1 SEGREGATION OF ASSETS

2 [Explanation: Thefollowing provisions wouldprotect swaps customers and counterparties by

3 settingforth segregation requirements for swaps. For uncleared swaps, segregation would be

4 upon request ofthe counterparty (consistent with H.R. 4173). With respect to cleared swaps, the

5 provisions below would build upon the existing segregation requirements in Section 4d ofthe

6 Commodity Exchange Act, which have proven to be effective, by adapting these requirements for

7 swaps. Derivatives clearing organizations (DCOs) would be dealing on a daily basis with

8 entities (futures commission merchants - FCMs) and account procedures (CEA Section 4d

9 segregation requirements) with which they already are very familiar. Existing rules, procedures,

10 and infrastructure at FCMs and DCOs could be adapted to swaps rather than requiring the

11 development ofnew ones.]

12

13 In H.R. 4173 as passed by the House of Representatives:

14

15 SEC. 3122. SEGREGATION OF ASSETS HELD AS COLLATERAL IN SWAP

16 TRANSACTIONS

17 Segregation Requirements for Cleared Swaps:

18 Section 4d of the Commodity Exchange Act (7 U.S.C. 6d) is amended by inserting at the

19 end the following:

20 "(d) Sw APS.-

21 "(1) REGISTRATION REQUIREMENT.-It shall be unlawful for any person to accept

22 any money, securities, or property (or to extend any credit in lieu of the foregoing) from,

23 for, or on behalf of a customer, to margin, guarantee, or secure a swap cleared by or

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 1 through a derivatives clearing organization (including money, securities, or property

2 accruing to such customer as the result of such a swap), unless such person shall have

3 registered under this Act with the Commission as a futures commission merchant, and

4 such registration shall not have expired nor been suspended nor revoked.

5 "(2) CLEARED SWAPS.-

6 "(A) SEGREGATION REQUIRED.-A futures commission merchant, swap

7 dealer, or major swap participant shall treat and deal with all money, securities,

8 and property of any swaps customer or counterparty received to margin,

9 guarantee, or secure a swap cleared by or though a derivatives clearing

10 organization (including money, securities, or property accruing to such customer

11 or counterparty as the result of such a swap) as belonging to such swaps customer

12 or counterparty.

13 "(B) COMMINGLING PROHIBITED.-Money, securities, and property of a

14 swaps customer or counterparty described in subparagraph (A) shall be separately

15 accounted for and shall not be commingled with the funds of such futures

16 commission merchant, swap dealer, or major swap participant or be used to

17 margin, secure or guarantee any trades or contracts of any customer or

18 counterparty or person other than the one for whom the same are held.

19 "(3) PROVISOS.-Notwithstanding paragraph (2)-

20 "(A) USE OF FUNDS.-

21 "(i) Money, securities, and property of a swaps customer or

22 counterparty of a futures commission merchant, swap dealer, or major

23 swap participant described in paragraph (2) may, for convenience, be

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 1 commingled and deposited in the same account or accounts with any bank

2 or trust company or with a derivatives clearing organization; and

3 "(ii) Such share of the money, securities, and property described in

4 clause (i) as in the normal course of business shall be necessary to margin,

5 guarantee, secure, transfer, adjust, or settle a cleared swap with a

6 derivatives clearing organization, or with any member of such derivatives

7 clearing organization, may be withdrawn and applied to such purposes,

8 including the payment of commissions, brokerage, interest, taxes, storage,

9 and other charges, lawfully accruing in connection with such cleared

10 swap;

11 "(B) COMMISSION ACTION.-In accordance with such terms and conditions

12 as the Commission may prescribe by rule, regulation, or order, any money,

13 securities, or property of the swaps customer or counterparty of a futures

14 commission merchant, swap dealer, or major swap participant described in

15 paragraph (2) may be commingled and deposited as provided in this section with

16 any other money, securities, or property received by such futures commission

17 merchant, swap dealer, or major swap participant and required by the

18 Commission to be separately accounted for and treated and dealt with as

19 belonging to the swaps customer or counterparty of such futures commission

20 merchant, swap dealer, or major swap participant.

