80 FR 15507 - Residual Interest Deadline for Futures Commission Merchants
COMMODITY FUTURES TRADING COMMISSION Federal Register Volume 80, Issue 56 (March 24, 2015)
Federal Register Volume 80, Issue 56 (March 24, 2015)
| Page Range | 15507-15510 | |
| FR Document | 2015-06548 |
[Federal Register Volume 80, Number 56 (Tuesday, March 24, 2015)] [Rules and Regulations] [Pages 15507-15510] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-06548] ======================================================================= ----------------------------------------------------------------------- COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 1 RIN 3038-AE22 Residual Interest Deadline for Futures Commission Merchants AGENCY: Commodity Futures Trading Commission. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: The Commodity Futures Trading Commission (``Commission'' or ``CFTC'') is amending its regulations to remove the December 31, 2018 automatic termination date for the phased-in compliance schedule for futures commission merchants (``FCMs'') and provides assurance that the residual interest deadline, as defined in the regulations (``Residual Interest Deadline''), will only be revised through a separate Commission rulemaking. DATES: The final rule is effective May 26, 2015. FOR FURTHER INFORMATION CONTACT: Division of Swap Dealer and Intermediary Oversight: Thomas Smith, Acting Director, 202-418-5495, tsmith@cftc.gov; Jennifer Bauer, Special Counsel, 202-418-5472, jbauer@cftc.gov; Joshua Beale, Attorney-Advisor, 202-418-5446, jbeale@cftc.gov, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. Division of Clearing and Risk: Kirsten V.K. Robbins, Associate Chief Counsel, 202-418-5313, krobbins@cftc.gov, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. Office of the Chief Economist: Stephen Kane, Research Economist, 202-418-5911, skane@cftc.gov, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. SUPPLEMENTARY INFORMATION: I. Background On October 30, 2013, the Commission amended Regulation 1.22 to enhance the safety of funds deposited by customers with FCMs as margin for futures transactions.\1\ The amendments require an FCM to maintain its own capital (hereinafter referred to as the FCM's ``Residual Interest'') in customer segregated accounts in an amount equal to or greater than its customers' aggregate undermargined amounts.\2\ The Commission established a phased-in compliance schedule for Regulation 1.22 with an initial Residual Interest Deadline of 6:00 p.m. Eastern Time on the date of the settlement referenced in Regulation 1.22(c)(2)(i) or (c)(4) (the ``Settlement Date''), beginning November 14, 2014.\3\ Amended Regulation 1.22 also directs staff to host a public roundtable and publish a report for public comment by May 16, 2016 addressing, to the extent information is practically available, the practicability (for both FCMs and customers) of moving the Residual Interest Deadline from 6:00 p.m. Eastern Time on the Settlement Date, to the time of settlement or to some other time of day.\4\ Furthermore, amended Regulation 1.22 provides that, absent Commission action, the phased-in compliance period for the Residual Interest Deadline automatically terminates on December 31, 2018.\5\ In the case of such automatic termination, the Residual Interest Deadline would change to the time of settlement on the Settlement Date. --------------------------------------------------------------------------- \1\ Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations, Final Rule, 78 FR 68506 (Nov. 14, 2013) (amending 17 CFR parts 1, 3, 22, 30 and 140). \2\ See 17 CFR 1.22(c)(3)(i). As defined in Regulation 1.22(c)(1), a customer's account is ``undermargined,'' when the value of the customer funds for a customer's account is less than the total amount of collateral required by derivatives clearing organizations for that account's contracts. See 78 FR 68513, n.30. \3\ See 17 CFR 1.22(c)(5)(ii); See 78 FR at 68578. \4\ See 17 CFR 1.22(c)(5)(iii)(A). \5\ See 17 CFR 1.22(c)(5)(iii)(C). --------------------------------------------------------------------------- II. The Proposal On November 3, 2014, the Commission proposed to revise Regulation 1.22 to remove the December 31, 2018 automatic termination of the phase-in compliance period.\6\ In the NPRM, the Commission stated the intention to retain the Residual Interest [[Page 15508]] Deadline \7\ at 6 p.m. Eastern Time, unless the Commission takes further action via rulemaking. --------------------------------------------------------------------------- \6\ Residual Interest Deadline for Futures Commission Merchants, Notice of Proposed Rulemaking, 79 FR 68148 (Nov. 14, 2014) (amending 17 CFR part 1). \7\ See 17 CFR 1.22(c)(3)(i). The term ``Residual Interest Deadline'' is defined in Regulation 1.22(c)(5). If an FCM is required to increase its Residual Interest as a result of customer undermargined accounts, the FCM must deposit additional funds into the customer segregated accounts by the specified Residual Interest Deadline. --------------------------------------------------------------------------- In the NPRM, the Commission stated that the removal of the automatic termination of the phase-in compliance period would provide the Commission with a greater degree of flexibility to assess all relevant data, including the costs and benefits of revising the Residual Interest Deadline. The Commission also retained in Regulation 1.22 the requirement for Commission staff to publish for public comment a report addressing the practicability and costs and benefits of revising the Residual Interest Deadline, and the additional requirement for Commission staff to conduct a public roundtable on the issue. The Commission invited comments on all aspects of the amendments, particularly those regarding the practicability and costs and benefits of revising the Residual Interest Deadline. III. Comments and Response The Commission received ten comments on the NPRM. The comments were submitted by the Futures Industry Association (``FIA''), CME Group (``CME''), National Futures Association (``NFA''), National Introducing Brokers Association (``NIBA''), Managed Funds Association (``MFA''), Coalition of National Producers and Agribusiness (``Agribusiness Coalition''),\8\ National Grain and Feed Association (``NGFA''), National Council of Farmer Cooperatives (``NCFC''), the Honorable Heidi Heitkamp, United States Senate, and Chris Barnard.