Account Class, 40794-40799 [E9-18853]
Download as PDF
40794
Federal Register / Vol. 74, No. 155 / Thursday, August 13, 2009 / Proposed Rules
sroberts on DSKGBLS3C1PROD with PROPOSALS
§ 1112.11 What Must a Third Party
Conformity Assessment Body Do After an
Audit?
(a) When the accreditation body
presents its findings to the third party
conformity assessment body, the third
party conformity assessment body’s
quality manager must receive the
findings and, if necessary, initiate
corrective action in response to the
findings.
(b) The quality manager must prepare
a resolution report identifying the
corrective actions taken and any followup activities. If findings indicate that
immediate corrective action is
necessary, the quality manager must
document that he/she notified the
relevant parties within the third party
conformity assessment body to take
immediate corrective action and also
document the action(s) taken.
(c) If the accreditation body decides to
reduce, suspend, or withdraw the third
party conformity assessment body’s
accreditation, and the reduction,
suspension, or withdrawal of
accreditation is relevant to the third
party conformity assessment body’s
activities pertaining to a CPSC
regulation or test method, the quality
manager must notify the CPSC. Such
notification must be sent to the
Assistant Executive Director, Office of
Hazard Identification and Reduction,
Consumer Product Safety Commission,
4330 East West Highway, Bethesda,
Maryland 20814, within five business
days of the accreditation body’s
notification to the third party
conformity assessment body.
(d) If the CPSC finds that the third
party conformity assessment body no
longer meets the conditions specified in
CPSC Form 223 or in the relevant
statutory provisions applicable to that
third party conformity assessment body,
the CPSC will notify the third party
conformity assessment body, identify
the condition or statutory provision that
is no longer met, and specify a time by
which the third party conformity
assessment body shall notify the CPSC
of the steps it intends to take to correct
the deficiency and when it will
complete such steps. The quality
manager must document that he/she
notified the relevant parties within the
third party conformity assessment body
to take corrective action and also
document the action(s) taken.
(e) If the third party conformity
assessment body fails to remedy the
deficiency in a timely fashion, the CPSC
shall take whatever action it deems
appropriate under the circumstances, up
to and including withdrawing the
CPSC’s accreditation of the third party
conformity assessment body or the
VerDate Nov<24>2008
18:45 Aug 12, 2009
Jkt 217001
CPSC’s acceptance of the third party
conformity assessment body’s
accreditation.
§ 1112.13 What Records Should a Third
Party Conformity Assessment Body Retain
Regarding an Audit?
A third party conformity assessment
body must retain all records relating to
an audit and all records pertaining to
the third party conformity assessment
body’s resolution of or plans for
resolving nonconformities identified
through a reassessment by an
accreditation body or through an
examination by the CPSC. A third party
conformity assessment body also must
retain such records relating to the last
three reassessments (or however many
reassessments have been conducted if
the third party conformity assessment
body has been reassessed less than three
times) and make such records available
to the CPSC upon request.
Dated: August 7, 2009.
Todd A. Stevenson,
Secretary.
[FR Doc. E9–19443 Filed 8–12–09; 8:45 am]
BILLING CODE 6355–01–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 190
RIN 3038–AC82
Account Class
AGENCY: Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
SUMMARY: The Commodity Futures
Trading Commission (the
‘‘Commission’’) proposes amending its
regulations (the ‘‘Regulations’’) to create
a sixth and separate ‘‘account class,’’
applicable only to the bankruptcy of a
commodity broker that is a futures
commission merchant (‘‘FCM’’), for
positions in cleared over-the-counter
(‘‘OTC’’) derivatives (and money,
securities, and/or other property
margining, guaranteeing, and securing
such positions). In general, the concept
of ‘‘account class’’ governs the manner
in which the trustee calculates the net
equity (i.e., claims against the estate)
and the allowed net equity (i.e., pro rata
share of the estate) for each customer of
a commodity broker in bankruptcy. The
Commission further proposes amending
the Regulations to codify the
appropriate allocation, in a bankruptcy
of any commodity broker, of positions
in commodity contracts of one account
class (and the money, securities, and/or
PO 00000
Frm 00030
Fmt 4702
Sfmt 4702
other property margining, guaranteeing,
or securing such positions) that are
commingled with positions in
commodity contracts of the futures
account class (and the money,
securities, and/or other property
margining, guaranteeing, or securing
such positions), pursuant to an order
issued by the Commission.
DATES: Submit comments on or before
September 14, 2009.
ADDRESSES: You may submit comments,
identified by RIN number, by any of the
following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Agency Web Site: https://
www.cftc.gov. Follow the instructions
for submitting comments on the Web
site.
• E-mail: secretary@cftc.gov. Include
the RIN number in the subject line of
the message.
• Fax: 202–418–5521.
• Mail: David A. Stawick, Secretary of
the Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW.,
Washington, DC 20581.
• Hand Delivery/Courier: Same as
mail above.
FOR FURTHER INFORMATION CONTACT:
Robert B. Wasserman, Associate
Director, Division of Clearing and
Intermediary Oversight, 202–418–5092,
rwasserman@cftc.gov; or Nancy
Schnabel, Attorney-Advisor, Division of
Clearing and Intermediary Oversight,
202–418–5344, nschnabel@cftc.gov;
Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
I. Net Equity
A. Authority of Commission To Define
‘‘Net Equity’’ and To Prescribe
Procedures for Its Calculation
The Commission is empowered by
Section 20 of the Commodity Exchange
Act (the ‘‘Act’’),1 (i) to define the ‘‘net
equity’’ of a customer of a commodity
broker 2 in bankruptcy, and (ii) to
prescribe, by rule or regulation,3 the
procedures for calculating such ‘‘net
17
U.S.C. 24.
101(6) of the Bankruptcy Code (11
U.S.C. 101(6)) defines ‘‘commodity broker’’ as a
‘‘futures commission merchant, foreign futures
commission merchant, clearing organization,
leverage transaction merchant, or commodity
options dealer, as defined in section 761 of this
title, with respect to which there is a customer, as
defined in section 761 of this title.’’
3 The regulations of the Commission can be found
at 17 CFR Chapter 1.
2 Section
E:\FR\FM\13AUP1.SGM
13AUP1
Federal Register / Vol. 74, No. 155 / Thursday, August 13, 2009 / Proposed Rules
equity.’’ Moreover, Section 761(17) of
the Bankruptcy Code 4 subjects the
definition of ‘‘net equity’’ in the case of
a commodity broker to ‘‘such rules and
regulations as the Commission
promulgates under the Act.’’ 5 Section
20 of the Act states, in pertinent part,
that:
Notwithstanding title 11 of the United
States Code, the Commission may provide,
with respect to a commodity broker that is a
debtor under chapter 7 of title 11 of the
United States Code, by rule or regulation—
* * * (5) how the net equity of a customer
is to be determined.6
The Commission has exercised its
power under Section 20 of the Act in
promulgating Regulation 190.07(b),
which defines ‘‘net equity’’ as:
[T]he total claim of a customer against the
estate of the debtor based on the commodity
contracts held by the debtor for or on behalf
of such customer less any indebtedness of the
customer to the debtor.7
In addition, the Commission has
exercised its power under Section 20 of
the Act in promulgating the remainder
of Regulation 190.07 (Calculation of
Allowed Net Equity). According to the
proposing release for Regulation Part
190 (the ‘‘Proposing Release’’),8 the
Commission intended Regulation 190.07
to constitute a ‘‘step-by-step method for
calculating the estate’s liability to a
customer (i.e., the customer’s net equity)
and of the pro rata share of the assets
available to pay that claim (i.e., the
customer’s allowed net equity claim).’’ 9
To further such intent, the Commission
set forth the concept of ‘‘account class’’
in Regulation 190.07, and defined the
term ‘‘account class’’ in Regulation
190.01(a).
B. Account Class
1. Definition
Regulation 190.01(a) currently defines
‘‘account class’’ as follows:
Each of the following types of customer
accounts which must be recognized as a
separate class of account by the trustee: [i]
futures accounts, [ii] foreign futures
accounts, [iii] leverage accounts, [iv]
commodity option accounts and [v] delivery
accounts as defined in § 190.05(a)(2):
Provided, however, That to the extent that the
equity balance, as defined in § 190.07, of a
customer in a commodity option, as defined
sroberts on DSKGBLS3C1PROD with PROPOSALS
4 Section
761(17) of the Bankruptcy Code (11
U.S.C. 761(17)) is one provision in Subchapter IV
of Chapter 7 of the Bankruptcy Code (11 U.S.C. 761
et seq.), which governs commodity broker
liquidations (‘‘Subchapter IV’’).
5 11 U.S.C. 761(17).
6 7 U.S.C. 24.
7 17 CFR 190.07(a).
8 See Proposed Rulemaking: 17 CFR Part 190
(Bankruptcy), 46 FR 57535 (November 24, 1981).
