81_FR_35443 81 FR 35337 - Notice of Proposed Order and Request for Comment on a Proposal To Exempt, Pursuant to the Authority in Section 4(c) of the Commodity Exchange Act, the Federal Reserve Banks From Sections 4d and 22 of the Commodity Exchange Act

81 FR 35337 - Notice of Proposed Order and Request for Comment on a Proposal To Exempt, Pursuant to the Authority in Section 4(c) of the Commodity Exchange Act, the Federal Reserve Banks From Sections 4d and 22 of the Commodity Exchange Act

COMMODITY FUTURES TRADING COMMISSION

Federal Register Volume 81, Issue 106 (June 2, 2016)

Page Range35337-35345
FR Document2016-13055

The Commodity Futures Trading Commission (``CFTC'' or ``Commission'') is proposing to permit Federal Reserve Banks to hold money, securities, and property deposited into a customer account by a systemically important derivatives clearing organization in accordance with the standards to which Federal Reserve Banks are held, as specified below. Thus, the Commission is proposing to exempt Federal Reserve Banks that provide customer accounts and other services to systemically important derivatives clearing organizations from Sections 4d and 22 of the Commodity Exchange Act (``CEA'' or the ``Act'').

Federal Register, Volume 81 Issue 106 (Thursday, June 2, 2016)
[Federal Register Volume 81, Number 106 (Thursday, June 2, 2016)]
[Notices]
[Pages 35337-35345]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-13055]


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COMMODITY FUTURES TRADING COMMISSION


Notice of Proposed Order and Request for Comment on a Proposal To 
Exempt, Pursuant to the Authority in Section 4(c) of the Commodity 
Exchange Act, the Federal Reserve Banks From Sections 4d and 22 of the 
Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed order and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing to permit Federal Reserve Banks to hold 
money, securities, and property deposited into a customer account by a 
systemically important derivatives clearing organization in accordance 
with the standards to which Federal Reserve Banks are held, as 
specified below. Thus, the Commission is proposing to exempt Federal 
Reserve Banks that provide customer accounts and other services to 
systemically important derivatives clearing organizations from Sections 
4d and 22 of the Commodity Exchange Act (``CEA'' or the ``Act'').

DATES: Comments must be received by July 5, 2016.

ADDRESSES: You may submit comments by any of the following methods:
     CFTC Web site: http://comments.cftc.gov. Follow the 
instructions for submitting comments through the Comments Online 
process on the Web site.
     Mail: Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail, above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one of these methods.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.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 established 
procedures in Sec.  145.9 of the Commission's regulations, 17 CFR 
145.9.
    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 http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of this action will be retained in the public comment file 
and will be considered as required under the Administrative Procedure 
Act and other applicable laws, and may be accessible under the Freedom 
of Information Act.

FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 
202-418-5096, edonovan@cftc.gov; M. Laura Astrada, Associate Director, 
202-418-7622, lastrada@cftc.gov; or Parisa Abadi, Attorney-Advisor, 
202-418-6620, pabadi@cftc.gov, in each case, at the Division of 
Clearing and Risk, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581; or Joe 
Opron, Special Counsel, 312-596-0653, jopron@cftc.gov, Division of 
Clearing and Risk, Commodity Futures Trading Commission, 525 West 
Monroe Street, Suite 1100, Chicago, IL 60661.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
II. Background
    A. Customer Protection
    B. Designation of Financial Market Utilities Under Title VIII of 
the Dodd-Frank Act
    C. Access to Federal Reserve Bank Accounts and Services
III. Standards of Depository Liability
    A. Depository Liability Under Section 4d of the CEA
    B. Federal Reserve Bank Liability Under Federal Reserve Bank 
Governing Documents
IV. Features Specific to the Federal Reserve Banks
V. Section 4(c) of the CEA
VI. Proposed Exemption From Sections 4d and 22 of the CEA
VII. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost and Benefit Considerations
VIII. Request for Comment
IX. Proposed Order of Exemption

I. Introduction

    In 2013, in response to significant segregated account shortfalls 
experienced by futures customers, the Commission adopted rules that 
aimed to improve the protection of customer funds.\1\ Recognizing that 
such protection is critical to the sound functioning of the futures and 
swaps markets, the Commission reiterated that money, securities, and 
other property deposited by customers must be carefully safeguarded and 
segregated at all times.
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    \1\ Enhancing Protections Afforded Customers and Customer Funds 
Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506 (Nov. 14, 2013).
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    That same year, the Commission adopted enhanced risk management 
standards \2\ and additional requirements for compliance with the 
derivatives clearing organization (``DCO'') core principles set forth 
in the CEA \3\ for DCOs that are designated as systemically important 
(``SIDCOs'') by the Financial Stability Oversight Council.\4\ The 
Commission adopted these requirements in part because of the critical 
role SIDCOs play in fostering

[[Page 35338]]

financial stability \5\ and because the ``failure of a SIDCO to 
complete core clearing and settlement functions within a rapid period 
could create systemic liquidity and credit dislocations on a global 
scale.'' \6\ Accordingly, these additional requirements were designed 
to promote a SIDCO's financial strength, operational integrity, 
security, and reliability.\7\ By requiring a SIDCO's liquidity 
arrangements to be highly reliable in stressed market conditions, the 
Commission sought to bolster a SIDCO's ability to promptly meet its 
cash obligations to its members in order to help avoid the loss of 
market confidence and cascading defaults.\8\
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    \2\ Enhanced Risk Management Standards for Systemically 
Important Derivatives Clearing Organizations, 78 FR 49663 (Aug. 15, 
2013).
    \3\ See Section 5b(c)(2) of the CEA; see also Derivatives 
Clearing Organizations and International Standards, 78 FR 72476 
(Dec. 2, 2013).
    \4\ Under Commission Regulation 39.2, a SIDCO is defined as a 
financial market utility that is a registered DCO under Section 5b 
of the Act, which has been designated by the Financial Stability 
Oversight Council to be systemically important and for which the 
Commission acts as the Supervisory Agency pursuant to Section 803(8) 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act''). 17 CFR 39.2. ``Supervisory Agency'' is defined 
as the Federal agency that has primary jurisdiction over a 
designated financial market utility under Federal banking, 
securities, or commodity futures laws. Section 803(8)(A) of the 
Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010). The text 
of the Dodd-Frank Act is available at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.
    \5\ See, e.g., 78 FR at 49672.
    \6\ Id. at 49674.
    \7\ See id. at 49668-49669; see also 78 FR at 72509.
    \8\ See 78 FR at 72509.
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    Title VIII of the Dodd-Frank Act, entitled ``Payment, Clearing, and 
Settlement Supervision Act of 2010,'' \9\ also included provisions 
aimed at safeguarding the U.S. financial system. One example of this is 
Section 806(a), which expressly permits the Board of Governors of the 
Federal Reserve System (``Board'') to authorize a Federal Reserve Bank 
to establish and maintain a deposit account for a SIDCO and provide 
certain services to the SIDCO, subject to any applicable rules, orders, 
standards, or guidelines prescribed by the Board.\10\
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    \9\ Section 801 of the Dodd-Frank Act.
    \10\ See Section 806(a) of the Dodd-Frank Act.
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    The Commission believes that establishing SIDCO segregated customer 
accounts at a Federal Reserve Bank and enabling SIDCOs to access 
related services there would both augment a SIDCO's liquidity 
arrangements and enhance the protection of customer funds.\11\ The 
Commission recognizes, however, that Section 4d of the CEA was not 
developed with a particular focus on the Federal Reserve Banks.\12\ As 
a result, the unique role that the Federal Reserve Banks play in the 
financial system was not expressly taken into account when the 
Commission's standard of liability was developed for depositories. The 
Commission notes that Federal Reserve financial services provided by 
the Federal Reserve Banks are governed by the terms and conditions that 
are set forth in various federal rules, Federal Reserve Board policies, 
and Federal Reserve Bank operating circulars, which have been carefully 
developed over several decades. The Commission further recognizes that 
the Federal Reserve Banks could be exposed to liability under Sections 
4d and 22 \13\ of the CEA, which could have disparate impact on the 
treatment of deposits at the Federal Reserve Banks and ultimately harm 
U.S. taxpayers. Accordingly, to facilitate SIDCOs' use of Federal 
Reserve Banks as depositories for customer funds, the Commission is 
proposing, pursuant to its authority under Section 4(c) of the CEA, to 
exempt Federal Reserve Banks that provide customer accounts and other 
services to SIDCOs from Sections 4d and 22 of the CEA.\14\ The 
exemption would enable the Federal Reserve Banks to maintain SIDCO 
customer accounts in accordance with the standards set forth in the 
relevant Federal Reserve Bank governing documents, as specified below.
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    \11\ See discussion infra Part VI.
    \12\ Section 4d of the CEA permits customer funds to be 
deposited with a bank, trust company, or DCO. 7 U.S.C. 6d.
    \13\ As discussed in further detail below, Section 22 of the CEA 
would typically provide for private rights of action for damages 
against persons who violate Section 4d, or persons who willfully 
aid, abet, counsel, induce, or procure the commission of a violation 
of Section 4d. See discussion supra Part VI.
    \14\ 7 U.S.C. 6(c); 7 U.S.C. 25.
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II. Background

A. Customer Protection

    The protection of customers--and the safeguarding of money, 
securities, or other property deposited by customers--is a fundamental 
component of the regulatory and oversight framework of the futures and 
swaps markets. Section 4d of the CEA requires a futures commission 
merchant (``FCM'') to segregate from its own assets all money, 
securities, and other property deposited by futures or cleared swaps 
customers to margin, secure, or guarantee futures contracts and options 
on futures contracts traded on designated contract markets, and cleared 
swaps. Section 4d further requires an FCM to treat customer funds as 
belonging to the customer, and prohibits an FCM from using the funds 
deposited by a customer to margin or extend credit to any person other 
than the customer that deposited the funds. Similarly, Section 4d of 
the CEA prohibits a DCO and any depository that has received such funds 
from holding, disposing of, or using such funds as belonging to the 
depositing FCM or any person other than the customers of such FCM.
    The importance of this statutory mandate to protect customer 
funds--to treat them as belonging to customers and not use the funds 
inappropriately--was reinforced in light of the FCM insolvency 
proceedings involving MF Global, Inc. (``MF Global'') and Peregrine 
Financial Group, Inc. (``Peregrine''). In October 2011, MF Global, 
which was dually-registered as an FCM with the Commission and as a 
securities broker-dealer with the U.S. Securities and Exchange 
Commission, was placed into a liquidation proceeding under the 
Securities Investor Protection Act by the Securities Investor 
Protection Corporation. At the time, the trustee appointed to oversee 
the liquidation of MF Global reported a potential $900 million 
shortfall of funds necessary to repay the account balances due to 
customers trading futures on designated contract markets, and an 
approximately $700 million shortfall in funds immediately available to 
repay the account balances of customers trading on foreign futures 
markets. The shortfall in customer segregated accounts was attributed 
by the MF Global trustee to significant transfers of funds out of the 
customer accounts that were used by MF Global, Inc. for various 
purposes other than to meet obligations to or on behalf of 
customers.\15\
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    \15\ See Report of the Trustee's Investigation and 
Recommendations, In. re MF Global, Inc., No. 11-2790 (MG) SIPA 
(Bankr. S.D.N.Y. Jun. 4, 2012). Customer claims were eventually paid 
in full after customer funds were recovered through bankruptcy 
proceedings and the Commission's enforcement action.
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    Shortly thereafter, in 2012, the Commission filed a civil 
injunctive complaint in federal district court against Peregrine and 
its Chief Executive Officer and sole owner, Russell R. Wasendorf, Sr. 
(``Wasendorf''), alleging that Peregrine and Wasendorf misappropriated 
customer funds, violated customer fund segregation laws, and made false 
statements regarding the amount of funds in customer segregated 
accounts in financial statements filed with the Commission. According 
to the complaint, Peregrine falsely represented that it held in excess 
of $220 million of customer funds, when it actually held only 
approximately $5.1 million.\16\ Spurred in part by these shocking 
failures, the Commission promulgated several rules aimed at 
strengthening the protection of customer funds and the U.S. financial 
markets.\17\
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    \16\ See Complaint, U.S. Commodity Futures Trading Commission v. 
Peregrine Financial Group, Inc., and Russell R. Wasendorf, Sr., No. 
12-cv-5383 (N.D. Ill. July 10, 2012).
    \17\ See discussion supra Part I; see also, e.g., Investment of 
Customer Funds and Funds Held in an Account for Foreign Futures and 
Foreign Options Transactions, 76 FR 78776 (Dec. 19, 2011) (revising 
the types of investments that an FCM or DCO could make with customer 
funds under Regulation 1.25 to minimize the exposure of such funds 
to liquidity, credit, and market risks).
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    In an effort to further strengthen customer protection, the 
Commission has also examined the current

[[Page 35339]]

regulatory framework through a series of roundtables and other public 
meetings. The Commission held a public roundtable to solicit input on 
customer protection issues from a broad cross-section of the 
derivatives industry, including market participants, FCMs, DCOs, self-
regulatory organizations, securities regulators, and academics.\18\ The 
Commission also hosted a public meeting of the Technology Advisory 
Committee to discuss potential technological solutions directed at 
enhancing the protection of customer funds.\19\
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    \18\ Further information on the public roundtable, including 
video recordings and transcripts of the discussions, are available 
on the Commission's Web site. See http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff022912 (relating to Feb. 29, 2012); http://www.cftc.gov/PressRoom/Events/opaevent_cftcstaff030112 (relating to 
Mar. 1, 2012).
    \19\ Additional information, including documents submitted by 
meeting participants, is available on the Commission's Web site. See 
http://www.cftc.gov/PressRoom/Events/opaevent_tac072612.
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    Customer protection continues to be a bedrock guiding principle for 
the Commission, as the protection of customer funds is paramount to a 
trusted marketplace.

B. Designation of Financial Market Utilities Under Title VIII of the 
Dodd-Frank Act

    Title VIII of the Dodd-Frank Act was enacted to mitigate risk in 
the financial system and promote financial stability.\20\ Accordingly, 
Section 804 of the Dodd-Frank Act requires the Financial Stability 
Oversight Council (``Council'') \21\ to designate those financial 
market utilities (``FMUs'') that the Council determines are, or are 
likely to become, systemically important.\22\ An FMU includes any 
person that manages or operates a multilateral system for the purpose 
of transferring, clearing, or settling payments, securities, or other 
financial transactions among financial institutions or between 
financial institutions and the person.\23\ As noted by the Council, 
FMUs are vital to the nation's financial infrastructure, and ``their 
smooth operation is integral to the soundness of the financial system 
and the overall economy.'' \24\
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    \20\ See Section 802(b) of the Dodd-Frank Act.
    \21\ The Council was established by Section 111 of the Dodd-
Frank Act. In general, the Council is tasked with identifying risks 
to the financial stability of the United States that could arise 
from the material financial distress or failure, or ongoing 
activities, of large, interconnected bank holding companies or 
nonbank financial companies, or that could arise outside the 
financial services marketplace, promoting market discipline, by 
eliminating expectations on the part of shareholders, creditors, and 
counterparties of such companies that the Government will shield 
them from losses in the event of failure, and responding to emerging 
threats to the stability of the United States financial system. 
Section 112(a)(1) of the Dodd-Frank Act.
    \22\ See Section 804(a) of the Dodd-Frank Act. The term 
``systemically important'' means a situation where the failure of or 
a disruption to the functioning of a financial market utility could 
create, or increase, the risk of significant liquidity or credit 
problems spreading among financial institutions or markets and 
thereby threaten the stability of the financial system of the United 
States. Section 803(9) of the Dodd-Frank Act; see also Authority to 
Designate Financial Market Utilities as Systemically Important, 76 
FR 44763, 44774 (July 27, 2011).
    \23\ Section 803(6)(A) of the Dodd-Frank Act.
    \24\ 76 FR at 44763.
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    In determining whether an FMU is systemically important, the 
Council follows a detailed two-stage designation process, using 
statutory considerations \25\ and other metrics to assess, among other 
things, ``whether possible disruptions [to the functioning of an FMU] 
are potentially severe, not necessarily in the sense that they 
themselves might trigger damage to the U.S. economy, but because such 
disruptions might reduce the ability of financial institutions or 
markets to perform their normal intermediation functions.'' \26\ Thus, 
if a systemically important FMU fails to perform, this failure could 
pose significant risk to its participants and to the U.S. financial 
system more broadly. For example, if a systemically important FMU fails 
to complete timely settlement, there could be significant credit and/or 
liquidity problems for its participants and participants' customers. On 
July 18, 2012, the Council designated eight FMUs as systemically 
important under Title VIII.\27\ Two of these designated FMUs, Chicago 
Mercantile Exchange, Inc. and ICE Clear Credit LLC, are SIDCOs.
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    \25\ Under Section 804(a)(2) of the Dodd-Frank Act, in 
determining whether an FMU is or is likely to become systemically 
important, the Council must take into consideration the following: 
(A) The aggregate monetary value of transactions processed by the 
FMU; (B) the aggregate exposure of the FMU to its counterparties; 
(C) the relationship, interdependencies, or other interactions of 
the FMU with other FMUs or payment, clearing, or settlement 
activities; (D) the effect that the failure of or a disruption to 
the FMU would have on critical markets, financial institutions, or 
the broader financial system; and (E) any other factors the Council 
deems appropriate.
    \26\ 76 FR at 44766.
    \27\ See Press Release, Financial Stability Oversight Council, 
Financial Stability Oversight Council Makes First Designations in 
Effort to Protect Against Future Financial Crises (July 18, 2012), 
available at http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
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C. Access to Federal Reserve Bank Accounts and Services