\9\ All ten comments supported the proposed amendments. --------------------------------------------------------------------------- \8\ The Commission received two comment letters filed by the Coalition of National Producers and Agribusiness. The second comment letter was identical to the first with the exception of an amendment adding two additional signatories. \9\ The comments are available on the Commission's Web site, http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1537. --------------------------------------------------------------------------- The FIA and its member firms supported the amendments, stating their willingness to participate in the study and citing concerns that a residual interest deadline earlier than 6:00 p.m. Eastern Time on the Settlement Date might impose significant financial and operational burdens on both customers and FCMs. The NFA encouraged the Commission to consider industry comment on the timing and parameters of the study to ensure the Commission has the most complete information available. The NIBA, NCFC, NGFA, Agribusiness Coalition, and MFA added that an earlier Residual Interest Deadline could force the pre-funding of margin by FCMs, in turn causing increased operational costs on FCMs and their customers, which could result in the possible exit of certain customers from the marketplace. Senator Heitkamp also supported the proposed amendments and stated that the rule would provide end users with the certainty they need to run their businesses. All commenters supported the position that any future revisions should be done through separate rulemaking. The FIA and CME further stated that the opportunity to provide input on the setting of the Residual Interest Deadline was something consistent with the goals of, if not required by, the Administrative Procedure Act. Chris Barnard asked for certainty on the proposed retention of the existing deadline absent further Commission rulemaking, stating that such a requirement is open-ended. The Commission has considered the comments and is adopting the amendments as proposed. Amending Regulation 1.22 to require the Commission to conduct a separate rulemaking prior to revising the Residual Interest Deadline will provide market participants with an opportunity to review and comment on the Commission's staff's roundtable and public report. The amendments also provide market participants with an opportunity to review and to provide comments, via a rulemaking process, on any Commission proposed revisions to the Residual Interest Deadline. IV. Cost-Benefit Considerations Section 15(a) of the Commodity Exchange Act (``CEA'') requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders.\10\ Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors. --------------------------------------------------------------------------- \10\ 7 U.S.C. 19(a). --------------------------------------------------------------------------- As noted in the NPRM, the status quo baseline with which the costs and benefits are compared is the Residual Interest Deadline of 6:00 p.m. Eastern Time on the Settlement Date, which would apply until the Commission takes further action or, in the absence of further action, until December 31, 2018. The status quo baseline includes the automatic termination of the phase-in compliance period at December 31, 2018, which, absent Commission action, would move the Residual Interest Deadline to the time of settlement referenced in Regulation 1.22(c)(2)(i), or as appropriate, 1.22(c)(4). As also noted in the NPRM, the status quo baseline is similar to this final rulemaking and, as such, the Commission believes that there is not likely to be any material differences between this final rulemaking and the status quo baseline in terms of the first four section 15(a) factors. The Commission notes that the amendments will alter the procedure followed with regard to the removal of the automatic termination of the phase-in period, which could alter the cost and benefit with respect to the fifth section 15(a) factor. The Commission specifically invited comment on the cost and benefit implications related to the fifth section 15(a) factor (``other public interest considerations''). However, the Commission received no comments that contained any quantitative data regarding the monetary value of any public interest considerations. As such, the Commission has considered the fifth section 15(a) factor qualitatively. All commenters supported the termination of the automatic phase-in compliance period. The CME stated that removing the automatic moving of the residual interest deadline will allow impacted market participants, including customers and FCMs, to provide comments on any proposed rule change that results from the study. In addition, the FIA stated the adoption of the amendment will also afford the Commission the opportunity to carefully consider the results of the staff study without being bound by an unnecessary deadline. The Commission agrees with commenters that a separate rulemaking prior to revising the Residual Interest Deadline will afford the public an opportunity to participate in any future decision-making concerning any possible movement of the Residual Interest Deadline. The termination of the automatic phase-in compliance period will grant the Commission more opportunity to consider the study and [[Page 15509]] the public roundtable, as well as an opportunity to receive and evaluate additional public comment on any proposed rule change. V. