[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]

[Proposed Rules]

[Pages 68148-68151]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2014-26978]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AE22

Residual Interest Deadline for Futures Commission Merchants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (“Commission” or

“CFTC”) is proposing to revise the Residual Interest Deadline in

Commission Rule 1.22. The amendment would remove the December 31, 2018

termination date for the phased-in compliance schedule for futures

commission merchants (“FCMs”) and provide assurance that the Residual

Interest Deadline would only be revised through a separate Commission

rulemaking.

DATES: Comments must be received on or before January 13, 2015.

ADDRESSES: You may submit comments, identified by RIN 3038-AE22, by any

of the following methods:

Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

through the Web site.

Mail: Send to Christopher Kirkpatrick, Secretary of the

Commission, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street NW., Washington, DC 20581.

Hand Delivery/Courier: 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 may be exempt from disclosure under the Freedom of

Information Act, a petition for confidential treatment of the exempt

information may be submitted according to the procedures set forth in

Sec. 145.9 of the Commission’s regulations.1

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1 Commission regulations referred to herein are found at 17

CFR Ch. 1 (2012). Commission regulations are accessible on the

Commission’s Web site, www.cftc.gov.

_____________________________________-

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 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 the

rulemaking will be retained in the public comment file and will be

considered as required under the Administrative Procedure Act and other

[[Page 68149]]

applicable laws, and may be accessible under the Freedom of Information

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Act.

FOR FURTHER INFORMATION CONTACT:

Division of Swap Dealer and Intermediary Oversight: Thomas Smith,

Deputy Director, 202-418-5495, [email protected]; Jennifer Bauer, Special

Counsel, 202-418-5472, [email protected]; Joshua Beale, Attorney-Advisor,

202-418-5446, [email protected], Three Lafayette Centre, 1155 21st Street

NW., Washington, DC 20581.

Division of Clearing and Risk: M. Laura Astrada, Associate Chief

Counsel, 202-418-7622, [email protected], or Kirsten V. K. Robbins,

Special Counsel, 202-418-5313, [email protected], Three Lafayette

Centre, 1155 21st Street NW., Washington, DC 20581.

Office of the Chief Economist: Stephen Kane, Research Economist,

[email protected], 202-418-5911, Three Lafayette Centre, 1155 21st Street

NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

On October 30, 2013, the Commission amended Regulation 1.22 to

enhance the safety of funds deposited by customers with FCMs as margin

for futures transactions.2 The amendments require an FCM to maintain

its own capital (hereinafter referred to as the FCM’s “Residual

Interest”) in customer segregated accounts in an amount equal to or

greater than its customers’ aggregate undermargined amounts.3

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2 Enhancing Protections Afforded Customers and Customer Funds

Held by Futures Commission Merchants and Derivatives Clearing

Organizations, Final Rule, 78 FR 68506 (Nov. 14, 2013) (amending 17

CFR Parts 1, 3, 22, 30 and 140).

3 See 17 CFR 1.22(c)(3)(i). As defined in Regulation

1.22(c)(1), a customer’s account is “undermargined,” when the

value of the customer funds for a customer’s account is less than

the total amount of collateral required by derivatives clearing

organizations for that account’s contracts. See 78 FR 68513, n.30.

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If an FCM is required to increase its Residual Interest as a result

of customer undermargined accounts, the FCM must deposit additional

funds into the customer segregated accounts by the specified Residual

Interest Deadline.4 The Commission established a phased-in compliance

schedule for Regulation 1.22 with an initial Residual Interest Deadline

of 6:00 p.m. Eastern Time on the date of the settlement referenced in

Regulation 1.22(c)(2)(i) (the “Settlement Date”), beginning November

14, 2014.5

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4 See 17 CFR 1.22(c)(3)(i). The term “Residual Interest

Deadline” is defined in Regulation 1.22(c)(5).

5 See 17 CFR 1.22(c)(5)(ii)(A); see 78 FR 68578.

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In addition, the Commission directed staff to publish for public

comment a report (the “Report”) addressing, to the extent information

is practically available, the practicability (for both FCMs and

customers) of moving the Residual Interest Deadline from 6:00 p.m.

