Futures Commission Merchant Regulation - Comment Letters

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Dodd-Frank Timeline, Investment of Customer Funds
Final Rule Issue Effective Date Compliance Deadline
December 19, 2011 February 17, 2012 June 18, 2012
Dodd-Frank Timeline, Protection of Cleared Swaps Customer Contracts and Collateral, Commodity Broker Bankruptcy Provisions
Final Rule Issue Effective Date Compliance Date
February 7, 2012 April 9, 2012 November 13, 2012
Dodd-Frank Timeline, Conflicts of Interest for Swap Entities, FCMs, IBs
Final Rule Issue Effective Date Compliance Date
April 3, 2012 August 3, 2012 October 12, 2012
Dodd-Frank Timeline, Required Compliance Policies
Final Rule Issue Effective Date Compliance Date, Non-Covered Firms Compliance Date, Covered Firms
April 3, 2012 June 4, 2012 September 30, 2012 March 31, 2013

Comment letters addressing futures commission merchant (FCM) regulation. The letters are grouped according to the rule proposal being addressed. As the conflicts of interest and required compliance policies proposals also pertain to swap dealers and major swap participants, those comment letters are grouped separately.

Additionally, several proposed rules address regulations pertaining to multiple swap entities. These rules have been grouped under 'Swap Entities Regulation'.

Contents

Investment of Customer Funds and Funds Held in an Account for Foreign Futures and Foreign Options Transactions

CME Group - December 2, 2010

Investment of Customer Funds and Credit Ratings
December 2, 2010

From the comment letter:

  • "CME Group believes that highly liquid U.S. agency obligations, including but not limited to notes issued by the Federal National Mortgage Association ("FNMAs") and the Federal Home Loan Mortgage Corporation ("FHLMCs"), should remain available as permitted investments."
  • "CME Group further suggests that the CFTC retain foreign sovereign debt as a permitted investment category.
  • "With respect repurchase (or repo) and reverse repo transactions with affiliates and in-house transactions, CME Group concurs with the reasoning in the FIA Letter and the FIA's conclusions that FCMs should continue to be allowed to enter into such transactions as permitted investments under Regulation 1.25."
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FIA/ISDA - December 2, 2010

Investment of Customer Funds and Credit Ratings
December 2, 2010

FIA and ISDA are "concerned that several of the proposed revisions are inconsistent with the Commission’s goals, may increase systemic risk or may have significant unintended consequences," particularly with the proposals to:

  • prohibit entirely investments in the securities of government sponsored enterprises (“GSEs”) and corporate obligations (unless such securities are guaranteed as to principal and interest by the United States) and all foreign sovereign debt,
  • limit the investment in money market mutual funds to 10 percent of investible assets held in segregation and
  • prohibit repurchase and reverse repurchase transactions with affiliated banks and registered broker-dealers (as well as so-called “in-house” transactions).

Attached to the letter are several charts highlighting the safety of agency debt during and subsequent to the financial crisis of 2007-2009.

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NewEdge/MF Global - December 2, 2010

Investment of Customer Funds and Credit Ratings
December 2, 2010

NewEdge and MF Global believe the proposed amendments:

  • "are unnecessary, considering that the current permissible investments under Rule 1.25 have not, to our knowledge, resulted in any FCM's inability to provide customers their segregated funds upon request, or to continue as a solvent entity,
  • will, in many cases, create new investment risks and logistical difficulties for FCMs, and
  • may well change the pricing dynamics for customers and the industry at large."

Among the entities' arguments:

  • The proposed amendments could substantially decrease the number of FCMs, which would reduce competition.
  • They will have an "anticompetitive impact" on the industry.
  • Current rules regarding investments do not put customer funds at risk.
  • Many proposed amendments will create "new investment risks and logistical difficulties" for FCMs.
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JP Morgan - December 2, 2010

Investment of Customer Funds and Credit Ratings
December 2, 2010

According to the comment letter, JP Morgan is unable to support certain aspects of the proposal, namely those which:

