The CFTC Proposes Rules to Protect Clearing Member Funds Held by DCOs

Summary of Proposed Changes

The proposed rule is focused on providing new protections for clearing member "proprietary funds." The term "proprietary funds" is defined as all money, securities, and property held in a proprietary account on behalf of clearing members used to margin, guarantee, or secure futures, foreign futures and swaps contracts, as well as option premiums and other funds held in relation to options contracts, plus clearing member contributions to a guaranty fund. 

• Proposed Regulation 39.15(f)(1) would require a DCO to segregate proprietary funds from its own funds such that proprietary fund accounts clearly identify the funds as belonging to clearing members.
• Proposed Regulation 39.15(f)(2) would require DCOs to obtain written acknowledgement letters from any depositories used to hold proprietary funds. The proposed rule would include a template form identical to that found in Regulation 1.20.
• Proposed Regulation 39.15(f)(3) would permit DCOs to commingle the proprietary funds of multiple clearing members in an omnibus account so long as they are not held with customer funds or the DCO's own funds. 
• Proposed Regulation 39.15(f)(4) would only permit DCOs and depositories to use proprietary funds as belonging to clearing members, provided that DCOs can use proprietary funds as part of DCO default waterfalls, subject to DCOs' rules and agreements with clearing members.

Further, the proposed rule would add Regulation 39.15(g) to require DCOs to reconcile funds daily. Accordingly, DCOs would need to confirm (a) the amount of proprietary and customer funds owed to customers and clearing members and (b) their ability to cover such amounts with their segregated accounts. The proposed rule would add to Regulation 39.19 a requirement that DCOs report to the Commission any discrepancies noticed in the daily reconciliations of proprietary and customer funds. 

The proposed rule would also amend existing Regulation 39.15(e), which sets out those investments that DCOs may make with proprietary funds. Consistent with the notion that the proposed rule is designed to align DCO and FCM regulations, 39.15(e) as proposed would limit a DCO's permitted investments with proprietary funds to those permitted for customer funds under current Regulation 1.25. 

The reconciliation and segregation protections are meant to ensure that funds are available and plainly identified to enable distribution to different groups in the event of a bankruptcy.

In keeping with the Commission's efforts to harmonize with foreign regulatory regimes when necessary or desirable, proposed Regulation 39.15(h) would provide exemptive relief for foreign DCOs—those operating with primary places of business outside the United States—as to many of the proposed rule's requirements. The Commission explained that in doing so it seeks to avoid conflict with the bankruptcy regimes of foreign jurisdictions. 

Proposed Regulations 39.15(b)(3) and (f)(2)(vi) would codify no-action exemptive relief for DCOs seeking to hold customer and proprietary funds with certain central banks. The codified relief applies with respect to the central banks of each non-U.S. G7 nation. If the rule is enacted, then DCOs holding customer or proprietary funds with such a central bank will still need to obtain written acknowledgement from the institution. However, the proposed rule provides a written acknowledgement form—modified from that in Regulation 1.20—to account for modifications various central banks requested.