    As noted above, Section 806(a) of the Dodd-Frank Act permits the 
Board to authorize a Federal Reserve Bank to establish and maintain an 
account for a SIDCO and provide to the SIDCO the services listed in 
Section 11A(b) of the Federal Reserve Act, subject to any applicable 
rules, orders, standards, or guidelines prescribed by the Board.\28\ In 
adopting regulations pursuant to Section 806(a) of the Dodd-Frank Act, 
the Board noted that the ``terms and conditions for access to Federal 
Reserve Bank accounts and services are intended to facilitate the use 
of [Federal] Reserve Bank accounts and services by a designated FMU in 
order to reduce settlement risk and strengthen settlement processes, 
while limiting the risk presented by the designated FMU to the 
[Federal] Reserve Banks.'' \29\ Accordingly, the Board ``expects that 
[Federal] Reserve Banks would provide services that are consistent with 
a designated FMU's need for safe and sound settlement processes under 
account and service agreements generally consistent with the provisions 
of existing [Federal] Reserve Bank operating circulars for such 
services.'' \30\ Highlighting the importance of Federal Reserve Bank 
operating circulars in this regard, the Board further requires that 
designated FMUs be in compliance with existing operating circulars.\31\
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    \28\ The services listed in Section 11A(b) of the Federal 
Reserve Act include wire transfers, settlement, and securities 
safekeeping, as well as services regarding currency and coin, check 
clearing and collection, and automated clearing house transactions. 
See 12 U.S.C. 248a(b). Section 806(a) of the Dodd-Frank Act also 
permits the Board to authorize a Federal Reserve Bank to establish 
deposit accounts under the first undesignated paragraph of Section 
13 of the Federal Reserve Act, 12 U.S.C. 342.
    \29\ Financial Market Utilities (Regulation HH), 78 FR 14024, 
14025 (Mar. 4, 2013).
    \30\ Id.
    \31\ See 12 CFR 234.5(b)(2) (setting forth rules to govern 
Federal Reserve Bank accounts held by designated FMUs).
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III. Standards of Depository Liability

A. Depository Liability Under Section 4d of the CEA

    Under Section 4d of the CEA, a depository, which may be a bank, 
trust company, or a DCO, will be held liable for the improper transfers 
of customer funds by an FCM or DCO if it knew or should have known that 
the transfer was improper.\32\ While a depository has no affirmative 
obligation to police or monitor an FCM or DCO account holder's 
compliance with the CEA or Commission regulations, a depository cannot 
ignore signs of wrongdoing.\33\
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    \32\ See CFTC Interpretative Letter No. 79-1, [1977-1980 
Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 20,835 (May 29, 1979). 
Section 4d of the CEA covers customer funds only; it does not relate 
to proprietary funds of clearing members.
    \33\ See 78 FR at 68539.
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    To ensure that a depository that holds customer funds has been 
informed that

[[Page 35340]]

the deposited funds are those of customers being held in accordance 
with Section 4d of the CEA, the Commission requires an FCM or DCO to 
obtain from each depository with which it deposits customer funds a 
written acknowledgment in this regard.\34\ Commission regulations 
require FCMs and DCOs to use a template acknowledgment letter in order 
to promote a uniform understanding among FCMs, DCOs, and depositories 
as to their obligations under the CEA and Commission regulations with 
respect to the proper treatment of customer funds. The template 
acknowledgment letter contains a provision that reflects the 
Commission's expectation that a depository will engage in its customary 
practices and will be held liable for a violation of Section 4d if it 
knew or should have known of the violation.\35\
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    \34\ See 17 CFR 1.20, Appendices A and B.
    \35\ See 78 FR at 68535; see also 17 CFR 1.20(g)(4)(ii).
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    It is important to note that as the aforementioned standard of 
liability was developed, the unique nature of the Federal Reserve Banks 
was not taken into account. Indeed, until recently, there was no 
statutory authority permitting a SIDCO to hold customer funds at a 
Federal Reserve Bank. However, and as discussed below, the standard of 
liability for Federal Reserve Banks acting as depositories has been 
carefully developed by the Board and not the Commission.

B. Federal Reserve Bank Liability Under Federal Reserve Bank Governing 
Documents

    The Federal Reserve System, which serves as the nation's central 
bank, was created by an act of Congress in 1913. The Federal Reserve 
System consists of a seven member Board, and twelve Federal Reserve 
Banks. The Federal Reserve Banks operate under the general supervision 
of the Board, although each Bank has a Board of Directors that oversees 
its operations. Federal Reserve Banks generate their own income, which 
is generally from interest earned on U.S. government securities that 
are acquired in the course of Federal Reserve monetary policy actions 
and from the provision of priced services to depository institutions. 
Federal Reserve Banks do not, however, operate for a profit. Indeed, 
each year they return to the U.S. Department of Treasury all earnings 
in excess of Federal Reserve Bank operating and other expenses. Federal 
Reserve Banks are, in essence, the operating arms of the United States' 
central banking system. In addition to their many responsibilities, 
Federal Reserve Banks operate as a bank for depository institutions and 
the U.S. government.\36\
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    \36\ For example, Federal Reserve Banks provide checking 
accounts for the U.S. Department of Treasury, issue and redeem U.S. 
government securities, and act in other ways as a fiscal agent for 
the U.S. government. See Federal Reserve Board, The Structure of the 
Federal Reserve System (Apr. 17, 2009), http://www.federalreserve.gov/pubs/frseries/frseri3.htm.
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    Some of the services provided by Federal Reserve Banks include the 
provision of funds and book-entry securities accounts, as well as 
certain financial services, such as wire transfers, book-entry 
securities transfers, and multilateral settlement services. These 
accounts and services are governed by account agreements, operating 
circulars issued by Federal Reserve Banks for each service, the Federal 
Reserve Act, and Federal Reserve regulations and policies, and, with 
respect to book-entry securities services, the regulations of the 
domestic issuer of the securities or the issuer's regulator (``Federal 
Reserve Bank Governing Documents'').\37\ Additionally, one or more 
Federal Reserve Banks have established proprietary accounts for SIDCOs 
\38\ pursuant to Section 806 of the Dodd-Frank Act. These proprietary 
accounts are also governed by the Federal Reserve Bank Governing 
Documents.
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    \37\ See, e.g., Federal Reserve Bank Operating Circular No. 6 
(governing funds transfers through the Fedwire Funds Service); 
Federal Reserve Bank Operating Circular No. 7 (governing the 
maintenance of and transfer services for book-entry securities 
accounts); 12 CFR part 210, subpart B (governing funds transfers 
through the Fedwire Funds Service); 31 CFR part 357, subpart B 
(setting forth the Department of the Treasury's regulations 
governing book-entry treasury bonds, notes, and bills).
    \38\ A SIDCO's proprietary account holds the proprietary funds 
of its clearing members.
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    The Federal Reserve Banks' standard of liability for the financial 
services it offers to depository institutions has been developed over 
the 100-plus years of Federal Reserve Bank operations, in many cases 
hand-in-hand with the development of federal and state statutory and 
regulatory provisions, as well as common law governing securities 
transfers, funds transfers, and other payment mechanisms. The operating 
circulars of the Federal Reserve Banks began having uniform terms and 
conditions across Federal Reserve Bank districts as of January 2, 1998. 
The 1998 version of the uniform Operating Circular 1 (Account 
Relationships) sets out the Federal Reserve Banks' standard and scope 
of liability that limits a Federal Reserve Bank's liability to only 
damages suffered by the account holder that are caused by the Federal 
Reserve Bank's failure to exercise ordinary care, and does not include 
lost profits, claims by third parties, or consequential or incidental 
damages.\39\
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    \39\ See Federal Reserve Board, Financial Services, https://web.archive.org/web/19990125095428/http:/www.frbservices.org/ (last 
visited Apr. 28, 2016). Prior to 1998, each Federal Reserve Bank had 
its own system with different numbered operating circulars; as a 
result, the circular language was not necessarily uniform.
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    The Commission understands that, in accordance with the Federal 
Reserve Bank Governing Documents, the Federal Reserve Banks are 
authorized to act on the instructions received through the use of 
procedures agreed upon with the account holders, without any liability 
or obligation to inquire as to the legitimacy or accuracy of the 
instruction or the transaction. By agreement with the respective 
account holders, the procedures for accepting an instruction are not 
used to detect an error in the transmission or content of the 
instruction, or compliance by the account holder with its legal 
obligations. In addition to limiting the areas of liability, the 
Commission understands that the Federal Reserve Bank Governing 
Documents limit a Federal Reserve Bank's liability in maintaining an 
account or acting on such an instruction to actual damages that are 
incurred solely by the account holder \40\ and that are proximately 
caused by the Federal Reserve Bank's failure to exercise ordinary care 
or act in good faith in accordance with the Federal Reserve Bank 
Governing Documents.
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    \40\ Under the Federal Reserve Bank Governing Documents, the 
Federal Reserve Banks are not liable to third parties.
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IV. Features Specific to the Federal Reserve Banks

    As noted above, Federal Reserve Banks play a unique role in the 
U.S. banking and payment system as compared to commercial banks and 
other depositories and payment service providers.\41\ The standards set 
forth in the Federal Reserve Bank Governing Documents are reflective of 
this unique role and have been developed over the years to capture the 
distinctive nature of

[[Page 35341]]

the Federal Reserve Banks. In addition to the accounts and services 
that Federal Reserve Banks provide to the government and to other 
depository institutions, the Federal Reserve Banks supervise and 
examine member banks for safety and soundness. They also participate in 
the setting of U.S. monetary policy, an activity that is the primary 
responsibility of the Federal Reserve System. Moreover, in an effort to 
reduce U.S. taxpayer burden, Congress requires that the residual 
earnings of each Federal Reserve Bank be distributed to the U.S. 
Treasury's general fund.\42\ In fact, the Federal Reserve Banks have 
sent to the U.S. Treasury approximately $98.7 billion in residual 
earnings in 2014 and about $500 billion on a cumulative basis since 
2008.\43\
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    \41\ Federal Reserve Banks `` `are not operated for the profit 
of shareholders;' rather, they `were created and are operated in 
furtherance of the national fiscal policy.' '' See Starr Int'l Co. 
v. Fed. Reserve Bank of New York, 742 F.3d 37, 40 (2d Cir. 2014) 
(quoting Fed. Reserve Bank of Bos. v. Comm'r of Corps. & Taxation of 
the Commonwealth of Mass., 499 F.2d 60, 62 (1st Cir. 1974)). 
``Because Federal Reserve Banks `conduct important governmental 
functions regarding' matters including the `general fiscal duties of 
the United States,' they are `instrumentalities of the federal 
government.' '' See id. (quoting Fed. Reserve Bank of St. Louis v. 
Metrocentre Improvement Dist. #1, 657 F.2d 183, 185-186 (8th Cir. 
1981)).
    \42\ The current congressional mandate requires that Federal 
Reserve Banks transfer their residual earnings in excess of $10 
billion to the U.S. Treasury. See FAST Act, Pub. L. 114-94, 129 
Stat. 1312 (2015). For prior congressional mandates in this regard, 
see, e.g., District of Columbia Appropriations Act, Pub. L. 106-113, 
113 Stat. 1501 (1999) (requiring that, in fiscal year 2000, Federal 
Reserve Banks transfer their residual earnings in the amount of 
$3,752,000,000 to the U.S. Treasury's general fund); Omnibus Budget 
Reconciliation Act of 1993, Pub. L. 103-66, 107 Stat. 312 (requiring 
that, during fiscal years 1997 and 1998, Federal Reserve Banks 
transfer their residual earnings in excess of 3 percent of the total 
paid-in capital and surplus to the U.S. Treasury's general fund).
    \43\ See Press Release, Board of Governors of the Federal 
Reserve System, Reserve Bank Income and Expense Data and Transfers 
to the Treasury for 2014 (Jan. 9, 2015), available at http://www.federalreserve.gov/newsevents/press/other/20150109a.htm; Annual 
Report, Board of Governors of the Federal Reserve System (2014), 
available at http://www.federalreserve.gov/publications/annual-report/files/2014-annual-report.pdf.
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    Federal Reserve Banks also do not provide financial services to 
businesses generally; rather, they serve only account holders 
authorized by statute, such as depository institutions and the U.S. 
government.\44\ In addition, Federal Reserve Banks may engage in a set 
range of services and only with the respective account holder. As such, 
Federal Reserve Banks do not provide the range of related account 
services that a commercial bank might provide, such as offering 
services to executives of the account holder as an additional incentive 
to do business with the bank. Therefore, the Commission believes that 
the Federal Reserve Banks do not have the potential conflict of 
interest that may arise when a commercial bank provides such services.
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    \44\ See, e.g., Federal Reserve Bank of Richmond, Consumer 
Issues and Information, available at https://www.richmondfed.org/faqs/consumer/ (last visited Feb. 26, 2016) (stating that ``Federal 
Reserve Banks are not authorized to open accounts for individuals[; 
rather, o]nly depository institutions and certain other financial 
entities may open an account at a Federal Reserve Bank''); see also 
Section 806(a) of the Dodd-Frank Act (authorizing accounts at a 
Federal Reserve Bank for designated FMUs).
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    Moreover, Federal Reserve Banks play a distinctive, dual role with 
respect to SIDCOs, as they may be both account service providers and 
participants in the supervision of SIDCOs. Under Title VIII of the 
Dodd-Frank Act, the Board may participate in any Commission examination 
of a SIDCO and otherwise consult and share information with the 
Commission regarding SIDCOs. Federal Reserve Banks may be delegated 
authority to assist the Board in fulfilling this function.\45\
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    \45\ See Federal Reserve Board, The Structure of the Federal 
Reserve System (Apr. 17, 2009), http://www.federalreserve.gov/pubs/frseries/frseri3.htm (noting that some supervisory responsibilities 
are delegated to the Federal Reserve Banks by the Board).
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    Further, Title VIII of the Dodd-Frank Act expressly permits the 
Commission and the Board to provide confidential supervisory 
information to, among others, the Federal Reserve Banks.\46\ Although a 
Federal Reserve Bank may have access to confidential supervisory 
information regarding a particular SIDCO, Board staff has represented 
that it has a long-standing ``Wall Policy'' that generally prohibits, 
subject to the limitations contained therein, the sharing of 
confidential supervisory information with Federal Reserve Bank account 
services staff, and requires that care be exercised to avoid actual or 
apparent conflict between a Federal Reserve Bank's role as a provider 
of financial services and its role as a regulator, supervisor, and 
lender.\47\ The Board has adopted certain standards regarding the 
organization, operations, and business practices of Federal Reserve 
Bank financial services which, among other things, generally prohibit 
Federal Reserve Bank personnel involved in day-to-day monetary policy, 
bank supervision, or the lending function from providing confidential 
information obtained in the course of their duties to Federal Reserve 
Bank personnel involved in day-to-day account services. In addition, 
the Wall Policy would generally prohibit Board supervisory staff from 
sharing any confidential supervisory information they receive about a 
SIDCO with the Federal Reserve Bank staff responsible for managing the 
SIDCO's account and financial services. Accordingly, given the unique 
role that Federal Reserve Banks play in the U.S. financial system, 
Federal Reserve Bank account services staff are unlikely to face 
conflicts of interest that would motivate them to overlook information 
that would otherwise raise suspicion of wrongdoing.
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    \46\ See Section 809(e)(2) of the Dodd-Frank Act.
    \47\ Federal Reserve's Key Policies for the Provision of 
Financial Services: Standards Related to Priced-Service Activities 
of the Federal Reserve Banks (1984), available at http://www.federalreserve.gov/paymentsystems/pfs_standards.htm. The policy 
permits certain limited exceptions in cases where such disclosure 
fulfills an important supervisory objective, preserves the integrity 
of the payment mechanism, or protects the assets of the Federal 
Reserve Banks. In such cases, information will be provided on a 
need-to-know basis and only with the approval of senior management.
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V. Section 4(c) of the CEA