9 Id. at 57546.
VerDate Nov<24>2008
18:45 Aug 12, 2009
Jkt 217001
in § 1.3(hh) of this chapter, may be
commingled with the equity balance of such
customer in any domestic commodity futures
contract pursuant to regulations under the
Act, the aggregate shall be treated for
purposes of this part as being held in a
futures account.10
2. Rationale for the Concept of Account
Class
In general, the Regulations apply
different requirements to the treatment
of positions in different types of
commodity contracts (and to the money,
securities, and/or other property
margining, guaranteeing, or securing
such positions) based on the underlying
characteristics of those contracts. For
example, the segregation requirements
in Regulations 1.20 through 1.30 11
would generally apply to positions in
commodity futures contracts that are
traded on a designated contract market
(i.e., futures contracts), and to the
money, securities, and/or other property
margining, guaranteeing, or securing
such positions. In contrast, the
requirements in Regulation 30.7 12
would generally apply to positions in
commodity futures contracts that are
traded on foreign boards of trade (i.e.,
foreign futures or foreign options
contracts), and to the money, securities,
and/or other property margining,
guaranteeing, or securing such
positions.13
Under the Regulations, requirements
for the treatment of positions (and the
money, securities, and/or other property
margining, guaranteeing, or securing
such positions) may differ in stringency,
and therefore in the degree of protection
that they afford customers of a
commodity broker in bankruptcy. For
example, the segregation requirements
in Regulations 1.20 through 1.30 are
more stringent than the requirements in
Regulation 30.7.14 Thus, the
10 17
CFR 190.01(a).
CFR 1.20–1.30.
12 17 CFR 30.7.
13 As discussed in further detail below, the
Commission has the power under Section 4d of the
Act (7 U.S.C. 6d) to issue an order permitting
positions in foreign futures contracts (and the
money, securities, and/or property margining,
guaranteeing, or securing such positions), to be
commingled, in either an FCM or DCO account,
with positions in futures contracts (and the money,
securities, and/or other property margining,
guaranteeing, or securing such positions).
14 When the Commission promulgated Regulation
Part 190 in 1983, the Regulations had no
requirements for the treatment of money, securities,
and/or other property that were used to margin,
guarantee, or secure commodity futures contracts
traded on foreign boards of trade. In 1987, however,
the Commission promulgated Regulation 30.7,
which applies different and less stringent
requirements to such money, securities, and/or
other property than the segregation requirements in
Regulations 1.20 through 1.30.
11 17
PO 00000
Frm 00031
Fmt 4702
Sfmt 4702
40795
Commission created the concept of
‘‘account class,’’ in order to ensure that,
in a bankruptcy of a commodity broker,
customers that hold positions in
commodity contracts (and deposit
money, securities, and/or other property
to margin, guarantee, or secure such
positions) subject to one requirement
would benefit from the specific
protections afforded by such
requirement. As the Commission stated
in the Proposing Release:
The reason for identifying classes of
customer accounts is to permit the
implementation of the principle of pro rata
distribution so that the differing segregation
requirements with respect to different classes
of accounts benefit customer claimants based
on the class of account for which they were
imposed.15
As the Commission further stated in
the Proposing Release:
Obviously, much of the benefit of
segregation would be lost if property
segregated on behalf of a particular account
class could be allocated to pay the claims of
customers of a different account class for
which less stringent segregation requirements
were in effect.16
The Commission codified the
aforementioned intent by promulgating
Regulation 190.08(c), which states:
[P]roperty held by or for the account of a
customer, which is segregated on behalf of a
specific account class * * * must be
allocated to the customer estate of the
account class for which it is segregated.
* * * 17
C. The Use of Account Class in the
Calculation of Net Equity and Allowed
Net Equity
As mentioned above, the concept of
‘‘account class’’ governs the manner in
which the trustee calculates the net
equity and the ‘‘allowed net equity’’ for
each customer of a commodity broker in
bankruptcy.
In general, Regulation 190.07(b)
requires a trustee to calculate net equity
separately for each account class.18
Specifically, Regulation 190.07(b)(2)
directs the trustee to ‘‘aggregate the
credit and debit equity balances of all
accounts of the same class held by a
customer in the same capacity’’ while
calculating net equity.19
15 Proposing
Release, supra, note 9 at 57536.
at 57554.
17 17 CFR 190.08(c).
18 17 CFR 190.07(b).
19 17 CFR 190.07(b)(2).
Regulation 190.07(b)(3) (17 CFR 190.07(b)(3))
provides a limited exception to Regulation
190.07(b)(2), by permitting the trustee, while
calculating net equity, to offset ‘‘[a] negative equity
balance with respect to one customer account class’’
against ‘‘a positive equity balance in any other
16 Id.
E:\FR\FM\13AUP1.SGM
Continued
13AUP1
40796
Federal Register / Vol. 74, No. 155 / Thursday, August 13, 2009 / Proposed Rules
Regulation 190.07(a) states that
‘‘allowed net equity’’ shall ‘‘be equal to
the aggregate of the funded balances of
such customer’s net equity claim for
each account class plus or minus’’
certain adjustments.20 Regulation
190.07(c), in turn, defines ‘‘funded
balance’’ as: ‘‘* * * a customer’s pro
rata share of the customer estate with
respect to each account class available
as of the primary liquidation date for
distribution to customers of the same
class.’’ 21
As this definition provides,
Regulation 190.07(c) requires a trustee
to calculate funded balance separately
for each account class. Specifically,
Regulation 190.07(c)(1) requires the
trustee to calculate, with respect to a
particular account class held by a
particular customer of a commodity
broker in bankruptcy, the ratio between
(i) the net equity of such customer for
such account class, and (ii) the net
equity of all customers for such account
class. Regulation 190.07(c)(1) then
requires the trustee to multiply such
ratio against the value of any money,
securities or other property that the
commodity broker held on behalf of
commodity contracts in such account
class. Finally, to calculate allowed net
equity, Regulation 190.07(a) requires the
trustee to aggregate the funded balances
across account classes, and to make
certain adjustments, thus generating the
total amount that each customer is
entitled to recover from all money,
securities, and/or other property held on
behalf of such customer.
sroberts on DSKGBLS3C1PROD with PROPOSALS
II. Proposed Amendments To Include
Cleared OTC Derivatives as a Separate
Account Class
A. Description
As mentioned above, Regulation
190.01(a) currently sets forth five
separate account classes: (i) Futures
accounts; (ii) foreign futures accounts;
(iii) leverage accounts; (iv) commodity
option accounts; and (v) delivery
accounts. The Commission is proposing
to amend Regulation 190.01(a) to
designate ‘‘cleared OTC derivatives’’ as
a sixth and separate account class with
respect to the bankruptcy of a
commodity broker that is an FCM. The
Commission is also proposing to make
certain conforming changes to
Regulation 190.07(b)(2)(viii) and Form 4
(Proof of Claim) in Appendix A to
Regulation Part 190 (Bankruptcy
Forms).22 As described below, the
account class of such customer held in the same
capacity.’’
20 17 CFR 190.07(a).
21 17 CFR 190.07(c).
22 17 CFR pt. 190, app. A, form 4.
VerDate Nov<24>2008
18:45 Aug 12, 2009
Jkt 217001
Commission does not intend for
‘‘cleared OTC derivatives’’ to constitute
a sixth and separate account class with
respect to a bankruptcy of a commodity
broker that is not an FCM.
The Commission is also proposing to
amend Regulation 190.01 to define
‘‘cleared OTC derivatives.’’ In its
Interpretative Statement, dated
September 26, 2008 (the ‘‘Statement on
Cleared OTC Derivatives’’), the
Commission defined ‘‘cleared-only
contracts’’ as those contracts that
‘‘although not executed or traded on a
Designated Contract Market or a
Derivatives Transaction Execution
Facility, are subsequently submitted for
clearing through a Futures Commission
Merchant * * * to a Derivatives
Clearing Organization.’’ 23 In the
definition of ‘‘cleared OTC derivatives’’
in the proposed amendment to
Regulation 190.01, the Commission is
proposing to incorporate the definition
for ‘‘cleared-only contracts’’ from the
Statement on Cleared OTC Derivatives.
However, consistent with the intentions
specified in the Proposing Release,24 the
Commission proposes to limit ‘‘cleared
OTC derivatives’’ to only those
positions in ‘‘cleared-only contracts’’
that (along with the money, securities,
and/or other property margining,
guaranteeing, or securing such
positions) are required to have been
(i) segregated in accordance with a rule,
regulation, or order issued by the
Commission, or (ii) held in a separate
account for ‘‘cleared-only contracts’’ in
accordance with the rules or bylaws of
a DCO. The Commission does not
intend to specify substantive
requirements for the treatment of
cleared OTC derivatives (and the
money, securities, and/or other property
margining, guaranteeing, or securing
such derivatives). Rather, the
Commission proposes to define ‘‘cleared
OTC derivatives’’ in such a manner as
to specify the sources from which such
substantive requirements may originate.
