On January 11, 2012, the Commodity Futures Trading Commission (CFTC) adopted its final rules regarding the protection of cleared swaps collateral under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). These rules impose requirements on futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) regarding the treatment of cleared swaps collateral, and make certain conforming amendments to bankruptcy provisions applicable to commodity brokers under the Commodity Exchange Act. The final rules have many similarities to the existing rules regarding the treatment of futures collateral, but include several additional customer protections.
The CFTC adopted what is known as the “legal segregation with operational commingling” or “LSOC” model for segregation of cleared swaps customer collateral. Under the LSOC model, both the FCM and the DCO are required to segregate on their respective books and records the cleared swaps collateral relating to each customer. The entries must indicate that the cleared swaps customer collateral is being held separate from the FCM’s or DCO’s obligations, as well as from the assets of non-cleared swaps customers. The FCM will be required to post to the DCO the gross margin required by the DCO of each of the FCM’s cleared swaps customers, rather than just the net margin obligation of all of the FCM’s cleared swaps customers in the aggregate. The FCM would continue to hold any margin it requires from its customer over and above the DCO’s requirement.
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