    Section 4(c) of the CEA provides that, in order to promote 
responsible economic or financial innovation and fair competition, the 
Commission, by rule, regulation, or order, after notice and opportunity 
for hearing, may exempt any agreement, contract, or transaction, or 
class thereof, including any person or class of persons offering, 
entering into, rendering advice, or rendering other services with 
respect to, the agreement, contract, or transaction, from the contract 
market designation requirements of Section 4(a) of the CEA, or any 
other provision of the CEA other than certain enumerated provisions, if 
the Commission determines that the exemption would be consistent with 
the public interest.\48\
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    \48\ 7 U.S.C. 6(c).
---------------------------------------------------------------------------

VI. Proposed Exemption From Sections 4d and 22 of the CEA

    The Commission proposes to exempt Federal Reserve Banks that 
provide customer accounts and other services to SIDCOs from Sections 4d 
and 22 of the CEA. The Commission further proposes to permit SIDCOs to 
maintain customer accounts with a Federal Reserve Bank pursuant to the 
standard of liability set forth in the Federal Reserve Bank Governing 
Documents. The proposed exemption would, however, require a Federal 
Reserve Bank to segregate customer funds deposited by a SIDCO from the 
proprietary funds deposited by a SIDCO, and to reply to any request 
from Commission staff for confirmation of account balances or for 
provision of any other information regarding the SIDCO account.
    As discussed above, Title VIII of the Dodd-Frank Act supports 
Federal Reserve Banks acting as depositories for SIDCOs. A Federal 
Reserve Bank, in its capacity as an instrument of the U.S. central 
bank, does not present the same types of risks as traditional 
commercial banks. Federal Reserve Banks are an integral part of the 
Federal Reserve System, serving the public interest and helping to 
maintain stability in the U.S. financial markets. Further, deposits at 
a Federal Reserve Bank have the lowest

[[Page 35342]]

credit risk. The Board and, through their role in the Federal Reserve 
System, Federal Reserve Banks are also the source of liquidity with 
regard to U.S. dollar deposits. A SIDCO would, therefore, face much 
lower credit and liquidity risk with a deposit at a Federal Reserve 
Bank than it would with a deposit at a commercial bank.
    Moreover, customer funds held at a Federal Reserve Bank would not 
be exposed to the risks associated with a commercial bank insolvency. 
As a result, the Commission believes that customer funds would be 
protected in an account held by a Federal Reserve Bank and would 
continue to be required to be segregated from the funds deposited in 
the SIDCO's proprietary account. The Commission notes that the standard 
of liability as set forth in the Federal Reserve Bank Governing 
Documents appears to be appropriate in the context of Federal Reserve 
Banks because this standard has been developed over the years to more 
appropriately reflect the unique nature of the Federal Reserve Banks. 
At this time, the Commission does not have any reason to believe that 
holding a Federal Reserve Bank to this standard would have the 
potential to harm futures and cleared swaps customers.
    The Federal Reserve Banks would also be exempt from liability under 
Section 22 of the CEA. Section 22 of the CEA provides for private 
rights of action for damages against persons who violate the CEA, or 
persons who willfully aid, abet, counsel, induce, or procure the 
commission of a violation of the CEA.\49\ The proposed exemption would 
preclude a third party from succeeding in a private right of action 
under Section 22 for a violation of Section 4d.\50\ The Commission 
believes that an exemption from Section 22 is appropriate because, for 
those requirements from which the Federal Reserve Banks are exempt, it 
follows that there should be no claim under Section 22 of the CEA with 
respect to those requirements. The Commission further notes that under 
the Federal Reserve Bank Governing Documents, the Federal Reserve Banks 
are currently insulated from third-party claims. While the Commission 
continues to believe that private claims empower injured parties to 
seek compensation for damages where the Commission lacks the resources 
to do so on their behalf, and the prospect of such claims serves the 
public interest in deterring misconduct, the Commission believes that, 
for the reasons discussed herein, exempting the Federal Reserve Banks 
from liability under Section 22 of the CEA would also serve the public 
interest.
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    \49\ 7 U.S.C. 25. By enacting Section 22, Congress provided 
private rights of action as a means for addressing violations of the 
Act as an alternative or supplement to Commission enforcement 
action. Specifically, Congress found that private damages actions 
are ``critical to protecting the public and fundamental to 
maintaining the credibility of the futures market.'' H.R. Rep. No. 
97-565, at 57 (1982).
    \50\ Cf. Effective Date for Swap Regulation, 76 FR 42508, 42517 
(July 19, 2011) (stating that ``exemptive relief would, in effect, 
preclude a person from succeeding in a private right of action under 
CEA section 22(a)''). However, for the avoidance of doubt, the 
Commission believes that an express exemption from Section 22 of the 
CEA for the Federal Reserve Banks is appropriate.
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    Federal Reserve Banks were created and are operated in furtherance 
of the national interest; they are not for-profit enterprises. 
Moreover, as discussed above, Federal Reserve Banks return all earnings 
in excess of operating and other expenses to the U.S. Treasury. All 
such amounts transferred to the U.S. Treasury's general fund inure to 
the benefit of U.S. taxpayers. In this case, private claims against a 
Federal Reserve Bank would reduce the amount of excess earnings that 
could be returned to the U.S. Treasury. In the Commission's view, the 
benefits afforded customers by holding SIDCO customer funds at a 
Federal Reserve Bank exceed the benefits of preserving the ability to 
bring any private claims under Section 22 of the CEA.
    Furthermore, the Commission recognizes that Title VIII of the Dodd-
Frank Act permits a Federal Reserve Bank to have access to confidential 
supervisory information. Specifically, Section 809(e)(2) provides that 
the Board of Governors or any Supervisory Agency may provide 
confidential supervisory information and other information obtained 
under Title VIII to each other and to the Federal Reserve Banks, State 
financial institution supervisory agencies, and foreign financial 
supervisors, provided, however, that no person or entity receiving 
information pursuant to this section may disseminate such information 
to entities or persons other than those listed in this paragraph 
without complying with applicable law, including section 8 of the CEA 
(7 U.S.C. 12). By permitting the Federal Reserve Banks to receive 
confidential supervisory information, Congress recognized the unique 
role of Federal Reserve Banks in the U.S. financial system, as 
distinguished from the role of commercial banks and other depository 
institutions. The Commission further recognizes, however, that the fact 
that Board supervisory staff may have access to confidential 
supervisory information about a SIDCO could create the false perception 
that Federal Reserve Bank staff responsible for managing the SIDCO's 
account and financial services would gain special knowledge about the 
SIDCO. Accordingly, and notwithstanding the Wall Policy described 
above, the Commission recognizes that a Federal Reserve Bank acting as 
a depository for customer funds could face greater scrutiny than a 
commercial bank acting as such. As a result, the proposed exemption 
would specify that: (1) Pursuant to the Wall Policy, information 
obtained by the Board supervisory staff during the course of 
supervising SIDCOs or any counterparty to a SIDCO will not be 
attributed by the Commission to any Federal Reserve Bank providing 
accounts and financial services to SIDCO account holders; and (2) a 
Federal Reserve Bank acting as a depository for SIDCO customer funds or 
otherwise providing account services to a SIDCO would continue to be 
held to the standard of liability set forth in the Federal Reserve Bank 
Governing Documents.
    Finally, the unique role that the Federal Reserve Banks play in the 
Federal Reserve System was not expressly taken into account when the 
Commission's standard of liability was developed for depositories. In 
fact, as described above, it was the Dodd-Frank Act that, for the first 
time, authorized designated FMUs (including SIDCOs) that are not banks 
or trust companies to open deposit accounts with a Federal Reserve 
Bank. However, while the Federal Reserve Banks may establish deposit 
accounts for SIDCOs, such accounts are subject to any applicable rules, 
orders, standards, or guidelines prescribed by the Board.\51\ The 
Commission notes that the Board has prescribed detailed rules and 
standards that govern account services provided to SIDCOs by the 
Federal Reserve Banks.\52\ These rules and standards have been 
carefully developed to provide clarity surrounding the provision of 
Federal Reserve financial services and to promote consistency in the 
treatment of deposit accounts at the Federal Reserve Banks for the 
benefit of the U.S. financial system. The Commission is concerned that 
exposing the Federal Reserve Banks to the standard of liability set 
forth in Section 4d of the CEA, as well as to potential third-party 
claims under Section 22 of the CEA, could disrupt these goals and 
ultimately

[[Page 35343]]

harm the U.S. financial system and, by extension, U.S. taxpayers.
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    \51\ See Section 806(a) of the Dodd-Frank Act.
    \52\ See 12 CFR 234.5 (setting forth the conditions and 
requirements for Federal Reserve Banks to open and maintain accounts 
for and provide financial services to designated FMUs); see also 
discussion supra Part III.B (discussing the Federal Reserve Bank 
Governing Documents).
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    For the reasons discussed above, the Commission believes that the 
proposed exemption would promote the safeguarding of futures and 
cleared swaps customer funds in a manner that would also benefit U.S. 
taxpayers. In light of the foregoing, the Commission believes the 
proposed exemption would promote responsible economic and financial 
innovation and fair competition, and would be consistent with the 
``public interest,'' as that term is used in Section 4(c) of the CEA.

VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \53\ requires that 
agencies consider whether the proposed exemption will have a 
significant economic impact on a substantial number of small entities 
and, if so, provide a regulatory flexibility analysis respecting the 
impact. The Commission believes that the proposed exemption will not 
have a significant economic impact on a substantial number of small 
entities. The exemption proposed by the Commission will impact SIDCOs 
and Federal Reserve Banks. The Commission has previously established 
certain definitions of ``small entities'' to be used by the Commission 
in evaluating the impact of its actions on small entities in accordance 
with the RFA.\54\ The Commission has previously determined that DCOs, 
including SIDCOs, are not small entities for purposes of the RFA.\55\ 
Similarly, the Commission believes that Federal Reserve Banks are not 
small entities for purposes of the RFA.
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    \53\ 5 U.S.C. 601 et seq.
    \54\ See 47 FR 18618, 18618-21 (Apr. 30, 1982).
    \55\ See New Regulatory Framework for Clearing Organizations, 66 
FR 45604, 45609 (Aug. 29, 2001).
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    Accordingly, the Commission does not expect the proposed exemption 
to have a significant impact on a substantial number of small entities. 
Therefore, the Chairman, on behalf of the Commission, hereby certifies, 
pursuant to 5 U.S.C. 605(b), that the proposed exemption would not have 
a significant economic impact on a substantial number of small 
entities. The Commission invites the public to comment on whether the 
entities covered by this proposed exemption should be considered small 
entities for purposes of the RFA, and, if so, whether there is a 
significant impact on a substantial number of small entities.

B. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995 (``PRA'') \56\ 
are, among other things, to minimize the paperwork burden to the 
private sector, ensure that any collection of information by a 
government agency is put to the greatest possible uses, and minimize 
duplicative information collections across the government. The PRA 
applies to all information, ``regardless of form or format,'' whenever 
the government is ``obtaining, causing to be obtained [or] soliciting'' 
information, and requires ``disclosure to third parties or the public, 
of facts or opinions,'' when the information collection calls for 
``answers to identical questions posed to, or identical reporting or 
recordkeeping requirements imposed on, ten or more persons.'' The PRA 
would not apply in this case given that the exemption would not impose 
any new recordkeeping or information collection requirements, or other 
collections of information on ten or more persons that require approval 
of the Office of Management and Budget.
---------------------------------------------------------------------------

    \56\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

C. Cost and Benefit Considerations

1. Costs
    The proposed exemption would exempt the Federal Reserve Banks from 
Sections 4d and 22 of the CEA. The Commission recognizes that such 
relief could represent a cost to a SIDCO, its FCM clearing members, and 
the FCMs' customers in the event of a loss of the deposited customer 
funds. For instance, if customer funds were lost due to the fault of a 
Federal Reserve Bank, the SIDCO, FCM clearing member, or customer would 
not have a cause of action under the CEA. Rather, as discussed above, 
the Federal Reserve Banks would be held to the standard of liability 
set forth in the Federal Reserve Bank Governing Documents.\57\ This 
cost, however, will never be realized if an incident does not occur. 
Therefore, given the resilience of the Federal Reserve Banks and the 
standards set forth in the Federal Reserve Bank Governing Documents, 
the Commission estimates that the circumstances that may give rise to 
such costs would be remote. Similarly, as discussed above, while the 
Commission continues to believe that private claims empower injured 
parties to seek compensation for damages where the Commission lacks the 
resources to do so on their behalf, and the prospect of such claims 
serves the public interest in deterring misconduct, the Commission 
believes that, for the reasons discussed herein, exempting the Federal 
Reserve Banks from liability under Section 22 of the CEA would also 
serve the public interest. The Commission further believes that the 
condition in the proposed exemption that would require Federal Reserve 
Banks to segregate customer funds deposited by a SIDCO from the 
proprietary funds deposited by a SIDCO and the benefits of facilitating 
SIDCOs' use of these accounts mitigate any costs that would flow from 
the loss of protection under Section 4d of the CEA.
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    \57\ For a more detailed discussion of the standard of liability 
set forth in the Federal Reserve Bank Governing Documents, see 
discussion supra Part IV.
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    As described above, the Commission has reinforced and enhanced the 
provisions of Section 4d of the CEA in order to further protect 
customer funds, and this proposal represents a limited exception to 
those provisions.
2. Benefits
    The proposed exemption would benefit market participants by 
permitting SIDCOs to deposit customer funds at the Federal Reserve 
Banks. Whereas commercial banks present credit and liquidity risks to a 
SIDCO, its FCM clearing members, and the FCMs' customers, the Federal 
Reserve Banks are substantially insulated from such risks. As discussed 
in greater detail above, Title VIII of the Dodd-Frank Act was enacted 
to mitigate systemic risk in the financial system and to promote 
financial stability, in part, through an enhanced supervisory framework 
for SIDCOs. In addition to this framework, Title VIII, and more 
specifically, Section 806(a) of the Dodd-Frank Act, permits the Board 
to authorize a Federal Reserve Bank to establish and maintain an 
account for a SIDCO and provide to the SIDCO certain financial 
services. By enacting Title VIII in general, and Section 806(a) in 
particular, Congress recognized the importance of reducing systemic 
risk and providing SIDCOs with a potential safeguard during an 
extraordinary liquidity event. The proposed exemption would therefore 
help promote Congress's goal of better preparing the U.S. financial 
system for potential future liquidity events. A SIDCO's access to 
Federal Reserve Bank deposit accounts is also consistent with the 
international standards set forth in the Principles for Financial 
Market Infrastructures (``PFMIs''), which acknowledge the protections 
afforded by central banks from such credit and liquidity risks.\58\
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    \58\ See, e.g., CPSS-IOSCO, PFMIs, ] 3.9.3 (noting that 
``[c]entral banks have the lowest credit risk and are the source of 
liquidity with regard to their currency of issue''); see also PFMIs, 
Key Consideration 8 (specifying that a financial market 
infrastructure ``with access to central bank accounts, payment 
services, or securities services should use these services, where 
practical, to enhance its management of liquidity risk'').