Moreover, by including contracts that
‘‘are required to be segregated * * * or
to be held in a separate account’’ for
‘‘cleared-only contracts,’’ the
Commission seeks to avoid the need to
engage in fact-intensive post-bankruptcy
inquiries regarding compliance with
such requirements.
B. Rationale
As detailed further below, the
Commission is proposing these
amendments (i) to reflect the extension
23 73
FR 65514 (November 4, 2008).
supra notes 16 and 17, and the
corresponding quotations from the Proposing
Release in the text of this preamble.
24 See
PO 00000
Frm 00032
Fmt 4702
Sfmt 4702
of Subchapter IV (and, in turn,
Regulation Part 190) to cleared OTC
derivatives under the Commodity
Futures Modernization Act of 2000 (the
‘‘CFMA’’),25 and (ii) to address a
scenario that the Statement on Cleared
OTC Derivatives did not reference. The
Commission is proposing the
amendments at this time because of
increased interest among DCOs in
clearing OTC derivatives, and the need
to enhance certainty regarding the
treatment of cleared OTC derivatives in
the bankruptcy of a commodity broker
that is an FCM.
1. To Reflect the Extension of
Subchapter IV to Cleared OTC
Derivatives
The Commission promulgated the
current version of Regulation 190.01(a)
in 1983. At that time, cleared OTC
derivatives, if they existed, were not
‘‘commodity contracts’’ within the
meaning of Section 761(4) of the
Bankruptcy Code.26 Therefore, neither
Subchapter IV nor Regulation Part 190
applied to cleared OTC derivatives.
The CFMA, however, created the
opportunity for OTC derivatives to be
cleared.27 In addition, the CFMA
extended Subchapter IV (and, in turn,
Regulation Part 190) to cleared OTC
derivatives. As mentioned in the
Statement on Cleared OTC Derivatives,
Section 761(4)(A) of the Bankruptcy
Code defines ‘‘commodity contract,’’
with respect to an FCM, as a ‘‘contract
for the purchase or sale of a commodity
for future delivery on, or subject to the
rules of, a contract market or board of
trade.’’ 28 The CFMA amended the
definition of ‘‘contract market’’ in
Section 761(7) of the Bankruptcy Code
to include reference to a ‘‘registered
entity.’’ As mentioned in the Statement
on Cleared OTC Derivatives, Section
761(8) of the Bankruptcy Code
incorporates by reference the definition
of ‘‘registered entity’’ in the Act.29
Therefore, the CFMA first permitted
cleared OTC derivatives, which are
subject to the rules of a DCO, to become
‘‘commodity contracts’’ within the
meaning of Section 761(4) of the
Bankruptcy Code, specifically with
respect to a commodity broker that is an
FCM.
25 Appendix E of Pub. L. 106–554, 114 Stat. 2763
(2000).
26 11 U.S.C. 761(4).
27 See Sections 2(d) and 2(e) of the Act (7 U.S.C.
§§ 2(d), (e)).
28 Id.
29 11 U.S.C. 761(8). The term ‘‘registered entity’’
is defined in Section 1a(29) of the Act (7 U.S.C.
§ 1a(29)) to include ‘‘(iii) a derivatives clearing
organization registered under Section 5b * * *.’’
E:\FR\FM\13AUP1.SGM
13AUP1
Federal Register / Vol. 74, No. 155 / Thursday, August 13, 2009 / Proposed Rules
As detailed in the Statement on
Cleared OTC Derivatives, in a
bankruptcy of a commodity broker that
is an FCM, claims arising out of cleared
OTC derivatives should be included in
the determination of net equity (and
therefore, by inference, in the
determination of allowed net equity), for
purposes of Subchapter IV and
Regulation Part 190.30 Consequently,
the Commission is proposing
amendments to provide a regulatory
framework to accomplish this goal.
2. To Address a Scenario Not
Referenced in the Statement on Cleared
OTC Derivatives
In the Statement on Cleared OTC
Derivatives, the Commission explained
that, for purposes of Regulation Part
190:
A claim arising out of a cleared-only
contract, or the property margining such a
contract, would be includable in the futures
account class, where, pursuant to
Commission Order, the contract or property
is included in an account segregated in
accordance with Section 4d of the Act.31
sroberts on DSKGBLS3C1PROD with PROPOSALS
However, the Commission did not
address the treatment, under Regulation
Part 190, of positions in cleared OTC
derivatives (and the money, securities,
and/or other property margining,
guaranteeing, or securing such
positions), in a scenario where there is
no applicable Section 4d Order (as such
term is defined below). Therefore, as
mentioned above, the Commission is
proposing amendments to create, only
with respect to the bankruptcy of a
commodity broker that is an FCM, a
sixth and separate account class, to
which cleared OTC derivatives (as well
as the money, securities, and/or other
property margining, guaranteeing, or
securing such derivatives) could be
allocated. By creating such an account
class, the Commission is effectively
specifying the manner in which the
trustee in the bankruptcy of a
commodity broker that is an FCM must
treat, in the absence of an applicable
Section 4d Order, claims arising out of
cleared OTC derivatives when
determining net equity and allowed net
equity.
III. Proposed Amendment To Clarify
Appropriate Allocation of Collateral to
Certain Account Classes
The Commission has the power under
Section 4d of the Act 32 to issue an order
(a ‘‘Section 4d Order’’) permitting
positions in commodity contracts of one
account class (and the money,
30 73
FR 65514, 65515 (November 4, 2008).
FR 65514, 65516 (November 4, 2008).
32 7 U.S.C. 6d.
securities, and/or other property
margining, guaranteeing or securing
such positions), to be commingled with
(and, therefore, to be accorded the same
protections in bankruptcy as) positions
in commodity contracts of the futures
account class (and the money,
securities, and/or other property
margining, guaranteeing or securing
such positions), in either an FCM or
DCO account. Specifically, Section 4d of
the Act states that:
class as opposed to the foreign futures
account class or another account class.34
In accordance with such terms and
conditions as the Commission may prescribe
by rule, regulation, or order, * * * money,
securities, and property of the customers of
such futures commission merchant may be
commingled and deposited * * * with any
other money, securities, and property
received by such futures commission
merchant and required by the Commission to
be separately accounted for and treated and
dealt with as belonging to the customers of
such futures commission merchant.
[I]n October 2004, the Commission issued
an interpretation regarding the appropriate
account class for funds attributable to
contracts traded on non-domestic boards of
trade, and the assets margining such
contracts, that are included in accounts
segregated in accordance with Section 4d of
the Act pursuant to Commission Order. In
that context, the Commission concluded that
the claim is properly against the Section 4d
account class because customers whose
assets are deposited in such an account
pursuant to Commission Order should
benefit from that pool of assets. The same
rationale supports the Commission’s
conclusion that a claim arising out of a
cleared-only contract, or the property
margining such a contract, would be
includable in the futures account class,
where, pursuant to Commission Order, the
contract or property is included in an
account segregated in accordance with
Section 4d of the Act.35
The Commission has issued two
interpretations stating that, for purposes
of Regulation Part 190, if positions in
commodity contracts (and relevant
money, securities, and/or other
property) of one account class, are,
pursuant to a Commission order,
commingled with positions in
commodity contracts (and relevant
money, securities, and/or other
property) of the futures account class,
then, the former positions (and relevant
money, securities, and/or other
property) shall be treated as part of the
futures account class. First, the
Commission issued an Interpretative
Statement on October 21, 2004 (the
‘‘Statement on Commingling Foreign
Futures Positions’’), stating that
‘‘collateral supporting foreign futures
placed in domestic segregation pursuant
to Commission Order should be treated
as in a futures account, not a foreign
futures account, for purposes of Part
190.’’ 33 In the Statement on
Commingling Foreign Futures Positions,
the Commission indicated that it would
accord similar treatment to positions in
other commodity contracts (and the
relevant money, securities, and/or other
property) that are placed in domestic
segregation. Specifically, the
Commission stated that:
In a situation whereby Commission order
or direction, customers are required or
allowed to contribute to a Commission
Regulation 1.20 segregated account, those
customers also should benefit from the
distribution of that account proportionately
to their contributions in the event of
insolvency. Such claims should be treated as
encompassed within the futures account
31 73
VerDate Nov<24>2008
18:45 Aug 12, 2009
Jkt 217001
40797
As mentioned above, the Commission
subsequently issued the Statement on
Cleared OTC Derivatives, which extends
the conclusion in the Statement on
Commingling Foreign Futures Positions
to cover cleared OTC derivatives that
have been placed in domestic
segregation pursuant to Commission
order. Specifically, the Commission
stated that:
The Commission is proposing to
codify explicitly, in Regulation
190.01(a), a generalized version of the
Statement on Commingling Foreign
Futures Positions and the Statement on
Cleared OTC Derivatives. This version
shall apply to positions in all
commodity contracts (and money,
securities, and/or other property
margining, guaranteeing, or securing
such positions). The Commission
believes that these amendments would
remove any concerns regarding whether
the Statement on Commingling Foreign
Futures Positions and the Statement on
Cleared OTC Derivatives would be
limited to the specific factual patterns
addressed therein. To be clear, it is the
belief of the Commission that the
Statement on Commingling Foreign
Futures Positions and the Statement on
Cleared OTC Derivatives are
nonetheless effective without such
explicit codification.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) 36 requires Federal agencies, in
promulgating regulations, to consider
the impact of those regulations on small
34 Id.
35 73
33 69
PO 00000
FR 69510, 69511 (November 30, 2004).