Eastern Time on the Settlement Date, to the time of settlement or to

some other time of day.6 The Report is also to address whether and on

what schedule it would be feasible to move the Residual Interest

Deadline, and the costs and benefits of such potential requirements.7

The Commission further directed staff to solicit public comment and

conduct a public roundtable regarding specific issues to be covered by

the Report.8 The Report is to be completed by May 16, 2016.9

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6 See 17 CFR 1.22(c)(5)(iii)(A).

7 Id.

8 Id.

9 Id.

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Within nine months after the publication of the Report, the

Commission may, by Order, terminate the phase-in period, or determine

that it is necessary or appropriate in the public interest to propose

through a separate rulemaking a different Residual Interest

Deadline.10 Finally, absent Commission action, the phased-in

compliance period for the Residual Interest Deadline will terminate on

December 31, 2018, and the Residual Interest Deadline will change to

the time of settlement on the Settlement Date.11

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10 See 17 CFR 1.22(c)(5)(iii)(B).

11 See 17 CFR 1.22(c)(5)(iii)(C).

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II. Discussion

As noted above, absent Commission action, the phase-in of the

compliance period for the Residual Interest Deadline will automatically

terminate on December 31, 2018, and change to the time of settlement on

the Settlement Date. The Commission is proposing to revise Regulation

1.22 to remove the December 31, 2018 automatic termination of the

phase-in compliance period. The proposal would instead provide that the

Residual Interest Deadline would remain at 6:00 p.m. Eastern Time,

unless the Commission takes further action via publication of a new

rule.

The Commission is proposing to amend Regulation 1.22 in order to

provide the Commission with a greater degree of flexibility to assess

the issues and all relevant data associated with revising the Residual

Interest Deadline. In this regard, the proposal would afford the

Commission the opportunity to fully and carefully consider the views

expressed during the public roundtable, the views and issues raised

during the solicitation of public comments, and the results of the

staff’s Report, regarding the practicability and costs and benefits of

revising the Residual Interest Deadline without the constraints of an

established regulatory deadline for Commission action. The Commission

is also proposing to revise Regulation 1.22 to make clear that any

subsequent revision to the Residual Interest Deadline may only be

effected through a separate rulemaking.

The Commission notes that this proposal does not alter the

requirement in Regulation 1.22(c)(3)(i) that, commencing November 14,

2014, all FCMs maintain the requisite Residual Interest in customer

accounts by no later than 6:00 p.m. Eastern Time on the Settlement

Date.

The Commission invites comments on all aspects of the proposed

amendments to the phase-in compliance period, including the costs and

benefits of this proposed change. For example, does the automatic

termination of the phase-in compliance period serve any useful

purposes, such as focusing attention on the Report, that the Commission

should consider? At this time, are there indications that issues

regarding the practicability and costs and benefits of revising the

Residual Interest Deadline will require significant time to consider,

such that the automatic termination of the phase-in compliance period

would hamper consideration of those issues? What are the particular

concerns, if any, suggesting that the automatic termination of the

phase-in compliance period is inappropriate in the specific context of

Regulation 1.22?

III. Cost-Benefit Considerations

Section 15(a) of the Commodity Exchange Act (“CEA”) requires the

Commission to consider the costs and benefits of its actions before

promulgating a regulation under the CEA or issuing certain orders.12

Section 15(a) further specifies that the costs and benefits shall be

evaluated in light of five broad areas of market and public concern:

(1) Protection of market participants and the public; (2) efficiency,

competitiveness, and financial integrity of futures markets; (3) price

discovery; (4) sound risk management practices; and (5) other public

interest considerations. The Commission considers the costs and

benefits resulting from its discretionary determinations with respect

to the section 15(a) factors.

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12 7 U.S.C. 19(a).