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[[Page 35344]]

    Moreover, the Federal Reserve Banks' standard of liability, as set 
forth in the Federal Reserve Bank Governing Documents, is better suited 
for the Federal Reserve Banks than Section 4d of the CEA, which was 
designed to govern customer funds deposited with a commercial bank, 
trust company, or DCO. Unlike commercial banks, Federal Reserve Banks 
do not operate for profit and serve only account holders authorized by 
statute, such as depository institutions and the U.S. government. 
Indeed, each year they return to the U.S. Department of Treasury all 
earnings in excess of Federal Reserve Bank operating and other 
expenses, such as litigation expenses. By exempting the Federal Reserve 
Banks from certain potential enforcement actions and private suits, the 
proposed exemption would reduce the Federal Reserve Banks' exposure to 
litigation. Because the Federal Reserve Banks return their earnings to 
the U.S. Department of Treasury's general fund, U.S. taxpayers may 
benefit from the proposed exemption. Therefore, the Commission believes 
that it is appropriate to apply the Federal Reserve Bank's standard of 
liability in order to facilitate the use of these accounts.
3. Section 15(a) Factors
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its action before issuing an order under the 
CEA.\59\ By its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of an order or to determine whether the 
benefits of the order outweigh its costs. Rather, Section 15(a) simply 
requires the Commission to ``consider the costs and benefits'' of its 
action.
---------------------------------------------------------------------------

    \59\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Section 15(a) of the CEA further specifies that 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 may in its 
discretion give greater weight to any one of the five enumerated areas 
and could in its discretion determine that, notwithstanding its costs, 
a particular order is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the CEA.
a. Protection of Market Participants and the Public
    The proposed exemption would serve to facilitate SIDCOs' use of 
Federal Reserve Banks as depositories for customer funds. As the 
Federal Reserve System is the nation's central bank, such accounts 
would provide SIDCOs with the lowest possible credit risk in the event 
of a market disruption. Moreover, as Federal Reserve Banks are the 
source of liquidity with regard to U.S. dollar deposits, SIDCOs with 
access to a deposit account at a Federal Reserve Bank would also be 
better equipped to handle a liquidity event. As SIDCOs have been so 
designated because of their importance to the broader financial system, 
reducing these risks would protect market participants and the public.
b. Efficiency, Competitiveness, and Financial Integrity
    A temporary or permanent disruption to the operations of a SIDCO 
could cause wide-spread and significant damage to the financial 
integrity of derivatives markets as a whole. Therefore, by facilitating 
a SIDCO's use of Federal Reserve Banks as depositories for customer 
funds, the proposed exemption would reduce liquidity and credit risk to 
the SIDCO, which would, in turn, promote the financial integrity of the 
derivatives markets.
    The Commission does not anticipate the proposed exemption to have a 
significant impact on the efficiency and competitiveness of the 
derivatives markets.
c. Price Discovery
    The Commission does not anticipate the proposed exemption to have 
an impact on the price discovery process.
d. Sound Risk Management Practices
    The Commission believes that establishing SIDCO segregated customer 
accounts and enabling SIDCOs to access related services at a Federal 
Reserve Bank would improve a SIDCO's ability to manage liquidity risk 
and protect customer funds. Additionally, the Commission believes that 
the availability of a Federal Reserve Bank account could allow a SIDCO 
to reduce its concentration risk by adding an additional creditworthy 
depository in which to diversify funds. Accordingly, the proposed 
exemption promotes sound risk management practices.
    The Commission further notes that, notwithstanding the proposed 
exemption from Section 4d of the CEA, the Federal Reserve Banks would 
still be required to segregate customer funds deposited by a SIDCO from 
the proprietary funds deposited by a SIDCO and adhere to the 
longstanding standards of liability that govern the Federal Reserve 
Banks.
e. Other Public Interest Considerations
    The Commission believes that facilitating a SIDCO's access to 
Federal Reserve Bank accounts will promote the public interest by 
bolstering a SIDCO's ability to conduct settlements with a high degree 
of confidence under a wide range of stress scenarios, thereby 
increasing the likelihood of the SIDCO being able to provide its 
customers with access to their funds in times of market distress.

VIII. Request for Comment

    The Commission requests comment on all aspects of the proposed 
exemption, including, without limitation, the Commission's 
determination that the proposed exemption is consistent with the public 
interest, and the Commission's consideration of the costs and benefits 
of the proposed exemption.
    The Commission requests comment regarding whether the proposed 
exemption should be expanded to include those customer accounts that 
are established pursuant to the CEA and that are held at Federal 
Reserve Banks by designated FMUs for which the Commission is not the 
Supervisory Agency.

IX. Proposed Order of Exemption

    After considering the above factors, the Commission proposes to 
issue the following:

Proposed Order

    Pursuant to Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act''), the Commodity Futures 
Trading Commission (``Commission'') is the supervisory agency for 
certain derivatives clearing organizations (``DCOs'') that have been 
designated by the Financial Stability Oversight Council as 
systemically important. Under Section 806(a) of the Dodd-Frank Act, 
the Board of Governors (``Board'') of the Federal Reserve System is 
permitted to authorize a Federal Reserve Bank to establish and 
maintain a deposit account for a systemically important DCO 
(``SIDCO'') and provide certain services to the SIDCO, subject to 
any applicable rules, orders, standards, or guidelines prescribed by 
the Board.
    DCOs, including SIDCOs, are required to hold funds belonging to 
customers of their clearing members in accounts subject to

[[Page 35345]]

Section 4d of the Commodity Exchange Act (``CEA''). In addition, 
Section 22 of the CEA would typically provide for private rights of 
action for damages against persons who violate Section 4d, or 
persons who willfully aid, abet, counsel, induce, or procure the 
commission of a violation of Section 4d. However, the Commission 
understands that deposit accounts maintained by any Federal Reserve 
Bank would also be governed by applicable account agreements, 
operating circulars issued by Federal Reserve Banks for each 
service, the Federal Reserve Act, and Federal Reserve regulations 
and policies, and, with respect to book-entry securities services, 
the regulations of the domestic issuer of the securities or the 
issuer's regulator (``Federal Reserve Bank Governing Documents''). 
The Federal Reserve Bank Governing Documents, as may be amended from 
time to time, include, but are not limited to, Federal Reserve Bank 
Operating Circular No. 6 (governing funds transfers through the 
Fedwire Funds Service); Federal Reserve Bank Operating Circular No. 
7 (governing the maintenance of and transfer services for book-entry 
securities accounts); 12 CFR part 210, subpart B (governing funds 
transfers through the Fedwire Funds Service); and 31 CFR part 357, 
subpart B (setting forth the U.S. Department of the Treasury's 
regulations governing book-entry treasury bonds, notes, and bills).
    The Commission understands that under the Federal Reserve Bank 
Governing Documents, a Federal Reserve Bank has no requirement or 
obligation to inquire as to the legitimacy or accuracy of the 
instructions, or the transactions related to those instructions, or 
compliance by the SIDCO with its obligations under the CEA. To the 
extent that liability may accrue under the Federal Reserve Bank 
Governing Documents, the Commission understands that the Federal 
Reserve Bank may be held liable only for actual damages that are (i) 
incurred solely by the SIDCO account holder, and (ii) proximately 
caused by the Federal Reserve Bank's failure to exercise ordinary 
care or act in good faith in accordance with the Federal Reserve 
Bank Governing Documents. The Commission proposes to exempt the 
Federal Reserve Banks in order to facilitate Federal Reserve Banks' 
ability to accept SIDCO customer accounts.
    Therefore, it is ordered, pursuant to Section 4(c) of the CEA, 7 
U.S.C. 6(c), that the Federal Reserve Banks are granted an exemption 
from Sections 4d and 22 of the CEA, subject to the terms and 
conditions specified herein:
    1. Segregation. Money, securities, and property deposited into a 
customer account established pursuant to the CEA by a SIDCO with a 
Federal Reserve Bank shall be separately accounted for and 
segregated from the money, securities, and property deposited into a 
proprietary account of the SIDCO depositing such funds and from the 
money, securities, and property deposited into the account of any 
person other than the customers for whom the money, securities, or 
property is held.
    2. Information Requests. Federal Reserve Banks must reply 
promptly and directly to any request for confirmation of account 
balances or provision of any other information regarding or related 
to the SIDCO customer account(s) that are established pursuant to 
the CEA from the director of the Division of Clearing and Risk of 
the Commission, or any successor division, or such director's 
designees.
    3. Applicability to Federal Reserve Banks. Subject to the 
conditions contained herein, the order applies to all Federal 
Reserve Banks that provide customer accounts and other services to 
SIDCOs. In addition, pursuant to the Federal Reserve's Key Policies 
for the Provision of Financial Services: Standards Related to 
Priced-Service Activities of the Federal Reserve Banks, information 
obtained by the Board of Governors of the Federal Reserve System or 
its designees during the course of supervising SIDCOs, pursuant to 
Title VIII of the Dodd-Frank Act, or any counterparty to a SIDCO 
under any authority, shall not be attributed by the Commission to 
any Federal Reserve Bank providing accounts and financial services 
to SIDCO account holders.
    4. Reservation of Rights. This order is based upon the analysis 
set forth above. Any material change in law or circumstances 
pursuant to which this order is granted might require the Commission 
to reconsider its finding that the exemption contained herein is 
appropriate and/or consistent with the public interest and purposes 
of the CEA. Further, the Commission reserves the right, in its 
discretion, to revisit any of the terms and conditions of the relief 
provided herein, including but not limited to, making a 
determination that certain entities described herein should be 
subject to the Commission's full jurisdiction, and to condition, 
suspend, terminate, or otherwise modify or restrict the exemption 
granted in this order, as appropriate, upon its own motion.

    Issued in Washington, DC, on May 27, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

Appendix to Notice of Proposed Order and Request for Comment on a 
Proposal To Exempt, Pursuant to the Authority in Section 4(c) of the 
Commodity Exchange Act, the Federal Reserve Banks From Sections 4d and 
22 of the Commodity Exchange Act--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

[FR Doc. 2016-13055 Filed 6-1-16; 8:45 am]
 BILLING CODE 6351-01-P



                                                                                   Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices                                                    35337

                                                    issues may not be the subjects of formal                  • Mail: Christopher Kirkpatrick,                        C. Access to Federal Reserve Bank
                                                    action during this meeting. Council                     Secretary of the Commission,                                 Accounts and Services
                                                    action will be restricted to those issues               Commodity Futures Trading                              III. Standards of Depository Liability
                                                    specifically listed in this notice and any              Commission, Three Lafayette Centre,                       A. Depository Liability Under Section 4d of
                                                    issues arising after publication of this                1155 21st Street NW., Washington, DC                         the CEA
                                                                                                                                                                      B. Federal Reserve Bank Liability Under
                                                    notice that require emergency action                    20581.
                                                                                                                                                                         Federal Reserve Bank Governing
                                                    under section 305(c) of the Magnuson-                     • Hand Delivery/Courier: Same as
                                                                                                                                                                         Documents
                                                    Stevens Act, provided that the public                   Mail, above.                                           IV. Features Specific to the Federal Reserve
                                                    has been notified of the Council’s intent                 • Federal eRulemaking Portal: http://                      Banks
                                                    to take final action to address the                     www.regulations.gov. Follow the                        V. Section 4(c) of the CEA
                                                    emergency.                                              instructions for submitting comments.                  VI. Proposed Exemption From Sections 4d
                                                                                                            Please submit your comments using                            and 22 of the CEA
                                                    Special Accommodations
                                                                                                            only one of these methods.                             VII. Related Matters
                                                      This meeting is physically accessible                    All comments must be submitted in                      A. Regulatory Flexibility Act
                                                    to people with disabilities. Requests for               English, or if not, accompanied by an                     B. Paperwork Reduction Act
                                                    sign language interpretation or other                   English translation. Comments will be                     C. Cost and Benefit Considerations
                                                    auxiliary aids should be directed to                                                                           VIII. Request for Comment
                                                                                                            posted as received to http://
                                                    Kathy Pereira (see ADDRESSES) at least 5                                                                       IX. Proposed Order of Exemption
                                                                                                            www.cftc.gov. You should submit only
                                                    days prior to the meeting date.                         information that you wish to make                      I. Introduction
                                                      Dated: May 27, 2016.                                  available publicly. If you wish the
                                                    Tracey L. Thompson,                                     Commission to consider information                        In 2013, in response to significant
                                                    Acting Deputy Director, Office of Sustainable           that you believe is exempt from                        segregated account shortfalls
                                                    Fisheries, National Marine Fisheries Service.           disclosure under the Freedom of                        experienced by futures customers, the
                                                    [FR Doc. 2016–13017 Filed 6–1–16; 8:45 am]              Information Act, a petition for                        Commission adopted rules that aimed to
                                                                                                            confidential treatment of the exempt                   improve the protection of customer
                                                    BILLING CODE 3510–22–P
                                                                                                            information may be submitted according                 funds.1 Recognizing that such
                                                                                                            to the established procedures in § 145.9               protection is critical to the sound
                                                                                                            of the Commission’s regulations, 17 CFR                functioning of the futures and swaps
                                                    COMMODITY FUTURES TRADING                                                                                      markets, the Commission reiterated that
                                                    COMMISSION                                              145.9.
                                                                                                               The Commission reserves the right,                  money, securities, and other property
                                                    Notice of Proposed Order and Request                    but shall have no obligation, to review,               deposited by customers must be
                                                    for Comment on a Proposal To                            pre-screen, filter, redact, refuse or                  carefully safeguarded and segregated at
                                                    Exempt, Pursuant to the Authority in                    remove any or all of your submission                   all times.
                                                    Section 4(c) of the Commodity                           from http://www.cftc.gov that it may                      That same year, the Commission
                                                    Exchange Act, the Federal Reserve                       deem to be inappropriate for                           adopted enhanced risk management
                                                    Banks From Sections 4d and 22 of the                    publication, such as obscene language.                 standards 2 and additional requirements
                                                    Commodity Exchange Act                                  All submissions that have been redacted                for compliance with the derivatives
                                                                                                            or removed that contain comments on                    clearing organization (‘‘DCO’’) core
                                                    AGENCY:  Commodity Futures Trading                      the merits of this action will be retained             principles set forth in the CEA 3 for
                                                    Commission.                                             in the public comment file and will be                 DCOs that are designated as
                                                    ACTION: Notice of proposed order and                    considered as required under the                       systemically important (‘‘SIDCOs’’) by
                                                    request for comment.                                    Administrative Procedure Act and other                 the Financial Stability Oversight
                                                    SUMMARY:   The Commodity Futures                        applicable laws, and may be accessible                 Council.4 The Commission adopted
                                                    Trading Commission (‘‘CFTC’’ or                         under the Freedom of Information Act.                  these requirements in part because of
                                                    ‘‘Commission’’) is proposing to permit                  FOR FURTHER INFORMATION CONTACT:                       the critical role SIDCOs play in fostering
                                                    Federal Reserve Banks to hold money,                    Eileen A. Donovan, Deputy Director,
                                                    securities, and property deposited into a               202–418–5096, edonovan@cftc.gov; M.                      1 Enhancing Protections Afforded Customers and

                                                    customer account by a systemically                      Laura Astrada, Associate Director, 202–                Customer Funds Held by Futures Commission
                                                                                                            418–7622, lastrada@cftc.gov; or Parisa                 Merchants and Derivatives Clearing Organizations,
                                                    important derivatives clearing                                                                                 78 FR 68506 (Nov. 14, 2013).
                                                    organization in accordance with the                     Abadi, Attorney-Advisor, 202–418–                        2 Enhanced Risk Management Standards for
                                                    standards to which Federal Reserve                      6620, pabadi@cftc.gov, in each case, at                Systemically Important Derivatives Clearing
                                                    Banks are held, as specified below.                     the Division of Clearing and Risk,                     Organizations, 78 FR 49663 (Aug. 15, 2013).
                                                    Thus, the Commission is proposing to                    Commodity Futures Trading                                3 See Section 5b(c)(2) of the CEA; see also

                                                                                                            Commission, Three Lafayette Centre,                    Derivatives Clearing Organizations and
                                                    exempt Federal Reserve Banks that                                                                              International Standards, 78 FR 72476 (Dec. 2, 2013).
                                                    provide customer accounts and other                     1155 21st Street NW., Washington, DC                     4 Under Commission Regulation 39.2, a SIDCO is
                                                    services to systemically important                      20581; or Joe Opron, Special Counsel,                  defined as a financial market utility that is a
                                                    derivatives clearing organizations from                 312–596–0653, jopron@cftc.gov,                         registered DCO under Section 5b of the Act, which
                                                    Sections 4d and 22 of the Commodity                     Division of Clearing and Risk,                         has been designated by the Financial Stability
                                                                                                                                                                   Oversight Council to be systemically important and
                                                    Exchange Act (‘‘CEA’’ or the ‘‘Act’’).                  Commodity Futures Trading                              for which the Commission acts as the Supervisory
                                                    DATES: Comments must be received by                     Commission, 525 West Monroe Street,
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                                                                                                                                                                   Agency pursuant to Section 803(8) of the Dodd-
                                                    July 5, 2016.                                           Suite 1100, Chicago, IL 60661.                         Frank Wall Street Reform and Consumer Protection
                                                                                                            SUPPLEMENTARY INFORMATION:                             Act (‘‘Dodd-Frank Act’’). 17 CFR 39.2. ‘‘Supervisory
                                                    ADDRESSES: You may submit comments                                                                             Agency’’ is defined as the Federal agency that has
                                                    by any of the following methods:                        Table of Contents                                      primary jurisdiction over a designated financial
                                                       • CFTC Web site: http://                                                                                    market utility under Federal banking, securities, or
                                                                                                            I. Introduction                                        commodity futures laws. Section 803(8)(A) of the
                                                    comments.cftc.gov. Follow the                           II. Background                                         Dodd-Frank Act, Public Law 111–203, 124 Stat.
                                                    instructions for submitting comments                       A. Customer Protection                              1376 (2010). The text of the Dodd-Frank Act is
                                                    through the Comments Online process                        B. Designation of Financial Market Utilities        available at http://www.cftc.gov/idc/groups/public/
                                                    on the Web site.                                              Under Title VIII of the Dodd-Frank Act           @swaps/documents/file/hr4173_enrolledbill.pdf.