Frm 00033
Fmt 4702
Sfmt 4702
36 5
FR 65514, 65516 (November 4, 2008).
U.S.C. 601 et seq.
E:\FR\FM\13AUP1.SGM
13AUP1
40798
Federal Register / Vol. 74, No. 155 / Thursday, August 13, 2009 / Proposed Rules
businesses. The amendments proposed
herein will affect only FCMs and DCOs.
The Commission has previously
established certain definitions of ‘‘small
entities’’ to be used by the Commission
in evaluating the impact of its
regulations on small entities in
accordance with the RFA.37 The
Commission has previously determined
that FCMs 38 and DCOs 39 are not small
entities for the purpose of the RFA.
Accordingly, pursuant to 5 U.S.C.
605(b), the Chairman, on behalf of the
Commission, certifies that the
amendments will not have a significant
economic impact on a substantial
number of small entities.
sroberts on DSKGBLS3C1PROD with PROPOSALS
B. Paperwork Reduction Act
The Paperwork Reduction Act
(‘‘PRA’’) 40 imposes certain
requirements on Federal agencies in
connection with their conducting or
sponsoring any collection of
information as defined by the PRA. The
amendments do not require the new
collection of information on the part of
any entities subject to such
amendments. Accordingly, for purposes
of the PRA, the Commission certifies
that the amendments, if promulgated in
final form, would not impose any new
reporting or recordkeeping
requirements.
C. Cost-Benefit Analysis
Section 15(a) of the Act requires that
the Commission, before promulgating a
regulation under the Act or issuing an
order, consider the costs and benefits of
its action. By its terms, Section 15(a) of
the Act does not require the
Commission to quantify the costs and
benefits of a new regulation or
determine whether the benefits of the
regulation outweigh its costs. Rather,
Section 15(a) of the Act simply requires
the Commission to ‘‘consider the costs
and benefits’’ of its action.
Section 15(a) of the Act further
specifies that costs and benefits shall be
evaluated in light of the following
considerations: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations.
Accordingly, the Commission could, in
its discretion, give greater weight to any
one of the five considerations and could
determine that, notwithstanding its
costs, a particular regulation was
37 47
FR 18618 (Apr. 30, 1982).
at 18619.
39 66 FR 45604, 45609 (Aug. 29, 2001).
40 44 U.S.C. 3501 et seq.
38 Id.
VerDate Nov<24>2008
18:45 Aug 12, 2009
Jkt 217001
necessary or appropriate to protect the
public interest or to effectuate any of the
provisions or to accomplish any of the
purposes of the Act.
The Commission has evaluated the
costs and benefits of the amendments,
in light of the specific considerations
identified in Section 15(a) of the Act, as
follows:
1. Protection of Market Participants and
the Public
The amendments would benefit FCMs
and DCOs, as well as customers of the
futures and options markets, by
providing greater certainty (i) in a
bankruptcy of a commodity broker that
is an FCM, regarding the treatment of
cleared OTC derivatives, and (ii) in a
bankruptcy of any commodity broker,
regarding the allocation of positions in
commodity contracts (and relevant
money, securities, and/or other
property) of one account class that are
commingled in an FCM or DCO account,
pursuant to an order from the
Commission, with positions in
commodity contracts (and relevant
money, securities, and/or other
property) of the futures account class.
2. Efficiency and Competition
The amendments are not expected to
have an effect on efficiency or
competition.
3. Financial Integrity of Futures Markets
and Price Discovery
The amendments would enhance the
protection, in the bankruptcy of a
commodity broker that is an FCM, of
customers with positions in cleared
OTC derivatives, by providing an
account class in which to hold such
positions (and relevant money,
securities, and/or other property). The
amendments would enhance certainty
regarding the treatment, in a bankruptcy
of any commodity broker, of customers
with positions (and relevant money,
securities, and/or other property)
subject to a Section 4d Order, by
removing concerns regarding whether
the Statement on Commingling Foreign
Futures Positions and the Statement on
Cleared OTC Derivatives would be
limited to the specific factual patterns
addressed therein. Thus, the proposed
regulations would contribute to the
financial integrity of the futures and
options markets as a whole.
4. Sound Risk Management Practices
The amendments would reinforce the
sound risk management practices
already required of FCMs and DCOs, by
(i) providing an account class in which
to hold positions in cleared OTC
derivatives (and relevant money,
PO 00000
Frm 00034
Fmt 4702
Sfmt 4702
securities, and/or other property), and
(ii) providing certainty to FCMs and
DCOs regarding the allocation between
account classes, in a commodity broker
bankruptcy, of customer positions (and
relevant money, securities, and/or other
property) subject to a Section 4d Order.
5. Other Public Considerations
Recent market events, including
disruptions in global credit markets,
render it prudent to enhance certainty
regarding the treatment of customer
positions (and relevant money,
securities, and/or other property) in a
commodity broker bankruptcy.
Accordingly, after considering the five
factors enumerated in the Act, the
Commission has determined to propose
the regulations set forth below.
List of Subjects in 17 CFR Part 190
Bankruptcy, Brokers, Commodity
Futures.
For the reasons stated in the
preamble, the Commission proposes to
amend 17 CFR part 190 as follows:
PART 190—BANKRUPTCY
1. The authority citation for part 190
continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a,
12, 19, and 24, and 11 U.S.C. 362, 546, 548,
556, and 761–766, unless otherwise noted.
2. In § 190.01, revise paragraph (a)
and add paragraph (oo) to read as
follows:
§ 190.01
Definitions.
*
*
*
*
*
(a) Account class means each of the
following types of customer accounts
which must be recognized as a separate
class of account by the trustee: futures
accounts, foreign futures accounts,
leverage accounts, commodity option
accounts, delivery accounts as defined
in § 190.05(a)(2), and, only with respect
to the bankruptcy of a commodity
broker that is a futures commission
merchant, cleared OTC derivatives
accounts; Provided, however, That to the
extent that the equity balance, as
defined in § 190.07, of a customer in a
commodity option, as defined in
§ 1.3(hh) of this chapter, may be
commingled with the equity balance of
such customer in any domestic
commodity futures contract pursuant to
regulations under the Act, the aggregate
shall be treated for purposes of this part
as being held in a futures account;
Provided, further, that, if positions in
commodity contracts of one account
class (and the money, securities, and/or
other property margining, guaranteeing,
or securing such positions), are,
pursuant to a Commission order,
E:\FR\FM\13AUP1.SGM
13AUP1
Federal Register / Vol. 74, No. 155 / Thursday, August 13, 2009 / Proposed Rules
commingled with positions in
commodity contracts of the futures
account class (and the money,
securities, and/or other property
margining, guaranteeing, or securing
such positions), then the former
positions (and the relevant money,
securities, and/or other property) shall
be treated, for purposes of this part, as
being held in an account of the futures
account class.
*
*
*
*
*
(oo) Cleared OTC derivatives shall
mean positions in commodity contracts
that have not been entered into or
traded on a contract market (as such
term is defined in § 1.3(h) of this
chapter) or on a derivatives transaction
execution facility (within the meaning
of Section 5a of the Act), but which
nevertheless are submitted by a
commodity broker that is a futures
commission merchant (as such term is
defined in § 1.3(p) of this chapter) for
clearing by a clearing organization (as
such term is defined in this section),
along with the money, securities, and/
or other property margining,
guaranteeing, or securing such
positions, which are required to be
segregated, in accordance with a rule,
regulation, or order issued by the
Commission, or which are required to
be held in a separate account for cleared
OTC derivatives only, in accordance
with the rules or bylaws of a clearing
organization (as such term is defined in
this section).
4. In § 190.07, revise paragraph
(b)(2)(viii) to read as follows:
§ 190.07
Calculation of allowed net equity.
sroberts on DSKGBLS3C1PROD with PROPOSALS
(b) * * *
(2) * * *
(viii) Subject to paragraph (b)(2)(ix) of
this section, the futures accounts,
leverage accounts, options accounts,
foreign futures accounts, and cleared
OTC derivatives accounts of the same
person shall not be deemed to be held
in separate capacities: Provided,
however, That such accounts may be
aggregated only in accordance with
paragraph (b)(3) of this section.
*
*
*
*
*
5. Amend ‘‘bankruptcy appendix form
4—proof of claim’’ in Appendix A to
Part 190 by revising paragraph a in
section III to read as follows:
Appendix A to Part 190—Bankruptcy
Forms
*
*
*
*
*
Bankruptcy Appendix Form 4—Proof of
Claim
*
*
*
*
*
III. * * *
a. Whether the account is a futures, foreign
futures, leverage, option (if an option
VerDate Nov<24>2008
18:45 Aug 12, 2009
Jkt 217001
account, specify whether exchange-traded or
dealer), ‘‘delivery’’ account, or, only with
respect to a bankruptcy of a commodity
broker that is a futures commission
merchant, a cleared OTC derivatives account.