21 "(4) PERMITTED INVESTMENTS.-Money described in paragraph (2) may be

22 invested in obligations of the United States, in general obligations of any State or of any

23 political subdivision thereof, and in obligations fully guaranteed as to principal and

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 1 interest by the United States, or in any other investment that the Commission may by rule

2 or regulation prescribe, and such investments shall be made in accordance with such rules

3 and regulations and subject to such conditions as the Commission may prescribe.

4 "(5) COMMODITY CONTRACT.-A swap cleared by or through a derivatives

5 clearing organization shall be considered to be a commodity contract as such term is

6 defined in Subchapter IV of Chapter 7 of Title 11 of the United States Code with regard

7 to all money, securities, and property of any swaps customer or counterparty received to

8 margin, guarantee, or secure the swap (including money, securities, or property accruing

9 to such customer or counterparty as the result of such swap) and held at a futures

10 commission merchant or a derivatives clearing organization.

11 "(6) PROHIBITION.-It shall be unlawful for any person, including but not limited

12 to any derivatives clearing organization and any depository, that has received any money,

13 securities, or property for deposit in a separate account or accounts as provided in

14 paragraph (2) to hold, dispose of, or use any such money, securities, or property as

15 belonging to the depositing futures commission merchant, swap dealer, or major swap

16 participant or any person other than the swaps customer or counterparty of such futures

17 commission merchant, swap dealer, or major swap participant.".

18

CFTC-CREW-0254
 1 Segregation Requirements for Uncleared Swaps:

2 The Commodity Exchange Act (7 U.S.C. 1 et seq) is amended by inserting after section

3 4t the following:

4 "SEC. 40. SEGREGATION OF ASSETS HELD AS COLLATERAL IN UNCLEARED

5 SWAP TRANSACTIONS

6 "(a) SEGREGATION REQUIRED.-At the request of a swap counterparty who provides funds

7 or other property to a swap dealer, major swap participant, or any other entity registered with the

8 Commission as initial margin or collateral to secure the obligations of the counterparty under a

9 swap between the counterparty and the swap dealer, major swap participant, or other entity

10 registered with the Commission that is not submitted for clearing to a derivatives clearing

11 organization, the swap dealer, major swap participant, or other entity registered with the

12 Commission shall-

13 "(1) segregate the funds or other property for the benefit of the counterparty; and

14 "(2) maintain the initial margin or collateral in an account that is carried by an

15 independent third-party custodian and designated as a segregated account for the

16 counterparty, in accordance with such rules and regulations as the Commission may

17 prescribe.

18 "(b) INDEPENDENT CUSTODIAN.-For the purpose of subsection (a), a custodian shall not

19 be considered independent if more than 20 percent of the custodian is owned by, or more than 50

20 percent representation on the board of directors of the custodian is held by, either the swap

21 dealer, major swap participant, or other entity registered with the Commission (or any affiliate

22 thereof) or the swap counterparty (or any affiliate thereof) if the swap counterparty is itself a

23 swap dealer, major swap participant, or other entity registered with the Commission.

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 1 "( c) INVESTMENT OF FUNDS.-

2 "(1) This section shall not be interpreted to preclude commercial arrangements

3 regarding the investment of segregated funds or other property described in subsection (a)

4 and the related allocation of gains and losses resulting from any such investment; and

5 "(2) Notwithstanding paragraph (1), segregated funds or other property described

6 in subsection (a) may be invested only in such investments as the Commission permits by

7 rule or regulation.

8 "(d) FURTHERAUDITREPORTING.-Ifa swap counterparty described in subsection (a)

9 does not request segregation of funds, the swap dealer, major swap participant, or any other

10 entity registered with the Commission shall report to the swap counterparty on a quarterly basis

11 that its procedures relating to margin and collateral requirements are in compliance with the

12 agreement of the parties.".

13

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