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                                                    35338                          Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices

                                                    financial stability 5 and because the                   Reserve Banks could be exposed to                        (‘‘Peregrine’’). In October 2011, MF
                                                    ‘‘failure of a SIDCO to complete core                   liability under Sections 4d and 22 13 of                 Global, which was dually-registered as
                                                    clearing and settlement functions within                the CEA, which could have disparate                      an FCM with the Commission and as a
                                                    a rapid period could create systemic                    impact on the treatment of deposits at                   securities broker-dealer with the U.S.
                                                    liquidity and credit dislocations on a                  the Federal Reserve Banks and                            Securities and Exchange Commission,
                                                    global scale.’’ 6 Accordingly, these                    ultimately harm U.S. taxpayers.                          was placed into a liquidation
                                                    additional requirements were designed                   Accordingly, to facilitate SIDCOs’ use of                proceeding under the Securities Investor
                                                    to promote a SIDCO’s financial strength,                Federal Reserve Banks as depositories                    Protection Act by the Securities Investor
                                                    operational integrity, security, and                    for customer funds, the Commission is                    Protection Corporation. At the time, the
                                                    reliability.7 By requiring a SIDCO’s                    proposing, pursuant to its authority                     trustee appointed to oversee the
                                                    liquidity arrangements to be highly                     under Section 4(c) of the CEA, to                        liquidation of MF Global reported a
                                                    reliable in stressed market conditions,                 exempt Federal Reserve Banks that                        potential $900 million shortfall of funds
                                                    the Commission sought to bolster a                      provide customer accounts and other                      necessary to repay the account balances
                                                    SIDCO’s ability to promptly meet its                    services to SIDCOs from Sections 4d                      due to customers trading futures on
                                                    cash obligations to its members in order                and 22 of the CEA.14 The exemption                       designated contract markets, and an
                                                    to help avoid the loss of market                        would enable the Federal Reserve Banks                   approximately $700 million shortfall in
                                                    confidence and cascading defaults.8                     to maintain SIDCO customer accounts                      funds immediately available to repay
                                                       Title VIII of the Dodd-Frank Act,                    in accordance with the standards set                     the account balances of customers
                                                    entitled ‘‘Payment, Clearing, and                       forth in the relevant Federal Reserve                    trading on foreign futures markets. The
                                                    Settlement Supervision Act of 2010,’’ 9                 Bank governing documents, as specified                   shortfall in customer segregated
                                                    also included provisions aimed at                       below.                                                   accounts was attributed by the MF
                                                    safeguarding the U.S. financial system.                                                                          Global trustee to significant transfers of
                                                    One example of this is Section 806(a),                  II. Background
                                                                                                                                                                     funds out of the customer accounts that
                                                    which expressly permits the Board of                    A. Customer Protection                                   were used by MF Global, Inc. for various
                                                    Governors of the Federal Reserve                           The protection of customers—and the                   purposes other than to meet obligations
                                                    System (‘‘Board’’) to authorize a Federal               safeguarding of money, securities, or                    to or on behalf of customers.15
                                                    Reserve Bank to establish and maintain                  other property deposited by                                 Shortly thereafter, in 2012, the
                                                    a deposit account for a SIDCO and                       customers—is a fundamental                               Commission filed a civil injunctive
                                                    provide certain services to the SIDCO,                  component of the regulatory and                          complaint in federal district court
                                                    subject to any applicable rules, orders,                oversight framework of the futures and                   against Peregrine and its Chief
                                                    standards, or guidelines prescribed by                  swaps markets. Section 4d of the CEA                     Executive Officer and sole owner,
                                                    the Board.10                                            requires a futures commission merchant                   Russell R. Wasendorf, Sr.
                                                       The Commission believes that                                                                                  (‘‘Wasendorf’’), alleging that Peregrine
                                                                                                            (‘‘FCM’’) to segregate from its own assets
                                                    establishing SIDCO segregated customer                                                                           and Wasendorf misappropriated
                                                                                                            all money, securities, and other property
                                                    accounts at a Federal Reserve Bank and                                                                           customer funds, violated customer fund
                                                                                                            deposited by futures or cleared swaps
                                                    enabling SIDCOs to access related                                                                                segregation laws, and made false
                                                                                                            customers to margin, secure, or
                                                    services there would both augment a                                                                              statements regarding the amount of
                                                                                                            guarantee futures contracts and options
                                                    SIDCO’s liquidity arrangements and                                                                               funds in customer segregated accounts
                                                                                                            on futures contracts traded on
                                                    enhance the protection of customer                                                                               in financial statements filed with the
                                                                                                            designated contract markets, and
                                                    funds.11 The Commission recognizes,                                                                              Commission. According to the
                                                                                                            cleared swaps. Section 4d further
                                                    however, that Section 4d of the CEA                                                                              complaint, Peregrine falsely represented
                                                                                                            requires an FCM to treat customer funds
                                                    was not developed with a particular                                                                              that it held in excess of $220 million of
                                                                                                            as belonging to the customer, and
                                                    focus on the Federal Reserve Banks.12                                                                            customer funds, when it actually held
                                                                                                            prohibits an FCM from using the funds
                                                    As a result, the unique role that the                                                                            only approximately $5.1 million.16
                                                                                                            deposited by a customer to margin or
                                                    Federal Reserve Banks play in the                                                                                Spurred in part by these shocking
                                                                                                            extend credit to any person other than
                                                    financial system was not expressly                                                                               failures, the Commission promulgated
                                                                                                            the customer that deposited the funds.
                                                    taken into account when the                                                                                      several rules aimed at strengthening the
                                                                                                            Similarly, Section 4d of the CEA
                                                    Commission’s standard of liability was                                                                           protection of customer funds and the
                                                                                                            prohibits a DCO and any depository that
                                                    developed for depositories. The                                                                                  U.S. financial markets.17
                                                                                                            has received such funds from holding,
                                                    Commission notes that Federal Reserve                                                                               In an effort to further strengthen
                                                                                                            disposing of, or using such funds as
                                                    financial services provided by the                                                                               customer protection, the Commission
                                                                                                            belonging to the depositing FCM or any
                                                    Federal Reserve Banks are governed by                                                                            has also examined the current
                                                                                                            person other than the customers of such
                                                    the terms and conditions that are set                   FCM.
                                                    forth in various federal rules, Federal                    The importance of this statutory                         15 See Report of the Trustee’s Investigation and

                                                    Reserve Board policies, and Federal                     mandate to protect customer funds—to                     Recommendations, In. re MF Global, Inc., No. 11–
                                                    Reserve Bank operating circulars, which                                                                          2790 (MG) SIPA (Bankr. S.D.N.Y. Jun. 4, 2012).
                                                                                                            treat them as belonging to customers                     Customer claims were eventually paid in full after
                                                    have been carefully developed over                      and not use the funds inappropriately—                   customer funds were recovered through bankruptcy
                                                    several decades. The Commission                         was reinforced in light of the FCM                       proceedings and the Commission’s enforcement
                                                    further recognizes that the Federal                     insolvency proceedings involving MF                      action.
                                                                                                                                                                        16 See Complaint, U.S. Commodity Futures
                                                                                                            Global, Inc. (‘‘MF Global’’) and                         Trading Commission v. Peregrine Financial Group,
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                                                      5 See, e.g., 78 FR at 49672.
                                                      6 Id.
                                                                                                            Peregrine Financial Group, Inc.                          Inc., and Russell R. Wasendorf, Sr., No. 12–cv–5383
                                                           at 49674.
                                                      7 See id. at 49668–49669; see also 78 FR at 72509.                                                             (N.D. Ill. July 10, 2012).
                                                                                                               13 As discussed in further detail below, Section 22      17 See discussion supra Part I; see also, e.g.,
                                                      8 See 78 FR at 72509.
                                                      9 Section 801 of the Dodd-Frank Act.
                                                                                                            of the CEA would typically provide for private           Investment of Customer Funds and Funds Held in
                                                                                                            rights of action for damages against persons who         an Account for Foreign Futures and Foreign
                                                      10 See Section 806(a) of the Dodd-Frank Act.
                                                                                                            violate Section 4d, or persons who willfully aid,        Options Transactions, 76 FR 78776 (Dec. 19, 2011)
                                                      11 See discussion infra Part VI.                      abet, counsel, induce, or procure the commission of      (revising the types of investments that an FCM or
                                                      12 Section 4d of the CEA permits customer funds       a violation of Section 4d. See discussion supra Part     DCO could make with customer funds under
                                                    to be deposited with a bank, trust company, or          VI.                                                      Regulation 1.25 to minimize the exposure of such
                                                    DCO. 7 U.S.C. 6d.                                          14 7 U.S.C. 6(c); 7 U.S.C. 25.                        funds to liquidity, credit, and market risks).



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                                                                                    Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices                                                      35339

                                                    regulatory framework through a series of                  or operates a multilateral system for the                services listed in Section 11A(b) of the
                                                    roundtables and other public meetings.                    purpose of transferring, clearing, or                    Federal Reserve Act, subject to any
                                                    The Commission held a public                              settling payments, securities, or other                  applicable rules, orders, standards, or
                                                    roundtable to solicit input on customer                   financial transactions among financial                   guidelines prescribed by the Board.28 In
                                                    protection issues from a broad cross-                     institutions or between financial                        adopting regulations pursuant to
                                                    section of the derivatives industry,                      institutions and the person.23 As noted                  Section 806(a) of the Dodd-Frank Act,
                                                    including market participants, FCMs,                      by the Council, FMUs are vital to the                    the Board noted that the ‘‘terms and
                                                    DCOs, self-regulatory organizations,                      nation’s financial infrastructure, and                   conditions for access to Federal Reserve
                                                    securities regulators, and academics.18                   ‘‘their smooth operation is integral to                  Bank accounts and services are intended
                                                    The Commission also hosted a public                       the soundness of the financial system                    to facilitate the use of [Federal] Reserve
                                                    meeting of the Technology Advisory                        and the overall economy.’’ 24                            Bank accounts and services by a
                                                    Committee to discuss potential                               In determining whether an FMU is                      designated FMU in order to reduce
                                                    technological solutions directed at                       systemically important, the Council                      settlement risk and strengthen
                                                    enhancing the protection of customer                      follows a detailed two-stage designation                 settlement processes, while limiting the
                                                    funds.19                                                  process, using statutory                                 risk presented by the designated FMU to
                                                      Customer protection continues to be a                   considerations 25 and other metrics to                   the [Federal] Reserve Banks.’’ 29
                                                    bedrock guiding principle for the                         assess, among other things, ‘‘whether                    Accordingly, the Board ‘‘expects that
                                                    Commission, as the protection of                          possible disruptions [to the functioning                 [Federal] Reserve Banks would provide
                                                    customer funds is paramount to a                          of an FMU] are potentially severe, not                   services that are consistent with a
                                                    trusted marketplace.                                      necessarily in the sense that they                       designated FMU’s need for safe and
                                                                                                              themselves might trigger damage to the                   sound settlement processes under
                                                    B. Designation of Financial Market
                                                                                                              U.S. economy, but because such                           account and service agreements
                                                    Utilities Under Title VIII of the Dodd-
                                                                                                              disruptions might reduce the ability of                  generally consistent with the provisions
                                                    Frank Act
                                                                                                              financial institutions or markets to                     of existing [Federal] Reserve Bank
                                                       Title VIII of the Dodd-Frank Act was                   perform their normal intermediation                      operating circulars for such services.’’ 30
                                                    enacted to mitigate risk in the financial                 functions.’’ 26 Thus, if a systemically                  Highlighting the importance of Federal
                                                    system and promote financial                              important FMU fails to perform, this                     Reserve Bank operating circulars in this
                                                    stability.20 Accordingly, Section 804 of                  failure could pose significant risk to its               regard, the Board further requires that
                                                    the Dodd-Frank Act requires the                           participants and to the U.S. financial                   designated FMUs be in compliance with
                                                    Financial Stability Oversight Council                     system more broadly. For example, if a                   existing operating circulars.31
                                                    (‘‘Council’’) 21 to designate those                       systemically important FMU fails to
                                                    financial market utilities (‘‘FMUs’’) that                complete timely settlement, there could                  III. Standards of Depository Liability
                                                    the Council determines are, or are likely                 be significant credit and/or liquidity                   A. Depository Liability Under Section 4d
                                                    to become, systemically important.22 An                   problems for its participants and                        of the CEA
                                                    FMU includes any person that manages                      participants’ customers. On July 18,
                                                                                                              2012, the Council designated eight                          Under Section 4d of the CEA, a
                                                       18 Further information on the public roundtable,
                                                                                                              FMUs as systemically important under                     depository, which may be a bank, trust
                                                    including video recordings and transcripts of the
                                                                                                              Title VIII.27 Two of these designated                    company, or a DCO, will be held liable
                                                    discussions, are available on the Commission’s Web                                                                 for the improper transfers of customer
                                                    site. See http://www.cftc.gov/PressRoom/Events/           FMUs, Chicago Mercantile Exchange,
                                                    opaevent_cftcstaff022912 (relating to Feb. 29, 2012);     Inc. and ICE Clear Credit LLC, are                       funds by an FCM or DCO if it knew or
                                                    http://www.cftc.gov/PressRoom/Events/opaevent_            SIDCOs.                                                  should have known that the transfer was
                                                    cftcstaff030112 (relating to Mar. 1, 2012).                                                                        improper.32 While a depository has no
                                                       19 Additional information, including documents
                                                                                                              C. Access to Federal Reserve Bank                        affirmative obligation to police or
                                                    submitted by meeting participants, is available on        Accounts and Services
                                                    the Commission’s Web site. See http://                                                                             monitor an FCM or DCO account
                                                    www.cftc.gov/PressRoom/Events/opaevent_                     As noted above, Section 806(a) of the                  holder’s compliance with the CEA or
                                                    tac072612.                                                Dodd-Frank Act permits the Board to                      Commission regulations, a depository
                                                       20 See Section 802(b) of the Dodd-Frank Act.
                                                       21 The Council was established by Section 111 of
                                                                                                              authorize a Federal Reserve Bank to                      cannot ignore signs of wrongdoing.33
                                                    the Dodd-Frank Act. In general, the Council is            establish and maintain an account for a                    To ensure that a depository that holds
                                                    tasked with identifying risks to the financial            SIDCO and provide to the SIDCO the                       customer funds has been informed that
                                                    stability of the United States that could arise from
                                                    the material financial distress or failure, or ongoing      23 Section  803(6)(A) of the Dodd-Frank Act.             28 The services listed in Section 11A(b) of the
                                                    activities, of large, interconnected bank holding           24 76                                                  Federal Reserve Act include wire transfers,
                                                                                                                       FR at 44763.
                                                    companies or nonbank financial companies, or that           25 Under Section 804(a)(2) of the Dodd-Frank Act,      settlement, and securities safekeeping, as well as
                                                    could arise outside the financial services                                                                         services regarding currency and coin, check
                                                    marketplace, promoting market discipline, by              in determining whether an FMU is or is likely to
                                                                                                              become systemically important, the Council must          clearing and collection, and automated clearing
                                                    eliminating expectations on the part of                                                                            house transactions. See 12 U.S.C. 248a(b). Section
                                                    shareholders, creditors, and counterparties of such       take into consideration the following: (A) The
                                                                                                              aggregate monetary value of transactions processed       806(a) of the Dodd-Frank Act also permits the Board
                                                    companies that the Government will shield them                                                                     to authorize a Federal Reserve Bank to establish
                                                    from losses in the event of failure, and responding       by the FMU; (B) the aggregate exposure of the FMU
                                                                                                              to its counterparties; (C) the relationship,             deposit accounts under the first undesignated
                                                    to emerging threats to the stability of the United                                                                 paragraph of Section 13 of the Federal Reserve Act,
                                                    States financial system. Section 112(a)(1) of the         interdependencies, or other interactions of the FMU
                                                                                                              with other FMUs or payment, clearing, or                 12 U.S.C. 342.
                                                    Dodd-Frank Act.                                                                                                      29 Financial Market Utilities (Regulation HH), 78
                                                       22 See Section 804(a) of the Dodd-Frank Act. The       settlement activities; (D) the effect that the failure
                                                                                                              of or a disruption to the FMU would have on              FR 14024, 14025 (Mar. 4, 2013).
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                                                    term ‘‘systemically important’’ means a situation                                                                    30 Id.
                                                    where the failure of or a disruption to the               critical markets, financial institutions, or the
                                                                                                              broader financial system; and (E) any other factors        31 See 12 CFR 234.5(b)(2) (setting forth rules to
                                                    functioning of a financial market utility could
                                                    create, or increase, the risk of significant liquidity    the Council deems appropriate.                           govern Federal Reserve Bank accounts held by
                                                    or credit problems spreading among financial                26 76 FR at 44766.                                     designated FMUs).
                                                                                                                27 See Press Release, Financial Stability Oversight      32 See CFTC Interpretative Letter No. 79–1,
                                                    institutions or markets and thereby threaten the
                                                    stability of the financial system of the United States.   Council, Financial Stability Oversight Council           [1977–1980 Transfer Binder] Comm. Fut. L. Rep.
                                                    Section 803(9) of the Dodd-Frank Act; see also            Makes First Designations in Effort to Protect Against    (CCH) ¶ 20,835 (May 29, 1979). Section 4d of the
                                                    Authority to Designate Financial Market Utilities as      Future Financial Crises (July 18, 2012), available at    CEA covers customer funds only; it does not relate
                                                    Systemically Important, 76 FR 44763, 44774 (July          http://www.treasury.gov/press-center/press-              to proprietary funds of clearing members.
                                                    27, 2011).                                                releases/Pages/tg1645.aspx.                                33 See 78 FR at 68539.