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (``RFA'') \11\ requires Federal agencies, in promulgating regulations, to consider the impact of those regulations on small entities. The Commission has previously established certain definitions of ``small entities'' to be used by the Commission in evaluating the impact of its rules on small entities in accordance with the RFA.\12\ The final amendments would affect FCMs. The Commission previously has determined that FCMs are not small entities for purposes of the RFA, and, thus, the requirements of the RFA do not apply to FCMs.\13\ The Commission's determination was based, in part, upon the obligation of FCMs to meet the minimum financial requirements established by the Commission to enhance the protection of customers' segregated funds and protect the financial condition of FCMs generally.\14\ Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the final amendments will not have a significant economic impact on a substantial number of small entities. --------------------------------------------------------------------------- \11\ 5 U.S.C. 601 et seq. \12\ 47 FR 18618 (Apr. 30, 1982). \13\ Id. at 18619. \14\ Id. --------------------------------------------------------------------------- B. Paperwork Reduction Act The Paperwork Reduction Act (``PRA'') provides that a Federal agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number issued by the Office of Management and Budget (``OMB''). This rulemaking amends requirements that contain a collection of information for which the Commission has previously received a control number from OMB. The title for this collection of information is ``Regulations and Forms Pertaining to Financial Integrity of the Market Place, OMB control number 3038-0024''. This collection of information is not expected to be impacted by the rule amendment approved herein, as the calculations which are already reflected in the burden estimate are not expected to change; the phase- in period for assessing compliance relative to such calculations is the sole aspect of the collection of information that will be altered. The PRA burden hours associated with this collection of information are therefore not expected to be increased or reduced as a result of the final amendments. Accordingly, for purposes of the PRA, these final rule amendments would not impose any new reporting or recordkeeping requirements. List of Subjects in 17 CFR Part 1 Brokers, Commodity futures, Consumer protection, Reporting and recordkeeping requirements. For the reasons discussed in the preamble, the Commodity Futures Trading Commission amends 17 CFR part 1 as set forth below: PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT 0 1. The authority citation for part 1 continues to read as follows: Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012). 0 2. In Sec. 1.22, revise paragraphs (c)(5)(iii)(B) and (C) to read as follows: Sec. 1.22 Use of futures customer funds restricted. * * * * * (c) * * * (5) * * * (iii) * * * (B) Nine months after publication of the report required by paragraph (c)(5)(iii)(A) of this section, the Commission may (but shall not be required to) do either of the following: (1) Terminate the phase-in period through rulemaking, in which case the phase-in period shall end as of a date established by a final rule published in the Federal Register, which date shall be no less than one year after the date such rule is published; or (2) Determine that it is necessary or appropriate in the public interest to propose through rulemaking a different Residual Interest Deadline. In that event, the Commission shall establish, if necessary, a phase-in schedule in the final rule published in the Federal Register. (C) If the phase-in schedule has not been terminated or revised pursuant to paragraph (c)(5)(iii)(B) of this section, then the Residual Interest Deadline shall remain 6:00 p.m. Eastern Time on the date of the settlement referenced in paragraph (c)(2)(i) or, as appropriate, (c)(4) of this section until such time that the Commission takes further action through rulemaking. Issued in Washington, DC, on March 18, 2015, by the Commission. Christopher J. Kirkpatrick, Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. Appendices to Residual Interest Deadline for Futures Commission Merchants--Commission Voting Summary, Chairman's Statement, and Commissioners' Statements Appendix 1--Commission Voting Summary On this matter, Chairman Massad and Commissioners Wetjen, Bowen, and Giancarlo voted in the affirmative. No Commissioner voted in the negative. Appendix 2--Statement of Chairman Timothy G. Massad Today we are finalizing a change to a rule that concerns one of the most important objectives of the Commission, which is to protect customer funds. In addition, today's action reflects one of my key priorities since taking office, which is to make sure our rules do not impose undue burdens or unintended consequences for the nonfinancial commercial businesses that depend on the derivatives markets to hedge commercial risks. Today's action concerns Regulation 1.22, regarding the posting of collateral. When a customer's account has insufficient margin, a futures commission merchant must commit its own capital--often referred to as the FCM's ``residual interest''--to