  • prohibit entirely investments in securities of government sponsored enterprises ("GSEs") (unless such securities are guaranteed as to principal and interest by the United States) and all foreign debt,
  • limit the investment in money market mutual funds to 10 percent of investible assets held in segregation and
  • prohibit repurchase and reverse repurchase transactions with affiliated banks and registered broker-dealers.
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LCH.Clearnet - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010

From the comment letter:

"A counterparty concentration limit of just 5 percent is, in the Group’s view, too onerous a requirement given that the credit risk between a DCO and its reverse repo counterparts will always be significantly mitigated by the fact that in exchange for cash the DCO is holding permissible securities of an equivalent or greater value. LCH.Clearnet is particularly concerned that a 5 percent concentration limit will give rise to increased operational risks and costs that would ultimately need to be borne by consumers and end investors. It would therefore recommend that the Commission instead look to impose a 10 or 20 percent concentration limit for such secured transactions."

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UBS Global Asset Management - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010

From the comment letter:

"Money market funds provide investors a greater degree of diversification and liquidity than many investment alternatives for which the CFTC has proposed higher issuer concentration and total investment limits. UBS Global AM submits that a more reasonable percentage limit on money market fund investment (if, indeed, any at all is required) might be 50%, with a 10% limitation on investment in any one fund."

The letter outlines its arguments that money market funds minimize credit, liquidity, and market risks.

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Investment Company Institute - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010

In the comment letter, ICI states that "the proposed new limitations on investments in money market funds under Regulation 1.25 are arbitrary and unduly severe. The practical effects of these limitations would be to require FCMs and DCOs to manage the vast majority of a portfolio of permitted investments themselves, and potentially to expose customer funds to greater credit, liquidity and/or price risk." ICI urges the Commission "to reconsider the proposed limitations in light of the actual risks posed by money market funds as compared to the other 'permitted investments'."

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Independent Community Bankers of America - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010 From the comment letter:

"Because the Dodd-Frank Act’s provisions relating to derivatives could affect over 1,000 community banks that engage in low-risk customized swaps, ICBA believes it is important to make appropriate distinctions between cleared swaps and customized swaps traded in the OTC market to ensure that the OTC market is not overly burdened by new regulations. Our general view is that regulations adopted by federal agencies based on the Dodd-Frank Act should seek to ensure a competitive and vibrant OTC market that does not unduly or unfairly restrict access to clearing of what are currently viewed as customized swaps, nor impose unnecessary capital and margin requirements on the customized swaps utilized by community banks and their customers as these are not the types of swaps that would lead to systemic risks and they essentially have similar or equal risks as cleared swaps."

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Dreyfus - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010

Summary of points from the comment letter:

  • Dreyfus suggests a concentration limit of 50 percent for government and agency money market funds, and 25 percent for prime and municipal money market funds.
  • Issuer-based concentration limits are unnecessary and "do not enhance the safety" of client assets.
  • Dreyfus would not support limiting permitted investments to U.S. Treasury funds, as other types of money market funds are "subject to sufficient risk-limiting constraints."
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R.J. O'Brien - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010

From the comment letter:

  • "The Commission implies that the list of newly designated permissible investments is intended to “guarantee” the principal of client assets. We disagree with this assumption and submit that credit, market and/or liquidity risk still exists even with the proposed list of permissible investments. It is our view that there is no guarantee, government or otherwise, that will fully eliminate all credit, market and/or liquidity risk when investing customer funds."
  • "With respect to repurchase agreements (“Repos”), the proposed counterparty limits of 5% would create significant operationally risk, eliminate efficiency related to larger denominated transactions and potentially expose the FCM community to a broader group of less capitalized counterparties. While RJO does not believe that a limit is necessary, if the Commission desires that one exist, RJO would suggest it be at least 25%, regardless of the status of the counterparty, i.e., an affiliate or a third party."
  • "Foreign sovereign debt, like other high quality asset classes, can be limited to those issuers with an acceptable credit quality and secondary market. We would propose G-7 only issuers with limits based upon the margin requirement of all client positions, as single currency margining is prevalent among FCMs."
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Farm Credit Administration - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010

From the comment letter:

"The proposed rule may have potential unintended consequences for GSEs that should be explored and evaluated...By excluding all GSE debt from the securities available for use in customer-segregated accounts, the CFTC's proposed rule has the potential to alter the market for GSE debt. To our knowledge, no GSE debt has ever resulted in a loss of principal or interest to any investor."