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                                                    35340                          Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices

                                                    the deposited funds are those of                        Reserve Banks operate as a bank for                    exercise ordinary care, and does not
                                                    customers being held in accordance                      depository institutions and the U.S.                   include lost profits, claims by third
                                                    with Section 4d of the CEA, the                         government.36                                          parties, or consequential or incidental
                                                    Commission requires an FCM or DCO to                       Some of the services provided by                    damages.39
                                                    obtain from each depository with which                  Federal Reserve Banks include the                         The Commission understands that, in
                                                    it deposits customer funds a written                    provision of funds and book-entry                      accordance with the Federal Reserve
                                                    acknowledgment in this regard.34                        securities accounts, as well as certain                Bank Governing Documents, the Federal
                                                    Commission regulations require FCMs                     financial services, such as wire                       Reserve Banks are authorized to act on
                                                    and DCOs to use a template                              transfers, book-entry securities transfers,            the instructions received through the
                                                    acknowledgment letter in order to                       and multilateral settlement services.                  use of procedures agreed upon with the
                                                    promote a uniform understanding                         These accounts and services are                        account holders, without any liability or
                                                    among FCMs, DCOs, and depositories as                   governed by account agreements,                        obligation to inquire as to the legitimacy
                                                    to their obligations under the CEA and                  operating circulars issued by Federal                  or accuracy of the instruction or the
                                                    Commission regulations with respect to                  Reserve Banks for each service, the                    transaction. By agreement with the
                                                    the proper treatment of customer funds.                 Federal Reserve Act, and Federal                       respective account holders, the
                                                    The template acknowledgment letter                      Reserve regulations and policies, and,                 procedures for accepting an instruction
                                                    contains a provision that reflects the                  with respect to book-entry securities                  are not used to detect an error in the
                                                    Commission’s expectation that a                         services, the regulations of the domestic              transmission or content of the
                                                    depository will engage in its customary                 issuer of the securities or the issuer’s               instruction, or compliance by the
                                                    practices and will be held liable for a                 regulator (‘‘Federal Reserve Bank                      account holder with its legal
                                                    violation of Section 4d if it knew or                   Governing Documents’’).37                              obligations. In addition to limiting the
                                                    should have known of the violation.35                   Additionally, one or more Federal                      areas of liability, the Commission
                                                       It is important to note that as the                  Reserve Banks have established                         understands that the Federal Reserve
                                                    aforementioned standard of liability was                proprietary accounts for SIDCOs 38                     Bank Governing Documents limit a
                                                    developed, the unique nature of the                     pursuant to Section 806 of the Dodd-                   Federal Reserve Bank’s liability in
                                                    Federal Reserve Banks was not taken                     Frank Act. These proprietary accounts                  maintaining an account or acting on
                                                    into account. Indeed, until recently,                   are also governed by the Federal Reserve               such an instruction to actual damages
                                                    there was no statutory authority                        Bank Governing Documents.                              that are incurred solely by the account
                                                    permitting a SIDCO to hold customer                        The Federal Reserve Banks’ standard                 holder 40 and that are proximately
                                                    funds at a Federal Reserve Bank.                        of liability for the financial services it             caused by the Federal Reserve Bank’s
                                                    However, and as discussed below, the                    offers to depository institutions has                  failure to exercise ordinary care or act
                                                    standard of liability for Federal Reserve               been developed over the 100-plus years                 in good faith in accordance with the
                                                    Banks acting as depositories has been                   of Federal Reserve Bank operations, in
                                                                                                                                                                   Federal Reserve Bank Governing
                                                    carefully developed by the Board and                    many cases hand-in-hand with the
                                                                                                                                                                   Documents.
                                                    not the Commission.                                     development of federal and state
                                                                                                            statutory and regulatory provisions, as                IV. Features Specific to the Federal
                                                    B. Federal Reserve Bank Liability Under                 well as common law governing                           Reserve Banks
                                                    Federal Reserve Bank Governing                          securities transfers, funds transfers, and
                                                    Documents                                                                                                        As noted above, Federal Reserve
                                                                                                            other payment mechanisms. The                          Banks play a unique role in the U.S.
                                                       The Federal Reserve System, which                    operating circulars of the Federal                     banking and payment system as
                                                    serves as the nation’s central bank, was                Reserve Banks began having uniform                     compared to commercial banks and
                                                    created by an act of Congress in 1913.                  terms and conditions across Federal                    other depositories and payment service
                                                    The Federal Reserve System consists of                  Reserve Bank districts as of January 2,
                                                                                                                                                                   providers.41 The standards set forth in
                                                    a seven member Board, and twelve                        1998. The 1998 version of the uniform
                                                                                                                                                                   the Federal Reserve Bank Governing
                                                    Federal Reserve Banks. The Federal                      Operating Circular 1 (Account
                                                                                                                                                                   Documents are reflective of this unique
                                                    Reserve Banks operate under the general                 Relationships) sets out the Federal
                                                                                                                                                                   role and have been developed over the
                                                    supervision of the Board, although each                 Reserve Banks’ standard and scope of
                                                                                                                                                                   years to capture the distinctive nature of
                                                    Bank has a Board of Directors that                      liability that limits a Federal Reserve
                                                    oversees its operations. Federal Reserve                Bank’s liability to only damages suffered                 39 See Federal Reserve Board, Financial Services,

                                                    Banks generate their own income,                        by the account holder that are caused by               https://web.archive.org/web/19990125095428/http:/
                                                    which is generally from interest earned                 the Federal Reserve Bank’s failure to                  www.frbservices.org/ (last visited Apr. 28, 2016).
                                                                                                                                                                   Prior to 1998, each Federal Reserve Bank had its
                                                    on U.S. government securities that are                                                                         own system with different numbered operating
                                                                                                               36 For example, Federal Reserve Banks provide
                                                    acquired in the course of Federal                                                                              circulars; as a result, the circular language was not
                                                                                                            checking accounts for the U.S. Department of
                                                    Reserve monetary policy actions and                     Treasury, issue and redeem U.S. government             necessarily uniform.
                                                    from the provision of priced services to                securities, and act in other ways as a fiscal agent       40 Under the Federal Reserve Bank Governing

                                                    depository institutions. Federal Reserve                for the U.S. government. See Federal Reserve Board,    Documents, the Federal Reserve Banks are not
                                                                                                            The Structure of the Federal Reserve System (Apr.      liable to third parties.
                                                    Banks do not, however, operate for a                    17, 2009), http://www.federalreserve.gov/pubs/            41 Federal Reserve Banks ‘‘ ‘are not operated for
                                                    profit. Indeed, each year they return to                frseries/frseri3.htm.                                  the profit of shareholders;’ rather, they ‘were
                                                    the U.S. Department of Treasury all                        37 See, e.g., Federal Reserve Bank Operating        created and are operated in furtherance of the
                                                    earnings in excess of Federal Reserve                   Circular No. 6 (governing funds transfers through      national fiscal policy.’ ’’ See Starr Int’l Co. v. Fed.
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                                                                                                            the Fedwire Funds Service); Federal Reserve Bank       Reserve Bank of New York, 742 F.3d 37, 40 (2d Cir.
                                                    Bank operating and other expenses.                      Operating Circular No. 7 (governing the                2014) (quoting Fed. Reserve Bank of Bos. v. Comm’r
                                                    Federal Reserve Banks are, in essence,                  maintenance of and transfer services for book-entry    of Corps. & Taxation of the Commonwealth of
                                                    the operating arms of the United States’                securities accounts); 12 CFR part 210, subpart B       Mass., 499 F.2d 60, 62 (1st Cir. 1974)). ‘‘Because
                                                    central banking system. In addition to                  (governing funds transfers through the Fedwire         Federal Reserve Banks ‘conduct important
                                                                                                            Funds Service); 31 CFR part 357, subpart B (setting    governmental functions regarding’ matters
                                                    their many responsibilities, Federal                    forth the Department of the Treasury’s regulations     including the ‘general fiscal duties of the United
                                                                                                            governing book-entry treasury bonds, notes, and        States,’ they are ‘instrumentalities of the federal
                                                      34 See 17 CFR 1.20, Appendices A and B.               bills).                                                government.’ ’’ See id. (quoting Fed. Reserve Bank
                                                      35 See 78 FR at 68535; see also 17 CFR                   38 A SIDCO’s proprietary account holds the          of St. Louis v. Metrocentre Improvement Dist. #1,
                                                    1.20(g)(4)(ii).                                         proprietary funds of its clearing members.             657 F.2d 183, 185–186 (8th Cir. 1981)).



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                                                                                    Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices                                             35341

                                                    the Federal Reserve Banks. In addition                   may arise when a commercial bank                        Federal Reserve Bank staff responsible
                                                    to the accounts and services that Federal                provides such services.                                 for managing the SIDCO’s account and
                                                    Reserve Banks provide to the                                Moreover, Federal Reserve Banks play                 financial services. Accordingly, given
                                                    government and to other depository                       a distinctive, dual role with respect to                the unique role that Federal Reserve
                                                    institutions, the Federal Reserve Banks                  SIDCOs, as they may be both account                     Banks play in the U.S. financial system,
                                                    supervise and examine member banks                       service providers and participants in the               Federal Reserve Bank account services
                                                    for safety and soundness. They also                      supervision of SIDCOs. Under Title VIII                 staff are unlikely to face conflicts of
                                                    participate in the setting of U.S.                       of the Dodd-Frank Act, the Board may                    interest that would motivate them to
                                                    monetary policy, an activity that is the                 participate in any Commission                           overlook information that would
                                                    primary responsibility of the Federal                    examination of a SIDCO and otherwise                    otherwise raise suspicion of
                                                    Reserve System. Moreover, in an effort                   consult and share information with the                  wrongdoing.
                                                    to reduce U.S. taxpayer burden,                          Commission regarding SIDCOs. Federal
                                                                                                             Reserve Banks may be delegated                          V. Section 4(c) of the CEA
                                                    Congress requires that the residual
                                                    earnings of each Federal Reserve Bank                    authority to assist the Board in fulfilling                Section 4(c) of the CEA provides that,
                                                    be distributed to the U.S. Treasury’s                    this function.45                                        in order to promote responsible
                                                    general fund.42 In fact, the Federal                        Further, Title VIII of the Dodd-Frank                economic or financial innovation and
                                                    Reserve Banks have sent to the U.S.                      Act expressly permits the Commission                    fair competition, the Commission, by
                                                    Treasury approximately $98.7 billion in                  and the Board to provide confidential                   rule, regulation, or order, after notice
                                                    residual earnings in 2014 and about                      supervisory information to, among                       and opportunity for hearing, may
                                                    $500 billion on a cumulative basis since                 others, the Federal Reserve Banks.46                    exempt any agreement, contract, or
                                                    2008.43                                                  Although a Federal Reserve Bank may                     transaction, or class thereof, including
                                                      Federal Reserve Banks also do not                      have access to confidential supervisory                 any person or class of persons offering,
                                                    provide financial services to businesses                 information regarding a particular                      entering into, rendering advice, or
                                                    generally; rather, they serve only                       SIDCO, Board staff has represented that                 rendering other services with respect to,
                                                    account holders authorized by statute,                   it has a long-standing ‘‘Wall Policy’’ that             the agreement, contract, or transaction,
                                                    such as depository institutions and the                  generally prohibits, subject to the                     from the contract market designation
                                                    U.S. government.44 In addition, Federal                  limitations contained therein, the                      requirements of Section 4(a) of the CEA,
                                                    Reserve Banks may engage in a set range                  sharing of confidential supervisory                     or any other provision of the CEA other
                                                    of services and only with the respective                 information with Federal Reserve Bank                   than certain enumerated provisions, if
                                                    account holder. As such, Federal                         account services staff, and requires that               the Commission determines that the
                                                    Reserve Banks do not provide the range                   care be exercised to avoid actual or                    exemption would be consistent with the
                                                    of related account services that a                       apparent conflict between a Federal                     public interest.48
                                                    commercial bank might provide, such as                   Reserve Bank’s role as a provider of                    VI. Proposed Exemption From Sections
                                                    offering services to executives of the                   financial services and its role as a                    4d and 22 of the CEA
                                                    account holder as an additional                          regulator, supervisor, and lender.47 The
                                                    incentive to do business with the bank.                  Board has adopted certain standards                        The Commission proposes to exempt
                                                    Therefore, the Commission believes that                  regarding the organization, operations,                 Federal Reserve Banks that provide
                                                    the Federal Reserve Banks do not have                    and business practices of Federal                       customer accounts and other services to
                                                    the potential conflict of interest that                  Reserve Bank financial services which,                  SIDCOs from Sections 4d and 22 of the
                                                                                                             among other things, generally prohibit                  CEA. The Commission further proposes
                                                       42 The current congressional mandate requires
                                                                                                             Federal Reserve Bank personnel                          to permit SIDCOs to maintain customer
                                                    that Federal Reserve Banks transfer their residual
                                                                                                             involved in day-to-day monetary policy,                 accounts with a Federal Reserve Bank
                                                    earnings in excess of $10 billion to the U.S.                                                                    pursuant to the standard of liability set
                                                    Treasury. See FAST Act, Pub. L. 114–94, 129 Stat.        bank supervision, or the lending
                                                    1312 (2015). For prior congressional mandates in         function from providing confidential                    forth in the Federal Reserve Bank
                                                    this regard, see, e.g., District of Columbia             information obtained in the course of                   Governing Documents. The proposed
                                                    Appropriations Act, Pub. L. 106–113, 113 Stat. 1501                                                              exemption would, however, require a
                                                    (1999) (requiring that, in fiscal year 2000, Federal     their duties to Federal Reserve Bank
                                                    Reserve Banks transfer their residual earnings in the    personnel involved in day-to-day                        Federal Reserve Bank to segregate
                                                    amount of $3,752,000,000 to the U.S. Treasury’s          account services. In addition, the Wall                 customer funds deposited by a SIDCO
                                                    general fund); Omnibus Budget Reconciliation Act
                                                                                                             Policy would generally prohibit Board                   from the proprietary funds deposited by
                                                    of 1993, Pub. L. 103–66, 107 Stat. 312 (requiring                                                                a SIDCO, and to reply to any request
                                                    that, during fiscal years 1997 and 1998, Federal         supervisory staff from sharing any
                                                    Reserve Banks transfer their residual earnings in        confidential supervisory information                    from Commission staff for confirmation
                                                    excess of 3 percent of the total paid-in capital and     they receive about a SIDCO with the                     of account balances or for provision of
                                                    surplus to the U.S. Treasury’s general fund).                                                                    any other information regarding the
                                                       43 See Press Release, Board of Governors of the
                                                                                                               45 See Federal Reserve Board, The Structure of the    SIDCO account.
                                                    Federal Reserve System, Reserve Bank Income and
                                                    Expense Data and Transfers to the Treasury for 2014      Federal Reserve System (Apr. 17, 2009), http://            As discussed above, Title VIII of the
                                                    (Jan. 9, 2015), available at http://                     www.federalreserve.gov/pubs/frseries/frseri3.htm        Dodd-Frank Act supports Federal
                                                    www.federalreserve.gov/newsevents/press/other/           (noting that some supervisory responsibilities are      Reserve Banks acting as depositories for
                                                    20150109a.htm; Annual Report, Board of Governors         delegated to the Federal Reserve Banks by the
                                                                                                             Board).                                                 SIDCOs. A Federal Reserve Bank, in its
                                                    of the Federal Reserve System (2014), available at
                                                    http://www.federalreserve.gov/publications/annual-         46 See Section 809(e)(2) of the Dodd-Frank Act.       capacity as an instrument of the U.S.
                                                    report/files/2014-annual-report.pdf.                       47 Federal Reserve’s Key Policies for the Provision   central bank, does not present the same
                                                                                                                                                                     types of risks as traditional commercial
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                                                       44 See, e.g., Federal Reserve Bank of Richmond,       of Financial Services: Standards Related to Priced-
                                                    Consumer Issues and Information, available at            Service Activities of the Federal Reserve Banks         banks. Federal Reserve Banks are an
                                                    https://www.richmondfed.org/faqs/consumer/ (last         (1984), available at http://www.federalreserve.gov/
                                                    visited Feb. 26, 2016) (stating that ‘‘Federal Reserve   paymentsystems/pfs_standards.htm. The policy            integral part of the Federal Reserve
                                                    Banks are not authorized to open accounts for            permits certain limited exceptions in cases where       System, serving the public interest and
                                                    individuals[; rather, o]nly depository institutions      such disclosure fulfills an important supervisory       helping to maintain stability in the U.S.
                                                    and certain other financial entities may open an         objective, preserves the integrity of the payment       financial markets. Further, deposits at a
                                                    account at a Federal Reserve Bank’’); see also           mechanism, or protects the assets of the Federal
                                                    Section 806(a) of the Dodd-Frank Act (authorizing        Reserve Banks. In such cases, information will be       Federal Reserve Bank have the lowest
                                                    accounts at a Federal Reserve Bank for designated        provided on a need-to-know basis and only with the
                                                    FMUs).                                                   approval of senior management.                           48 7   U.S.C. 6(c).



