CFTC Proposes Safeguards for Clearing Member Funds in DCOs

At a CFTC Open Meeting on December 13, 2023, the Commission voted to propose a rulemaking to protect clearing members' funds held by derivatives clearing organizations ("DCOs").

In a Fact Sheet on the rule proposal, the CFTC contrasted the longstanding comprehensive protections for funds belonging to customers of a futures commission merchant ("FCM") to the lack of similar protections "for funds belonging to clearing members of a DCO, whether they are individual market participants or FCMs." The proposed rulemaking would amend CFTC Regulation 39.15 ("Treatment of funds") to extend similar protections to the funds of clearing members. The Commission is also proposing rules to facilitate DCOs holding customer and clearing member funds at certain foreign central banks.

In the proposal, the CFTC addressed:

• Definition of Proprietary Funds: The proposal would amend the definition of "proprietary funds" to mean all money, security, or property received by a DCO from or on behalf of clearing members in connection with cleared futures, options and swaps contracts.

• Segregation of Proprietary Funds: The proposal would require DCOs to account for and hold proprietary funds separately from their own funds.

• Written Acknowledgment from Depositories: The proposal would mandate that DCOs obtain a written acknowledgment letter from depositories holding proprietary funds, paralleling the template letter as to/for customer funds.

• Commingling of Proprietary Funds: The proposal would allow DCOs to commingle proprietary funds of multiple clearing members in a single account but disallow the commingling of proprietary funds with customers' or DCOs' own funds.

• Limitation on Use of Proprietary Funds: The proposal would restrict the use of proprietary funds solely as belonging to clearing members by amending Regulation 39.15(e) to restrict DCOs' investments with proprietary funds to those permitted for customer funds under Regulation 1.25.

• Daily Reconciliation: The proposal would require DCOs to confirm and verify on a daily basis the amounts of proprietary and customer funds owed to each clearing member.

• Central Bank as Depositories: The proposal would provide limited exemptions from the above requirements to allow DCOs to hold customer and proprietary funds at central banks of certain countries.

The CFTC stated that DCOs based primarily outside the United States would not be subject to all the requirements applicable to U.S. DCOs.

Comments are due within 60 days from the publication date on the CFTC's website.