A ‘‘delivery’’ account is one which contains
only documents of title, commodities, cash,
or other property identified to the claimant
and deposited for the purposes of making or
taking delivery on a commodity underlying
a commodity contract or for payment of the
strike price upon exercise of an option.
*
*
*
*
*
Issued in Washington, DC, on July 31,
2009, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9–18853 Filed 8–12–09; 8:45 am]
BILLING CODE P
DEPARTMENT OF THE INTERIOR
[SATS No. MT–029–FOR; Docket ID: OSM–
2008–0022]
Office of Surface Mining Reclamation
and Enforcement
30 CFR Part 926
Montana Regulatory Program
AGENCY: Office of Surface Mining
Reclamation and Enforcement, Interior.
ACTION: Proposed rule; reopening and
extension of public comment period on
proposed amendment.
SUMMARY: We are announcing the
receipt of revisions pertaining to a
previously proposed amendment to the
Montana regulatory program
(hereinafter, the ‘‘Montana program’’)
under the Surface Mining Control and
Reclamation Act of 1977 (‘‘SMCRA’’ or
‘‘the Act’’). Montana proposes additions
of rules and revisions to the
Administrative Rules of Montana (ARM)
concerning Normal Husbandry
Practices. Montana intends to revise its
program to improve operational
efficiency.
This document gives the times and
locations that the Montana program and
proposed amendment to that program
are available for your inspection, the
comment period during which you may
submit written comments on the
amendment, and the procedures that we
will follow for the public hearing, if one
is requested.
DATES: We will accept written
comments on this amendment until 4
p.m., mountain daylight time September
14, 2009. If requested, we will hold a
public hearing on the amendment on
September 8, 2009. We will accept
requests to speak until 4 p.m., mountain
daylight time, on August 28, 2009.
PO 00000
Frm 00035
Fmt 4702
Sfmt 4702
40799
ADDRESSES: You may submit comments,
identified by ‘‘MT–029–FOR’’ or Docket
ID number OSM–2008–0022, using any
of the following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. The proposed rule
has been assigned Docket ID OSM–
2008–0022. If you would like to submit
comments via the Federal eRulemaking
portal, go to https://www.regulations.gov
and do the following. Click on the
‘‘Advanced Docket Search’’ button on
the right side of the screen. Type in the
Docket ID ‘‘OSM–2008–0022’’ and click
on the ‘‘Submit’’ button at the bottom of
the page. The next screen will display
the Docket Search Results for the rule
making. If you click on ‘‘OSM–2008–
0022’’, you can view the proposed rule
and submit a comment. You can also
view supporting material and any
comments submitted by others.
• Mail, Hand Delivery/Courier: Jeff
Fleischman, Director, Casper Field
Office, Office of Surface Mining
Reclamation and Enforcement, Federal
Building, 150 East B Street, Room 1018,
Casper, WY 82601–1018, (307) 261–
6550. Fax: (307) 261–6552.
Instructions: All submissions received
must include the agency name and MT–
029–FOR. For detailed instructions on
submitting comments and additional
information on the rulemaking process,
see the ‘‘Public Comment Procedures’’
heading of the SUPPLEMENTARY
INFORMATION section of this document.
Docket: Access to the docket to review
copies of the Montana program, this
amendment, a listing of any scheduled
public hearings, and all written
comments received in response to this
document, may be obtained at the
addresses listed below during normal
business hours, Monday through Friday,
excluding holidays. You may receive
one free copy of the amendment by
contacting the Office of Surface Mining
Reclamation and Enforcement’s (OSM’s)
Casper Field Office. In addition, you
may review a copy of the amendment
during regular business hours at the
following locations:
Jeff Fleischman, Director, Casper Field
Office, Office of Surface Mining
Reclamation and Enforcement,
Federal Building, 150 East B Street,
Room 1018, Casper, WY 82601–1018,
Telephone: (307) 261–6550, E-mail:
jfleischman@osmre.gov.
Neil Harrington, Chief, Industrial and
Energy Minerals Bureau, Montana
Department of Environmental Quality,
P.O. Box 200901, Helena, MT 59620–
0901, Telephone: (406) 444–2544, Email: neharrington@mt.gov.
E:\FR\FM\13AUP1.SGM
13AUP1
Agencies
[Federal Register Volume 74, Number 155 (Thursday, August 13, 2009)]
[Proposed Rules]
[Pages 40794-40799]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-18853]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 190
RIN 3038-AC82
Account Class
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')
proposes amending its regulations (the ``Regulations'') to create a
sixth and separate ``account class,'' applicable only to the bankruptcy
of a commodity broker that is a futures commission merchant (``FCM''),
for positions in cleared over-the-counter (``OTC'') derivatives (and
money, securities, and/or other property margining, guaranteeing, and
securing such positions). In general, the concept of ``account class''
governs the manner in which the trustee calculates the net equity
(i.e., claims against the estate) and the allowed net equity (i.e., pro
rata share of the estate) for each customer of a commodity broker in
bankruptcy. The Commission further proposes amending the Regulations to
codify the appropriate allocation, in a bankruptcy of any commodity
broker, of positions in commodity contracts of one account class (and
the money, securities, and/or other property margining, guaranteeing,
or securing such positions) that are commingled with positions in
commodity contracts of the futures account class (and the money,
securities, and/or other property margining, guaranteeing, or securing
such positions), pursuant to an order issued by the Commission.
DATES: Submit comments on or before September 14, 2009.
ADDRESSES: You may submit comments, identified by RIN number, by any of
the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web Site: https://www.cftc.gov. Follow the
instructions for submitting comments on the Web site.
E-mail: secretary@cftc.gov. Include the RIN number in the
subject line of the message.
Fax: 202-418-5521.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate
Director, Division of Clearing and Intermediary Oversight, 202-418-
5092, rwasserman@cftc.gov; or Nancy Schnabel, Attorney-Advisor,
Division of Clearing and Intermediary Oversight, 202-418-5344,
nschnabel@cftc.gov; Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Net Equity
A. Authority of Commission To Define ``Net Equity'' and To Prescribe
Procedures for Its Calculation
The Commission is empowered by Section 20 of the Commodity Exchange
Act (the ``Act''),\1\ (i) to define the ``net equity'' of a customer of
a commodity broker \2\ in bankruptcy, and (ii) to prescribe, by rule or
regulation,\3\ the procedures for calculating such ``net
[[Page 40795]]
equity.'' Moreover, Section 761(17) of the Bankruptcy Code \4\ subjects
the definition of ``net equity'' in the case of a commodity broker to
``such rules and regulations as the Commission promulgates under the
Act.'' \5\ Section 20 of the Act states, in pertinent part, that:
---------------------------------------------------------------------------
\1\ 7 U.S.C. 24.
\2\ Section 101(6) of the Bankruptcy Code (11 U.S.C. 101(6))
defines ``commodity broker'' as a ``futures commission merchant,
foreign futures commission merchant, clearing organization, leverage
transaction merchant, or commodity options dealer, as defined in
section 761 of this title, with respect to which there is a
customer, as defined in section 761 of this title.''
\3\ The regulations of the Commission can be found at 17 CFR
Chapter 1.
\4\ Section 761(17) of the Bankruptcy Code (11 U.S.C. 761(17))
is one provision in Subchapter IV of Chapter 7 of the Bankruptcy
Code (11 U.S.C. 761 et seq.), which governs commodity broker
liquidations (``Subchapter IV'').
\5\ 11 U.S.C. 761(17).
Notwithstanding title 11 of the United States Code, the
Commission may provide, with respect to a commodity broker that is a
debtor under chapter 7 of title 11 of the United States Code, by
rule or regulation--* * * (5) how the net equity of a customer is to
be determined.\6\
---------------------------------------------------------------------------
\6\ 7 U.S.C. 24.
The Commission has exercised its power under Section 20 of the Act
---------------------------------------------------------------------------
in promulgating Regulation 190.07(b), which defines ``net equity'' as:
[T]he total claim of a customer against the estate of the debtor
based on the commodity contracts held by the debtor for or on behalf
of such customer less any indebtedness of the customer to the
debtor.\7\
---------------------------------------------------------------------------
\7\ 17 CFR 190.07(a).
In addition, the Commission has exercised its power under Section
20 of the Act in promulgating the remainder of Regulation 190.07
(Calculation of Allowed Net Equity). According to the proposing release
for Regulation Part 190 (the ``Proposing Release''),\8\ the Commission
intended Regulation 190.07 to constitute a ``step-by-step method for
calculating the estate's liability to a customer (i.e., the customer's
net equity) and of the pro rata share of the assets available to pay
that claim (i.e., the customer's allowed net equity claim).'' \9\ To
further such intent, the Commission set forth the concept of ``account
class'' in Regulation 190.07, and defined the term ``account class'' in
Regulation 190.01(a).