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FC Stone - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010

From the comment letter:

"...the proposed asset based concentration limit of ten percent along with the counterparty concentration limit of five percent for reverse repurchase agreements places an undue burden on FCMs in the form of increased costs and operational inefficiencies. These changes will significantly limit an FCM's ability to effectively manage their liquidity with regards to clearing margin deposits and variation margin requirements with the various designated clearing organizations (DCOs)."

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ADM Investor Services - December 3, 2010

Investment of Customer Funds and Credit Ratings
December 3, 2010

From the comment letter:

  • ADMIS believes the money market limits are too restrictive. The company agrees that some limit is appropriate and suggests limits based on total customer segregated funds of twenty percent per MMF family, and a MMF total of fifty percent.
  • The company feels that a counterparty limit for reverse repos is not warranted.
  • Sovereign debt from all G-7 countries should be specifically included as allowable investments.
  • Negotiable CDs "should continue to be an allowable investment."
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Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies

Newedge - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

Newedge feels strongly that the “current customer off-set rule should be applied to cleared swaps activity because, among other things:

  1. eliminating customer off-sets in insolvent FCMs is "anti-customer" in that it would increase systemic risk generally by discouraging clearing members from maintaining substantial excess capital; and
  2. swap counterparties - all of whom must qualify as eligible contract participants - are already, as a practical matter, in the best position to mitigate their off-set risk by selecting FCMs that are well-capitalized and have robust risk management procedures (and the CFTC can aid them in such decisions by requiring FCMs to disclose additional material financial and risk related information to the public."
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Coalition of Energy End Users - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

From the comment letter:

“The coalition of energy end-users believes that it is essential that the transaction costs and the amount of working capital associated with FCM and DCO collateral management be kept at a reasonable level. The current omnibus model has achieved this goal while protecting against both individual and systemic risks. While the coalition is generally supportive of providing additional choice in the market, including the provision of an individual account option, the coalition is concerned about the cost impacts the individual account model might have, even if implemented only as an option… Finally, the potential for cost increases associated with implementation of the various segregation models highlights the importance of the CFTC adhering to congressional intent in properly exempting end-users from the mandatory clearing requirement, thus allowing end users to retain the flexibility to manage their individual risks as best suits their businesses.”

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Minneapolis Grain Exchange - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

In their comment letter, MGEX “recommends the CFTC allow the use of the “baseline model” as described in the Federal Register for the clearing and margining of both futures and swaps. As the Commission notes, the current approach to futures is the baseline model. Therefore, DCOs which already clear futures would not need to alter their approach if the baseline model is permitted whereas the using other models will necessitate adopting changes requiring additional recordkeeping and different risk assessments. The trickledown effect of changing models will likely require the Exchange to create new rules addressing defaults, procedures for calculating intra-day variations, new banking agreements and separate bank accounts. Additionally, instead of mandating use of a specific model, MGEX believes that the CFTC could permit several acceptable models from which a DCO could choose. DCOs could be allowed to set up other margining/default systems and let the marketplace choose what method is most competent and best addresses risk. Over time, the most efficient model will dominate the marketplace.”

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National Futures Association - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

NFA believes that the Commission’s regulations should ensure that DCOs have the flexibility to offer those alternative structures and that counterparties receive adequate disclosures regarding the residual risks of the structure offered by the DCO. With respect to the alternative models discussed by the Commission, NFA urges the Commission to consider how each model would affect:

  • An end user’s incentive to conduct due diligence before choosing (or remaining with) an FCM
  • The effect on competition among FCMs (including whether a model will eliminate smaller FCMs and decrease the number of FCM players);
  • An end user’s willingness to post excess margin collateral
  • The ease and likelihood of portfolio margining
  • The effect on an end user’s choice to clear or not clear certain swap transactions
  • An FCM’s willingness to maintain excess net capital
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Futures Industry Association - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

FIA argues that “while the Commission has understandably focused on the operational costs and benefits that may result from a change in models for the protection of cleared swap customer funds, we believe the examination should be broader. This is particularly so since, from an operational perspective, we are uncertain whether FCMs and DCOs could maintain separate models for exchange-traded futures and cleared swaps customer funds. Consequently, any changes that may be implemented would affect the entire industry. The Commission must also be mindful that any proposal to reduce fellow-customer risk may increase fellow-clearing member risk and inadvertently discourage FCMs from holding excess capital at levels they otherwise might.”