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The proposed rule and the status quo baseline with which the costs

and benefits are compared are similar. The baseline for this costs and

benefits consideration is the status quo, in which

[[Page 68150]]

the 6:00 p.m. Eastern Time on the Settlement Date would apply until the

Commission takes further action or, in the absence of further action,

December 31, 2018. Inasmuch as the proposed rule would not change the

settlement date, but would eliminate the December 31, 2018 deadline

requiring FCMs to maintain sufficient Residual Interest in its customer

accounts by the time of settlement on the Settlement Date, the

Commission believes that there is not likely to be any material

difference between this proposed rulemaking and the status quo baseline

in terms of the first four section 15(a) factors.

With respect to the fifth section 15(a) factor, “other public

interest considerations,” the Commission has considered that the

presence of an automatic termination of the phase-in compliance period

in the regulation may have beneficial effects. For example, the

automatic termination of the phase-in compliance period may focus

attention on the results of the Report and provide a timeline for the

Commission’s consideration of issues about the Residual Interest

requirement. On the other hand, the Commission has considered that time

will be required to consider the Report and related roundtable and

public comments, prior to any change in the Residual Interest Deadline.

As it does not have relevant data to quantify a monetary value of the

public interest considerations likely to be implicated by the proposed

elimination of the December 31, 2018 deadline, the Commission has

considered them qualitatively in reaching its preliminary decision to

propose the elimination of the regulatory deadline. The Commission

invites comment on the cost and benefit implications of all of the

public interest considerations that are relevant to its proposal, as

well as on the other section 15(a) factors.

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) 13 requires Federal

agencies, in promulgating regulations, to consider the impact of those

regulations on small entities. The Commission has previously

established certain definitions of “small entities” to be used by the

Commission in evaluating the impact of its rules on small entities in

accordance with the RFA.14 The proposed regulations would affect

FCMs. The Commission previously has determined that FCMs are not small

entities for purposes of the RFA, and, thus, the requirements of the

RFA do not apply to FCMs.15 The Commission’s determination was based,

in part, upon the obligation of FCMs to meet the minimum financial

requirements established by the Commission to enhance the protection of

customers’ segregated funds and protect the financial condition of FCMs

generally.16 Accordingly, the Chairman, on behalf of the Commission,

hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed

regulations will not have a significant economic impact on a

substantial number of small entities.

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13 5 U.S.C. 601 et seq.

14 47 FR 18618 (Apr. 30, 1982).

15 Id. at 18619.

16 Id.

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The Commission invites comments on the impact of this proposed

regulation on small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act (“PRA”) provides that a Federal

agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless it displays a currently

valid control number issued by the Office of Management and Budget

(“OMB”). This proposed rulemaking amends requirements that contain a

collection of information for which the Commission has previously

received a control number from OMB. The title for this collection of

information is “Regulations and Forms Pertaining to Financial

Integrity of the MarketPlace, OMB control number 3038-0024”. This

collection of information is not expected to be impacted by the rule

amendment proposed herein, as the calculations which are already

reflected in the burden estimate are not expected to change, but the

phase-in period for assessing compliance relative to such calculations

is solely proposed to be altered. The PRA burden hours associated with

this collection of information are therefore not expected to be

increased or reduced as a result of the amendment proposed.

Accordingly, for purposes of the PRA, these proposed rule

amendments, if promulgated in final form, would not impose any new

reporting or recordkeeping requirements. The Commission invites public

comment on the accuracy of its estimate that no additional information

collection requirements or changes to existing collection requirements

would result from the rules proposed herein.

List of Subjects in 17 CFR Part 1

Brokers, Commodity futures, Consumer protection, Reporting and

recordkeeping requirements.

For the reasons discussed in the preamble, the Commodity Futures

Trading Commission proposes to amend 17 CFR chapter I as set forth

below:

PART 1–GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0

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

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9,

10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).

0

2. In Sec. 1.22, revise paragraphs (c)(5)(iii)(B) and (C) to read as

follows:

Sec. 1.22 Use of futures customer funds restricted.