---------------------------------------------------------------------------
\8\ See Proposed Rulemaking: 17 CFR Part 190 (Bankruptcy), 46 FR
57535 (November 24, 1981).
\9\ Id. at 57546.
---------------------------------------------------------------------------
B. Account Class
1. Definition
Regulation 190.01(a) currently defines ``account class'' as
follows:
Each of the following types of customer accounts which must be
recognized as a separate class of account by the trustee: [i]
futures accounts, [ii] foreign futures accounts, [iii] leverage
accounts, [iv] commodity option accounts and [v] delivery accounts
as defined in Sec. 190.05(a)(2): Provided, however, That to the
extent that the equity balance, as defined in Sec. 190.07, of a
customer in a commodity option, as defined in Sec. 1.3(hh) of this
chapter, may be commingled with the equity balance of such customer
in any domestic commodity futures contract pursuant to regulations
under the Act, the aggregate shall be treated for purposes of this
part as being held in a futures account.\10\
---------------------------------------------------------------------------
\10\ 17 CFR 190.01(a).
2. Rationale for the Concept of Account Class
In general, the Regulations apply different requirements to the
treatment of positions in different types of commodity contracts (and
to the money, securities, and/or other property margining,
guaranteeing, or securing such positions) based on the underlying
characteristics of those contracts. For example, the segregation
requirements in Regulations 1.20 through 1.30 \11\ would generally
apply to positions in commodity futures contracts that are traded on a
designated contract market (i.e., futures contracts), and to the money,
securities, and/or other property margining, guaranteeing, or securing
such positions. In contrast, the requirements in Regulation 30.7 \12\
would generally apply to positions in commodity futures contracts that
are traded on foreign boards of trade (i.e., foreign futures or foreign
options contracts), and to the money, securities, and/or other property
margining, guaranteeing, or securing such positions.\13\
---------------------------------------------------------------------------
\11\ 17 CFR 1.20-1.30.
\12\ 17 CFR 30.7.
\13\ As discussed in further detail below, the Commission has
the power under Section 4d of the Act (7 U.S.C. 6d) to issue an
order permitting positions in foreign futures contracts (and the
money, securities, and/or property margining, guaranteeing, or
securing such positions), to be commingled, in either an FCM or DCO
account, with positions in futures contracts (and the money,
securities, and/or other property margining, guaranteeing, or
securing such positions).
---------------------------------------------------------------------------
Under the Regulations, requirements for the treatment of positions
(and the money, securities, and/or other property margining,
guaranteeing, or securing such positions) may differ in stringency, and
therefore in the degree of protection that they afford customers of a
commodity broker in bankruptcy. For example, the segregation
requirements in Regulations 1.20 through 1.30 are more stringent than
the requirements in Regulation 30.7.\14\ Thus, the Commission created
the concept of ``account class,'' in order to ensure that, in a
bankruptcy of a commodity broker, customers that hold positions in
commodity contracts (and deposit money, securities, and/or other
property to margin, guarantee, or secure such positions) subject to one
requirement would benefit from the specific protections afforded by
such requirement. As the Commission stated in the Proposing Release:
---------------------------------------------------------------------------
\14\ When the Commission promulgated Regulation Part 190 in
1983, the Regulations had no requirements for the treatment of
money, securities, and/or other property that were used to margin,
guarantee, or secure commodity futures contracts traded on foreign
boards of trade. In 1987, however, the Commission promulgated
Regulation 30.7, which applies different and less stringent
requirements to such money, securities, and/or other property than
the segregation requirements in Regulations 1.20 through 1.30.
The reason for identifying classes of customer accounts is to
permit the implementation of the principle of pro rata distribution
so that the differing segregation requirements with respect to
different classes of accounts benefit customer claimants based on
the class of account for which they were imposed.\15\
---------------------------------------------------------------------------
\15\ Proposing Release, supra, note 9 at 57536.
---------------------------------------------------------------------------
As the Commission further stated in the Proposing Release:
Obviously, much of the benefit of segregation would be lost if
property segregated on behalf of a particular account class could be
allocated to pay the claims of customers of a different account
class for which less stringent segregation requirements were in
effect.\16\
---------------------------------------------------------------------------
\16\ Id. at 57554.
The Commission codified the aforementioned intent by promulgating
---------------------------------------------------------------------------
Regulation 190.08(c), which states:
[P]roperty held by or for the account of a customer, which is
segregated on behalf of a specific account class * * * must be
allocated to the customer estate of the account class for which it
is segregated. * * * \17\
---------------------------------------------------------------------------
\17\ 17 CFR 190.08(c).
C. The Use of Account Class in the Calculation of Net Equity and
Allowed Net Equity
As mentioned above, the concept of ``account class'' governs the
manner in which the trustee calculates the net equity and the ``allowed
net equity'' for each customer of a commodity broker in bankruptcy.
In general, Regulation 190.07(b) requires a trustee to calculate
net equity separately for each account class.\18\ Specifically,
Regulation 190.07(b)(2) directs the trustee to ``aggregate the credit
and debit equity balances of all accounts of the same class held by a
customer in the same capacity'' while calculating net equity.\19\
---------------------------------------------------------------------------
\18\ 17 CFR 190.07(b).
\19\ 17 CFR 190.07(b)(2).
Regulation 190.07(b)(3) (17 CFR 190.07(b)(3)) provides a limited
exception to Regulation 190.07(b)(2), by permitting the trustee,
while calculating net equity, to offset ``[a] negative equity
balance with respect to one customer account class'' against ``a
positive equity balance in any other account class of such customer
held in the same capacity.''
---------------------------------------------------------------------------
[[Page 40796]]
Regulation 190.07(a) states that ``allowed net equity'' shall ``be
equal to the aggregate of the funded balances of such customer's net
equity claim for each account class plus or minus'' certain
adjustments.\20\ Regulation 190.07(c), in turn, defines ``funded
balance'' as: ``* * * a customer's pro rata share of the customer
estate with respect to each account class available as of the primary
liquidation date for distribution to customers of the same class.''
\21\
---------------------------------------------------------------------------
\20\ 17 CFR 190.07(a).
\21\ 17 CFR 190.07(c).
---------------------------------------------------------------------------
As this definition provides, Regulation 190.07(c) requires a
trustee to calculate funded balance separately for each account class.
Specifically, Regulation 190.07(c)(1) requires the trustee to
calculate, with respect to a particular account class held by a
particular customer of a commodity broker in bankruptcy, the ratio
between (i) the net equity of such customer for such account class, and
(ii) the net equity of all customers for such account class. Regulation
190.07(c)(1) then requires the trustee to multiply such ratio against
the value of any money, securities or other property that the commodity
broker held on behalf of commodity contracts in such account class.
Finally, to calculate allowed net equity, Regulation 190.07(a) requires
the trustee to aggregate the funded balances across account classes,
and to make certain adjustments, thus generating the total amount that
each customer is entitled to recover from all money, securities, and/or
other property held on behalf of such customer.
II. Proposed Amendments To Include Cleared OTC Derivatives as a
Separate Account Class
A. Description
As mentioned above, Regulation 190.01(a) currently sets forth five
separate account classes: (i) Futures accounts; (ii) foreign futures
accounts; (iii) leverage accounts; (iv) commodity option accounts; and
(v) delivery accounts. The Commission is proposing to amend Regulation
190.01(a) to designate ``cleared OTC derivatives'' as a sixth and
separate account class with respect to the bankruptcy of a commodity
broker that is an FCM. The Commission is also proposing to make certain
conforming changes to Regulation 190.07(b)(2)(viii) and Form 4 (Proof
of Claim) in Appendix A to Regulation Part 190 (Bankruptcy Forms).\22\
As described below, the Commission does not intend for ``cleared OTC
derivatives'' to constitute a sixth and separate account class with
respect to a bankruptcy of a commodity broker that is not an FCM.
---------------------------------------------------------------------------
\22\ 17 CFR pt. 190, app. A, form 4.
---------------------------------------------------------------------------
The Commission is also proposing to amend Regulation 190.01 to
define ``cleared OTC derivatives.'' In its Interpretative Statement,
dated September 26, 2008 (the ``Statement on Cleared OTC
Derivatives''), the Commission defined ``cleared-only contracts'' as
those contracts that ``although not executed or traded on a Designated
Contract Market or a Derivatives Transaction Execution Facility, are
subsequently submitted for clearing through a Futures Commission
Merchant * * * to a Derivatives Clearing Organization.'' \23\ In the
definition of ``cleared OTC derivatives'' in the proposed amendment to
Regulation 190.01, the Commission is proposing to incorporate the
definition for ``cleared-only contracts'' from the Statement on Cleared
OTC Derivatives. However, consistent with the intentions specified in
the Proposing Release,\24\ the Commission proposes to limit ``cleared
OTC derivatives'' to only those positions in ``cleared-only contracts''
that (along with the money, securities, and/or other property
margining, guaranteeing, or securing such positions) are required to
have been (i) segregated in accordance with a rule, regulation, or
order issued by the Commission, or (ii) held in a separate account for
``cleared-only contracts'' in accordance with the rules or bylaws of a
DCO. The Commission does not intend to specify substantive requirements
for the treatment of cleared OTC derivatives (and the money,
securities, and/or other property margining, guaranteeing, or securing
such derivatives). Rather, the Commission proposes to define ``cleared
OTC derivatives'' in such a manner as to specify the sources from which
such substantive requirements may originate. Moreover, by including
contracts that ``are required to be segregated * * * or to be held in a
separate account'' for ``cleared-only contracts,'' the Commission seeks
to avoid the need to engage in fact-intensive post-bankruptcy inquiries
regarding compliance with such requirements.