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                                                    35342                          Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices

                                                    credit risk. The Board and, through their               are currently insulated from third-party               SIDCO’s account and financial services
                                                    role in the Federal Reserve System,                     claims. While the Commission                           would gain special knowledge about the
                                                    Federal Reserve Banks are also the                      continues to believe that private claims               SIDCO. Accordingly, and
                                                    source of liquidity with regard to U.S.                 empower injured parties to seek                        notwithstanding the Wall Policy
                                                    dollar deposits. A SIDCO would,                         compensation for damages where the                     described above, the Commission
                                                    therefore, face much lower credit and                   Commission lacks the resources to do so                recognizes that a Federal Reserve Bank
                                                    liquidity risk with a deposit at a Federal              on their behalf, and the prospect of such              acting as a depository for customer
                                                    Reserve Bank than it would with a                       claims serves the public interest in                   funds could face greater scrutiny than a
                                                    deposit at a commercial bank.                           deterring misconduct, the Commission                   commercial bank acting as such. As a
                                                       Moreover, customer funds held at a                   believes that, for the reasons discussed               result, the proposed exemption would
                                                    Federal Reserve Bank would not be                       herein, exempting the Federal Reserve                  specify that: (1) Pursuant to the Wall
                                                    exposed to the risks associated with a                  Banks from liability under Section 22 of               Policy, information obtained by the
                                                    commercial bank insolvency. As a                        the CEA would also serve the public                    Board supervisory staff during the
                                                    result, the Commission believes that                    interest.                                              course of supervising SIDCOs or any
                                                    customer funds would be protected in                       Federal Reserve Banks were created                  counterparty to a SIDCO will not be
                                                    an account held by a Federal Reserve                    and are operated in furtherance of the                 attributed by the Commission to any
                                                    Bank and would continue to be required                  national interest; they are not for-profit             Federal Reserve Bank providing
                                                    to be segregated from the funds                         enterprises. Moreover, as discussed                    accounts and financial services to
                                                    deposited in the SIDCO’s proprietary                    above, Federal Reserve Banks return all                SIDCO account holders; and (2) a
                                                    account. The Commission notes that the                  earnings in excess of operating and                    Federal Reserve Bank acting as a
                                                    standard of liability as set forth in the               other expenses to the U.S. Treasury. All               depository for SIDCO customer funds or
                                                    Federal Reserve Bank Governing                          such amounts transferred to the U.S.                   otherwise providing account services to
                                                    Documents appears to be appropriate in                  Treasury’s general fund inure to the                   a SIDCO would continue to be held to
                                                    the context of Federal Reserve Banks                    benefit of U.S. taxpayers. In this case,               the standard of liability set forth in the
                                                    because this standard has been                          private claims against a Federal Reserve               Federal Reserve Bank Governing
                                                    developed over the years to more                        Bank would reduce the amount of                        Documents.
                                                    appropriately reflect the unique nature                 excess earnings that could be returned
                                                                                                                                                                      Finally, the unique role that the
                                                    of the Federal Reserve Banks. At this                   to the U.S. Treasury. In the
                                                                                                                                                                   Federal Reserve Banks play in the
                                                    time, the Commission does not have any                  Commission’s view, the benefits
                                                    reason to believe that holding a Federal                afforded customers by holding SIDCO                    Federal Reserve System was not
                                                    Reserve Bank to this standard would                     customer funds at a Federal Reserve                    expressly taken into account when the
                                                    have the potential to harm futures and                  Bank exceed the benefits of preserving                 Commission’s standard of liability was
                                                    cleared swaps customers.                                the ability to bring any private claims                developed for depositories. In fact, as
                                                       The Federal Reserve Banks would                      under Section 22 of the CEA.                           described above, it was the Dodd-Frank
                                                    also be exempt from liability under                        Furthermore, the Commission                         Act that, for the first time, authorized
                                                    Section 22 of the CEA. Section 22 of the                recognizes that Title VIII of the Dodd-                designated FMUs (including SIDCOs)
                                                    CEA provides for private rights of action               Frank Act permits a Federal Reserve                    that are not banks or trust companies to
                                                    for damages against persons who violate                 Bank to have access to confidential                    open deposit accounts with a Federal
                                                    the CEA, or persons who willfully aid,                  supervisory information. Specifically,                 Reserve Bank. However, while the
                                                    abet, counsel, induce, or procure the                   Section 809(e)(2) provides that the                    Federal Reserve Banks may establish
                                                    commission of a violation of the CEA.49                 Board of Governors or any Supervisory                  deposit accounts for SIDCOs, such
                                                    The proposed exemption would                            Agency may provide confidential                        accounts are subject to any applicable
                                                    preclude a third party from succeeding                  supervisory information and other                      rules, orders, standards, or guidelines
                                                    in a private right of action under Section              information obtained under Title VIII to               prescribed by the Board.51 The
                                                    22 for a violation of Section 4d.50 The                 each other and to the Federal Reserve                  Commission notes that the Board has
                                                    Commission believes that an exemption                   Banks, State financial institution                     prescribed detailed rules and standards
                                                    from Section 22 is appropriate because,                 supervisory agencies, and foreign                      that govern account services provided to
                                                    for those requirements from which the                   financial supervisors, provided,                       SIDCOs by the Federal Reserve Banks.52
                                                    Federal Reserve Banks are exempt, it                    however, that no person or entity                      These rules and standards have been
                                                    follows that there should be no claim                   receiving information pursuant to this                 carefully developed to provide clarity
                                                    under Section 22 of the CEA with                        section may disseminate such                           surrounding the provision of Federal
                                                    respect to those requirements. The                      information to entities or persons other               Reserve financial services and to
                                                    Commission further notes that under the                 than those listed in this paragraph                    promote consistency in the treatment of
                                                    Federal Reserve Bank Governing                          without complying with applicable law,                 deposit accounts at the Federal Reserve
                                                    Documents, the Federal Reserve Banks                    including section 8 of the CEA (7 U.S.C.               Banks for the benefit of the U.S.
                                                                                                            12). By permitting the Federal Reserve                 financial system. The Commission is
                                                       49 7 U.S.C. 25. By enacting Section 22, Congress     Banks to receive confidential                          concerned that exposing the Federal
                                                    provided private rights of action as a means for        supervisory information, Congress                      Reserve Banks to the standard of
                                                    addressing violations of the Act as an alternative or
                                                    supplement to Commission enforcement action.            recognized the unique role of Federal                  liability set forth in Section 4d of the
                                                    Specifically, Congress found that private damages       Reserve Banks in the U.S. financial                    CEA, as well as to potential third-party
                                                                                                            system, as distinguished from the role of              claims under Section 22 of the CEA,
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                                                    actions are ‘‘critical to protecting the public and
                                                    fundamental to maintaining the credibility of the       commercial banks and other depository                  could disrupt these goals and ultimately
                                                    futures market.’’ H.R. Rep. No. 97–565, at 57 (1982).
                                                       50 Cf. Effective Date for Swap Regulation, 76 FR
                                                                                                            institutions. The Commission further
                                                    42508, 42517 (July 19, 2011) (stating that              recognizes, however, that the fact that                  51 See Section 806(a) of the Dodd-Frank Act.
                                                    ‘‘exemptive relief would, in effect, preclude a         Board supervisory staff may have access                  52 See 12 CFR 234.5 (setting forth the conditions
                                                    person from succeeding in a private right of action     to confidential supervisory information                and requirements for Federal Reserve Banks to open
                                                    under CEA section 22(a)’’). However, for the                                                                   and maintain accounts for and provide financial
                                                    avoidance of doubt, the Commission believes that
                                                                                                            about a SIDCO could create the false                   services to designated FMUs); see also discussion
                                                    an express exemption from Section 22 of the CEA         perception that Federal Reserve Bank                   supra Part III.B (discussing the Federal Reserve
                                                    for the Federal Reserve Banks is appropriate.           staff responsible for managing the                     Bank Governing Documents).



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                                                                                   Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices                                                      35343

                                                    harm the U.S. financial system and, by                  B. Paperwork Reduction Act                             the public interest in deterring
                                                    extension, U.S. taxpayers.                                 The purposes of the Paperwork                       misconduct, the Commission believes
                                                       For the reasons discussed above, the                 Reduction Act of 1995 (‘‘PRA’’) 56 are,                that, for the reasons discussed herein,
                                                    Commission believes that the proposed                   among other things, to minimize the                    exempting the Federal Reserve Banks
                                                                                                            paperwork burden to the private sector,                from liability under Section 22 of the
                                                    exemption would promote the
                                                                                                            ensure that any collection of                          CEA would also serve the public
                                                    safeguarding of futures and cleared
                                                                                                            information by a government agency is                  interest. The Commission further
                                                    swaps customer funds in a manner that
                                                                                                            put to the greatest possible uses, and                 believes that the condition in the
                                                    would also benefit U.S. taxpayers. In                                                                          proposed exemption that would require
                                                    light of the foregoing, the Commission                  minimize duplicative information
                                                                                                            collections across the government. The                 Federal Reserve Banks to segregate
                                                    believes the proposed exemption would                                                                          customer funds deposited by a SIDCO
                                                    promote responsible economic and                        PRA applies to all information,
                                                                                                            ‘‘regardless of form or format,’’                      from the proprietary funds deposited by
                                                    financial innovation and fair                                                                                  a SIDCO and the benefits of facilitating
                                                    competition, and would be consistent                    whenever the government is ‘‘obtaining,
                                                                                                            causing to be obtained [or] soliciting’’               SIDCOs’ use of these accounts mitigate
                                                    with the ‘‘public interest,’’ as that term                                                                     any costs that would flow from the loss
                                                    is used in Section 4(c) of the CEA.                     information, and requires ‘‘disclosure to
                                                                                                            third parties or the public, of facts or               of protection under Section 4d of the
                                                    VII. Related Matters                                    opinions,’’ when the information                       CEA.
                                                                                                                                                                      As described above, the Commission
                                                                                                            collection calls for ‘‘answers to identical
                                                    A. Regulatory Flexibility Act                                                                                  has reinforced and enhanced the
                                                                                                            questions posed to, or identical
                                                                                                                                                                   provisions of Section 4d of the CEA in
                                                       The Regulatory Flexibility Act                       reporting or recordkeeping requirements
                                                                                                                                                                   order to further protect customer funds,
                                                    (‘‘RFA’’) 53 requires that agencies                     imposed on, ten or more persons.’’ The
                                                                                                                                                                   and this proposal represents a limited
                                                    consider whether the proposed                           PRA would not apply in this case given
                                                                                                                                                                   exception to those provisions.
                                                    exemption will have a significant                       that the exemption would not impose
                                                                                                            any new recordkeeping or information                   2. Benefits
                                                    economic impact on a substantial
                                                                                                            collection requirements, or other                         The proposed exemption would
                                                    number of small entities and, if so,
                                                                                                            collections of information on ten or                   benefit market participants by
                                                    provide a regulatory flexibility analysis               more persons that require approval of
                                                    respecting the impact. The Commission                                                                          permitting SIDCOs to deposit customer
                                                                                                            the Office of Management and Budget.                   funds at the Federal Reserve Banks.
                                                    believes that the proposed exemption
                                                    will not have a significant economic                    C. Cost and Benefit Considerations                     Whereas commercial banks present
                                                    impact on a substantial number of small                                                                        credit and liquidity risks to a SIDCO, its
                                                                                                            1. Costs                                               FCM clearing members, and the FCMs’
                                                    entities. The exemption proposed by the
                                                                                                               The proposed exemption would                        customers, the Federal Reserve Banks
                                                    Commission will impact SIDCOs and
                                                                                                            exempt the Federal Reserve Banks from                  are substantially insulated from such
                                                    Federal Reserve Banks. The Commission
                                                                                                            Sections 4d and 22 of the CEA. The                     risks. As discussed in greater detail
                                                    has previously established certain                                                                             above, Title VIII of the Dodd-Frank Act
                                                                                                            Commission recognizes that such relief
                                                    definitions of ‘‘small entities’’ to be used                                                                   was enacted to mitigate systemic risk in
                                                                                                            could represent a cost to a SIDCO, its
                                                    by the Commission in evaluating the                     FCM clearing members, and the FCMs’                    the financial system and to promote
                                                    impact of its actions on small entities in              customers in the event of a loss of the                financial stability, in part, through an
                                                    accordance with the RFA.54 The                          deposited customer funds. For instance,                enhanced supervisory framework for
                                                    Commission has previously determined                    if customer funds were lost due to the                 SIDCOs. In addition to this framework,
                                                    that DCOs, including SIDCOs, are not                    fault of a Federal Reserve Bank, the                   Title VIII, and more specifically, Section
                                                    small entities for purposes of the RFA.55               SIDCO, FCM clearing member, or                         806(a) of the Dodd-Frank Act, permits
                                                    Similarly, the Commission believes that                 customer would not have a cause of                     the Board to authorize a Federal Reserve
                                                    Federal Reserve Banks are not small                     action under the CEA. Rather, as                       Bank to establish and maintain an
                                                    entities for purposes of the RFA.                       discussed above, the Federal Reserve                   account for a SIDCO and provide to the
                                                       Accordingly, the Commission does                     Banks would be held to the standard of                 SIDCO certain financial services. By
                                                    not expect the proposed exemption to                    liability set forth in the Federal Reserve             enacting Title VIII in general, and
                                                    have a significant impact on a                          Bank Governing Documents.57 This                       Section 806(a) in particular, Congress
                                                    substantial number of small entities.                   cost, however, will never be realized if               recognized the importance of reducing
                                                    Therefore, the Chairman, on behalf of                   an incident does not occur. Therefore,                 systemic risk and providing SIDCOs
                                                                                                            given the resilience of the Federal                    with a potential safeguard during an
                                                    the Commission, hereby certifies,
                                                                                                            Reserve Banks and the standards set                    extraordinary liquidity event. The
                                                    pursuant to 5 U.S.C. 605(b), that the
                                                                                                            forth in the Federal Reserve Bank                      proposed exemption would therefore
                                                    proposed exemption would not have a
                                                                                                            Governing Documents, the Commission                    help promote Congress’s goal of better
                                                    significant economic impact on a                                                                               preparing the U.S. financial system for
                                                                                                            estimates that the circumstances that
                                                    substantial number of small entities.                                                                          potential future liquidity events. A
                                                                                                            may give rise to such costs would be
                                                    The Commission invites the public to                                                                           SIDCO’s access to Federal Reserve Bank
                                                                                                            remote. Similarly, as discussed above,
                                                    comment on whether the entities                                                                                deposit accounts is also consistent with
                                                                                                            while the Commission continues to
                                                    covered by this proposed exemption                      believe that private claims empower                    the international standards set forth in
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                                                    should be considered small entities for                 injured parties to seek compensation for               the Principles for Financial Market
                                                    purposes of the RFA, and, if so, whether                damages where the Commission lacks                     Infrastructures (‘‘PFMIs’’), which
                                                    there is a significant impact on a                      the resources to do so on their behalf,                acknowledge the protections afforded by
                                                    substantial number of small entities.                   and the prospect of such claims serves                 central banks from such credit and
                                                                                                                                                                   liquidity risks.58
                                                      53 5U.S.C. 601 et seq.                                  56 44  U.S.C. 3501 et seq.
                                                      54 See 47 FR 18618, 18618–21 (Apr. 30, 1982).           57 For  a more detailed discussion of the standard     58 See, e.g., CPSS–IOSCO, PFMIs, ¶ 3.9.3 (noting
                                                      55 See New Regulatory Framework for Clearing          of liability set forth in the Federal Reserve Bank     that ‘‘[c]entral banks have the lowest credit risk and
                                                    Organizations, 66 FR 45604, 45609 (Aug. 29, 2001).      Governing Documents, see discussion supra Part IV.                                                  Continued




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                                                    35344                          Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices