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LCH.Clearnet - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

In their comment letter, LCH.Clearnet (The Group) “believes it is of the utmost importance that DCOs are managed prudently. Accordingly, their risk waterfalls must cater for all events, not just shock events. This requires that DCOs clearing Swaps must always assume that no client Initial Margin is available at the point of a default, as this is the most conservative assumption from a risk management standpoint.” In respect to the models proposed by the Commission, the Group believes the LSOC model is both the optimal and most achievable model for providing the client collateral protection levels sought by Congress. LSOC offers a greater level of client protections than the other options, “without wholly altering the DCO and FCM infrastructure that is already in place for clearing, risk managing and default managing Swaps. The LSOC model facilitates broader client participation in Swaps clearing, as it allows an FCM to exchange client collateral for alternative higher quality collateral that is eligible for submission to the DCO."

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International Swaps and Derivatives Association - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

ISDA is concerned that in moving from the Baseline Model to one of the three New Models (Individual Segregation Model, LSOC Model and Waterfall Model), three main types of additional cost would occur:

  • Operational and compliance costs;
  • Collateral requirements (increased IM or guarantee fund contributions); and
  • Any systemic costs that may be implied by a New Model (including any potential moral hazard).

In addition, the “ANPR suggests the possibility of customers being offered a choice between different models. If optionality is offered, certain costs could be incurred by FCMs and DCOs in providing any New Model. To give market participants appropriate incentives, the implementation of any requirement on FCMs or DCOs to offer optionality should be carefully considered so that those customers who do not select the option of increased collateral protection do not directly or indirectly bear the cost of offering that protection to other customers.”

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IntercontinentalExchange - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

“ICE submits that the significant and various costs that would be associated with the potential non-Baseline models described in the Commission’s Advanced Notice, (including implementation, administrative, regulatory and compliance, increases in initial margin and systemic costs) would, at each level of the marketplace (customer, FCM, and DCO), far outweigh any benefit. In addition, ICE submits that the Commission’s recently proposed Large Trader reporting and stress testing regulations should serve to mitigate “fellow-customer risk.” Accordingly, ICE suggests that it would be more prudent and practical for the Commission to allow the traditional omnibus (mutualized) clearing model to be applied to customer-related swaps transactions.”

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Managed Funds Association - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

MFA offers their suggestions and opinions regarding the New Models. Additionally, MFA “request that the Commission, prior to adopting any regulations for the protection of customer assets related to cleared swaps, conduct or sponsor an independent cost analysis of the different segregation models. We recognize that the models proposed by the Commission, other than Model 4, might result in: (i) higher costs, in the case of Models 1 or 2; or (ii) a redistribution of risk among different classes of market participants, in the case of Model 3. However, as discussed above, we believe that such a cost analysis might show that the benefits offered by each of these models, when compared to Model 4, outweigh the costs imposed. The Commission should complete this study before promulgating any rules regarding the protection of customer assets for cleared swaps, and the Commission should provide market participants sufficient time to evaluate the results of the study and respond.”

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Securities Industry and Financial Markets Association - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

From the comment letter:

“SIFMA is concerned about the possibility that fragmented segregation requirements will be adopted that place client collateral for OTC transactions, which are currently in one pool, into four separate pools – one for cleared swaps, one for uncleared swaps, one for cleared security-based swaps, one for uncleared security-based swaps – and thereby create barriers to portfolio margining across positions in these separate pools which can easily be portfolio margined today, replicating the current problem that creates for portfolio margining securities and futures positions. SIFMA urges the CFTC to comply with Dodd-Frank’s portfolio margining mandate and to work with the SEC towards consistent segregation regimes which would enable portfolio margining, not only across OTC derivatives positions, but also across swaps, futures, security-based swaps and securities positions.”