make up the difference. Regulation 1.22 sets the deadline for posting residual interest. That deadline, in turn, affects when customers must post collateral. The regulation provided that the deadline, which is currently 6:00 p.m. on the next day, would automatically become earlier in a couple years, without any Commission action or opportunity for public input. Last fall, we proposed to amend the rule so that the FCM's deadline to post ``residual interest'' will not become earlier than 6:00 p.m. without an affirmative Commission action and an opportunity for public comment. Today, we are finalizing that change. An earlier deadline can help make sure that FCMs always hold sufficient margin and do not use one customer's margin to support another customer, but it can also impose costs on customers who must deliver margin sooner. We will do a study of how well the current rule and deadline are working, the practicability of changing the deadline, and the costs and benefits of any change. Today's action will make sure that the Commission considers all those issues and that customers will have an opportunity to provide us with input on any future change the Commission may consider. Appendix 3--Statement of Commissioner Mark P. Wetjen In the fall of 2013, the Commission made some important changes to rule 1.22, to which registered futures commission [[Page 15510]] merchants (FCMs) are subject. The revision to this rule, known as the ``residual-interest requirement'', clarified that one customer's funds could not be used by an FCM to cover another customer's margin deficit, but phased in a deadline for stricter compliance with this clarified standard. The change was designed to reduce risks to those customer funds placed in the care of FCMs, and were among a host of regulatory enhancements adopted by the Commission after two failures of large, registered FCMs in 2011 and 2012--MF Global and Peregrine Financial. I supported those regulatory enhancements--including the revision to rule 1.22--because of the importance of the matter addressed in each: The safekeeping of customer money, which is the most sacrosanct duty that any financial institution owes to its customers. Today, the overall framework of regulatory requirements that registered FCMs must comply with is substantially different today than in 2011. For example, FCMs are no longer permitted to use customer funds for in-house lending through repurchase agreements; they are subject to restrictions on the types of securities that customer funds can be invested in; they must pass on customer initial margin on a gross basis to the clearinghouse; through LSOC (legal segregation with operational comingling) they must legally segregate cleared swaps customer collateral on an individual basis; and they were required to significantly enhance their supervision of and accounting for customer funds. As a result, the risks posed to customers funds stewarded by FCMs have been significantly reduced. The recent customer protection rulemakings all were well intentioned, but indisputably carried some additional costs and burdens for both FCMs and their customers. The analysis was made at the time, however, that those burdens and costs were outweighed by the benefits to FCM customers, especially against the very recent backdrop of hundreds of millions of dollars of customer funds having been stolen, or tied up in a bankruptcy proceeding, for at least a period of time. The release before us essentially re-weighs the cost or burden on one hand, and the benefit on the other, and comes up with a slightly different, but well supported, conclusion regarding the residual-interest requirement. The costs or burdens revisited in the release: (1) Uncertainty to the marketplace invited by a time-of- settlement compliance deadline that was subject to future review by the Commission staff, which suggested a change could come to the requirements, but might not; and (2) the anticipated costs to FCMs of having to finance the funding to top up their customers' margin deficits, or the cost to customers of pre-funding their margin accounts with FCMs. And the benefit at issue in the release: The value to an FCM customer of ensuring that its funds will never be borrowed by an FCM to cover another customer's deficit. The inherent risk to this common practice by FCMs is that should an FCM become insolvent after it posts required margin to the clearinghouse, but before it collects margin deficits from all of its customers, the customers whose funds were used to cover a deficit might not see those funds again, or perhaps only after a protracted bankruptcy proceeding. This practice also is not technically compliant with how rule 1.22 is written, which prohibits FCMs from ``using, or permitting the use of, the futures customer funds of one futures customer to purchase, margin, or settle the trades, contracts, or commodity options of, or to secure or extend the credit of, any person other than such futures customer.'' This final rule keeps the residual-interest deadline at the close of business on the day following the margin-deficit calculation and eliminates the future deadline of the time of settlement on the day following the margin-deficit calculation. The Commission staff is still required to perform a feasibility study to determine whether future, more aggressive residual-interest deadlines would be desirable. The comment file overwhelmingly supported the change in today's final rule--in other words, commenters took the view that the potential costs associated with the 2013 residual-interest rule appear to outweigh the risk that some of their funds could be lost in the event their FCM becomes insolvent after the time of settlement, but before an FCM collects