                                                       Moreover, the Federal Reserve Banks’                 order is necessary or appropriate to                     The Commission further notes that,
                                                    standard of liability, as set forth in the              protect the public interest or to                      notwithstanding the proposed
                                                    Federal Reserve Bank Governing                          effectuate any of the provisions or to                 exemption from Section 4d of the CEA,
                                                    Documents, is better suited for the                     accomplish any of the purposes of the                  the Federal Reserve Banks would still be
                                                    Federal Reserve Banks than Section 4d                   CEA.                                                   required to segregate customer funds
                                                    of the CEA, which was designed to                                                                              deposited by a SIDCO from the
                                                    govern customer funds deposited with a                  a. Protection of Market Participants and
                                                                                                                                                                   proprietary funds deposited by a SIDCO
                                                    commercial bank, trust company, or                      the Public
                                                                                                                                                                   and adhere to the longstanding
                                                    DCO. Unlike commercial banks, Federal                      The proposed exemption would serve                  standards of liability that govern the
                                                    Reserve Banks do not operate for profit                 to facilitate SIDCOs’ use of Federal                   Federal Reserve Banks.
                                                    and serve only account holders                          Reserve Banks as depositories for
                                                    authorized by statute, such as                          customer funds. As the Federal Reserve                 e. Other Public Interest Considerations
                                                    depository institutions and the U.S.                    System is the nation’s central bank,                     The Commission believes that
                                                    government. Indeed, each year they                      such accounts would provide SIDCOs                     facilitating a SIDCO’s access to Federal
                                                    return to the U.S. Department of                        with the lowest possible credit risk in                Reserve Bank accounts will promote the
                                                    Treasury all earnings in excess of                      the event of a market disruption.                      public interest by bolstering a SIDCO’s
                                                    Federal Reserve Bank operating and                      Moreover, as Federal Reserve Banks are                 ability to conduct settlements with a
                                                    other expenses, such as litigation                      the source of liquidity with regard to                 high degree of confidence under a wide
                                                    expenses. By exempting the Federal                      U.S. dollar deposits, SIDCOs with                      range of stress scenarios, thereby
                                                    Reserve Banks from certain potential                    access to a deposit account at a Federal               increasing the likelihood of the SIDCO
                                                    enforcement actions and private suits,                  Reserve Bank would also be better                      being able to provide its customers with
                                                    the proposed exemption would reduce                     equipped to handle a liquidity event. As               access to their funds in times of market
                                                    the Federal Reserve Banks’ exposure to                  SIDCOs have been so designated                         distress.
                                                    litigation. Because the Federal Reserve                 because of their importance to the
                                                                                                                                                                   VIII. Request for Comment
                                                    Banks return their earnings to the U.S.                 broader financial system, reducing these
                                                    Department of Treasury’s general fund,                  risks would protect market participants                  The Commission requests comment
                                                    U.S. taxpayers may benefit from the                     and the public.                                        on all aspects of the proposed
                                                    proposed exemption. Therefore, the                                                                             exemption, including, without
                                                                                                            b. Efficiency, Competitiveness, and                    limitation, the Commission’s
                                                    Commission believes that it is
                                                                                                            Financial Integrity                                    determination that the proposed
                                                    appropriate to apply the Federal Reserve
                                                    Bank’s standard of liability in order to                   A temporary or permanent disruption                 exemption is consistent with the public
                                                    facilitate the use of these accounts.                   to the operations of a SIDCO could                     interest, and the Commission’s
                                                                                                            cause wide-spread and significant                      consideration of the costs and benefits
                                                    3. Section 15(a) Factors                                damage to the financial integrity of                   of the proposed exemption.
                                                       Section 15(a) of the CEA requires the                derivatives markets as a whole.                          The Commission requests comment
                                                    Commission to consider the costs and                    Therefore, by facilitating a SIDCO’s use               regarding whether the proposed
                                                    benefits of its action before issuing an                of Federal Reserve Banks as depositories               exemption should be expanded to
                                                    order under the CEA.59 By its terms,                    for customer funds, the proposed                       include those customer accounts that
                                                    Section 15(a) does not require the                      exemption would reduce liquidity and                   are established pursuant to the CEA and
                                                    Commission to quantify the costs and                    credit risk to the SIDCO, which would,                 that are held at Federal Reserve Banks
                                                    benefits of an order or to determine                    in turn, promote the financial integrity               by designated FMUs for which the
                                                    whether the benefits of the order                       of the derivatives markets.                            Commission is not the Supervisory
                                                    outweigh its costs. Rather, Section 15(a)                  The Commission does not anticipate                  Agency.
                                                    simply requires the Commission to                       the proposed exemption to have a
                                                    ‘‘consider the costs and benefits’’ of its              significant impact on the efficiency and               IX. Proposed Order of Exemption
                                                    action.                                                 competitiveness of the derivatives                       After considering the above factors,
                                                       Section 15(a) of the CEA further                     markets.                                               the Commission proposes to issue the
                                                    specifies that costs and benefits shall be                                                                     following:
                                                                                                            c. Price Discovery
                                                    evaluated in light of five broad areas of
                                                                                                               The Commission does not anticipate                  Proposed Order
                                                    market and public concern: (1)
                                                    Protection of market participants and                   the proposed exemption to have an                         Pursuant to Title VIII of the Dodd-Frank
                                                                                                            impact on the price discovery process.                 Wall Street Reform and Consumer Protection
                                                    the public; (2) efficiency,
                                                                                                                                                                   Act (‘‘Dodd-Frank Act’’), the Commodity
                                                    competitiveness, and financial integrity                d. Sound Risk Management Practices                     Futures Trading Commission
                                                    of futures markets; (3) price discovery;                                                                       (‘‘Commission’’) is the supervisory agency for
                                                    (4) sound risk management practices;                       The Commission believes that
                                                                                                                                                                   certain derivatives clearing organizations
                                                    and (5) other public interest                           establishing SIDCO segregated customer                 (‘‘DCOs’’) that have been designated by the
                                                    considerations. The Commission may in                   accounts and enabling SIDCOs to access                 Financial Stability Oversight Council as
                                                    its discretion give greater weight to any               related services at a Federal Reserve                  systemically important. Under Section 806(a)
                                                    one of the five enumerated areas and                    Bank would improve a SIDCO’s ability                   of the Dodd-Frank Act, the Board of
                                                    could in its discretion determine that,                 to manage liquidity risk and protect                   Governors (‘‘Board’’) of the Federal Reserve
                                                                                                            customer funds. Additionally, the                      System is permitted to authorize a Federal
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                                                    notwithstanding its costs, a particular
                                                                                                            Commission believes that the                           Reserve Bank to establish and maintain a
                                                                                                            availability of a Federal Reserve Bank                 deposit account for a systemically important
                                                    are the source of liquidity with regard to their                                                               DCO (‘‘SIDCO’’) and provide certain services
                                                    currency of issue’’); see also PFMIs, Key               account could allow a SIDCO to reduce
                                                                                                                                                                   to the SIDCO, subject to any applicable rules,
                                                    Consideration 8 (specifying that a financial market     its concentration risk by adding an                    orders, standards, or guidelines prescribed by
                                                    infrastructure ‘‘with access to central bank            additional creditworthy depository in
                                                    accounts, payment services, or securities services                                                             the Board.
                                                    should use these services, where practical, to          which to diversify funds. Accordingly,                    DCOs, including SIDCOs, are required to
                                                    enhance its management of liquidity risk’’).            the proposed exemption promotes                        hold funds belonging to customers of their
                                                      59 7 U.S.C. 19(a).                                    sound risk management practices.                       clearing members in accounts subject to



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                                                                                   Federal Register / Vol. 81, No. 106 / Thursday, June 2, 2016 / Notices                                            35345

                                                    Section 4d of the Commodity Exchange Act                balances or provision of any other                     SUMMARY:    The Corporation for National
                                                    (‘‘CEA’’). In addition, Section 22 of the CEA           information regarding or related to the SIDCO          and Community Service (CNCS) has
                                                    would typically provide for private rights of           customer account(s) that are established               submitted a public information
                                                    action for damages against persons who                  pursuant to the CEA from the director of the
                                                                                                            Division of Clearing and Risk of the
                                                                                                                                                                   collection request (ICR) entitled
                                                    violate Section 4d, or persons who willfully
                                                    aid, abet, counsel, induce, or procure the              Commission, or any successor division, or              National Service Trust Voucher and
                                                    commission of a violation of Section 4d.                such director’s designees.                             Payment Request Form/National Service
                                                    However, the Commission understands that                   3. Applicability to Federal Reserve Banks.          Trust Manual Payment Request Form for
                                                    deposit accounts maintained by any Federal              Subject to the conditions contained herein,            review and approval in accordance with
                                                    Reserve Bank would also be governed by                  the order applies to all Federal Reserve Banks         the Paperwork Reduction Act of 1995,
                                                    applicable account agreements, operating                that provide customer accounts and other               Public Law 104–13, (44 U.S.C. Chapter
                                                    circulars issued by Federal Reserve Banks for           services to SIDCOs. In addition, pursuant to
                                                                                                                                                                   35). Copies of this ICR, with applicable
                                                    each service, the Federal Reserve Act, and              the Federal Reserve’s Key Policies for the
                                                                                                            Provision of Financial Services: Standards             supporting documentation, may be
                                                    Federal Reserve regulations and policies,
                                                    and, with respect to book-entry securities              Related to Priced-Service Activities of the            obtained by calling the Corporation for
                                                    services, the regulations of the domestic               Federal Reserve Banks, information obtained            National and Community Service,
                                                    issuer of the securities or the issuer’s                by the Board of Governors of the Federal               Nahid Jarrett, at 202–606–6753 or email
                                                    regulator (‘‘Federal Reserve Bank Governing             Reserve System or its designees during the             to njarrett@cns.gov. Individuals who use
                                                    Documents’’). The Federal Reserve Bank                  course of supervising SIDCOs, pursuant to              a telecommunications device for the
                                                    Governing Documents, as may be amended                  Title VIII of the Dodd-Frank Act, or any               deaf (TTY–TDD) may call 1–800–833–
                                                    from time to time, include, but are not                 counterparty to a SIDCO under any authority,
                                                                                                            shall not be attributed by the Commission to           3722 between 8 a.m. and 8 p.m. Eastern
                                                    limited to, Federal Reserve Bank Operating
                                                                                                            any Federal Reserve Bank providing accounts            Time, Monday through Friday.
                                                    Circular No. 6 (governing funds transfers
                                                    through the Fedwire Funds Service); Federal             and financial services to SIDCO account                DATES: Comments may be submitted,
                                                    Reserve Bank Operating Circular No. 7                   holders.                                               identified by the title of the information
                                                    (governing the maintenance of and transfer                 4. Reservation of Rights. This order is             collection activity, within July 5, 2016.
                                                    services for book-entry securities accounts);           based upon the analysis set forth above. Any
                                                                                                            material change in law or circumstances                ADDRESSES: Comments may be
                                                    12 CFR part 210, subpart B (governing funds                                                                    submitted, identified by the title of the
                                                    transfers through the Fedwire Funds                     pursuant to which this order is granted might
                                                                                                            require the Commission to reconsider its               information collection activity, to the
                                                    Service); and 31 CFR part 357, subpart B
                                                    (setting forth the U.S. Department of the               finding that the exemption contained herein            Office of Information and Regulatory
                                                                                                            is appropriate and/or consistent with the              Affairs, Attn: Ms. Sharon Mar, OMB
                                                    Treasury’s regulations governing book-entry
                                                                                                            public interest and purposes of the CEA.               Desk Officer for the Corporation for
                                                    treasury bonds, notes, and bills).
                                                                                                            Further, the Commission reserves the right,            National and Community Service, by
                                                       The Commission understands that under
                                                                                                            in its discretion, to revisit any of the terms
                                                    the Federal Reserve Bank Governing
                                                                                                            and conditions of the relief provided herein,          any of the following two methods
                                                    Documents, a Federal Reserve Bank has no                                                                       within 30 days from the date of
                                                                                                            including but not limited to, making a
                                                    requirement or obligation to inquire as to the                                                                 publication in the Federal Register:
                                                                                                            determination that certain entities described
                                                    legitimacy or accuracy of the instructions, or                                                                    (1) By fax to: 202–395–6974,
                                                                                                            herein should be subject to the Commission’s
                                                    the transactions related to those instructions,         full jurisdiction, and to condition, suspend,          Attention: Ms. Sharon Mar, OMB Desk
                                                    or compliance by the SIDCO with its                     terminate, or otherwise modify or restrict the
                                                    obligations under the CEA. To the extent that                                                                  Officer for the Corporation for National
                                                                                                            exemption granted in this order, as                    and Community Service; or
                                                    liability may accrue under the Federal                  appropriate, upon its own motion.
                                                    Reserve Bank Governing Documents, the                                                                             (2) By email to: smar@omb.eop.gov.
                                                    Commission understands that the Federal                   Issued in Washington, DC, on May 27,                 SUPPLEMENTARY INFORMATION: The OMB
                                                    Reserve Bank may be held liable only for                2016, by the Commission.                               is particularly interested in comments
                                                    actual damages that are (i) incurred solely by          Christopher J. Kirkpatrick,                            which:
                                                    the SIDCO account holder, and (ii)                      Secretary of the Commission.                              • Evaluate whether the proposed
                                                    proximately caused by the Federal Reserve
                                                                                                            Appendix to Notice of Proposed Order                   collection of information is necessary
                                                    Bank’s failure to exercise ordinary care or act
                                                    in good faith in accordance with the Federal            and Request for Comment on a                           for the proper performance of the
                                                    Reserve Bank Governing Documents. The                   Proposal To Exempt, Pursuant to the                    functions of CNCS, including whether
                                                    Commission proposes to exempt the Federal               Authority in Section 4(c) of the                       the information will have practical
                                                    Reserve Banks in order to facilitate Federal            Commodity Exchange Act, the Federal                    utility;
                                                    Reserve Banks’ ability to accept SIDCO
                                                                                                            Reserve Banks From Sections 4d and 22                     • Evaluate the accuracy of the
                                                    customer accounts.                                                                                             agency’s estimate of the burden of the
                                                       Therefore, it is ordered, pursuant to                of the Commodity Exchange Act—
                                                                                                            Commission Voting Summary                              proposed collection of information,
                                                    Section 4(c) of the CEA, 7 U.S.C. 6(c), that                                                                   including the validity of the
                                                    the Federal Reserve Banks are granted an                  On this matter, Chairman Massad and                  methodology and assumptions used;
                                                    exemption from Sections 4d and 22 of the
                                                    CEA, subject to the terms and conditions
                                                                                                            Commissioners Bowen and Giancarlo voted                   • Propose ways to enhance the
                                                                                                            in the affirmative. No Commissioner voted in           quality, utility, and clarity of the
                                                    specified herein:                                       the negative.
                                                       1. Segregation. Money, securities, and                                                                      information to be collected; and
                                                    property deposited into a customer account
                                                                                                            [FR Doc. 2016–13055 Filed 6–1–16; 8:45 am]                • Propose ways to minimize the
                                                    established pursuant to the CEA by a SIDCO              BILLING CODE 6351–01–P                                 burden of the collection of information
                                                    with a Federal Reserve Bank shall be                                                                           on those who are to respond, including
                                                    separately accounted for and segregated from                                                                   through the use of appropriate
                                                    the money, securities, and property                     CORPORATION FOR NATIONAL AND
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                                                                                                                                                                   automated, electronic, mechanical, or
                                                    deposited into a proprietary account of the             COMMUNITY SERVICE                                      other technological collection
                                                    SIDCO depositing such funds and from the
                                                                                                                                                                   techniques or other forms of information
                                                    money, securities, and property deposited               Information Collection; Submission for
                                                    into the account of any person other than the                                                                  technology.
                                                                                                            OMB Review, Comment Request
                                                    customers for whom the money, securities, or                                                                   Comments
                                                    property is held.                                       AGENCY: Corporation for National and
                                                       2. Information Requests. Federal Reserve             Community Service.                                       A 60-day Notice requesting public
                                                    Banks must reply promptly and directly to                                                                      comment was published in the Federal
                                                                                                            ACTION: Notice.
                                                    any request for confirmation of account                                                                        Register on February 12, 2016, at 81 FR


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Document Created: 2016-06-02 01:23:09
Document Modified: 2016-06-02 01:23:09
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
ActionNotice of proposed order and request for comment.
DatesComments must be received by July 5, 2016.
ContactEileen A. Donovan, Deputy Director, 202-418-5096, [email protected]; M. Laura Astrada, Associate Director, 202-418-7622, [email protected]; or Parisa Abadi, Attorney-Advisor, 202-418-6620, [email protected], in each case, at the Division of Clearing and Risk, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581; or Joe Opron, Special Counsel, 312-596-0653, [email protected], Division of Clearing and Risk, Commodity Futures Trading Commission, 525 West Monroe Street, Suite 1100, Chicago, IL 60661.
FR Citation81 FR 35337 

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