* * * * *

(c) * * *

(5) * * *

(iii) * * *

(B) Nine months after publication of the report required by

paragraph (c)(5)(iii)(A) of this section, the Commission may (but shall

not be required to) do either of the following:

(1) Terminate the phase-in period through rulemaking, in which case

the phase-in period shall end as of a date established by a final rule

published in the Federal Register, which date shall be no less than one

year after the date such rule is published; or

(2) Determine that it is necessary or appropriate in the public

interest to propose through rulemaking a different Residual Interest

Deadline. In that event, the Commission shall establish, if necessary,

a phase-in schedule in the final rule published in the Federal

Register.

(C) If the phase-in schedule has not been terminated or revised

pursuant to paragraph (c)(5)(iii)(B) of this section, then the Residual

Interest Deadline shall remain 6:00 p.m. Eastern Time on the date of

the settlement referenced in paragraph (c)(2)(i) or, as appropriate,

(c)(4) of this section until such time that the Commission takes

further action through rulemaking.

Issued in Washington, DC, on November 3, 2014, by the

Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

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

Federal Regulations.

[[Page 68151]]

Appendices to Residual Interest Deadline for Futures Commission

Merchants–Commission Voting Summary and Chairman’s Statement Appendix

1–Commission Voting Summary

On this matter, Chairman Massad and Commissioners Wetjen, Bowen,

and Giancarlo voted in the affirmative. No Commissioner voted in the

negative.

Appendix 2–Statement of Chairman Timothy G. Massad

I support the Staff’s recommendation. One of my priorities has

been to fine-tune our rules to make sure they work as intended and

do not impose undue burdens or unintended consequences, particularly

for the nonfinancial commercial businesses that use these markets to

hedge commercial risks. The proposed amendment is consistent with

that goal. It is designed to help ensure that the funds deposited by

customers with Futures Commission Merchants, or FCMs, remain safe.

It is not a major change, but it is significant in making sure that

manufacturers, farmers, ranchers, and other companies that rely on

the derivatives markets to hedge routine business risks can continue

to use them efficiently and effectively.

The rule prohibits an FCM from using customer funds of one

customer for the benefit of another customer. Last fall, the

Commission amended Regulation 1.22 to further enhance the safety of

such funds by making sure that customer accounts have sufficient

margin. On any day when a customer is required to post additional

margin but has not yet done so, the FCM must maintain its own

capital–often referred to as the FCM’s “Residual Interest”–in

customer segregated accounts to make up the difference. The

amendments provided that the FCM must deposit the additional funds

by a specified deadline. Specifically, the amendments said that as

of November 14, 2014, the deadline would be 6:00 p.m. Eastern Time

on the settlement date. The deadline for the FCMs to post their

capital affects the deadline for customers to increase their own

funds.

The amendments passed last fall also provide that the Commission

will conduct a study, and solicit public comment–including by way

of a public roundtable–concerning the practicability, for both FCMs

and their customers, of moving that deadline from 6:00 p.m. to the

morning daily clearing settlement cycle or the time of settlement,

which I will refer to as 9:00 a.m. for convenience. The amendments

said the Commission would decide, within nine months after

publication of the report, whether to move the deadline to 9:00 a.m.

Finally, the amendments said that if the Commission failed to take

any action, the deadline would automatically move to 9:00 a.m. as of

December 31, 2018.

Today, we are making a minor, but important, change. We are

proposing to eliminate the provision that says the deadline will

automatically move to 9:00 a.m. as of December 31, 2018. The

deadline will still move to 6:00 p.m. as of November 14 of this

year, and we will still conduct a study of the practicability of

making the deadline earlier. An earlier residual interest deadline

better protects customers from one another, in line with the

statute, but we want to make sure we move deliberately so that the

model works best for customers in light of all of their interests,

since the deadline will affect how much margin customers have to

post and when. Today’s proposal will make sure that customers have

an opportunity to not only review the study but give us input when

we consider whether to accelerate the deadline.

[FR Doc. 2014-26978 Filed 11-13-14; 8:45 am]

BILLING CODE 6351-01-P

 

Last Updated: November 14, 2014