margin deficits. Indeed, the risk that an FCM becomes insolvent during this precise timeframe without some prior notice to its customers of financial stress at the FCM is very low. Notably, many comments supporting this final rule were filed by FCM customers, the constituency rule 1.22 is designed to protect, and who appreciate the aforementioned risk. The Commission must respect the comment process and the FCM-customer viewpoint that today's rule better balances the cost and benefits of rule 1.22. Another relevant factor that supports the change to rule 1.22 is the risk of concentration within the FCM community as a whole, and what that means for the costs to customers of trading in derivatives and its related impacts on liquidity in those markets. The number of registered FCMs has decreased in recent years, which may make it more difficult for customers to manage their risk by limiting their ability to access the markets, or by making it more difficult for them to allocate funds between multiple FCMs to minimize concentration risk. The results of the public comment process, when considered in the context of the overall stronger regulatory framework for FCMs and the concentration in the FCM community described above, give me the comfort needed to support the changes to 1.22 contained in today's release. On the other hand, without the five-year phase-in period, we might see a reluctance by the industry to move as swiftly to streamline margin-collection practices and to take advantage of any technological solutions that may be developed. Some recent technology advances hold the promise to reduce the very sorts of risks addressed by rule 1.22 by facilitating real-time margin collection and settlement. To be sure, those advances would have been more seriously and expeditiously tested and--if they demonstrate merit--embraced without the change to rule 1.22 we are releasing today. In other words, just as in 2013 when the existing rule was finalized, I continue to believe that the most costly solutions for complying with rule 1.22 that were anticipated by many commenters should not be the ones ultimately embraced by the marketplace. Moreover, given regulatory requirements imposed by other regulators, today members of the clearing ecosystem are exploring a variety of solutions to new compliance and capital burdens that also would ease and enable stricter compliance with rule 1.22, thus minimizing further the likelihood that pre-funding customer margin accounts with FCMs will become the preferred solution to compliance. Finally, I note that a study and roundtable to review these advancements, and how they might lower risks and related costs, still are mandated by law, and I ask the Chairman to direct staff to move swiftly to comply with these regulatory requirements so that the Commission may act appropriately when and if it needs to. I look forward to continuing to collaborate with staff and market participants as we work towards enhancing the safety and efficiency of our markets. Appendix 4--Statement of Commissioner J. Christopher Giancarlo I support the Commission's action to change the residual interest deadline, if necessary or appropriate, only upon a Commission rulemaking following a public comment period. This approach will allow the Commission to better understand the market impacts and operational challenges of moving the residual interest deadline. This approach is especially important given the likely negative impacts on smaller futures commission merchants who provide our farmers, ranchers and rural producers with critical risk management services. I call on the Commission to take the same deliberative approach to the de minimis exception to the swap dealer definition so that the de minimis level does not automatically adjust from $8 billion to $3 billion, absent a rulemaking with proper notice and comment. Like today's proposal, the Commission should only adjust the de minimis threshold if necessary or appropriate after it has considered the data and weighed public comments. [FR Doc. 2015-06548 Filed 3-23-15; 8:45 am] BILLING CODE 6351-01-P
![Federal Register / Vol. 80, No. 56 / Tuesday, March 24, 2015 / Rules and Regulations 15507
(SBREFA) requires FAA to comply with department, agency, or instrumentality; SUPPLEMENTARY INFORMATION:
small entity requests for information or and third, for all other operations.
advice about compliance with statutes (2) [Reserved] I. Background
and regulations within its jurisdiction. * * * * * On October 30, 2013, the Commission
A small entity with questions regarding (e) Expiration. This Special Federal amended Regulation 1.22 to enhance the
this document may contact its local Aviation Regulation will remain in safety of funds deposited by customers
FAA official, or the person listed under effect until March 20, 2017. The FAA with FCMs as margin for futures
the FOR FURTHER INFORMATION CONTACT may amend, rescind, or extend this transactions.1 The amendments require
heading at the beginning of the Special Federal Aviation Regulation as an FCM to maintain its own capital
preamble. To find out more about necessary. (hereinafter referred to as the FCM’s
SBREFA on the Internet, visit http:// Issued in Washington, DC, under the ‘‘Residual Interest’’) in customer
www.faa.gov/regulations_policies/ authority of 49 U.S.C. 106(f), 40101(d)(1), segregated accounts in an amount equal
rulemaking/sbre_act/. 40105(b)(1)(A), and 44701(a)(5), on March 19, to or greater than its customers’
2015.
List of Subjects in 14 CFR Part 91 aggregate undermargined amounts.2 The
Michael P. Huerta, Commission established a phased-in
Air traffic control, Aircraft, Airmen,
Administrator. compliance schedule for Regulation
Airports, Aviation safety, Freight, Libya.