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CME Group - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

CME Group is very concerned that adopting an individual-segregation model for customer cleared swaps would undermine Dodd-Frank’s key principles. Such models would impose significantly higher costs on customers and clearing members, and inject moral hazard into the system at the customer and FCM levels… Consequently, smaller FCMs may be forced out of the business, larger FCMs may not be incented to stay in the business, and firms otherwise qualified to act as FCMs may be unwilling to do so if the risk and cost profile of the FCM model is adversely impacted by requirements of individual segregation. This may lead to a larger concentration of customer exposures at fewer FCMs, further increases to margin and guaranty fund requirements, and further increased costs to customers.”

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Federal Home Loan Banks - January 18, 2011

Protection of Cleared Swaps Customers Before and After Commodity Broker Bankruptcies
January 18, 2011

The FHLBanks argues that the proposed Model 1 is most consistent with the intent of Dodd-Frank’s clearing requirements. Full collateral segregation places the economic risk of cleared swap transactions on the proper parties and also places the burdens of due diligence and credit analysis on the proper parties. Furthermore, it allows customers to limit their credit exposure by performing the same type of extensive credit analysis on clearing members that they currently perform on their OTC counterparties. In addition, Model 1 is consistent with the statutory right of OTC market participants to have collateral posted as initial margin in uncleared derivative transactions held by an independent custodian in order to protect such collateral upon the insolvency of their counterparties.

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Protection of Cleared Swaps Customer Contracts and Collateral and Conforming Amendments to the Commodity Broker Bankruptcy Provisions

LCH.Clearnet - August 5, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 5, 2011

From the comment letter:

"In our view the Complete Legal Segregation model outlined by the Commission is the most appropriate model for customers clearing swaps transactions. It is also the most readily achievable model for providing the client collateral protection levels sought by Congress and the model that most closely parallels the protections that we understand will be required in Europe under the European Commission‟s proposal for a European Market Infrastructure Regulation (“EMIR”).

"In our view the CLS model offers the best level of client protections without wholly altering the infrastructure that is already in place for clearing, risk managing and default managing swaps. Indeed, it ensures that the protection afforded clients is akin to that afforded to direct clearing members. Like direct clearing members, who do not risk losing their initial margin owing to the default of another member, clients clearing under the CLS structure will not be exposed to losing their initial margin due to a default of another client of their clearing member.

"We are aware that some clearinghouses argue that higher costs are involved in the CLS structure, however having implemented this model we can categorically refute these claims. We set out our detailed arguments for this in the attached annex, but would like to bring the following points to the Commission‟s immediate attention."

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Investment Company Institute - August 8, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 8, 2011

From the comment letter:

"...we recommend that the Commission move forward with [Legal Segregation with Commingling] ("LSOC") at this time rather than the alternatives it is continuing to consider, namely,

  1. a modified LSOC model under which a DCO would be permitted to access the collateral of the non-defaulting cleared swaps customers of a defaulting member FCM, after it applies its own capital to cure the default and also the guaranty fund contributions of its non-defaulting FCM members and
  2. a model permitting each DCO to choose the level of protection that it would provide cleared swap customer collateral of its FCM members.

We agree with the Commission that LSOC, subject to addressing the concerns discussed below, strikes the best balance between benefits and costs in order to protect cleared swaps customers’ collateral because it would mitigate the risk that a DCO would access the collateral of non-defaulting cleared swap customers to cure an FCM default, also referred to as “Fellow-Customer Risk.”

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ISDA - August 8, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 8, 2011

From the comment letter:

"ISDA agrees with the Commission’s selection of the Complete Legal Segregation Model as the most appropriate choice of holding model for cleared swaps collateral. ISDA regards this selection as an important first step in arranging appropriate customer protections against FCM failure. ISDA sees porting as one of the most important of these protections and offers below additional mechanisms in support of porting. We also highlight certain bankruptcy issues that may affect more difficult FCM liquidations and hope to elicit Commission interest in helping to resolve these issues, if not within this rulemaking, then over the longer term."