---------------------------------------------------------------------------
\23\ 73 FR 65514 (November 4, 2008).
\24\ See supra notes 16 and 17, and the corresponding quotations
from the Proposing Release in the text of this preamble.
---------------------------------------------------------------------------
B. Rationale
As detailed further below, the Commission is proposing these
amendments (i) to reflect the extension of Subchapter IV (and, in turn,
Regulation Part 190) to cleared OTC derivatives under the Commodity
Futures Modernization Act of 2000 (the ``CFMA''),\25\ and (ii) to
address a scenario that the Statement on Cleared OTC Derivatives did
not reference. The Commission is proposing the amendments at this time
because of increased interest among DCOs in clearing OTC derivatives,
and the need to enhance certainty regarding the treatment of cleared
OTC derivatives in the bankruptcy of a commodity broker that is an FCM.
---------------------------------------------------------------------------
\25\ Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).
---------------------------------------------------------------------------
1. To Reflect the Extension of Subchapter IV to Cleared OTC Derivatives
The Commission promulgated the current version of Regulation
190.01(a) in 1983. At that time, cleared OTC derivatives, if they
existed, were not ``commodity contracts'' within the meaning of Section
761(4) of the Bankruptcy Code.\26\ Therefore, neither Subchapter IV nor
Regulation Part 190 applied to cleared OTC derivatives.
---------------------------------------------------------------------------
\26\ 11 U.S.C. 761(4).
---------------------------------------------------------------------------
The CFMA, however, created the opportunity for OTC derivatives to
be cleared.\27\ In addition, the CFMA extended Subchapter IV (and, in
turn, Regulation Part 190) to cleared OTC derivatives. As mentioned in
the Statement on Cleared OTC Derivatives, Section 761(4)(A) of the
Bankruptcy Code defines ``commodity contract,'' with respect to an FCM,
as a ``contract for the purchase or sale of a commodity for future
delivery on, or subject to the rules of, a contract market or board of
trade.'' \28\ The CFMA amended the definition of ``contract market'' in
Section 761(7) of the Bankruptcy Code to include reference to a
``registered entity.'' As mentioned in the Statement on Cleared OTC
Derivatives, Section 761(8) of the Bankruptcy Code incorporates by
reference the definition of ``registered entity'' in the Act.\29\
Therefore, the CFMA first permitted cleared OTC derivatives, which are
subject to the rules of a DCO, to become ``commodity contracts'' within
the meaning of Section 761(4) of the Bankruptcy Code, specifically with
respect to a commodity broker that is an FCM.
---------------------------------------------------------------------------
\27\ See Sections 2(d) and 2(e) of the Act (7 U.S.C. Sec. Sec.
2(d), (e)).
\28\ Id.
\29\ 11 U.S.C. 761(8). The term ``registered entity'' is defined
in Section 1a(29) of the Act (7 U.S.C. Sec. 1a(29)) to include
``(iii) a derivatives clearing organization registered under Section
5b * * *.''
---------------------------------------------------------------------------
[[Page 40797]]
As detailed in the Statement on Cleared OTC Derivatives, in a
bankruptcy of a commodity broker that is an FCM, claims arising out of
cleared OTC derivatives should be included in the determination of net
equity (and therefore, by inference, in the determination of allowed
net equity), for purposes of Subchapter IV and Regulation Part 190.\30\
Consequently, the Commission is proposing amendments to provide a
regulatory framework to accomplish this goal.
---------------------------------------------------------------------------
\30\ 73 FR 65514, 65515 (November 4, 2008).
---------------------------------------------------------------------------
2. To Address a Scenario Not Referenced in the Statement on Cleared OTC
Derivatives
In the Statement on Cleared OTC Derivatives, the Commission
explained that, for purposes of Regulation Part 190:
A claim arising out of a cleared-only contract, or the property
margining such a contract, would be includable in the futures
account class, where, pursuant to Commission Order, the contract or
property is included in an account segregated in accordance with
Section 4d of the Act.\31\
---------------------------------------------------------------------------
\31\ 73 FR 65514, 65516 (November 4, 2008).
However, the Commission did not address the treatment, under
Regulation Part 190, of positions in cleared OTC derivatives (and the
money, securities, and/or other property margining, guaranteeing, or
securing such positions), in a scenario where there is no applicable
Section 4d Order (as such term is defined below). Therefore, as
mentioned above, the Commission is proposing amendments to create, only
with respect to the bankruptcy of a commodity broker that is an FCM, a
sixth and separate account class, to which cleared OTC derivatives (as
well as the money, securities, and/or other property margining,
guaranteeing, or securing such derivatives) could be allocated. By
creating such an account class, the Commission is effectively
specifying the manner in which the trustee in the bankruptcy of a
commodity broker that is an FCM must treat, in the absence of an
applicable Section 4d Order, claims arising out of cleared OTC
derivatives when determining net equity and allowed net equity.
III. Proposed Amendment To Clarify Appropriate Allocation of Collateral
to Certain Account Classes
The Commission has the power under Section 4d of the Act \32\ to
issue an order (a ``Section 4d Order'') permitting positions in
commodity contracts of one account class (and the money, securities,
and/or other property margining, guaranteeing or securing such
positions), to be commingled with (and, therefore, to be accorded the
same protections in bankruptcy as) positions in commodity contracts of
the futures account class (and the money, securities, and/or other
property margining, guaranteeing or securing such positions), in either
an FCM or DCO account. Specifically, Section 4d of the Act states that:
---------------------------------------------------------------------------
\32\ 7 U.S.C. 6d.
In accordance with such terms and conditions as the Commission
may prescribe by rule, regulation, or order, * * * money,
securities, and property of the customers of such futures commission
merchant may be commingled and deposited * * * with any other money,
securities, and property received by such futures commission
merchant and required by the Commission to be separately accounted
for and treated and dealt with as belonging to the customers of such
---------------------------------------------------------------------------
futures commission merchant.
The Commission has issued two interpretations stating that, for
purposes of Regulation Part 190, if positions in commodity contracts
(and relevant money, securities, and/or other property) of one account
class, are, pursuant to a Commission order, commingled with positions
in commodity contracts (and relevant money, securities, and/or other
property) of the futures account class, then, the former positions (and
relevant money, securities, and/or other property) shall be treated as
part of the futures account class. First, the Commission issued an
Interpretative Statement on October 21, 2004 (the ``Statement on
Commingling Foreign Futures Positions''), stating that ``collateral
supporting foreign futures placed in domestic segregation pursuant to
Commission Order should be treated as in a futures account, not a
foreign futures account, for purposes of Part 190.'' \33\ In the
Statement on Commingling Foreign Futures Positions, the Commission
indicated that it would accord similar treatment to positions in other
commodity contracts (and the relevant money, securities, and/or other
property) that are placed in domestic segregation. Specifically, the
Commission stated that:
---------------------------------------------------------------------------
\33\ 69 FR 69510, 69511 (November 30, 2004).
In a situation whereby Commission order or direction, customers
are required or allowed to contribute to a Commission Regulation
1.20 segregated account, those customers also should benefit from
the distribution of that account proportionately to their
contributions in the event of insolvency. Such claims should be
treated as encompassed within the futures account class as opposed
to the foreign futures account class or another account class.\34\
---------------------------------------------------------------------------
\34\ Id.
As mentioned above, the Commission subsequently issued the
Statement on Cleared OTC Derivatives, which extends the conclusion in
the Statement on Commingling Foreign Futures Positions to cover cleared
OTC derivatives that have been placed in domestic segregation pursuant
---------------------------------------------------------------------------
to Commission order. Specifically, the Commission stated that:
[I]n October 2004, the Commission issued an interpretation
regarding the appropriate account class for funds attributable to
contracts traded on non-domestic boards of trade, and the assets
margining such contracts, that are included in accounts segregated
in accordance with Section 4d of the Act pursuant to Commission
Order. In that context, the Commission concluded that the claim is
properly against the Section 4d account class because customers
whose assets are deposited in such an account pursuant to Commission
Order should benefit from that pool of assets. The same rationale
supports the Commission's conclusion that a claim arising out of a
cleared-only contract, or the property margining such a contract,
would be includable in the futures account class, where, pursuant to
Commission Order, the contract or property is included in an account
segregated in accordance with Section 4d of the Act.\35\
---------------------------------------------------------------------------
\35\ 73 FR 65514, 65516 (November 4, 2008).