[FR Doc. 2015–06697 Filed 3–20–15; 8:45 am] 1.22 with an initial Residual Interest
The Amendment BILLING CODE 4910–13–P Deadline of 6:00 p.m. Eastern Time on
In consideration of the foregoing, the the date of the settlement referenced in
Federal Aviation Administration Regulation 1.22(c)(2)(i) or (c)(4) (the
amends chapter I of title 14, Code of COMMODITY FUTURES TRADING ‘‘Settlement Date’’), beginning
Federal Regulations as follows: COMMISSION November 14, 2014.3 Amended
Regulation 1.22 also directs staff to host
PART 91—GENERAL OPERATING AND 17 CFR Part 1 a public roundtable and publish a report
FLIGHT RULES RIN 3038–AE22 for public comment by May 16, 2016
■ 1. The authority citation for part 91 addressing, to the extent information is
Residual Interest Deadline for Futures practically available, the practicability
continues to read as follows:
Commission Merchants (for both FCMs and customers) of
Authority: 49 U.S.C. 106(f), 106(g), 1155, moving the Residual Interest Deadline
40101, 40103, 40105, 40113, 40120, 44101, AGENCY: Commodity Futures Trading
44111, 44701, 44704, 44709, 44711, 44712, Commission. from 6:00 p.m. Eastern Time on the
44715, 44716, 44717, 44722, 46306, 46315, Settlement Date, to the time of
ACTION: Final rule.
46316, 46504, 46506–46507, 47122, 47508, settlement or to some other time of day.4
47528–47531, 47534, articles 12 and 29 of the SUMMARY: The Commodity Futures Furthermore, amended Regulation 1.22
Convention on International Civil Aviation Trading Commission (‘‘Commission’’ or provides that, absent Commission
(61 Stat. 1180), (126 Stat. 11). ‘‘CFTC’’) is amending its regulations to action, the phased-in compliance period
■ 2. In § 91.1603, revise paragraphs (c) remove the December 31, 2018 for the Residual Interest Deadline
and (e) to read as follows: automatic termination date for the automatically terminates on December
phased-in compliance schedule for 31, 2018.5 In the case of such automatic
§ 91.1603 Special Federal Aviation termination, the Residual Interest
futures commission merchants
Regulation No. 112—Prohibition Against
Certain Flights Within the Tripoli (HLLL) (‘‘FCMs’’) and provides assurance that Deadline would change to the time of
Flight Information Region (FIR). the residual interest deadline, as settlement on the Settlement Date.
defined in the regulations (‘‘Residual
* * * * * II. The Proposal
(c) Permitted operations. This section Interest Deadline’’), will only be revised
does not prohibit persons described in through a separate Commission On November 3, 2014, the
paragraph (a) of this section from rulemaking. Commission proposed to revise
conducting flight operations within the DATES: The final rule is effective May Regulation 1.22 to remove the December
Tripoli (HLLL) FIR under the following 26, 2015. 31, 2018 automatic termination of the
conditions: FOR FURTHER INFORMATION CONTACT: phase-in compliance period.6 In the
(1) Flight operations are conducted Division of Swap Dealer and NPRM, the Commission stated the
under a contract, grant, or cooperative Intermediary Oversight: Thomas Smith, intention to retain the Residual Interest
agreement with a department, agency, or Acting Director, 202–418–5495, tsmith@
instrumentality of the U.S. government cftc.gov; Jennifer Bauer, Special 1 Enhancing Protections Afforded Customers and
(or under a subcontract between the Counsel, 202–418–5472, jbauer@ Customer Funds Held by Futures Commission
prime contractor of the department, Merchants and Derivatives Clearing Organizations,
cftc.gov; Joshua Beale, Attorney- Final Rule, 78 FR 68506 (Nov. 14, 2013) (amending
agency, or instrumentality, and the Advisor, 202–418–5446, jbeale@ 17 CFR parts 1, 3, 22, 30 and 140).
person described in paragraph (a) of this cftc.gov, Three Lafayette Centre, 1155 2 See 17 CFR 1.22(c)(3)(i). As defined in
section), with the approval of the FAA, 21st Street NW., Washington, DC 20581. Regulation 1.22(c)(1), a customer’s account is
or under an exemption issued by the Division of Clearing and Risk: Kirsten ‘‘undermargined,’’ when the value of the customer
funds for a customer’s account is less than the total
FAA. The FAA will process requests for V.K. Robbins, Associate Chief Counsel, amount of collateral required by derivatives
approval or exemption in a timely 202–418–5313, krobbins@cftc.gov, clearing organizations for that account’s contracts.