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Managed Funds Association - August 8, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 8, 2011

From the comment letter:

"The Complete Legal Segregation Model provides superior customer collateral protection when compared to the Legal Segregation with Recourse Model and the Futures Model. Unlike the Complete Legal Segregation Model, both the Legal Segregation with Recourse Model and the Futures Model would fail to protect FCM customers against fellow customer risk (though to differing degrees) and would hamper portability. The Complete Legal Segregation Model also is operationally easier to implement than the Full Physical Segregation Model. However, MFA believes that the Commission should permit FCM customers who would prefer Full Physical Segregation to elect such increased protection as long as it can be accomplished within the Complete Legal Segregation Model."

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Note: Subsequent to the bankruptcy of futures commission merchant MF Global in October 2011, MFA submitted a follow-up letter to the CFTC regarding this rulemaking on December 2, 2011. Click the link below to access the December 2nd letter.

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Futures Industry Association - August 8, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 8, 2011

From the comment letter:

"FIA has carefully reviewed both the several alternatives set out on the Federal Register release and the proposed rules. We have concluded that both the complete legal segregation model and the futures model meet the underlying purposes of section 4d(f) identified above...however, we do not believe that (i) physical segregation, (ii) legal segregation with recourse, or (iii) the optional model are practical solutions for the protection of cleared swaps collateral."

In the letter, FIA poses several questions regarding the treatment of variation margin, limitations on use of customer collateral, currency-by-currency segregation, location of securities depositories, time allotted to meet margin calls, FCM disclosures, and the treatment of funds in omnibus accounts.

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Newedge - August 8, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 8, 2011

In the comment letter, which was co-authored by Newedge, DRW Trading Group, and other industry participants, offers the following arguments for adoption of the "futures model" for cleared swaps:

  • The futures model is most consistent with the purpose of Dodd-Frank Title VII;
  • Eliminating customer offsets introduces moral hazard and is, thus, ant-customer in nature;
  • The complete legal segregation model (CSM) will increase customer costs and margin, as well as default fund deposits and infrastructure changes; and
  • swaps customers can limit their offset exposure by choosing their FCM wisely.
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BlackRock - August 8, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 8, 2011

From the comment letter:

"We appreciate the Commission's consideration of the strengths and weaknesses of each model for customer collateral protection and we endorse the Commission's view that the Complete Legal Segregation Model would protect customer collateral from fellow customer and other risk without imposing undue costs on market participants, including FCMs and DCOs. In addition, the Complete Legal Segregation Model will increase the safety and soundness of the U.S. financial system by facilitating portability of positions. Accordingly, we encourage the Commission to adopt the Complete Legal Segregation Model for swaps clearing."

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Association of Institutional Investors - August 8, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 8, 2011

From the comment letter:

"The Association supports the Complete Legal Segregation or Legally Segregated, Operationally Commingled (“LSOC”) model as the most cost effective framework to adequately protect the margin customers post to cleared swap transactions. We also support the Commission’s conclusion that in the event a futures commission merchant (“FCM”) defaults based on its inability to meet the margin obligations of one of its defaulting cleared swaps customers, the derivatives clearing organization (“DCO”) should only have access to the margin of such defaulting customer to satisfy such customer’s obligations.2 In so limiting access to the margin of the defaulting customer, the “fellow customer risk” presented in the futures market, whereby all customers share pro rata in the default of a fellow customer, is not extended to the cleared swaps market. It also effectively accounts for portability and portfolio margining interests."

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Securities Industry and Financial Markets Association - August 8, 2011

Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions
August 8, 2011

From the comment letter:

"The [Asset Management Group of SIFMA] ("AMG") believes that eliminating fellow-customer risk should be the paramount goal as the Commission implements requirements in Title VII governing the protection of cleared swaps customer collateral. The majority of AMG members support the LS Model because it provides the optimal balance between maximizing protection of cleared swaps customer collateral and minimizing implementation and other costs. The AMG further believes that the protection of cleared swaps customer collateral is so critical that mandatory clearing should not be phased in until the CFTC is confident that the model it adopts fully protects cleared swaps customers from fellow customer risk and provides operational and legal certainty to market participants in distressed market conditions."

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References

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