The Commission is proposing to codify explicitly, in Regulation
190.01(a), a generalized version of the Statement on Commingling
Foreign Futures Positions and the Statement on Cleared OTC Derivatives.
This version shall apply to positions in all commodity contracts (and
money, securities, and/or other property margining, guaranteeing, or
securing such positions). The Commission believes that these amendments
would remove any concerns regarding whether the Statement on
Commingling Foreign Futures Positions and the Statement on Cleared OTC
Derivatives would be limited to the specific factual patterns addressed
therein. To be clear, it is the belief of the Commission that the
Statement on Commingling Foreign Futures Positions and the Statement on
Cleared OTC Derivatives are nonetheless effective without such explicit
codification.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \36\ requires Federal
agencies, in promulgating regulations, to consider the impact of those
regulations on small
[[Page 40798]]
businesses. The amendments proposed herein will affect only FCMs and
DCOs. The Commission has previously established certain definitions of
``small entities'' to be used by the Commission in evaluating the
impact of its regulations on small entities in accordance with the
RFA.\37\ The Commission has previously determined that FCMs \38\ and
DCOs \39\ are not small entities for the purpose of the RFA.
Accordingly, pursuant to 5 U.S.C. 605(b), the Chairman, on behalf of
the Commission, certifies that the amendments will not have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\36\ 5 U.S.C. 601 et seq.
\37\ 47 FR 18618 (Apr. 30, 1982).
\38\ Id. at 18619.
\39\ 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA'') \40\ imposes certain
requirements on Federal agencies in connection with their conducting or
sponsoring any collection of information as defined by the PRA. The
amendments do not require the new collection of information on the part
of any entities subject to such amendments. Accordingly, for purposes
of the PRA, the Commission certifies that the amendments, if
promulgated in final form, would not impose any new reporting or
recordkeeping requirements.
---------------------------------------------------------------------------
\40\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
C. Cost-Benefit Analysis
Section 15(a) of the Act requires that the Commission, before
promulgating a regulation under the Act or issuing an order, consider
the costs and benefits of its action. By its terms, Section 15(a) of
the Act does not require the Commission to quantify the costs and
benefits of a new regulation or determine whether the benefits of the
regulation outweigh its costs. Rather, Section 15(a) of the Act simply
requires the Commission to ``consider the costs and benefits'' of its
action.
Section 15(a) of the Act further specifies that costs and benefits
shall be evaluated in light of the following considerations: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. Accordingly, the Commission could, in its
discretion, give greater weight to any one of the five considerations
and could determine that, notwithstanding its costs, a particular
regulation was necessary or appropriate to protect the public interest
or to effectuate any of the provisions or to accomplish any of the
purposes of the Act.
The Commission has evaluated the costs and benefits of the
amendments, in light of the specific considerations identified in
Section 15(a) of the Act, as follows:
1. Protection of Market Participants and the Public
The amendments would benefit FCMs and DCOs, as well as customers of
the futures and options markets, by providing greater certainty (i) in
a bankruptcy of a commodity broker that is an FCM, regarding the
treatment of cleared OTC derivatives, and (ii) in a bankruptcy of any
commodity broker, regarding the allocation of positions in commodity
contracts (and relevant money, securities, and/or other property) of
one account class that are commingled in an FCM or DCO account,
pursuant to an order from the Commission, with positions in commodity
contracts (and relevant money, securities, and/or other property) of
the futures account class.
2. Efficiency and Competition
The amendments are not expected to have an effect on efficiency or
competition.
3. Financial Integrity of Futures Markets and Price Discovery
The amendments would enhance the protection, in the bankruptcy of a
commodity broker that is an FCM, of customers with positions in cleared
OTC derivatives, by providing an account class in which to hold such
positions (and relevant money, securities, and/or other property). The
amendments would enhance certainty regarding the treatment, in a
bankruptcy of any commodity broker, of customers with positions (and
relevant money, securities, and/or other property) subject to a Section
4d Order, by removing concerns regarding whether the Statement on
Commingling Foreign Futures Positions and the Statement on Cleared OTC
Derivatives would be limited to the specific factual patterns addressed
therein. Thus, the proposed regulations would contribute to the
financial integrity of the futures and options markets as a whole.
4. Sound Risk Management Practices
The amendments would reinforce the sound risk management practices
already required of FCMs and DCOs, by (i) providing an account class in
which to hold positions in cleared OTC derivatives (and relevant money,
securities, and/or other property), and (ii) providing certainty to
FCMs and DCOs regarding the allocation between account classes, in a
commodity broker bankruptcy, of customer positions (and relevant money,
securities, and/or other property) subject to a Section 4d Order.
5. Other Public Considerations
Recent market events, including disruptions in global credit
markets, render it prudent to enhance certainty regarding the treatment
of customer positions (and relevant money, securities, and/or other
property) in a commodity broker bankruptcy.
Accordingly, after considering the five factors enumerated in the
Act, the Commission has determined to propose the regulations set forth
below.
List of Subjects in 17 CFR Part 190
Bankruptcy, Brokers, Commodity Futures.
For the reasons stated in the preamble, the Commission proposes to
amend 17 CFR part 190 as follows:
PART 190--BANKRUPTCY
1. The authority citation for part 190 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24,
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise
noted.
2. In Sec. 190.01, revise paragraph (a) and add paragraph (oo) to
read as follows:
Sec. 190.01 Definitions.
* * * * *
(a) Account class means each of the following types of customer
accounts which must be recognized as a separate class of account by the
trustee: futures accounts, foreign futures accounts, leverage accounts,
commodity option accounts, delivery accounts as defined in Sec.
190.05(a)(2), and, only with respect to the bankruptcy of a commodity
broker that is a futures commission merchant, cleared OTC derivatives
accounts; Provided, however, That to the extent that the equity
balance, as defined in Sec. 190.07, of a customer in a commodity
option, as defined in Sec. 1.3(hh) of this chapter, may be commingled
with the equity balance of such customer in any domestic commodity
futures contract pursuant to regulations under the Act, the aggregate
shall be treated for purposes of this part as being held in a futures
account; Provided, further, that, if positions in commodity contracts
of one account class (and the money, securities, and/or other property
margining, guaranteeing, or securing such positions), are, pursuant to
a Commission order,
[[Page 40799]]
commingled with positions in commodity contracts of the futures account
class (and the money, securities, and/or other property margining,
guaranteeing, or securing such positions), then the former positions
(and the relevant money, securities, and/or other property) shall be
treated, for purposes of this part, as being held in an account of the
futures account class.
* * * * *
(oo) Cleared OTC derivatives shall mean positions in commodity
contracts that have not been entered into or traded on a contract
market (as such term is defined in Sec. 1.3(h) of this chapter) or on
a derivatives transaction execution facility (within the meaning of
Section 5a of the Act), but which nevertheless are submitted by a
commodity broker that is a futures commission merchant (as such term is
defined in Sec. 1.3(p) of this chapter) for clearing by a clearing
organization (as such term is defined in this section), along with the
money, securities, and/or other property margining, guaranteeing, or
securing such positions, which are required to be segregated, in
accordance with a rule, regulation, or order issued by the Commission,
or which are required to be held in a separate account for cleared OTC
derivatives only, in accordance with the rules or bylaws of a clearing
organization (as such term is defined in this section).
4. In Sec. 190.07, revise paragraph (b)(2)(viii) to read as
follows:
Sec. 190.07 Calculation of allowed net equity.
(b) * * *
(2) * * *
(viii) Subject to paragraph (b)(2)(ix) of this section, the futures
accounts, leverage accounts, options accounts, foreign futures
accounts, and cleared OTC derivatives accounts of the same person shall
not be deemed to be held in separate capacities: Provided, however,
That such accounts may be aggregated only in accordance with paragraph
(b)(3) of this section.
* * * * *
5. Amend ``bankruptcy appendix form 4--proof of claim'' in Appendix
A to Part 190 by revising paragraph a in section III to read as
follows:
Appendix A to Part 190--Bankruptcy Forms
* * * * *
Bankruptcy Appendix Form 4--Proof of Claim
* * * * *
III. * * *
a. Whether the account is a futures, foreign futures, leverage,
option (if an option account, specify whether exchange-traded or
dealer), ``delivery'' account, or, only with respect to a bankruptcy
of a commodity broker that is a futures commission merchant, a
cleared OTC derivatives account. A ``delivery'' account is one which
contains only documents of title, commodities, cash, or other
property identified to the claimant and deposited for the purposes
of making or taking delivery on a commodity underlying a commodity
contract or for payment of the strike price upon exercise of an
option.
* * * * *
Issued in Washington, DC, on July 31, 2009, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-18853 Filed 8-12-09; 8:45 am]
BILLING CODE P