TKELLEY on DSK3SPTVN1PROD with RULES
manner, with the order of preference Three Lafayette Centre, 1155 21st Street See 78 FR 68513, n.30.
being: First, for those operations in NW., Washington, DC 20581. 3 See 17 CFR 1.22(c)(5)(ii); See 78 FR at 68578.
4 See 17 CFR 1.22(c)(5)(iii)(A).
support of U.S. government-sponsored Office of the Chief Economist:
5 See 17 CFR 1.22(c)(5)(iii)(C).
activities; second, for those operations Stephen Kane, Research Economist, 6 Residual Interest Deadline for Futures
in support of government-sponsored 202–418–5911, skane@cftc.gov, Three Commission Merchants, Notice of Proposed
activities of a foreign country with the Lafayette Centre, 1155 21st Street NW., Rulemaking, 79 FR 68148 (Nov. 14, 2014)
support of a U.S. government Washington, DC 20581. (amending 17 CFR part 1).
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![15510 Federal Register / Vol. 80, No. 56 / Tuesday, March 24, 2015 / Rules and Regulations
merchants (FCMs) are subject. The revision deficits from all of its customers, the embraced without the change to rule 1.22 we
to this rule, known as the ‘‘residual-interest customers whose funds were used to cover a are releasing today. In other words, just as in
requirement’’, clarified that one customer’s deficit might not see those funds again, or 2013 when the existing rule was finalized, I
funds could not be used by an FCM to cover perhaps only after a protracted bankruptcy continue to believe that the most costly
another customer’s margin deficit, but proceeding. This practice also is not solutions for complying with rule 1.22 that
phased in a deadline for stricter compliance technically compliant with how rule 1.22 is were anticipated by many commenters
with this clarified standard. The change was written, which prohibits FCMs from ‘‘using, should not be the ones ultimately embraced
designed to reduce risks to those customer or permitting the use of, the futures customer by the marketplace. Moreover, given
funds placed in the care of FCMs, and were funds of one futures customer to purchase, regulatory requirements imposed by other
among a host of regulatory enhancements margin, or settle the trades, contracts, or regulators, today members of the clearing
adopted by the Commission after two failures commodity options of, or to secure or extend ecosystem are exploring a variety of solutions
of large, registered FCMs in 2011 and 2012— the credit of, any person other than such to new compliance and capital burdens that
MF Global and Peregrine Financial. futures customer.’’ also would ease and enable stricter
I supported those regulatory This final rule keeps the residual-interest compliance with rule 1.22, thus minimizing
enhancements—including the revision to deadline at the close of business on the day further the likelihood that pre-funding
rule 1.22—because of the importance of the following the margin-deficit calculation and customer margin accounts with FCMs will
matter addressed in each: The safekeeping of eliminates the future deadline of the time of become the preferred solution to compliance.
customer money, which is the most settlement on the day following the margin- Finally, I note that a study and roundtable
sacrosanct duty that any financial institution deficit calculation. The Commission staff is to review these advancements, and how they
owes to its customers. Today, the overall still required to perform a feasibility study to might lower risks and related costs, still are
framework of regulatory requirements that determine whether future, more aggressive mandated by law, and I ask the Chairman to
registered FCMs must comply with is residual-interest deadlines would be direct staff to move swiftly to comply with
substantially different today than in 2011. desirable. these regulatory requirements so that the
For example, FCMs are no longer permitted The comment file overwhelmingly Commission may act appropriately when and
to use customer funds for in-house lending supported the change in today’s final rule— if it needs to. I look forward to continuing to
through repurchase agreements; they are in other words, commenters took the view collaborate with staff and market participants
subject to restrictions on the types of that the potential costs associated with the as we work towards enhancing the safety and
securities that customer funds can be 2013 residual-interest rule appear to efficiency of our markets.
