculating the Secured Amount 2. Funds Held in Non-U.S. Depositories 3. Commingling of Positions in Foreign Futures and Foreign Options Accounts 4. Further Harmonization With Treatment of Customer Segregated Funds 5. Harmonization With Other Commission Proposals S. §3.3: Chief Compliance Officer Annual Report III. Compliance Dates A. Financial Reports of FCMs: §1.10 B. Risk Management Program for FCMs: §1.11 C. Qualifications and Reports of Accountants: §1.16 D. Minimum Financial Requirements for FCMs E. Written Acknowledgment Letters: §§1.20, 1.26, and 30.7 F. Undermargined Amounts: §§1.22(c), 30.7(a) G. SRO Minimum Financial Surveillance: §1.52 H. Public Disclosures by FCMs: §1.55 IV. Cost Benefit Considerations V. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act Appendix 1—Table of Comment Letters Appendix 2—CFTC Form 1–FR–FCM
I. Background
A. General Statutory and Current Regulatory Structure
The protection of customers—and the safeguarding of money, securities or other property deposited by customers with an FCM—is a fundamental component of the Commission’s disclosure and financial responsibility framework. Section 4d(a)(2)
1
of the Commodity Exchange Act (‘‘the Act’’ or ‘‘the CEA’’)
2
requires each FCM to segregate from its own assets all money, securities, and other property deposited  by futures customers to margin, secure, or guarantee futures contracts and options on futures contracts traded on designated contract markets.
3
Section 4d(a)(2) further requires an FCM to treat and deal with futures customer funds as  belonging to the futures customer, and prohibits an FCM from using the funds deposited by a futures customer to margin or extend credit to any person other than the futures customer that deposited the funds. Section 4d(f) of the Act, which was added by section 724(a) of the Dodd- Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’),
4
 requires each FCM to segregate from its own assets all money, securities, and other property deposited by Cleared Swaps Customers to margin Cleared Swaps.
5
Section 4d(f) also provides that an FCM shall treat and deal with all money, securities, and property of any swaps customer received to margin, guarantee, or secure a swap cleared by or through a DCO (including money, securities, or property accruing to the swaps customer as the result of such a swap) as belonging to the swaps customer. Section 4d(f) further provides that an FCM shall separately account for and not commingle with its own funds any money, securities, and property of a swaps customer, and shall not use such swaps customer’s funds to margin, secure, or guarantee any trades or contracts of any swaps customer or person other than the person for whom the same are held. The Commission adopted §§1.20 through 1.30, and §1.32, to implement section 4d(a)(2) of the Act, and adopted part 22 to implement section 4d(f) of the Act. The purpose of these regulations is to safeguard funds deposited by futures customers and Cleared Swaps Customers, respectively. Regulation 1.20 requires each FCM and DCO to separately account for and to segregate from its own proprietary funds all money, securities, or other property deposited by futures customers for trading on designated contract markets. In addition, all futures customer funds must be separately accounted for, and may not be commingled with the money, securities or property of an FCM or of any other person, or be used to secure or guarantee the trades, contracts or commodity options, or to secure or extend the credit, of any person other than the one for whom the same are held. Regulation 1.20 also provides that an FCM or DCO may deposit futures customer funds only with a bank or trust company, and for FCMs only, a DCO or another FCM. The funds must  be deposited under an account name that clearly identifies the funds as  belonging to the futures customers of the FCM or DCO and further shows that the funds are segregated as required by section 4d(a)(2) of the Act and Commission regulations. FCMs and DCOs also are required to obtain a written acknowledgment from a depository stating that the depository was informed that the funds deposited are customer funds being held in accordance with the Act. FCMs and DCOs also are restricted in their use of futures customer funds. Regulation 1.22 prohibits an FCM from using, or permitting the use of, the
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