CFTC Considers Protections for Swap Collateral

November 22, 2010

At an open meeting on November 19, the CFTC proposed a rule regarding protection of collateral of counterparties to uncleared swaps and issued an advance notice of proposed rulemaking on the treatment of collateral of cleared swaps customers.

Proposed Rule on Uncleared Swap Collateral

The Dodd-Frank Act requires swap dealers and major swap participants to notify their uncleared swap counterparties of their right to segregate their initial swap margin with an independent third-party custodian.

The CFTC's proposed rule would require that the custodian be independent of both the counterparty and the swap dealer or major swap participant and that there be a written custody agreement between the counterparties and the custodian.  The proposed rule provides that segregated margin may only be invested pursuant to the CFTC's existing Rule 1.25 under the Commodity Exchange Act, which governs futures commission merchant and clearing organization investment of customer funds.  The proposed rule does not, however, address the required amount of margin or the permissible types of collateral for uncleared swaps or limit any commercial arrangements between the parties concerning the allocation of any gains and losses from the investment of the counterparty's collateral.

The CFTC also proposed to amend its Part 190 Regulations to include securities held in a portfolio margining account carried as a futures account as "customer property" and owners of such accounts as "customers" for purposes of the commodity broker liquidation provisions of the Bankruptcy Code.  These provisions distribute "customer property" ratably to "customers" on the basis and to the extent of such customers' allowed net equity claims and in priority to all other claims, except expenses for the administration of such customer property.

Comments on the proposals are due within 60 days of publication in the Federal Register, which is expected shortly.

Advanced Notice of Proposed Rulemaking on Cleared Swap Collateral

Though not required by Dodd-Frank, the CFTC also issued an advance notice of proposed rulemaking requesting comments on segregation of cleared swap collateral.  This was issued in response to customer concerns expressed at the CFTC's roundtable on segregation of swaps collateral about protection of commingled customer swap margin.  The CFTC requested comments on the costs and benefits of a variety of protection models, including:

  • individual segregation of each customer's collateral at the futures commission merchant, derivatives clearing organization and custodian levels;
  • commingling of collateral of multiple customers, but in which the value of each customer's collateral is treated on an individual basis;
  • use of collateral of non-defaulting customers in the default of a futures commission merchant only after the derivatives clearing organization's default resources package is used; and
  • commingling of collateral of a futures commission merchant's customers, as in the current futures model.

Comments are due within 45 days of the publication of the notice in the Federal Register, which is expected shortly.

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CFTC Fact Sheet: Proposed Rule on Protection of Collateral of Counterparties to Uncleared Swaps

CFTC Q&A: Protection of Collateral of Counterparties to Uncleared Swaps

CFTC Fact Sheet: Advanced Notice of Proposed Rulemaking on Protection of Cleared Swaps Customers Before And After Commodity Broker Bankruptcies

CFTC Q&A: Protection of Cleared Swaps Customers Before And After Commodity Broker Bankruptcies


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