invested in; they must pass on customer outweigh the risk that some of their funds Appendix 4—Statement of
initial margin on a gross basis to the could be lost in the event their FCM becomes Commissioner J. Christopher Giancarlo
clearinghouse; through LSOC (legal insolvent after the time of settlement, but
segregation with operational comingling) before an FCM collects margin deficits. I support the Commission’s action to
they must legally segregate cleared swaps Indeed, the risk that an FCM becomes change the residual interest deadline, if
customer collateral on an individual basis; insolvent during this precise timeframe necessary or appropriate, only upon a
and they were required to significantly without some prior notice to its customers of Commission rulemaking following a public
enhance their supervision of and accounting financial stress at the FCM is very low. comment period. This approach will allow
for customer funds. As a result, the risks Notably, many comments supporting this the Commission to better understand the
posed to customers funds stewarded by final rule were filed by FCM customers, the market impacts and operational challenges of
FCMs have been significantly reduced. constituency rule 1.22 is designed to protect, moving the residual interest deadline. This
The recent customer protection and who appreciate the aforementioned risk. approach is especially important given the
rulemakings all were well intentioned, but The Commission must respect the comment likely negative impacts on smaller futures
indisputably carried some additional costs process and the FCM-customer viewpoint commission merchants who provide our
and burdens for both FCMs and their that today’s rule better balances the cost and farmers, ranchers and rural producers with
customers. The analysis was made at the benefits of rule 1.22. critical risk management services.
time, however, that those burdens and costs Another relevant factor that supports the I call on the Commission to take the same
were outweighed by the benefits to FCM change to rule 1.22 is the risk of deliberative approach to the de minimis
customers, especially against the very recent concentration within the FCM community as exception to the swap dealer definition so
backdrop of hundreds of millions of dollars a whole, and what that means for the costs that the de minimis level does not
of customer funds having been stolen, or tied to customers of trading in derivatives and its automatically adjust from $8 billion to $3
up in a bankruptcy proceeding, for at least a related impacts on liquidity in those markets. billion, absent a rulemaking with proper
period of time. The number of registered FCMs has notice and comment. Like today’s proposal,
The release before us essentially re-weighs decreased in recent years, which may make the Commission should only adjust the de
the cost or burden on one hand, and the it more difficult for customers to manage minimis threshold if necessary or appropriate
benefit on the other, and comes up with a their risk by limiting their ability to access after it has considered the data and weighed
slightly different, but well supported, the markets, or by making it more difficult for public comments.
conclusion regarding the residual-interest them to allocate funds between multiple [FR Doc. 2015–06548 Filed 3–23–15; 8:45 am]
requirement. The costs or burdens revisited FCMs to minimize concentration risk. BILLING CODE 6351–01–P
in the release: (1) Uncertainty to the The results of the public comment process,
marketplace invited by a time-of-settlement when considered in the context of the overall
compliance deadline that was subject to stronger regulatory framework for FCMs and
future review by the Commission staff, which the concentration in the FCM community ENVIRONMENTAL PROTECTION
suggested a change could come to the described above, give me the comfort needed AGENCY
requirements, but might not; and (2) the to support the changes to 1.22 contained in
anticipated costs to FCMs of having to today’s release. 40 CFR Part 63
finance the funding to top up their On the other hand, without the five-year [EPA–HQ–OAR–2009–0234; FRL–9923–98–
customers’ margin deficits, or the cost to phase-in period, we might see a reluctance by OAR]
customers of pre-funding their margin the industry to move as swiftly to streamline
accounts with FCMs. And the benefit at issue margin-collection practices and to take RIN 2060–AS39
TKELLEY on DSK3SPTVN1PROD with RULES
in the release: The value to an FCM customer advantage of any technological solutions that
of ensuring that its funds will never be may be developed. Some recent technology National Emission Standards for
borrowed by an FCM to cover another advances hold the promise to reduce the very Hazardous Air Pollutants: Coal- and
customer’s deficit. sorts of risks addressed by rule 1.22 by Oil-Fired Electric Steam Generating
The inherent risk to this common practice facilitating real-time margin collection and Units
by FCMs is that should an FCM become settlement. To be sure, those advances would
insolvent after it posts required margin to the have been more seriously and expeditiously AGENCY: Environmental Protection
clearinghouse, but before it collects margin tested and—if they demonstrate merit— Agency (EPA).
VerDate Sep<11>2014 19:04 Mar 23, 2015 Jkt 235001 PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 E:\FR\FM\24MRR1.SGM 24MRR1](https://thefederalregister.org/doc/80_FR_15563/page/4.svg)
Document Created: 2015-12-18 11:45:11
Document Modified: 2015-12-18 11:45:11
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Rules and Regulations | |
| Action | Final rule. | |
| Dates | The final rule is effective May 26, 2015. | |
| Contact | Division of Swap Dealer and Intermediary Oversight: Thomas Smith, Acting Director, 202-418-5495, [email protected]; Jennifer Bauer, Special Counsel, 202-418-5472, [email protected]; Joshua Beale, Attorney-Advisor, 202-418-5446, [email protected], Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. | |
| FR Citation | 80 FR 15507 | |
| RIN Number | 3038-AE22 | |
| CFR Associated | Brokers; Commodity Futures; Consumer Protection and Reporting and Recordkeeping Requirements |
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