Today, the Commodity Futures Trading Commission (CFTC) published in the Federal Register new requirements for futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) when handling customer collateral pledged as margin for cleared swaps. The rules, adopted by a 4-1 vote, will impose a regime of legal segregation with operational commingling (known as LSOC or Complete Legal Segregation). LSOC builds on the segregation framework that currently applies to futures and imposes additional requirements and prohibitions intended to protect those customers from losing collateral as a result of the default of a fellow customer.

Under LSOC, an FCM or DCO may commingle swap customers’ funds in a single account as is allowed for futures. However, both the FCM and the DCO must separately account for each swaps customer, ensure that the customer account is separate from any account holding FCM, DCO or non-swaps customer property, and may not use a swap customer’s funds to cover the default of another customer. LSOC does not alter the pro rata distribution of customer funds called for by the U.S. Bankruptcy Code in the event of an FCM or DCO bankruptcy.

FCMs and DCOs must implement LSOC for cleared swaps customer accounts by November 8, 2012. The remainder of the final rules, which amend existing definitions and deadlines in the bankruptcy provisions under the Commodities Exchange Act (CEA) that are applicable to FCM and DCO insolvencies, are effective April 9, 2012.